UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File No. 0-20139
Diacrin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3016912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 96 13th Street, Charlestown Navy Yard, Charlestown, MA 02129
(Address of principal executive offices, including zip code)
(617) 242-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
Common Stock, $.01 par value
Common Stock Purchase Warrants
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES x NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant (based on the closing price of the Common Stock
on February 10, 1998) was $88,686,769.
As of February 10, 1998, 13,269,131 shares of the
registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Specifically identified portions of the Company's definitive proxy
statement for its 1998 Annual Meeting of Stockholders, which will be filed with
the Commission not later than 120 days after the end of the Company's fiscal
year end, are incorporated by reference into Part III.
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PART I
This Annual Report on Form 10-K contains forward-looking statements,
including information with respect to planned timetables for the completion of
ongoing Phase 1 clinical trials and commencement of Phase 2 clinical trials for
NeuroCell(TM)-PD and NeuroCell(TM)-HD, planned timetables for the completion of
ongoing Phase 1 clinical trials for NeuroCell(TM)-FE, the planned timetables and
duration of any planned future clinical or preclinical trials for any of the
Company's other product candidates, development funding expected to be received
in connection with the Diacrin/Genzyme joint venture and the expected sources of
porcine cells used in the Company's products. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause actual events or the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results" included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II of this Annual Report on Form 10-K.
Item 1. Business
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Diacrin is developing transplantable cells for the treatment of human
diseases which are characterized by cell dysfunction or cell death and for which
current therapies are either inadequate or nonexistent. Products under
development for the treatment of neurological disorders include:
NeuroCell(TM)-PD for Parkinson's disease and NeuroCell(TM)-HD for Huntington's
disease, both of which are being developed in a joint venture with Genzyme
Corporation ("Genzyme"), NeuroCell(TM)-FE for focal epilepsy, porcine neural
cells for stroke and spinal cord cells for spinal cord injury. Also under
development are hepatocytes for alcoholic hepatitis and cirrhosis, myoblasts for
cardiac disease and retinal epithelial cells for macular degeneration.
In March 1995, the United States Food and Drug Administration ("FDA")
cleared the Company to conduct the first ever clinical trial of transplanted
porcine cells in humans and in April 1995 the Company initiated a Phase 1
clinical trial to evaluate NeuroCell(TM)-PD for the treatment of Parkinson's
disease. Enrollment in this 12-patient Phase 1 clinical trial was completed in
October 1996 and patient recruitment in a 36-patient pivotal Phase 2 clinical
trial of NeuroCell(TM)-PD was recently initiated. In May 1996, the Company
initiated a Phase 1 clinical trial to evaluate NeuroCell(TM)-HD for the
treatment of Huntington's disease. In March 1997 enrollment of all 12 patients
in the trial was completed. In January 1998, the Company initiated a Phase 1
clinical trial to evaluate NeuroCell(TM)-FE for the treatment of complex partial
epileptic seizures in patients whose disease is not well-controlled with drug
therapy.
While the feasibility of cell transplantation has been demonstrated
clinically, widespread use of cell transplantation in clinical applications has
been hampered by the lack of an adequate supply of human donor cells. To
overcome this constraint, Diacrin has pioneered the use of porcine cells for
clinical transplantation. The Company believes that pigs will be a reliable
source of a wide range of cell types suitable for transplantation into humans.
The Company has shown in preclinical studies and early clinical trials that,
under standard immunosuppressive regimens, transplanted porcine cells appear
capable of addressing the functional deficits caused by cell damage or cell
death.
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In addition, Diacrin is developing a proprietary immunomodulation
technology which is exclusively licensed to the Company from the Massachusetts
General Hospital ("MGH"). This technology involves the selective treatment of
major histocompatibility complex ("MHC") class I antigens on cell populations
prior to transplantation to prevent the patient's immune system from rejecting
the transplanted cells. The Company's approach would obviate the need for
standard immunosuppressive regimens, which may leave the patient vulnerable to a
wide range of undesirable side effects, including susceptibility to infectious
agents and cancer. Preclinical studies in animal models, including primates,
have demonstrated the ability of the Company's immunomodulation technology to
prevent rejection of transplanted porcine cells without compromising the ability
of the immune system to protect the recipient in its normal fashion. Neurons,
hepatocytes and cardiac myocytes treated with Diacrin's proprietary
immunomodulation technology have been successfully transplanted into animals
without immunosuppression. This technology is presently being evaluated in
Parkinson's disease, Huntington's disease and focal epilepsy patients as part of
Phase 1 clinical trials of NeuroCell(TM)-PD, NeuroCell(TM)-HD and
NeuroCell(TM)-FE, respectively. Phase 1 clinical trial results suggest that
NeuroCell(TM)-PD treated with the Company's immunomodulation technology may be
effective without the use of standard immunosuppression.
The FDA has granted orphan drug designation for NeuroCell(TM)-PD for
advanced Parkinson's disease and NeuroCell(TM)-HD for Huntington's disease. Each
received a designation for use of the product with Diacrin's immunomodulation
technology to prevent rejection and a designation for use without this
technology. Under current law, the first developer to receive FDA marketing
approval for a designated orphan drug is generally entitled to a seven-year
exclusive marketing period in the United States.
In September 1996, the Company and Genzyme formed Diacrin/Genzyme LLC (the
"Joint Venture"), a joint venture to develop and commercialize NeuroCell(TM)-PD
and NeuroCell(TM)-HD (the "Joint Venture Products"). Under the terms, and
subject to certain conditions, of the joint venture agreement, which was
effective October 1, 1996, Genzyme has agreed to provide 100% of the first $10
million in funding and 75% of the following $40 million in funding for the
development and commercialization of the Joint Venture Products. The Company
agreed to provide the remaining 25% of the following $40 million in funding. All
costs incurred in excess of $50 million are to be shared equally between Genzyme
and the Company in accordance with the terms of the agreement. Any profits of
the Joint Venture are to be shared equally by the two parties. The Joint Venture
plans that Diacrin and Genzyme will perform, on behalf of the Joint Venture, the
development activities in connection with the Joint Venture Products and that
Genzyme will market and sell the Joint Venture Products on a cost reimbursement
basis on behalf of the Joint Venture.
Diacrin has five additional products in various stages of preclinical
development: (i) hepatocytes for alcoholic hepatitis and cirrhosis; (ii)
myoblasts for cardiac disease; (iii) neural cells for stroke; (iv) spinal cord
cells for spinal cord injury and (v) retinal epithelial cells for macular
degeneration.
Diacrin's Transplantation Technology
While the feasibility of cell transplantation has been demonstrated
clinically, widespread use of cell transplantation in clinical applications has
been hampered by the lack of an adequate supply of human donor cells. To
overcome this constraint, Diacrin has pioneered the use of porcine cells for
clinical transplantation and in March 1995 received the first FDA clearance to
transplant porcine cells into humans. Each step of Diacrin's production process
has been carefully designed and is tightly controlled in order to obtain
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cells suitable for human transplantation. The Company has developed procedures
to screen pigs thoroughly for infectious agents and then isolate donor pigs in
specially-filtered rooms. In the case of NeuroCell(TM)-PD, NeuroCell(TM)-HD and
NeuroCell(TM)-FE, where fetal cells are required, Diacrin harvests tissue of
appropriate fetal age and type under current good manufacturing practices
("cGMPs"). Specific cell populations from the harvested tissue are then isolated
and prepared at either Diacrin's or the Joint Venture's facilities. The Company
has filed patent applications to protect its proprietary donor pig qualification
and cell harvesting processes and related products.
Diacrin's screening procedures are performed in accordance with proposed
FDA guidelines covering xenotransplantation. The Company has worked closely with
the FDA to provide input in the development of these guidelines. The
implementation of these guidelines is necessary to avoid contamination of
transplanted cellular products with infectious agents. The Company is aware of
recent scientific publications by others which demonstrate, under laboratory
conditions, that porcine endogenous retroviruses ("PERV") have the potential to
infect human cells. In response to these findings, the FDA in October 1997
instructed all sponsors of human clinical trials involving porcine tissue,
including the Company, to test for the presence of infectious PERV in porcine
cells and for evidence of PERV in patient blood samples prior to the
transplantation of any additional patients in clinical trials. The Company,
together with an outside contractor, tested porcine cells and patients for PERV.
Given the satisfactory results of those tests, the FDA cleared the Company to
proceed with its planned clinical trials in NeuroCell(TM)-PD and
NeuroCell(TM)-FE in December 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Certain Factors That May Affect
Future Results - Reliance on Cell Transplantation Technology; No Currently
Approved Xenotransplantation-Based Product; PERV Testing."
Current transplantation technology generally requires the recipient to be
immunosuppressed in order to avoid graft rejection. T cells, the main cells
involved in directing the body's immune response, recognize and bind to MHC
class I antigens. Binding of foreign MHC class I antigens triggers a cascade of
events which results in destruction of the engrafted cells that display these
antigens. Cyclosporine, a standard immunosuppressive agent, prevents this
rejection process. Using cyclosporine, Diacrin has demonstrated survival of
transplanted porcine cells in a variety of preclinical animal models and has
histologically documented survival of transplanted porcine neurons in a deceased
patient who had received NeuroCell(TM)-PD.
Diacrin is also developing proprietary immunomodulation technology which
involves the treatment of isolated cell populations prior to transplantation
with antibody fragments directed against MHC class I antigens in order to
obviate the need for generalized immunosuppression using agents such as
cyclosporine. Chronic generalized immunosuppression may result in complications
such as increased susceptibility to infectious diseases and cancer. Preclinical
studies performed by Diacrin scientists and academic collaborators have shown
that neural cells, hepatocytes and cardiac myocytes that have been pretreated
using Diacrin's immunomodulation technology prior to transplantation survived in
several animal models without immunosuppression. Since the antibody fragments
would not be expected to remain permanently bound to the engrafted cells, the
long-term survival of the engrafted cells seen in these studies suggests that
the graft recipient's immune system has "learned" to accept the graft. Thus, the
Company believes that treatment of cells with antibody fragments prior to
transplantation will induce a state of graft-specific immunological tolerance,
which would allow continued survival of the transplanted cells.
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In connection with its ongoing Phase 1 clinical trials, six Parkinson's
disease patients, six Huntington's disease patients and one focal epilepsy
patient have been transplanted with antibody pretreated NeuroCell(TM)-PD,
NeuroCell(TM)-HD and NeuroCell(TM)-FE, respectively, using no immunosuppression.
Preliminary indications from the Phase 1 NeuroCell(TM)-PD clinical trial suggest
that improvement in Parkinson's disease symptoms have occurred in patients
transplanted with pre-treated NeuroCell(TM)-PD. However, the Company believes
that, given the severity of advanced Parkinson's disease and Huntington's
disease, both NeuroCell(TM)-PD and NeuroCell(TM)-HD could be useful products
even if they require the use of chronic immunosuppression.
Product Development Programs
Diacrin is focusing its research and development activities on the
production and transplantation of cells for use in the treatment of human
diseases characterized by cell dysfunction or cell death. The Company is
developing products to address important medical needs which represent a
broad-based application of Diacrin's technologies for cell production and
transplantation. The following table illustrates Diacrin's product development
programs in cell transplantation and each program's stage in development:
<TABLE>
Diacrin Product Development Programs
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Therapeutic Activity Development
Product Candidate Disease Indication Defect of Transplanted Cells Status
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NeuroCell(TM)-PD * Parkinson's disease Death of Regulated release of Phase 2
dopaminergic neurons dopamine at synapses
in specific brain
regions
- ------------------------------------------------------------------------------------------------------------------------
NeuroCell(TM)-HD * Huntington's disease Death of GABAergic Reconstitution of neuronal Phase 1
neurons in specific pathways and regulated accrual
brain regions release of GABA at synapses completed
- ------------------------------------------------------------------------------------------------------------------------
NeuroCell(TM)-FE Focal epilepsy Inappropriate Inhibition of epileptogenic Phase 1
neuronal firing focus
- ------------------------------------------------------------------------------------------------------------------------
Porcine neural cells Stroke Ischemic death of Neuronal replacement Preclinical
neurons
- ------------------------------------------------------------------------------------------------------------------------
Porcine spinal cord Spinal cord injury Traumatic loss of Restoration of signal Preclinical
cells spinal cord function transmission
- ------------------------------------------------------------------------------------------------------------------------
Porcine hepatocytes Alcoholic hepatitis Hepatocyte death Restore liver function IND Filed
- ------------------------------------------------------------------------------------------------------------------------
Human hepatocytes Cirrhosis Loss of liver Restore liver function Preclinical
function
- ------------------------------------------------------------------------------------------------------------------------
Human myoblasts Cardiac disease Diseased or damaged Provide functional Preclinical
myocardium contractile tissue
- ------------------------------------------------------------------------------------------------------------------------
Porcine retinal Macular degeneration Loss of central Restore function of Preclinical
epithelial cells vision photoreceptors
- ------------------------------------------------------------------------------------------------------------------------
* Being developed by Diacrin / Genzyme LLC.
</TABLE>
NeuroCell(TM)-PD for Parkinson's Disease
Parkinson's disease is a neurodegenerative disease that results from the
loss of dopamine-producing neurons within an area of the brain called the
substantia nigra, causing
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the loss of coordinated muscular activity. The disease is generally
characterized by progressively worsening physical conditions including
difficulty in movement, muscular rigidity, tremors and postural instability. The
majority of Parkinson's disease patients are first diagnosed between the ages of
45 and 65. In addition to a decreased quality of life, Parkinson's disease may
also result in premature death. In the United States, there are approximately
500,000 people afflicted with Parkinson's disease. These patients can be
classified according to the severity of their disease by Hoehn and Yahr staging,
from stage 1 early in the disease process to stage 5 when the disease has
progressed to result in the patient being bedridden or wheelchair-bound.
NeuroCell(TM)-PD will be directed to the treatment of patients in stage 4 and
stage 5, which the Company estimates to be between 115,000 and 155,000 patients
in the United States. With the increasing average age of the population, the
prevalence of Parkinson's disease is expected to increase. The Company has
received orphan drug designation for NeuroCell(TM)-PD. See "Government
Regulation."
Current therapies consist of administration of levodopa ("L-dopa"), a
precursor of dopamine, and dopamine analogues. However, L-dopa is only effective
for a limited period of time, with most patients experiencing a progressive
reduction in drug efficacy over a 10 to 15 year period, due to the cumulative
loss of viable neurons and tolerance to L-dopa. In addition, L-dopa therapy can
result in severe side-effects including dyskinesias and hallucinations. No
currently available therapy prevents progression of the neurological deficits
caused by Parkinson's disease.
Clinical researchers have shown that transplantation of human fetal neural
cells into Parkinsonian patients is effective in treating the disease. For
example, Swedish researchers have demonstrated survival and function of
transplanted human fetal cells in Parkinson's disease patients in an ongoing
study commenced in 1989. This study has shown cells surviving for at least eight
years and improvements in the patients' condition. However, widespread clinical
application is limited by the lack of availability of human fetal neural cells
and ethical concerns regarding the use of human fetal tissue. Moreover, even
when available, the quality of human fetal cells is variable, which may limit
the clinical effectiveness of such treatment.
Diacrin's approach to the treatment of Parkinson's disease is to produce
and transplant NeuroCell(TM)-PD to replace the function of those neurons damaged
by the disease. The Company and its collaborators have shown in animal models
that these transplanted cells become integrated into the surrounding brain
tissue and correct functional defects. While NeuroCell(TM)-PD is not a cure for
Parkinson's disease, the goal of this treatment is to significantly improve the
clinical condition of patients with severe Parkinson's disease sufficiently to
allow them to function independently.
Diacrin harvests fetal porcine midbrain cells under cGMPs for
transplantation. These cells are functionally indistinguishable from human fetal
neural cells. The porcine tissue source has been developed by Diacrin in
conjunction with Tufts University School of Veterinary Medicine ("Tufts"). The
cell isolation and testing has been done in conjunction with the Company's
academic collaborators at Harvard Medical School. Company scientists, in
conjunction with academic collaborators, have shown reversal of functional
deficits in a rodent model of Parkinson's disease transplanted with
NeuroCell(TM)-PD. Under a Diacrin-sponsored research program, a non-human
primate model for Parkinson's disease was transplanted with NeuroCell(TM)-PD.
Results confirmed the presence of viable cells in the transplantation site at
the conclusion of this 17-month study.
In October 1996, enrollment in a Phase 1 clinical trial of NeuroCell(TM)-PD
in patients with severe Parkinson's disease was completed. This trial, which was
initiated by the Company in April 1995 and, since October 1996, has been
conducted by Diacrin on
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behalf of the Joint Venture, was the first FDA-authorized trial involving
transplantation of porcine cells into humans. Although the study was designed to
evaluate the safety of NeuroCell(TM)-PD, its effects on the Parkinson's disease
symptoms of the transplant recipients are also being evaluated. The
NeuroCell(TM)-PD clinical trial is being conducted at the Lahey Hitchcock Clinic
in Burlington, Massachusetts and at Boston University School of Medicine under
an IND application.
All twelve patients were transplanted unilaterally (one side of the brain)
with approximately 12 million cells using standard stereotactic surgical
techniques. Eleven patients continue to be evaluated as part of the clinical
trial. In January 1996, the twelfth patient, a 69-year old male who had
undergone NeuroCell(TM)-PD transplant surgery in May 1995, died of a pulmonary
embolism. An autopsy determined that this patient's death was unrelated to the
transplant. A histological study of this patient published in the March 1997
issue of Nature Medicine demonstrated that fetal pig neural cells survived and
matured in his brain. This study marked the first published documentation of
survival of cells transplanted from another species into the human brain and the
appropriate growth of the non-human neurons in a Parkinsonian brain.
It is expected that any clinical improvement of Parkinson's disease
patients after transplantation will occur gradually as the fetal pig neurons
mature. All eleven Parkinson's disease patients in the Phase 1 clinical study
have been evaluated at twelve months post-transplantation. The patients continue
to demonstrate statistically significant clinical improvement one year after
transplantation (p-value of 0.01) as measured by the Unified Parkinson's Disease
Rating Scale.
The Joint Venture plans to initiate three clinical trials of
NeuroCell(TM)-PD in 1998. It is anticipated that all transplanted patients in
these trials will receive approximately 48 million cells transplanted
bilaterally (both sides of the brain). Patient recruitment has commenced in a
36-patient pivotal Phase 2 clinical trial involving the transplantation of
NeuroCell(TM)-PD in conjunction with cyclosporine immunosuppression versus a
control group. A planned second pivotal Phase 2 clinical trial will involve the
transplantation of NeuroCell(TM)-PD using the Company's immunomodulation
technology versus a control group. A third open-label clinical trial is planned
to transplant NeuroCell(TM)-PD into two groups of patients, one with
cyclosporine immunosuppression and the other using the Company's
immunomodulation technology, to confirm the results of the pivotal Phase 2
clinical trials. Assuming successful completion of these trials, the Company
believes that sufficient clinical evidence will be produced to: (i) determine
the superiority of the Company's immunomodulation technology versus cyclosporine
immunosuppression used in conjunction with NeuroCell(TM)-PD; and (ii) support a
Product License Application for NeuroCell(TM)-PD used in conjunction with either
cyclosporine immunosuppression or the Company's immunomodulation technology.
NeuroCell(TM)-HD for Huntington's Disease
Huntington's disease is a genetically transmitted disease which is caused
by a loss of the specific type of neurons which produce the neurotransmitter
gamma aminobutyric acid ("GABA"). The loss of these GABAergic cells results in a
progressive deterioration marked by discordant movement, intellectual impairment
and a spectrum of psychiatric and behavioral disturbances. The majority of cases
of Huntington's disease first present between 40 and 50 years of age. There are
approximately 25,000 people diagnosed with Huntington's disease in the United
States. Currently there is no effective therapy for Huntington's disease.
Treatment is palliative with tranquilizers and anti-psychotic drugs being the
only options. The Company has received orphan drug designation for
NeuroCell(TM)-HD. See "Government Regulation."
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Diacrin's approach to treating this disease consists of producing and
transplanting NeuroCell(TM)-HD to replace the function of neurons damaged by
Huntington's disease. Fetal porcine neurons from an area of the brain called the
lateral ganglionic eminence are harvested under cGMPs for transplantation into
the striatum of the graft recipient's brain. Diacrin and its scientific
collaborators have tested NeuroCell(TM)-HD in a non-human primate model of
Huntington's disease. Results indicate that NeuroCell(TM)-HD has significantly
improved the behavioral defect in this model. This study demonstrated that the
transplanted neural cells become integrated into the brain tissue and assumed
the function of GABAergic neurons which have been destroyed in this model.
The Company, on behalf of the Joint Venture, has completed enrollment in an
FDA monitored 12-patient Phase 1 clinical trial with NeuroCell(TM)-HD
transplanted unilaterally. The Company is not aware of any other potential
treatment of Huntington's disease cleared by the FDA for clinical trials in the
United States. The Phase 1 clinical trial is being conducted at the Boston
University School of Medicine, Lahey Hitchcock Clinic, and Brigham and Women's
Hospital in Massachusetts and at Rush-Presbyterian-St. Luke's Medical Center in
Chicago. As with neural cell transplantation for Parkinson's disease, it is
expected that any clinical improvement would occur gradually over a period of
months. As of October 1997, all 12 patients treated have been evaluated at least
six months post-transplantation. The Huntington's disease patients that have
been transplanted with NeuroCell(TM)-HD have tolerated the procedure well and
the preliminary clinical data suggests that the product is safe. Efficacy data
is currently being evaluated. The Joint Venture plans to initiate a clinical
trial in 1998 to determine the effect of NeuroCell(TM)-HD transplanted
bilaterally.
NeuroCell(TM)-FE for Focal Epilepsy
Epilepsy is a chronic, recurrent disorder characterized by excessive
neuronal discharge in the brain, causing muscle spasms or convulsions. Epileptic
seizures are usually associated with some alteration of consciousness. The
seizures are of many different types and arise as a result of diverse
pathologies. Epilepsy is one of the most common neurological disorders and is
estimated to affect 1.8 million people in the United States.
Epileptic seizure classification is important clinically since it
determines the drug therapy used for seizure control. Clinical diagnosis of
seizures includes differentiation by onset and whether or not consciousness is
lost. Seizures can be classified into three broad categories based on onset:
generalized seizures, partial seizures and unclassified seizures. Generalized
seizures exhibit no focus of onset, cause loss of consciousness and may or may
not cause convulsions. They comprise approximately 40% of all epileptic
seizures. Partial seizures have a focal onset and may cause loss of
consciousness (complex partial seizures) or may not cause loss of consciousness
(simple partial seizures). Partial seizures comprise approximately 57% of all
epileptic seizures. The remaining 3% of seizures are unclassified.
The anti-epileptic drugs currently used fail to control seizure activity in
a significant number of patients and frequently cause side effects that range in
severity from minimal impairment of the central nervous system to death from
aplastic anemia or hepatic failure. In 1993, the market for anti-epileptic
agents was approximately $525 million in the United States.
Diacrin's initial therapeutic focus in this area is in the treatment of
patients with complex partial seizures. By several estimates, approximately
200,000 patients with
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complex partial epilepsy have seizures that are not well-controlled with
currently available drug therapy. The only other therapy available to these
refractory patients is surgical removal of portions of the temporal lobe,
amygdala and hippocampus. However, the Company believes that transplantation of
cells will be preferable to removal of brain tissue if NeuroCell(TM)-FE is shown
to be safe and efficacious.
Because focal epilepsy is characterized by excessive electrical activity in
a localized area and the spread of this activity through the brain, Diacrin's
approach to therapy is to apply its proprietary technology to the production and
transplantation of NeuroCell(TM)-FE in order to exert an inhibitory effect on
the hyperexcitable brain region. The source of inhibitory neurons being
evaluated for NeuroCell(TM)-FE is the lateral ganglionic eminence within the
fetal porcine striatum. Diacrin has demonstrated survival and safety of
transplanted NeuroCell(TM)-FE in a preclinical animal model when transplanted
into the hippocampus.
In January 1998, the Company initiated under IND a Phase 1 clinical trial
of NeuroCell(TM)-FE at Beth Israel Deaconess Medical Center in Boston. The
Company anticipates transplanting up to six patients previously scheduled for
surgical removal of the portion of the brain causing the seizure activity. Upon
surgical removal of that portion of the brain at six months post-transplant, the
Company will be afforded the opportunity to histologically analyze the graft and
graft site for the presence of viable pre-treated GABAergic porcine neural
cells. In addition, the trial will generate safety data necessary to initiate a
Phase 2 clinical trial of NeuroCell(TM)-FE.
Porcine Neural Cells for Stroke
Stroke is the third leading cause of death in the United States, ranking
behind coronary artery disease and cancer. It is also the leading cause of
long-term disability in the U.S. Approximately 500,000 people suffer a stroke
each year in the U.S.
Thrombolytic stroke (cerebral infarction) represents nearly 80% of all
cases of stroke each year and is caused primarily by thrombus formation in a
blood vessel which effectively blocks blood flow to a region of the brain,
causing neuronal cell death.
Current therapies include surgical management to remove a clearly defined
clot or anticoagulant therapy to "break up" the clot formation. While such
therapies increase the likelihood of surviving a stroke, the neuronal damage
caused by the initial trauma remains.
The Company believes disabled patients who have survived thrombolytic
stroke may benefit from porcine fetal neural cell transplantation for the repair
of the damaged neuronal circuitry caused by stroke. Several animal studies
conducted by others utilizing allografts have demonstrated the feasibility of
repairing and restoring function to the stroke damaged brain. The Company has
initiated studies in a well-defined animal model of stroke to determine whether
fetal porcine neural cells derived from the ganglionic eminence will engraft and
repair the damage, leading to improved mobility and function. This cell
population is expected to be most useful in treating striatal and cortical
thrombolytic strokes, which occur at a rate of over 160,000 annually in the U.S.
Assuming successful completion of these animal studies, the Company plans to
seek FDA clearance to initiate human clinical trials.
Spinal Cord Cells for Spinal Cord Injury
The U.S. prevalence of Spinal Cord Injury ("SCI") is approximately 200,000
with 13,000 additional SCI's annually. Nearly 80% of the injured patients are
males in their late
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twenties to early thirties. Greater than 95% of these SCI's are compression
injuries, the remainder are cases in which the cord is severed. The cervical
spine is vulnerable to injury because of its extreme mobility. Approximately 20%
of SCI occur in the thoracic region which is more stable due to extra support
supplied by the ribs. Loss of sensorimotor neuron function due to injury
requires lengthy hospitalization after the initial accident as well as extensive
rehabilitative care. Further, all victims of SCI face a lifelong series of acute
and chronic non-neurological complications that can be life-threatening.
The primary objective of current therapies available for SCI is to prevent
further injury by physically stabilizing the spine and by pharmacologically
attenuating the endogenous injury response. These strategies attempt to
establish optimal conditions for functional recovery and improve patients'
rehabilitative potential. Surgery is designed to protect the patient from
further injury through immobilization, spinal cord realignment and
stabilization, and decompression. To date there is no pharmacotherapy available
for spinal cord injury except palliative therapies employing methylprednisolone
(corticosteroid) therapy to reduce inflammation of the initial traumatized area,
and standard medical practice for complications arising from chronic
denervation, (for example, pneumonia, pulmonary embolism, decubitus ulcers,
urinary tract infections, renal failure, deep vein thrombosis and heterotopic
ossification of bone) and, if required, medical therapy for psychiatric
disorders.
Diacrin believes that its porcine spinal cord cell product candidate
transplanted into the site of injury of a human severed spinal cord may have the
potential to partially reestablish sensorimotor neuronal pathways. The
transplantation of this product into a recently injured cord may prevent
secondary neuronal and muscular atrophy known to occur in these patients.
Partial or full recovery of limb movement, and other motor neuron pathways may
reduce the overall time spent in the hospital, decrease the secondary equipment
required for care, and reduce severe and life threatening complications arising
from the injury. Further, the ability to deliver fetal neurons to a site of
injury in a severed spinal cord may have broader technical and clinical
applications. Once proof of principle is realized in the severed SCI, the fetal
porcine cell product will be delivered to sites in the spinal cord where
compression fractures have occurred. The Company has initiated studies in animal
models of spinal cord injury to determine whether fetal porcine spinal cord
cells transplanted into the damaged spinal cord region will engraft and repair
the damage, leading to improved mobility and function. Assuming successful
completion of the Company's ongoing studies, the Company plans to seek FDA
clearance to initiate human clinical trials.
Hepatocytes for Alcoholic Hepatitis
Alcoholic hepatitis is an acute form of alcoholic liver disease
resulting from excessive alcohol intake immediately preceding hospitalization.
The disease accounts for 45,000 hospitalizations annually. Alcoholic liver
injury is predominantly from direct hepatotoxicity of ethanol and severe
inflammation of the liver. The clinical spectrum of disease can include
abdominal pain, fever and manifestations of liver failure (ascites, jaundice and
encephalopathy). The mortality of alcoholic hepatitis can be as high as 70% with
patients dying from infection, GI bleeding or hepatorenal failure. Alcoholic
hepatitis can produce irreversible liver damage in patients that survive. In a
recent study of 280 alcoholics, deaths occurred in 50% of those with cirrhosis
and 66% of those with cirrhosis and alcoholic hepatitis within 4 years. In some
urban areas, alcoholic liver disease is the 4th leading cause of death for
patients aged 25-64.
There is currently no established treatment for alcoholic hepatitis.
Multiple treatments have been proposed including dietary supplementation and the
use of high dose steroids. Although various conclusions have been reached on the
use of steroids, standard
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<PAGE>
clinical practice is to use them in patients with severe liver disease, hepatic
encephalopathy or deteriorating clinical status. Liver transplantation is an
effective treatment, but a minimum period of 6 months of abstinence is required
before a patient can be considered a transplant candidate.
In extensive studies of hepatocyte transplantation for the treatment of
metabolic disease in animal models, Diacrin scientists have shown that porcine
hepatocytes can be isolated and infused into the recipient liver where they
lodge and continue to function. Long-term survival and function of these cells
has been demonstrated. Hepatocytes are able to pass through the lining of liver
capillaries and integrate into the liver where they can function alongside the
host cells. Therefore, the Company believes hepatocyte transplantation could
become a viable alternative to whole liver transplantation for the treatment of
acute liver disease. This approach would be preferable to transplantation of a
whole liver due to the difficulty of obtaining livers for transplantation
(currently over 5,000 individuals await liver transplants in the United States
and about 4,000 liver transplants are performed per year for all indications) as
well as the expense and invasiveness of the procedure.
Diacrin has submitted an IND application to the FDA for a Phase 1 clinical
trial to test transplantation of porcine hepatocytes for the treatment of
alcoholic hepatitis. All patients in this planned trial will have been diagnosed
with alcoholic hepatitis on admission to the hospital and will have received
prednisolone or its equivalent for at least 7 days. The patients selected for
this trial, which is planned to commence at Boston University Medical Center in
the first half of 1998, will have failed all other available medical therapy.
This subgroup of patients would have an expected in-hospital mortality of
approximately 70% and is thus an appropriate group for the evaluation of liver
function after hepatocyte transplantation. Porcine hepatocytes will be infused
into the spleen of these patients by interventional radiology, thus avoiding a
surgical procedure for these critically ill patients. In addition to the high
level of quality control that can be maintained over the production of porcine
hepatocytes, these cells also have the advantage of being resistant to infection
by human hepatitis B and C viruses. Since many of the patients enrolled in this
study are likely to carry these viruses, the Company believes the resistance of
the porcine cells to infection may prevent infection of the transplanted
hepatocytes providing a further advantage over human liver transplantation in
which hepatitis B and C reinfect donor livers.
Hepatocytes for Cirrhosis
Cirrhosis of the liver is a common affliction in the United States,
affecting an estimated 1.5 million individuals and leading to approximately
50,000 deaths annually. In cirrhosis, liver tissue is progressively lost to
accumulation of fibrous tissue and scarring, and liver function is compromised
due to the degenerative changes. The most common causes of cirrhosis are viral
hepatitis B and C infections and alcoholic liver disease. In the initial stages
of the disease the patient may experience jaundice and disorientation as the
detoxifying functions of the liver are lost. With more serious disease, the
patient will develop ascites and will be hospitalized with increasing central
nervous system effects (encephalopathy) that lead to coma. The tremendous
reserve of liver tissue allows the continued function of the organ despite loss
of up to 90% of the normal complement of hepatocytes. In advanced cirrhosis,
little normal liver tissue remains.
The only known therapy for advanced cirrhosis is liver transplantation.
However, the United Network of Organ Sharing has documented a national lack of
donor livers for transplantation, resulting in a waiting period of over 2 years
for the average patient requiring liver transplantation. Recently, artificial
extra-corporeal liver assist devices ("ELAD") using porcine hepatocytes or human
hepatoma cell lines attached to a dialysis
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<PAGE>
cartridge have been used in an attempt to treat liver failure in advanced
cirrhosis. Studies to date suggest that ELAD may improve some biochemical
parameters such as ammonia levels, but the devices have not resulted in
increased survival. Allogeneic human hepatocyte transplantation has also been
used in both acute and chronic liver failure. Both transplantation into the
liver via the portal vein and ectopic transplantation into the spleen have been
used in these studies. In pilot studies by others, liver and splenic hepatocyte
transplantation has been shown to be both safe and potentially effective in
humans as a bridge to orthotopic transplantation. Immunosuppression is required
in all patients receiving allogeneic human hepatocyte transplantation.
For chronic liver disease, Diacrin and others have shown in animal
models that hepatocyte integration is possible when hepatocytes are injected
into the liver via the portal vein or into the splenic pulp. The spleen appears
to be the preferred site in this situation due to the fibrosis and loss of blood
supply to the liver. In animal models, hepatization of the spleen is a well
described phenomenon and results in replacement of the splenic pulp with cords
of functioning hepatocytes that perform hepatic functions including synthesis of
albumin and clotting factors, detoxification of ammonia and oxidative
metabolism.
Diacrin plans to file an IND application to initiate a Phase 1 clinical
trial of human hepatocyte transplantation in 1998 for the treatment of cirrhosis
in a group of patients that have been listed for organ transplantation but are
likely to wait at least two years before receiving a transplant. The Company
believes these patients may benefit from the growth of transplanted hepatocytes
in their spleen leading to an increase in liver function. In addition, expansion
of the cells may allow sufficient improvement to render a liver transplant
unnecessary unlike the case of an ELAD which is used only as a bridge to
transplantation. As part of the planned trial, conventional immunosuppression
will be compared to the use of Diacrin's immunomodulation technology to
determine whether graft protection is achieved by this technique. This study is
planned to be conducted in collaboration with Massachusetts General Hospital.
Additional Hepatocyte Applications
Successful delivery of hepatocytes to patients with alcoholic hepatitis
or cirrhosis may open the possibility of applying this technology to a variety
of other diseases. The preparation of the cells and their delivery by radiologic
procedures should be the same in each of these applications, thus providing a
platform that may be used in multiple applications.
Additional applications include the use of hepatocytes for the
treatment of metabolic diseases resulting from genetic mutations. Familial
hypercholesterolemia is a disease caused by a defective receptor gene for low
density lipoprotein ("LDL") that leads to elevated levels of LDL cholesterol and
coronary disease at an early age. By transplantation of hepatocytes into a
rabbit model of this disease, Diacrin scientists have shown that porcine cells
provide the animal with functional receptors that reduce serum LDL levels.
Familial hypercholesterolemia afflicts approximately 500,000 patients in the
United States. Currently available drugs do not sufficiently lower circulating
LDL cholesterol levels in approximately 20% of these patients, who may thus
benefit from hepatocyte transplantation. Additional metabolic disorders that may
be candidates for treatment by hepatocyte transplantation include hemophilia,
phenylketonuria, carbamoyl phosphate synthetase deficiency, ornithine
transcarbamolyase deficiency, Crigler-Najjar syndrome, and disorders of glycogen
metabolism. Approximately 30,000 patients in the United States suffer from these
metabolic disorders.
12
<PAGE>
Acute liver failure unrelated to cirrhosis is another potential
application of hepatocyte transplantation. Over 2,000 patients die of fulminant
hepatic failure each year. Although liver transplantation is performed for these
patients when possible, the shortage of human livers leaves many patients
without this therapeutic option. Hepatocyte transplantation has been shown to be
effective in animal models of acute liver failure and may support liver function
both acutely and for the long term. In addition, hepatocyte transplantation
could be used to support patients who undergo resection of liver tumors. If the
tumor grows to a certain size, liver failure can develop and support of liver
function would allow survival and recovery as liver mass increased.
Myoblasts for Cardiac Disease
Coronary heart disease is the leading cause of death in the United States,
responsible for 1 of every 4.8 deaths or close to 500,000 deaths each year. The
disease is caused by the accumulation of atherosclerotic plaque, consisting of
lipid deposits, macrophages and fibrous tissue, on the walls of vessels
supplying heart muscle. Rupture of unstable plaques exposes substances that
promote platelet aggregation and thrombus formation. The thrombus is composed of
platelets, blood cells and fibrin that can block one or more of the coronary
vessels, resulting in an inadequate supply of oxygen to the heart muscle. This
highly active muscle is quickly damaged and the lesions are irreversible because
cardiomyocytes, the specialized muscle cells of the heart, are not capable of
cell division. The end result is an infarct, a damaged area of heart muscle in
which necrotic cardiomyocytes are replaced by scar tissue and fibrosis,
weakening the contractility and function of the heart. According to the American
Heart Association, approximately 1,000,000 heart attacks occur annually in the
U.S. Of the 800,000 patients who survive, approximately 200,000 will die within
a year.
Treatments to prevent ischemic damage after a myocardial infarction include
thrombolytic drugs that break down fibrin clots and open up occluded arteries.
These drugs have greatly influenced morbidity and mortality from occlusive
events, but must be administered within a short interval after a myocardial
infarction to be effective. Even with current medical management, over one third
of acute myocardial infarctions are fatal. Cardiac catheterization and
angioplasty to dislodge the thrombus and open the occluded vessel has proved
effective in restoring perfusion but cannot reverse preexisting ischemic damage.
While cardiac myocytes do not have the capacity to divide and repair
damaged myocardium, skeletal muscle contains cells called myoblasts that divide
when called upon to repair damaged muscle. Diacrin scientists have isolated and
expanded myoblasts from human tissue and are studying the use of these cells for
transplantation into damaged heart muscle. The Company believes that patients
suffering from myocardial infarctions would benefit greatly if these myoblasts
could repair their damaged myocardium. These cells would be isolated from a
muscle biopsy of a patient who had suffered a myocardial infarction and would
thus allow transplantation of a patient's own myoblasts into their heart,
thereby avoiding any immunological barriers. Preclinical studies conducted by
Diacrin have demonstrated that myoblasts integrate into rodent heart muscle. In
a large animal model of myocardial infarction, Diacrin has demonstrated that
myoblasts can be delivered to the site of an infarct by infusion via the
coronary vessels (allowing use of the radiological procedures currently
practiced for angioplasty). These cells survive and infiltrate the myocardium in
and around the infarct zone. These studies are now being extended to determine
whether the myoblasts infused into infarcted myocardium repair the damaged,
ischemic tissue. Any improvement will be measured by increased myocardial
contractility and cardiac output. Assuming successful completion of these animal
studies, the Company plans to seek FDA clearance to initiate human clinical
trials.
13
<PAGE>
Retinal Epithelial Cells for Macular Degeneration
Age related macular degeneration ("AMD") is a disease of the retina
characterized by the loss of vision due to the atrophy of photoreceptors in the
central part of the retina, the macula lutea. The macula is the most important
part of the eye for central vision and for high resolution vision such as that
used in reading and driving. Retinal pigment epithelial (RPE) cells that lie
beneath the light-sensing cells responsible for vision provide support for the
retinal photoreceptors and digest the discarded outer segments of the neural
retina.
In AMD, abnormal accumulation of metabolic debris results from reduced
activity of the RPE and leads to gradual loss of photoreceptors. The RPE cells
become dysfunctional and metabolic by-products damage photoreceptors, thus
compromising visual acuity. As this layer of cells does not readily replicate in
the adult, damage to the RPE can be irreversible and lead to loss of
photoreceptors with concomitant decreased visual acuity. Macular degeneration is
a common disease, affecting 13 million people in the United States. It is
primarily a disease of the elderly, with 19.4% of 65-74 year olds and 36.8% of
individuals over 75 having vision loss. Approximately 85%-90% of AMD patients
have the "dry " form of the disease in which the RPE layer degenerates without
new blood vessel growth and 10-15% have the "wet" form. Effective therapies for
AMD are not currently available.
Diacrin's approach is to repopulate the dysfunctional RPE cell layer by
transplanting RPE cells into the correct anatomical space below the retinal
photoreceptors. This therapeutic approach has the potential to reestablish
function in the macula, prevent further loss of vision and to improve visual
acuity in patients presenting with the dry form of the disease. In patients with
the wet form of AMD, this therapy could be used in conjunction with surgery to
remove choroidal neovascular membranes. Because of its key role in maintaining
the integrity of the photoreceptors and its lack of regenerative capacity, the
idea of replacing defective RPE by transplantation is an attractive one.
Recently, RPE transplantation has been performed by others in the clinic using
human fetal RPE cells. The Company plans to use porcine fetal tissue, thus
avoiding the ethical and practical problems of obtaining aborted human tissue.
Preclinical studies are in progress to demonstrate the efficacy of fetal porcine
RPE cells for the repair of damaged RPE in animal models. The Company will also
test its proprietary immunomodulation technology to prevent rejection of the
graft. Assuming successful completion of preclinical studies, the Company plans
to seek FDA clearance to initiate human clinical trials.
Manufacturing
The manufacture of the Company's products will require the continuous
availability of porcine tissue harvested under cGMPs from pigs tested to be free
of infectious agents. The Company's current source of pig facilities and
services is obtained under contracts from Tufts and Charles River Pharmservices,
Inc. The Company has also qualified several pig producers to provide pigs for
the Company's production processes. The Company's current long-range plan is to
establish contractual relationships with pig producers for the supply of
qualified pigs.
For the Phase 1 clinical trials of the Joint Venture Products, the Company
isolated and prepared populations of porcine tissue in its own clinical
production facilities. The Joint Venture is finalizing a five-year sublease
agreement with Genzyme's Tissue Repair Division for approximately 15,000 square
feet of clinical production and support space for the production of the Joint
Venture Products needed in conjunction with planned clinical trials. This
facility is also believed to be capable of satisfying projected initial demand
for
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<PAGE>
commercial quantities of the Joint Venture Products. This arrangement will
enable the Company to utilize its existing clinical production facilities for
the clinical supply of other product candidates and to postpone the need for
significant additional investment in such facilities.
The antibody fragment used in Diacrin's immunomodulation technology is
currently obtained from a contract manufacturer. The Company will evaluate on an
ongoing basis the cost effectiveness and other relevant factors necessary to
determine whether the Company should continue to obtain the antibody fragment
from a contract manufacturer or produce the antibody fragment on its own.
The Company's long-range plan is to establish certain of its own internal
manufacturing capabilities, including the facilities necessary to test, isolate
and package an adequate supply of finished cell products in order to meet its
long-term clinical and commercial manufacturing needs.
Patents and Licenses
The Company intends to aggressively seek patent protection for any products
it develops. The Company also intends to seek patent protection or rely upon
trade secrets to protect certain of its technologies which will be used in
discovering and evaluating new products. The Company has 5 issued U.S. patents
and 19 patent applications pending with the United States Patent and Trademark
Office. Foreign counterparts have also been filed in a number of selected
countries. These applications seek composition-of-matter and use protection for
the various products the Company has in development. Applications are on file
for neurons, hepatocytes, cardiac myocytes and expansions of the Company's
technology base.
On February 1, 1994, MGH was awarded a patent in the United States covering
the basic immunomodulation technology used by Diacrin. Foreign counterparts of
this patent have been filed. Under an agreement with MGH, the Company has an
exclusive, worldwide license to the technology and the inventions described in
the patent, and all foreign counterparts, including any continuations, reissues
or substitutions as well as any patents and equivalents which may mature from
such patent, subject to the payment of royalties. Unless sooner terminated, the
Company's rights will continue, on a country by country basis, until the last to
expire of the patents, at which time the Company will have a fully paid-up
license. Either party may terminate the agreement, upon notice, in the event the
other party defaults in its material obligations and has failed to cure such
default within 60 days of receipt of such notice.
In September 1996, the Company and Genzyme entered into an agreement to
form a joint venture to develop and commercialize the Joint Venture Products. In
connection with that agreement, the Company granted to the Joint Venture the
exclusive, worldwide, irrevocable (during the term of the Joint Venture
agreement), royalty-free right and license under the Company's existing patent
rights and technology to develop, make, have made, use, offer for sale, sell,
have sold, import and export the Joint Venture Products. The license granted by
the Company is limited to the treatment of Parkinson's disease and Huntington's
disease in humans using porcine fetal cells (the "Field"). In the event that
either the Company or Genzyme develops or acquires additional technology or
patent rights that are useful in the Field, the party owning such technology or
patent rights is obligated to offer a license to the Joint Venture, as described
above, to such technology or patent rights. The immunomodulation technology
licensed to the Company from MGH has been non-exclusively sublicensed to the
Joint Venture for use exclusively in the Field.
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<PAGE>
To protect its trade secrets and other proprietary information, the Company
requires all employees, consultants, advisors and collaborators to enter into
confidentiality agreements with Diacrin.
Sales and Marketing
Under the terms of the Joint Venture agreement, Genzyme, which has an
established sales force and experience in the sales and marketing of
biopharmaceutical and surgical products, is authorized to market and sell the
Joint Venture Products on an exclusive basis as agent for and on behalf of the
Joint Venture.
With regard to the Company's other product candidates, the Company has not
yet developed sales and marketing capabilities. The Company may form strategic
alliances with established pharmaceutical or biotechnology companies in order to
finance the development of certain of its products and, assuming successful
development, to market such products. Such alliances may enable the Company to
expand or accelerate its product development efforts and also may provide the
Company with access to established marketing organizations.
Government Regulation
Regulation by governmental authorities in the United States and foreign
countries is a significant factor in the development, manufacture and marketing
of the Company's product candidates and in its ongoing research and product
development activities. All of the Company's products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous testing and approval
procedures by the FDA and similar authorities in foreign countries. Various
federal statutes and regulations govern the preclinical and clinical testing,
manufacturing, labeling, distribution, advertising and sale of such products.
The process of obtaining these approvals and the subsequent compliance with
applicable federal statutes and regulations require the expenditure of
substantial time and financial and other resources.
Preclinical testing is generally conducted in the laboratory on animals to
evaluate the potential efficacy and the safety of a product. The results of
these studies are submitted to the FDA as part of an IND application, which must
become effective before human clinical testing can begin. Typically, clinical
evaluation involves a three-phase process. In Phase 1, clinical trials are
conducted with a small number of healthy human subjects to determine the early
safety profile. In Phase 2, clinical trials are conducted with groups of
patients afflicted with the specific disease in order to determine preliminary
efficacy, optimal treatment regimens and expanded evidence of safety. In Phase
3, large scale, multi-center, comparative clinical trials are conducted with
patients afflicted with a target disease in order to provide enough data for the
statistical proof of safety and efficacy as required by the FDA and others. In
addition, the FDA may request post-marketing (Phase 4) monitoring of the
approved product, during which clinical data are collected on selected groups of
patients to monitor longer-term safety.
Upon completion of Phase 3, for products regulated by the FDA's Center for
Biologic Evaluation and Research ("CBER"), the results of preclinical and
clinical testing are submitted to the FDA in the form of an Establishment
License Application ("ELA") and a Product License Application ("PLA") or
Biologics License Application ("BLA") (an integration of the PLA and ELA) for
approval to manufacture and commence commercial sales. In responding to these
applications, the FDA may grant marketing approval, request additional
information or deny the application if the FDA determines that the application
does not satisfy its regulatory approval criteria. The Joint Venture Products
and all of the
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<PAGE>
Company's other products are expected to be regulated by CBER. The Company will
also be subject to widely varying foreign regulations governing clinical trials
and sales of its products. Whether or not FDA approval has been obtained,
approval of a product by the comparable regulatory authorities of foreign
countries must be obtained prior to the commencement of marketing of the product
in those countries. The approval process varies from country to country and the
time may be longer or shorter than that necessary for FDA approval. The Company
may rely on licensees to obtain regulatory approval for marketing certain of its
products in certain foreign countries.
The Company intends to take advantage of the regulatory pathways which may
provide accelerated marketing approval of its cell transplantation products and
allow limited cost recovery during the clinical research phase. These include:
(i) marketing exclusivity for products which qualify for orphan drug status;
(ii) approval for limited cost recovery during clinical testing under treatment
IND status; and (iii) accelerated marketing approval for more effective or
better tolerated therapies for serious conditions.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or diseases where fewer than 200,000 persons in the United States would
be likely to receive the treatment. A drug that receives orphan drug designation
by the FDA and is the first product to receive FDA marketing approval for its
product claim is entitled to a seven-year exclusive marketing period in the
United States for that product claim. Orphan drug designation can be terminated
by the FDA for a number of reasons, including if the manufacturer of the orphan
drug product can not provide an adequate supply of the product. Furthermore, a
drug that is considered by the FDA to be different than a particular orphan drug
is not barred from sale in the United States during such seven-year exclusive
marketing period. Legislation has previously been introduced in Congress to
limit the marketing exclusivity provided for certain orphan drugs. Although the
outcome of that legislation, if reintroduced, is uncertain, there remains a
possibility that future legislation will limit the incentives currently afforded
to the developers of orphan drugs.
Diacrin has assigned to the Joint Venture the orphan drug designation it
has received from the FDA for NeuroCell(TM)-PD for the treatment of Hoehn and
Yahr stage 4 and stage 5 Parkinson's disease patients and for NeuroCell(TM)-HD.
Diacrin's NeuroCell(TM)-FE, and spinal cord cells for spinal cord injury are
also targeted to populations of less than 200,000 and, therefore, will be
pursued as orphan drugs.
Treatment IND is a mechanism established by the FDA in 1987 which allows a
company to distribute promising investigational therapies to patients outside of
the established clinical trials and to charge a reasonable fee for such therapy.
The disease must be serious or life- threatening and there must not be
satisfactory alternative treatments. Treatment IND status has been applied to a
variety of diseases including cancer, AIDS, Parkinson's disease, Alzheimer's
disease and multiple sclerosis and to several anti-infectives for renal
transplant patients. Diacrin intends to pursue this designation, where
appropriate.
In 1988, the FDA issued a rule to expedite the testing and approval process
for therapies which can treat life-threatening and severely debilitating
diseases. Recently, the FDA published a rule which expands this concept to
patients with chronic illnesses that are generally well managed by available
therapy but may have serious outcomes in some or all phases of the disease. The
Company believes that many of its potential therapies may be covered under this
rule, which accelerates the FDA approval process by reducing or eliminating the
need to conduct large, expanded (Phase 3) clinical studies prior to applying for
a marketing license (Subpart E regulation) and allowing the use of "surrogate
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<PAGE>
endpoints" in clinical trials (Subpart H regulation).
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds, infectious disease agents and recombinant DNA materials used in
connection with the Company's research work.
Competition
The Company believes that its ability to compete successfully will be based
on its ability to create and maintain scientifically advanced technology,
develop proprietary products, attract and retain qualified scientific personnel,
obtain adequate financing, obtain patents, orphan drug designation or other
protection for its products, obtain required regulatory approvals and
manufacture and successfully market its products both independently and through
collaborators.
The biopharmaceutical and pharmaceutical industries are characterized by
intense competition. The Company competes against numerous companies, many of
which have substantially greater financial and other resources than the Company.
Private and public academic and research institutions also compete with Diacrin
in the research and development of human therapeutic products. In addition, many
of the Company's competitors have significantly greater experience than the
Company in the testing of pharmaceutical and other therapeutic products and
obtaining FDA and other regulatory approvals of products for use in health care.
Accordingly, the Company's competitors may succeed in obtaining FDA approval for
products more rapidly than the Company. If the Company commences significant
commercial sales of its products, it will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which it has
limited or no experience.
The Company's products under development will compete with products and
therapies which are either currently available or currently under development.
Competition will be based, among other things, on efficacy, safety, reliability,
price, availability of reimbursement and patent position. The Company is aware
of other companies which are pursuing research and development of alternative
products or technologies addressing the same disease categories as Diacrin's
development programs.
Employees
As of January 31, 1998, the Company had 52 full-time employees, 39 of whom
were engaged in research, development, clinical and quality assurance/quality
control activities. No Company employees are represented by a labor union or
covered by a collective bargaining agreement.
Item 2. Properties
----------
The Company leases a facility which contains approximately 28,000 square
feet of space in Charlestown, Massachusetts. The lease has a ten-year term
ending in 2001, providing for a base rental rate of approximately $60,000 per
month, plus applicable property taxes and insurance. The Company's facilities
are equipped with laboratory and cell culture capabilities sufficient to satisfy
the Company's research and development requirements for the foreseeable future
and cell isolation capabilities sufficient to satisfy the clinical production
requirements of several of its product candidates. To the extent that additional
similar facilities may be required, the Company will be required to secure
additional facilities or seek outside contractors to provide such capabilities.
The Joint Venture is finalizing a sublease agreement ending in 2002 with
Genzyme's Tissue Repair Division for approximately 15,000 square feet of
clinical production and support space for the production of the Joint Venture
Products. The sublease agreement provides for a minimum gross rental rate of
approximately $81,000 per month to be paid by the Joint Venture. These
facilities are equipped with cell isolation facilities which Diacrin believes
are sufficient to satisfy the clinical and initial commercial production
requirements of the Joint Venture Products. To the extent that
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additional facilities are required for commercial production of the Joint
Venture Products, the Joint Venture will be required to secure additional
facilities to provide such capabilities.
Item 3. Legal Proceedings
-----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
fiscal year ended December 31, 1997.
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Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the
directors, executive officers and other key employees of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Thomas H. Fraser, Ph.D. (1) 49 President and Chief Executive Officer; Director
E. Michael Egan 44 Senior Vice President, Corporate Development
Mark J. Fitzpatrick 35 Vice President of Finance and Administration;
Chief Financial Officer and Treasurer
Albert S. B. Edge, Ph.D. 44 Senior Director of Molecular and Cellular
Biology
Jonathan H. Dinsmore, Ph.D. 36 Director of Cell Transplantation Research
Roger J. Gay, Ph.D. 44 Director of Process Development
Abdellah Sentissi, Ph.D. 48 Director of Quality Control and Quality
Assurance
Zola P. Horovitz, Ph.D. (1) 63 Director
John W. Littlechild (2) 46 Director
Stelios Papadopoulos, Ph.D. (1) (2) 49 Director
Henri A. Termeer (2) 51 Director
Christopher T. Walsh, Ph.D. 54 Director
- -------------------------------------------
(1) Member of Audit and Finance Committee
(2) Member of Compensation Committee
</TABLE>
Thomas H. Fraser, Ph.D., has been President and Chief Executive Officer and
a member of the Board of Directors of the Company since 1990. He was previously
Executive Vice President, Corporate Development, for Repligen Corporation
("Repligen"), a biopharmaceutical company. Dr. Fraser was the founding Vice
President for Research and Development at Repligen in 1981 and served as
Executive Vice President from 1982 through 1990 as well as Chief Technical
Officer from 1982 through 1988. Prior to joining Repligen, Dr. Fraser headed the
recombinant DNA research group in Pharmaceutical Research and Development at The
Upjohn Company, a pharmaceutical company. Dr. Fraser received his Ph.D. in
biochemistry from the Massachusetts Institute of Technology and was a Damon
Runyon-Walter Winchell Cancer Fund Postdoctoral Fellow at The University of
Colorado.
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E. Michael Egan has been Senior Vice President, Corporate Development, of
the Company since June 1993. Mr. Egan joined Diacrin from Repligen, where he was
employed from 1983 to 1993, and since 1989 had been Vice President of Business
Development. He was also a member of the Board of Directors of Repligen Clinical
Partners, L.P., and the Secretary/Treasurer of Repligen Sandoz Research
Corporation. Mr. Egan's previous positions at Repligen include Director of
Business Development and Manager of Business Development. Prior to joining
Repligen in 1983, Mr. Egan was a laboratory supervisor at Dana-Farber Cancer
Institute, Division of Medicine. He received a B.S. in biology from Boston
College and a Certificate of Special Studies in Administration and Management
from Harvard University in 1986.
Mark J. Fitzpatrick has been Vice President of Finance and Administration
and Chief Financial Officer since November 1996, Director of Finance and
Administration from September 1992 to November 1996, Treasurer since February
1992 and joined Diacrin as Controller in July 1991. From 1987 to 1991, he was
employed at Repligen, first as Accounting Manager and then as Manager of
Financial Analysis and Planning. From 1984 to 1987, he was a member of the
professional staff of Arthur Andersen & Co. Mr. Fitzpatrick received a B.S.
degree in accounting from Boston College and was awarded a CPA certificate from
the Commonwealth of Massachusetts in 1987.
Albert S.B. Edge, Ph.D., has been Senior Director of Molecular and Cellular
Biology since October 1994. He joined Diacrin in 1992 as Director of Protein
Chemistry and in 1993 became Director of Molecular and Cellular Biology. Dr.
Edge was previously Assistant Professor of Medicine at Harvard Medical School
and Investigator at the Joslin Diabetes Center. He has been Principal
Investigator on several grants from the NIH and was the recipient of a Career
Development Award from the Juvenile Diabetes Foundation from 1987 to 1990. He
was Mary K. Iacocca Fellow of the Joslin Diabetes Center in 1984 and after
appointment to the faculty was selected as Capps Scholar in Diabetes of Harvard
Medical School from 1985 to 1987. While a Postdoctoral Fellow in the Department
of Biological Chemistry at Harvard Medical School, Dr. Edge was awarded
Fellowships from the American Cancer Society and the NIH. He received his Ph.D.
in biochemistry from Albany Medical College where he was a Predoctoral Research
Fellow of the United States Public Health Service.
Jonathan H. Dinsmore, Ph.D., has been Director of Cell Transplantation
Research since December 1994. He joined Diacrin in 1992 as a Research Scientist
and was subsequently promoted to Principal Investigator. Dr. Dinsmore was
previously a Postdoctoral Fellow of the American Cancer Society in the Biology
department at the Massachusetts Institute of Technology from 1988 to 1992. He
received a Ph.D. in biology from Dartmouth College, where he was a Presidential
Scholar and recipient of a Kramer Fellowship. Dr. Dinsmore has worked on
National Science Foundation-sponsored research projects at the Marine Biological
Laboratories in Woods Hole, Massachusetts and at a United States research base
in Antarctica.
Roger J. Gay, Ph.D., has been Director of Process Development since
November 1993. From 1986 through 1993, he was Director of Product Development at
Organogenesis, Inc. Dr. Gay's previous positions were Manager of a Contract
Research and Cytotoxicity Testing Laboratory and Director of Product Development
at Bioassay Systems Research Corporation from 1982 to 1986. He received a B.A.
in chemistry from the College of the Holy Cross in 1975 and a Ph.D. in
biochemistry from the University of Rochester in 1981. From 1981 through 1983,
he was a postdoctoral research fellow in the Department of Microbiology and
Molecular Genetics at Harvard Medical School.
21
<PAGE>
Abdellah Sentissi, Ph.D., has been Director of Quality Control and Quality
Assurance since October 1995. Prior to joining Diacrin, from 1992 to 1995, he
served as the Director of QC/QA and Technical Affairs at Endocon, Inc. From 1985
through 1992, he was the Chief of Quality Control at Massachusetts Biologics
Laboratories. He received a pharmacy degree in 1973 and a biology degree in 1976
from the University of Paul Sabatier, Toulouse, France, and a Ph.D. in
biomedical sciences from Northeastern University in 1984. From 1984 through
1985, he was a postdoctoral research fellow in the Department of Clinical
Chemistry at Northeastern University. He has been a lecturer in pharmaceutical
biotechnology at the School of Pharmacy at Northeastern University since 1990.
Zola P. Horovitz, Ph.D., has served as a Director of the Company since May
1994. He was Vice President, Business Development and Planning at Bristol-Myers
Squibb Pharmaceutical Group from August 1991 until 1994 and was Vice President,
Licensing from 1989 to August 1991. Prior to 1989, Dr. Horovitz spent 30 years
as a member of the Squibb Institute for Medical Research, most recently as Vice
President, Research Planning. He is also director of Avigen Inc., BioCryst
Pharmaceuticals, Clinicor, Magainin Pharmaceuticals, Procept, Inc., Roberts
Pharmaceuticals and Synaptic Pharmaceuticals, Inc., biotechnology companies. Dr.
Horovitz received his Ph.D. from the University of Pittsburgh.
John W. Littlechild has been a Director of the Company since April 1992.
Mr. Littlechild is a general partner of HealthCare Partners II, L.P. ("HCPII"),
HealthCare Partners III, L.P. ("HCPIII") and HealthCare Partners IV, L.P.
("HCPIV"), the general partner, respectively, of HealthCare Ventures II, L.P.
("HCVII"), HealthCare Ventures III, L.P. ("HCVIII") and HealthCare Ventures IV,
L.P. ("HCVIV"), and a Vice Chairman of HealthCare Investment Corporation
("HIC"), a venture management company that, among other things, provides
management services to HCVII, HCVIII and HCVIV. HCVII, HCVIII and HCVIV are
principal stockholders of the Company. From 1984 to 1991, Mr. Littlechild was a
Senior Vice President of Advent International Corporation, a venture capital
company ("Advent") in Boston and London. Prior to working at Advent in Boston,
Mr. Littlechild was involved in establishing Advent in the United Kingdom. From
1980 to 1982, Mr. Littlechild served as Assistant Vice President for Citicorp
Venture Corporation, a venture capital company, in London, prior to which he
worked with ICI Ltd., an agro-chemical company, and Rank Xerox, an office
equipment company, in marketing and financial management. He holds a B.Sc. from
the University of Manchester and an MBA from Manchester Business School. Mr.
Littlechild serves on the boards of directors of various health care and
biotechnology companies, including Orthofix International N.V., a medical
devices company, and LeukoSite, Inc. and Virus Research Institute, Inc.,
biotechnology companies.
Stelios Papadopoulos, Ph.D., has been a Director of the Company since
November 1991. He is a Managing Director and Head of the Health Care Investment
Banking Group at PaineWebber Incorporated ("PaineWebber"), which is engaged in
investment banking and securities brokerage. From 1986 until joining PaineWebber
in April 1987, Dr. Papadopoulos was a Vice President in equity research at
Drexel Burnham Lambert Incorporated, an investment banking firm. From 1985 to
1986, Dr. Papadopoulos was a biomedical technology analyst at Donaldson, Lufkin
and Jenrette Securities Corporation. Prior to that, Dr. Papadopoulos was a
member of the faculty of the Department of Cell Biology at New York University
Medical Center. Dr. Papadopoulos holds a Ph.D. in biophysics and an MBA in
finance, both from New York University.
Henri A. Termeer has been a Director of the Company since December 1996. He
has served as President and a Director of Genzyme since October 1983, as Chief
Executive
22
<PAGE>
Officer since December 1985 and as Chairman of the Board since May 1988. In May
1995, he was elected Chairman of the Biotechnology Industry Organization, the
biotechnology industry's national trade association. For ten years prior to
joining Genzyme, Mr. Termeer held various management positions at Baxter
Travenol Laboratories, Inc., a manufacturer of human health care products. Mr.
Termeer also serves on the boards of directors of Abiomed, Inc., AutoImmune
Inc., GelTex Pharmaceuticals Inc., Genzyme Transgenics Corporation and
Introgene, all biotechnology companies and is a trustee of Hambrecht & Quist
Healthcare Investors and Hambrecht & Quist Life Sciences Investors.
Christopher T. Walsh, Ph.D. has been a Director of the Company since April
1997. From 1992 to 1995, he served as President of the Dana-Farber Cancer
Institute. Since 1991, Dr. Walsh has served as Hamilton Kuhn Professor of
Biological Chemistry and Molecular Pharmacology at Harvard Medical School. From
1987 to 1995, he was Chairman of the Harvard Medical School Biological Chemistry
and Molecular Pharmacology Department. Dr. Walsh received his A.B. from Harvard
University and his Ph.D. in Life Sciences from Rockefeller University. He is
also director of LeukoSite, Inc., a biotechnology company.
Directors are elected annually by the stockholders of the Company and hold
office until the next annual meeting of stockholders or until their resignation
or removal. Executive officers of the Company are elected by the Board of
Directors on an annual basis and serve at the discretion of the Board of
Directors. There are no family relationships among any of the executive officers
or directors of the Company.
23
<PAGE>
Scientific Advisory Board
The Company's scientific advisory board (the "Scientific Advisory Board")
is a multi-disciplinary assemblage of scientists and physicians in the fields of
transplantation, immunology, endocrinology, neurophysiology and neuromuscular
physiology, transplantation biology and surgery. The Scientific Advisory Board
meets regularly to review and evaluate the Company's research programs and
advise the Company with respect to technical matters. The members of the
Scientific Advisory Board are as follows:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Hugh Auchincloss, Jr., M.D. Associate Professor of Surgery, Harvard Medical School; Director,
Pancreas Transplantation and Associate Visiting Surgeon,
Massachusetts General Hospital
Jay A. Berzofsky, M.D., Ph.D. Chief, Molecular Immunogenetics and Vaccine Research Section,
Metabolism Branch, NCI
Robert H. Brown, Jr., M.D., D.Phil. Director of Cecil B. Day Laboratory for Muscular Research,
Associate in Neurology, Massachusetts General Hospital; Associate
Professor of Neurology, Harvard Medical School
Laurie H. Glimcher, M.D. Professor of Immunology, Department of Cancer Biology, Harvard
School of Public Health and Professor of Medicine, Harvard Medical
School
Ronald D. McKay, Ph.D. Chief, Laboratory of Molecular Biology,
National Institute of Neurological Disorders and Stroke, National
Institute of Health
David H. Sachs, M.D. Director, Transplantation Biology Research Center, Massachusetts
General Hospital; Paul S. Russell/Warner-Lambert Professor of
Surgery (Immunology), Harvard Medical School
</TABLE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
--------------------------------------------------------------------
The Company's Common Stock and Warrants have been traded on the National
Market tier of The Nasdaq Stock Market under the symbols DCRN and DCRNW,
respectively, since August 12, 1996. From February 13, 1996 (the date of the
Company's initial public offering) until August 12, 1996 (the date on which the
securities included in the Units, issued in the IPO, became separately
transferable), the Company's Units, which consisted of one share of Common Stock
and one Warrant to purchase one share of Common Stock traded on the National
Market tier of The Nasdaq Stock Market under the symbol DCRNZ. Prior to February
13, 1996, there was no established public trading market for any of the
Company's equity securities. The following table sets forth for the periods
indicated the high and low sale prices for the Units, Common Stock and Warrants
during 1996 and 1997 as reported on the Nasdaq National Market:
24
<PAGE>
<TABLE>
<CAPTION>
High Low
--------------------------- --------------------------
Fiscal Year 1996
- ----------------
Units:
- ------
<S> <C> <C>
First Quarter (from February 13, 1996) 12 1/2 8
Second Quarter 14 3/4 10
Third Quarter (until August 12, 1996) 12 5/8 9 1/4
Common Stock:
- -------------
Third Quarter (from August 12, 1996) 10 1/2 7 1/4
Fourth Quarter 10 1/4 7 5/8
Warrants:
- ---------
Third Quarter (from August 12, 1996) 3 1
Fourth Quarter 2 7/8 1 3/4
Fiscal Year 1997
- ----------------
Common Stock:
- -------------
First Quarter 16 3/4 9 7/8
Second Quarter 14 8 1/2
Third Quarter 12 3/4 9
Fourth Quarter 14 8 3/4
Warrants:
- ---------
First Quarter 6 1/2 1 7/8
Second Quarter 5 1/4 2 1/4
Third Quarter 4 1/8 2 1/2
Fourth Quarter 3 7/8 1 3/4
</TABLE>
As of February 4, 1998, there were approximately 3,100 holders of record of
the Company's Common Stock.
The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain earnings, if any, for use in its
business and does not anticipate declaring or paying any cash dividends in the
foreseeable future.
25
<PAGE>
The Company did not sell any equity securities during the quarter ended
December 31, 1997 that were not registered under the Securities Act.
The following information updates and supplements the information regarding
use of proceeds originally filed by Diacrin on Form SR for the period ended May
12, 1996, as amended to date and relates to securities sold by the Company
pursuant to the Registration Statement on Form S-2 (Registration No: 33-80773)
which was declared effective on February 12, 1996: Through December 31, 1997,
the Company has used approximately $3,267,000 of the total net proceeds from its
initial public offering of $20,911,755. Of the $3,267,000 used, approximately
$221,000 was used for the purchase of machinery and equipment; approximately
$189,000 was used for repayment of indebtedness; and approximately $2,857,000
was used for working capital. The unused proceeds of approximately $17,645,000
are in temporary investments consisting of corporate notes, a U.S. government
agency obligation, a money market mutual fund, commercial paper and certificates
of deposit. All proceeds used or invested were direct or indirect payments to
others.
Item 6. Selected Financial Data
-----------------------
The selected financial data set forth below as of December 31, 1996 and
1997 and for the three years in the period ended December 31, 1997 are derived
from the Company's financial statements which have been audited by Arthur
Andersen LLP, independent public accountants, and which are included elsewhere
in this Annual Report on Form 10-K. The selected financial data set forth below
as of December 31, 1993, 1994 and 1995 and for the years ended December 31, 1993
and 1994 are derived from the Company's financial statements which have been
audited by Arthur Andersen LLP and are not included herein. The data set forth
below should be read in conjunction with the Company's financial statements,
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Annual Report on
Form 10-K.
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
REVENUES:
Research and development $ $ 152 $ 45 $ 1,144 $ 4,763
Interest income 371 203 245 1,100 1,302
---------- ---------- ---------- ---------- ----------
Total revenues 371 355 290 2,244 6,065
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Research and development 5,883 4,912 4,478 5,767 6,863
General and administrative 1,041 1,281 1,128 1,304 1,460
Interest expense 15 12 397 158 93
---------- ---------- ---------- ---------- ----------
Total operating expenses 6,939 6,205 6,003 7,229 8,416
---------- ---------- ---------- ---------- ----------
Net loss $ (6,568) (5,850) $ (5,713) $ (4,985) $ (2,351)
========== ========== ========== ========== ==========
Net loss per common share (1) $ (.58) $ (.57) $ (.40) $ (.18)
========== ========== ========== ==========
Shares used in computing net
loss per common share (1) 10,036,707 10,053,677 12,500,513 13,235,286
========== ========== ========== ==========
<CAPTION>
December 31,
-------------------------------------------------------------
Balance Sheet Data: 1993 1994 1995 1996 1997
- ------------------- ----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents
and investments $ 8,204 $ 2,752 $ 4,115 $ 23,482 $ 21,347
Working capital 7,285 1,603 2,753 12,413 9,551
Total assets 9,023 3,658 5,160 24,275 22,780
Long-term debt 303 493 7,550 370 672
Stockholders' equity (deficit) 7,687 1,840 (3,864) 22,437 20,204
(1) Computed as described in Note 2 (e) of Notes to Financial Statements.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Overview
Since its inception, the Company has principally focused its efforts and
resources on research and development of cell transplantation products to treat
neurodegenerative and other human diseases. The Company's primary source of
working capital to fund such activities has been proceeds from the sale of
equity and debt securities. In addition, commencing October 1, 1996, the Company
has received funding from the Joint Venture with Genzyme in support of the
NeuroCell(TM)-PD and NeuroCell(TM)-HD product development programs. The Company
has not received any revenues from the sale of products to date and does not
expect to generate product revenues for at least the next several years. The
Company has experienced fluctuating operating losses since its inception and
expects that the additional activities required to develop and commercialize the
Company's products will result in increasing operating losses for at least the
next several years. At December 31, 1997, the Company had an accumulated deficit
of $34.7 million.
27
<PAGE>
Results of Operations
Year Ended December 31, 1997 Versus Year Ended December 31, 1996
Research and development revenues were approximately $4.8 million for the
year ended December 31, 1997 versus $1.1 million for the year ended December 31,
1996. The significant increase in revenues during the year ended December
31,1997 was due to revenues received from the Joint Venture.
Interest income was $1.3 million for the year ended December 31, 1997
versus $1.1 million for the year ended December 31, 1996. The 18% increase was
primarily due to additional interest income realized on higher cash balances
available for investment.
Research and development expenses were $6.9 million for the year ended
December 31, 1997 versus $5.8 million for the year ended December 31, 1996. The
19% increase was primarily due to an increase in clinical affairs staffing
necessary to support the clinical trials of the Joint Venture Products, an
increase in quality control/assurance staffing to support expanded clinical
production facilities completed by the Joint Venture during 1997 and an increase
in research personnel. Furthermore, additional costs were incurred in the
current year to validate the Joint Venture production facilities.
General and administrative expenses were $1.5 million for the year ended
December 31, 1997 versus $1.3 million for the year ended December 31, 1996. The
12% increase was primarily due to an increase in administrative personnel as
well as increased costs of shareholder relations.
Interest expense was $93,000 for the year ended December 31, 1997 versus
$158,000 for the year ended December 31, 1996. The decrease was primarily
attributable to interest expense recognized during the 1996 period on the
Company's $7.0 million of Convertible Notes which were issued in May 1995 and
converted to common stock upon the closing of the Company's initial public
offering.
The Company incurred a net loss of approximately $2.4 million for the year
ended December 31, 1997 versus a net loss of approximately $5.0 million for the
year ended December 31, 1996.
Year Ended December 31, 1996 Versus Year Ended December 31, 1995
Research and development revenues were $1.1 million for the year ended
December 31, 1996 versus $45,000 for the year ended December 31, 1995. The 1996
increase was due to approximately $1.0 million of revenue earned in the fourth
quarter of 1996 under the Joint Venture agreement with Genzyme.
Interest income was $1.1 million for the year ended December 31, 1996
versus $245,000 for the year ended December 31, 1995. The increase was primarily
due to additional interest income earned on substantially higher cash balances
available for investment primarily as a result of the Company's initial public
offering.
Research and development expenses were $5.8 million for the year ended
December 31, 1996 versus $4.5 million for the year ended December 31, 1995. The
29% increase was primarily due to an increase in the external costs of
conducting Phase 1 human clinical trials of the NeuroCell(TM)-PD and
NeuroCell(TM)-HD product candidates and the additional quality control and
clinical affairs staffing necessary to support these trials.
28
<PAGE>
General and administrative expenses were $1.3 million for the year ended
December 31, 1996 versus $1.1 million for the year ended December 31, 1995. The
16% increase was primarily due to increased costs of shareholder relations,
professional fees and insurance expense since the Company completed its initial
public offering in February 1996, as well as professional fees incurred in 1996
in connection with establishing the Joint Venture between the Company and
Genzyme.
Interest expense was $158,000 for the year ended December 31, 1996 versus
$397,000 for the year ended December 31, 1995. The 60% decrease was primarily
attributable to the conversion of the Company's $7.0 million of Convertible
Notes, issued in May 1995, to common stock upon the closing of the Company's
initial public offering.
The Company incurred a net loss of approximately $5.0 million for the year
ended December 31, 1996 versus a net loss of approximately $5.7 million for the
year ended December 31, 1995.
Liquidity and Capital Resources
The Company has financed its activities primarily with the net proceeds
from private sales of preferred stock, which in the aggregate have totaled
approximately $22.6 million; with the issuance of $7.0 million of convertible
notes payable; with the net proceeds of $20.9 million from the Company's initial
public offering; with the net proceeds of approximately $3.1 million from the
exercise of warrants originally issued in 1991 in connection with a private sale
of preferred stock; and with the interest earned thereon. In addition, the
Company has recorded approximately $5.8 million of revenue from the Joint
Venture since it commenced on October 1, 1996. At December 31, 1997, the Company
had cash and cash equivalents, short-term investments and long-term investments
aggregating approximately $21.3 million.
The Company purchased approximately $2.2 million of capital equipment since
inception. In November 1997, the Company borrowed $650,000 at the Prime Rate
+.5% under an unsecured five-year term loan with a bank to finance production
equipment acquired during 1997. In December 1994, approximately $805,000 of
capital equipment was sold for proceeds of $600,000 and subsequently leased back
over a four-year term. In addition, approximately $227,000 was sold in 1995 for
its original cost and subsequently leased back over a four-year term. The
Company had no material commitments for capital expenditures as of December 31,
1997.
Under the joint venture agreement with Genzyme, the Company's two lead
product development programs, NeuroCell(TM)-PD for the treatment of Parkinson's
disease and NeuroCell(TM)-HD for the treatment of Huntington's disease, are
being developed by the Joint Venture. Both Genzyme and Diacrin are responsible
for funding the Joint Venture in accordance with the terms, and subject to the
conditions, of the joint venture agreement. Genzyme agreed to fund 100% of the
first $10 million of development and commercialization costs incurred after
October 1, 1996, 75% of the next $40 million and 50% of all remaining
development and commercialization costs in excess of $50 million. After Genzyme
funds the first $10 million, the Company is responsible for funding 25% of the
next $40 million and 50% of all development and commercialization costs in
excess of $50 million. As of December 31, 1997, Genzyme has contributed
approximately $8.7 million to the Joint Venture. The Company's obligation to
fund 25% of the program costs will commence in the first quarter of 1998. The
Company expects that the Joint Venture's 1998 product development plans together
with the Company's commencement of funding of the Joint Venture will
significantly increase the Company's net loss and cash
29
<PAGE>
and investments used in 1998 as compared with 1997.
The Company believes that its existing funds, together with expected future
funding under the Joint Venture agreement with Genzyme, will be sufficient to
fund its operating expenses and capital requirements as currently planned
through at least 1999. However, the Company's cash requirements may vary
materially from those now planned because of results of research and
development, the scope and results of preclinical and clinical testing, any
termination of the Joint Venture, relationships with strategic partners, changes
in the focus and direction of the Company's research and development programs,
competitive and technological advances, the FDA's regulatory process, the market
acceptance of any approved Company products and other factors.
The Company expects to incur substantial additional costs, including costs
related to ongoing research and development activities, preclinical studies,
clinical trials, establish-ing pig production capabilities and the expansion of
its laboratory and administrative activities. Therefore, in order to achieve
commercialization of its potential products, the Company will need substantial
additional funds. There can be no assurance that the Company will be able to
obtain the additional funding that it will require on acceptable terms, if at
all.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time. Note that, except where the context otherwise requires, all references
to the Company's products are inclusive of the Joint Venture Products being
developed in the Joint Venture.
Reliance on Joint Venture with Genzyme Corporation
The Company and Genzyme are parties to a joint venture agreement relating
to the development and commercialization of NeuroCell(TM)-PD and
NeuroCell(TM)-HD, the Company's most advanced product candidates. Under the
agreement, Genzyme has agreed to provide the first $10 million of product
development and commercialization funding required after October 1, 1996 for the
Joint Venture Products, 75% of the next $40 million of funding and 50% of
funding thereafter. In addition, Genzyme has agreed to market and sell the Joint
Venture Products on behalf of the Joint Venture. Furthermore, the Joint Venture
plans to manufacture the Joint Venture Products in facilities controlled by
Genzyme.
Genzyme has the right, at any time after it has contributed $10 million of
funding, to terminate the joint venture agreement, without cause, upon 180 days
notice to Diacrin. In the event of such termination, the Company (i) would lose
a significant source of funding for the NeuroCell(TM)-PD and the
NeuroCell(TM)-HD product development programs, (ii) would lose access to
Genzyme's experienced sales, marketing, development and manufacturing
organizations, and (iii) would need to establish clinical production facilities
for the production of the Joint Venture Products. There can be no assurance that
the Company would be able to complete development or commercialization of
NeuroCell(TM)-PD and NeuroCell(TM)-HD if Genzyme terminated the joint venture
agreement.
In addition, under certain circumstances, Genzyme has the right to
terminate the joint venture agreement following an unremedied breach by Diacrin
of any material term of the agreement. In the event of such termination, Genzyme
has the option to obtain an exclusive, worldwide, royalty-bearing license to
certain Diacrin technology required to
30
<PAGE>
manufacture and market the Joint Venture Products. If Genzyme exercised its
option, the Company would be entitled to receive a royalty on the net sales of
the Joint Venture Products, which royalty may be significantly less than amounts
the Company would be entitled to receive under the 50%/50% profit split agreed
to as part of the joint venture agreement.
Any termination of the joint venture agreement, whether by Genzyme or
Diacrin, could have a material adverse effect on the Company's business, results
of operations or financial position. In addition, there can be no assurance that
the economic and other interests of the Company and Genzyme will coincide during
the term of the joint venture agreement or that disagreements will not occur
between the Company and Genzyme during the term of the agreement, either of
which could have a material adverse effect on the Company's business, results of
operations or financial position. See "Dependence on Others."
Reliance on Cell Transplantation Technology; No Currently Approved
Xenotransplantation-Based Products; PERV Testing
Diacrin has concentrated its efforts and therapeutic product research on
its cell transplantation technology and will be dependent on the successful
development of the technology. Cell transplantation technology is an emerging
technology with, as yet, limited clinical applications. There can be no
assurance that the Company's cell transplantation technology will result in the
development of any therapeutic products. If it does not, the Company may be
required to change dramatically the scope and direction of its product
development activities.
The Company's approach involves xenotransplantation -- the transplantation
of cells from one species into another. Although several companies are focusing
on this area, xenotransplantation-based products represent a novel therapeutic
approach that has not yet been subject to extensive clinical testing.
Xenotransplantation also poses a risk that viruses or other animal pathogens may
be unintentionally transmitted to a human patient. The Company has been required
by the FDA to perform certain tests to determine whether PERV is present in
patients that have received porcine cells. These tests have been performed on
samples from patients who have received NeuroCell(TM)-PD and no PERV was
detected in these samples. The Company has also been required by the FDA to
perform additional tests on porcine neural cells to determine if infectious PERV
is present. These tests have been performed and no PERV was detected. The
Company has been required by the FDA to develop an additional test for the
detection of PERV and has been instructed to routinely monitor patient blood
samples for the presence of PERV. If PERV is detected in this test or samples,
additional tests may be required to assess the risk to patients of PERV
infection. If such additional tests are required, trials of the Company's
porcine cell products may be delayed. While PERV has not been shown to cause any
disease in pigs, it is not known what effect, if any, PERV may have on human
beings. The Company's porcine cell product development programs would be
negatively impacted by the detection of infectious PERV in porcine cells or
clinical trial subjects. An inability to proceed with further trials or a
substantial delay in the clinical trials would have a material adverse effect on
the Company.
No xenotransplantation-based therapeutic product has been approved for sale
by the FDA. The FDA has not yet established definitive regulatory guidelines for
xenotransplantation, but has proposed guidelines in an attempt to reduce the
risk of contamination of transplanted cellular products with infectious agents.
Diacrin has provided the FDA with a written response to the proposed guidelines,
however, there can be no assurance that such guidelines will be issued, or that
Diacrin will be able to comply
31
<PAGE>
with final guidelines that may be issued. Furthermore, there can be no assurance
that any products developed and tested by Diacrin will be approved by the FDA or
regulatory authorities in other countries, or that xenotransplantation-based
products, including the Company's product candidates, will be accepted by the
medical community or third-party payers or that the degree of acceptance will
not limit the size of the market for such products.
History of Operating Losses; No Assurance of Revenue or Operating Profit
The Company has generated no revenue from product sales to date. Diacrin
has accumulated net losses from its inception in 1989 through December 31, 1997
of approximately $34.7 million, and losses are continuing. The Company expects
to incur substantial operating losses for the foreseeable future. The Company
expects that the Joint Venture's 1998 product development plans together with
the Company's commencement of funding of the Joint Venture will significantly
increase the Company's net loss in 1998 as compared with 1997. The Company
currently has no material sources of revenue from product sales or license fees,
and there can be no assurance that it will be able to develop such revenue
sources or that its operations will become profitable, even if it is able to
commercialize any products.
Lack of Commercial Products; No Assurance of Successful Product Development
The Company has no products available for sale and does not expect to have
any therapeutic products commercially available for at least the next several
years, if at all. The Company's potential products will require significant
additional development, preclinical and clinical testing, regulatory approval
and additional investment prior to commercialization. The Company's potential
therapeutic products are at early stages of research and development and the
Company's growth will depend on the successful development and commercialization
of its products. There can be no assurance that any such potential products will
be successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable costs or be successfully marketed.
Need for Substantial Additional Funds
The Company will require substantial additional funding for its research
and product development programs and operating expenses, and for pursuing
regulatory clearances and building production capabilities. Adequate funds for
these purposes, whether obtained through equity or debt financings,
collaborative or other arrangements with corporate partners or from other
sources, may not be available when needed or on terms acceptable to the Company.
Insufficient funds may require the Company to delay, scale back or eliminate
certain of its product development programs or to license others to
commercialize products or technologies that the Company would otherwise seek to
develop and commercialize itself, any of which would have a material adverse
effect on the Company.
Uncertainty Associated with Preclinical and Clinical Testing
Before obtaining regulatory approvals for the commercial sale of any of the
Company's potential products, the products will be subjected to extensive
preclinical and clinical testing to demonstrate their safety and efficacy in
humans. To date, the Company has administered NeuroCell(TM)-PD, NeuroCell(TM)-HD
and NeuroCell(TM)-FE to an aggregate of 25 patients in Phase 1 human clinical
trials. Results of initial preclinical and clinical testing of products under
development by the Company are not necessarily predictive of
32
<PAGE>
results that will be obtained from subsequent or more extensive preclinical and
clinical testing. Furthermore, there can be no assurance that clinical trials of
products under development will demonstrate the safety and efficacy of such
products at all or to the extent necessary to obtain regulatory approvals.
Companies in the biotechnology industry have suffered significant setbacks in
advanced clinical trials, even after promising results in earlier trials. The
failure to adequately demonstrate the safety and efficacy of a therapeutic
product under development could delay or prevent regulatory approval of the
product and would have a material adverse effect on the Company.
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the study and the existence of
competitive clinical trials. Delays in planned patient enrollment in the
Company's current clinical trial or future clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company.
No Assurance of FDA Approval; Government Regulation
The FDA and comparable government agencies in foreign countries impose
substantial regulations on the manufacture and marketing of pharmaceutical
products through lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
Satisfaction of these regulations typically takes several years or more and
varies substantially based upon the type, complexity and novelty of the proposed
product. The Company cannot yet accurately predict when it might first submit
any PLA or BLA for FDA or other regulatory approval.
The effect of government regulation may be to delay marketing of new
products for a considerable or indefinite period of time, to impose costly
procedures upon the Company's activities or to diminish or eliminate any
competitive advantage the Company may enjoy. There can be no assurance that FDA
or other regulatory approval for any products developed by the Company will be
granted on a timely basis, if at all. Any such delay in obtaining, or failure to
obtain, such approvals could adversely affect the marketing of the Company's
products and the ability to generate product revenue. The extent of potentially
adverse government regulation which might arise from future legislation or
administrative action cannot be predicted.
If regulatory approval of a product is obtained, such approval may be
conditioned upon limitations and restrictions on the product use. In addition,
any marketed product and its manufacturer are subject to continuing governmental
review and any subsequent discovery of previously unrecognized problems could
result in restrictions on the product or manufacturer, including, without
limitation, withdrawal of the product from the market. Failure of the Company to
comply with applicable regulatory requirements can, among other things, result
in fines, suspension of regulatory approvals, product recalls, seizure of
products, operating restrictions or civil or criminal prosecution.
Additionally, the Company is or may become subject to various federal,
state and local laws, regulations and recommendations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with the Company's research and development work. The Company is
unable to predict the extent of restrictions that might arise from any
governmental or administrative action. There can also be no assurance that the
Company will not be required to incur significant costs to comply with
environmental laws and regulations, or any assurance that the operations,
business or
33
<PAGE>
assets of the Company will not be materially adversely affected by current or
future environmental laws or regulations.
Rapid Technological Changes; Competition
The Company is engaged in activities in the biopharmaceutical field, which
is characterized by extensive research efforts and rapid technological progress.
There can be no assurance that research and discoveries by other biotechnology
or pharmaceutical companies will not render the Company's programs or products
uneconomical, result in therapies superior to any therapy developed by the
Company or that any products developed by the Company will be preferred to any
existing or newly-developed technologies.
The biotechnology and pharmaceutical industries are characterized by
intense competition. The Company competes against numerous companies, many of
which have substantially greater financial and other resources than the Company.
Several such enterprises have initiated cell transplantation research programs
and/or efforts to treat the same diseases targeted by the Company through
alternate technologies. These competitive enterprises have devoted, and will
continue to devote, substantial resources to the development of cell
transplantation or other products to treat such diseases. Private and public
academic and research institutions also compete with Diacrin in the research and
development of human therapeutic products.
In addition, many of the Company's competitors have significantly greater
experience than the Company in preclinical testing and human clinical trials of
biotechnology and pharmaceutical products and in obtaining FDA and other
regulatory approvals of products. Accordingly, the Company's competitors may
succeed in obtaining FDA approval for products more rapidly or effectively than
the Company. If the Company commences significant commercial sales of its
products, it will also be competing with respect to manufacturing efficiency and
sales and marketing capabilities, areas in which it has no experience.
Limited Regulatory, Manufacturing, Marketing and Sales Capabilities
The Company has not yet invested significantly in regulatory,
manufacturing, marketing, distribution or product sales resources. To date, the
Company has relied on others for the supply and production of pigs for its
clinical programs. Although the Company intends to develop regulatory,
manufacturing, marketing, distribution and sales resources in the future, there
can be no assurance that the Company will be able to develop such resources
successfully.
Uncertain Ability to Protect Proprietary Technology; Reliance Upon Licenses
The biotechnology and pharmaceutical industries place considerable
importance on obtaining patent and trade secret protection for new technologies,
products and processes. The Company's success will depend, in part, on its
ability to obtain patent protection for its products, preserve its trade secrets
and operate without infringing the proprietary rights of others. The Company has
ongoing research efforts and expects to seek additional patents covering this
research in the future. There can be no assurance of its success or timeliness
in obtaining any patents, or of the breadth or degree of protection that any
such patents will afford the Company.
The patent position of biotechnology products is often highly uncertain and
usually involves complex legal and factual questions. There can be no assurance
that patent
34
<PAGE>
applications relating to the Company's potential products or
technology will result in additional patents being issued or that, if issued,
such patents will afford adequate protection to the Company or not be
challenged, invalidated or infringed. Furthermore, there can be no assurance
that others will not independently develop similar products and processes,
duplicate any of the Company's products or, if patents are issued to the
Company, design around such patents. In addition, the Company could incur
substantial costs in defending itself in suits brought against it or in suits in
which it may assert its patents against others. If the outcome of any such
litigation is unfavorable, the Company's business could be adversely affected.
To determine the priority of inventions, the Company may also have to
participate in interference proceedings declared by the United States Patent and
Trademark Office, which could result in substantial cost to the Company.
Much of the Company's know-how and technology is not patentable. To protect
its rights, the Company requires all employees, consultants, advisors and
collaborators to enter into confidentiality agreements with Diacrin. There can
be no assurance, however, that these agreements will provide meaningful
protection for the Company's trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. Further, in the
absence of patent protection, the Company's business may be adversely affected
by competitors who independently develop substantially equivalent technology.
Uncertain Availability of Third-Party Reimbursement and Product Pricing
The Company's ability to commercialize products successfully will depend
substantially on reimbursement of the costs of such products and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). There can be no assurance that reimbursement in the United States or
foreign countries will be available for any products the Company may develop or,
if available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products, thereby
adversely affecting the Company's business.
Third-party payers are increasingly challenging the prices charged for
medical products and services. Also, the trend toward managed health care in the
United States and the concurrent growth of organizations, such as HMOs, which
can control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reform health care or reduce
government insurance programs, may result in lower prices for therapeutic
products. The cost containment measures that health care providers are
instituting, including practice protocols and guidelines and clinical pathways,
and the effect of any health care reform, could materially adversely affect the
Company's ability to sell its products if successfully developed and approved.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future or what effect such legislation
or regulation would have on the Company's business.
Dependence on Key Personnel
Because of the specialized nature of its business, the Company is highly
dependent on its ability to attract and retain qualified scientific and
technical personnel for the research and development activities conducted or
sponsored by the Company. The loss of certain key executive officers could be
significantly detrimental to the Company. Recruiting and retaining qualified
scientific personnel to perform research and development work is critical to the
Company's success. In addition, the Company's anticipated growth and expansion
into areas and activities requiring additional expertise, such as clinical
testing, regulatory
35
<PAGE>
compliance, manufacturing and marketing, will require the addition of new
management personnel and the development of additional expertise by existing
management personnel. There is intense competition for qualified personnel in
the areas of the Company's activities, and there can be no assurance that the
Company will be able to continue to attract and retain the qualified personnel
necessary for the development of its business. The failure to attract and retain
such personnel or to develop such expertise would adversely affect the Company's
business.
Dependence on Others
The Company's strategy for development and commercialization of its product
candidates entails entering into arrangements with corporate partners,
collaborators, licensees and others and upon the subsequent success of these
third parties in performing their obligations, including, as the case may be,
any or all of preclinical and clinical testing, obtaining regulatory approvals,
manufacturing and marketing. There can be no assurance that the Company will be
able to maintain its existing arrangements or establish additional collaborative
arrangements on favorable terms, if at all. If the Company is able to enter into
any additional arrangements, such arrangements may require the Company to
transfer certain material rights to third parties.
There can be no assurance that any such corporate partners, collaborators,
licensees or others will perform their obligations as expected or that the
Company will derive any revenue or profit from any existing or future
arrangements. While the Company believes its partners, collaborators, licensees
and others will have an economic motivation to succeed in performing their
contractual responsibilities, the amount and timing of resources to be devoted
by such parties is not within the control of the Company. Furthermore, there can
be no assurance that the interest of the Company will coincide with those of
such other parties or that disagreements over rights to technology or other
proprietary information or other matters will not occur. In addition, it is
possible that such other parties will be independently involved in the
development of products that may be competitive with the products they are
developing in collaboration with the Company. If any of the Company's partners,
collaborators, licensees or others breaches or terminates its agreement with the
Company or otherwise fails to conduct its required activities in a timely
manner, the development or commercialization of the product candidate under such
collaborative agreement may be delayed, the Company may be required to undertake
unforeseen additional responsibilities or devote unforeseen additional resources
to such development or commercialization or such development or
commercialization could be terminated. Any such event could adversely effect the
Company's business, results of operations or financial position.
Potential Product Liability; Limited Product Liability Insurance
The testing, marketing and sale of human health care products entail an
inherent risk of product liability claims, and there can be no assurance that
substantial product liability claims will not be asserted against the Company.
The Company has limited product liability insurance and may need to increase its
coverage as it expands human clinical trials and if and when it begins to market
products. There can be no assurance that adequate insurance coverage will be
available on acceptable terms, if at all, or that a product liability claim
would not materially adversely affect the business or financial condition of the
Company.
36
<PAGE>
Item 8. Financial Statements
--------------------
All financial statements required to be filed hereunder are filed as an
exhibit hereto, are listed under item 14(a)(1) and are incorporated herein by
reference.
Item 9. Changes in and Disagreements on Accounting and Financial Disclosure
-------------------------------------------------------------------
There have been no disagreements on accounting and financial disclosure
matters.
PART III
Items 10 - 13.
The information required for Part III of this Annual Report on Form 10-K is
hereby incorporated by reference from portions of the Company's definitive proxy
statement relating to the 1998 annual meeting of stockholders of the Company,
which statement will be filed with the Commission not later than 120 days after
the end of the Company's 1997 fiscal year. Such information will be contained in
the sections of such proxy statement captioned "Election of Directors,"
"Meetings of Board of Directors and Committees," "Executive Compensation,"
"Certain Relationships and Related Transactions," "Section 16(a) Beneficial
Ownership Reporting Compliance," "Compensation Committee Interlocks and Insider
Participation," and "Principal Stockholders." Information regarding executive
officers of the Company is furnished in Part I of this Annual Report on Form
10-K under the heading, "Executive Officers of the Registrant."
37
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) (1) Index to Financial Statements
The following Financial Statements are included in this Annual Report on
Form 10-K.
Financial Statements: Page
1. Report of Independent Public Accountants F-1
2. Balance Sheets as of December 31, 1996 and 1997 F-2
3. Statements of Operations for the three years in the period ended
December 31, 1997 F-3
4. Statements of Stockholders' Equity (Deficit) for the three
years in the period ended December 31, 1997 F-4
5. Statements of Cash Flow for the three years in the period ended
December 31, 1997 F-5
6. Notes to Financial Statements F-6
(2) Exhibits
The following is a list of exhibits filed as part of this Annual Report
on Form 10-K:
Exhibit
No. Title Page
- ------- ----------------------------------------------------------------- ----
3.1 - Amended and Restated Certificate of Incorporation
of the Company as amended to date (7)
3.2 - Amended and Restated By-laws of the Company (6)
+10.1 - Research and License Agreement effective as of
October 1, 1989 by and among the Company and The
General Hospital Corporation, as amended effective
as of February 1, 1991 (2)
++10.2 - Employment Agreement dated February 6, 1990 by
and between the Company and Dr. Thomas H. Fraser (2)
10.3 - Rights Agreement dated July 29, 1991 by and among
the Company and the holders of the preferred stock
as amended on September 27, 1991 (2)
10.3(a) - Consent and Agreement to Amend dated April 26, 1995
by and among the Registrant and certain investors
named therein (1)
38
<PAGE>
Exhibit
No. Title Page
- ------- ----------------------------------------------------------------- ----
10.3(b) - Consent and Agreement to Amend dated as of January 4,
1996 by and among the Registrant and certain
investors named therein (6)
10.4 - Warrant Agreement dated November 14, 1991 by and
between Diacrin, Inc. and American Stock Transfer &
Trust Company, as Warrant Agent (2)
10.4(a) - Supplement No. 1 to Warrant Agreement dated
November 14, 1991, dated April 24, 1995, by and
between the Registrant and American Stock Transfer
& Trust Company, as Warrant Agent (1)
++10.5 - 1990 Stock Option Plan, as amended (3)
10.6 - Sublease dated January 24, 1991 by and among the
Company and Building 79 Associated Limited Partnership
and Building 96 Associates Limited Partnership (2)
+10.7 - Letter Agreement dated December 10, 1993 between
the Company and The General Hospital Corporation (4)
++10.8 - 1994 Directors' Stock Option Plan, as amended (9)
10.9 - Master Lease Agreement, dated December 22, 1994,
between the Company and Aberlyn Capital Management
Limited Partnership (5)
10.10 - Agreement to Issue Warrant between the Company
and Aberlyn Capital Management Limited Partnership
dated December 22, 1994, including Common Stock
Purchase Warrant and Registration Rights Agreement (5)
10.10(a)- Waiver and Consent Agreement dated April 24, 1995
by and between the Registrant and Aberlyn
Capital Management Limited Partnership (1)
10.11 - Registration Rights Agreements dated May 31, 1995
by and among the Registrant and the investors
listed on Schedules I and II attached thereto (1)
10.11(a)- Amendment No. 1 to Registration Rights Agreement
dated as of January 4, 1996 by and among the
Registrant and certain investors named therein (6)
10.12 - Unit and Warrant Agreement dated February 12, 1996
by and between the Registrant and American Stock
Transfer & Trust Company (7)
39
<PAGE>
Exhibit
No. Title Page
- ------- ----------------------------------------------------------------- ----
+10.13 - Collaboration Agreement among Diacrin, Inc.,
Genzyme Corporation and Diacrin/Genzyme, LLC dated
as of October 1, 1996 (8)
+10.14 - Operating Agreement of Diacrin/Genzyme LLC (8)
++10.15 - 1997 Stock Option Plan (10)
10.16 - $650,000 Promissory Note dated November 25, 1997
made by the Registrant to the order of Fleet
National Bank *
10.16(a)- Letter Agreement dated November 25, 1997 by and
between the Registrant and Fleet National Bank *
11 - Computation of Net Loss per Common Share *
21 - Subsidiaries - None *
23 - Consent of Arthur Andersen LLP *
27 - Financial Data Schedule *
(b) Reports on Form 8-K.
No current reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this report.
(c) Description of Exhibits.
See Item 14 (a)
40
<PAGE>
(d) Description of Financial Statement Schedules.
None.
- --------------------------------------------------------------------------------
* Filed herewith
(1) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q
(File No. 0-20139) for the quarter ended June 30, 1995 and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10, as amended (File No.
0-20139), on April 29, 1992, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File
No. 0-20139) for the quarter ended September 30, 1994 and incorporated
herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139) for the fiscal year ended December 31, 1993 and incorporated
herein by reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139), for the fiscal year ended December 31, 1994 and incorporated
herein by reference.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-2, as
amended (Registration No. 33-80773) on December 22, 1995, and incorporated
herein by reference.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139) for the fiscal year ended December 31, 1995 and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, as
amended on Form 10-Q/A (File No. 0-20139) for the quarter ended September
30, 1996 and incorporated herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No.
0-20139) for the fiscal year ended December 31, 1996 and incorporated
herein by reference.
(10) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q (File
No. 0-20139) for the quarter ended June 30, 1997 and incorporated herein by
reference.
+Confidential treatment granted as to certain portions of this exhibit.
++Management contract or compensatory plan or arrangement filed as an exhibit to
this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
41
<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 Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
DIACRIN, INC.
By: /s/ Thomas H. Fraser
------------------------
Thomas H. Fraser
President and
Chief Executive Officer
Date: February 13, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Date Title
--------- ---- -----
<S> <C> <C>
/s/ Thomas H. Fraser February 13, 1998 President, Chief Executive
- -------------------------- Officer and Director (Principal
Thomas H. Fraser Executive Officer)
/s/ Mark J. Fitzpatrick February 13, 1998 Vice President of Finance and
- -------------------------- Administration; CFO & Treasurer
Mark J. Fitzpatrick (Principal Financial and Accounting
Officer)
/s/ Zola P. Horovitz February 13, 1998 Director
- --------------------------
Zola P. Horovitz
/s/ John W. Littlechild February 13, 1998 Director
- --------------------------
John W. Littlechild
/s/ Stelios Papadopoulos February 13, 1998 Director
- --------------------------
Stelios Papadopoulos
Director
- --------------------------
Henri A. Termeer
Director
- --------------------------
Christopher T. Walsh
</TABLE>
42
<PAGE>
Report of Independent Public Accountants
To Diacrin, Inc.:
We have audited the accompanying balance sheets of Diacrin, Inc. (a
Delaware corporation) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Diacrin, Inc. as of December
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 14, 1998
F-1
<PAGE>
DIACRIN, INC.
Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,308,710 $ 5,015,777
Short-term investments 6,255,507 6,000,098
Interest receivable and other current assets 316,107 438,756
------------ ------------
Total current assets 13,880,324 11,454,631
------------ ------------
Property and equipment, at cost:
Laboratory and manufacturing equipment 101,738 839,856
Equipment under capital leases 675,262 675,262
Furniture and office equipment 224,920 277,109
Leasehold improvements 51,424 55,557
------------ ------------
1,053,344 1,847,784
Less - Accumulated depreciation and amortization 576,725 853,911
------------ ------------
476,619 993,873
------------ ------------
Long-term investments 9,917,875 10,331,289
------------ ------------
$ 24,274,818 $ 22,779,793
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 162,058 $ 185,306
Accrued expenses 506,949 994,166
Deferred revenue 618,844 387,056
Current portion of long-term debt 179,452 337,171
------------ ------------
Total current liabilities 1,467,303 1,903,699
------------ ------------
Long-term debt 370,431 672,426
------------ ------------
Commitments (Notes 7 and 11)
Stockholders' equity:
Preferred stock, $.01 par value; authorized--5,000,000
shares; none issued and outstanding - -
Common stock, $.01 par value; authorized--30,000,000
shares; issued and outstanding-- 13,189,559 and
13,268,256 shares at December 31, 1996 and 1997,
respectively 131,896 132,683
Additional paid-in capital 54,613,512 54,730,773
Accumulated deficit (32,308,324) (34,659,788)
------------ ------------
Total stockholders' equity 22,437,084 20,203,668
------------ ------------
$ 24,274,818 $ 22,779,793
============ ============
See Accompanying Notes to Financial Statements
</TABLE>
F-2
<PAGE>
DIACRIN, INC.
Statements of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Research and development $ 44,832 $ 1,143,787 $ 4,763,270
Interest income 245,648 1,099,828 1,301,477
------------ ------------ ------------
Total revenues 290,480 2,243,615 6,064,747
------------ ------------ ------------
OPERATING EXPENSES:
Research and development 4,478,114 5,766,528 6,862,528
General and administrative 1,128,359 1,303,731 1,460,403
Interest expense 396,724 158,155 93,280
------------ ------------ ------------
Total operating expenses 6,003,197 7,228,414 8,416,211
------------ ------------ ------------
NET LOSS $ (5,712,717) $ (4,984,799) $ (2,351,464)
============ ============ ============
NET LOSS PER COMMON SHARE $ (.57) $ (.40) $ (.18)
============ ============ ============
SHARES USED IN COMPUTING
NET LOSS PER COMMON SHARE 10,053,677 12,500,513 13,235,286
============ ============ ============
</TABLE>
See Accompanying Notes to Financial Statements
F-3
<PAGE>
DIACRIN, INC.
Statement of Stockholders' Equity (Deficit)
<TABLE>
Convertible Preferred Stock
----------------------------------------------------------
Series A Series B Series C Common Stock
---------------------------------------------------------- -----------------
Number $.01 Number $.01 Number $.01 Number $.01
of Par of Par of Par of Par
Shares Value Shares Value Shares Value Shares Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 6,484,331 $64,843 2,446,917 $24,469 4,455,000 $44,550 372,149 $3,722
Exercise of stock options - - - - - - 9,703 97
Net loss - - - - - - - -
------------------------------------------------------------------------------
BALANCE, December 31, 1995 6,484,331 64,843 2,446,917 24,469 4,455,000 44,550 381,852 3,819
Proceeds from initial public
offering of units, net of
$2,096,640 financing costs - - - - - - 2,875,000 28,750
Conversion of notes payable
and accrued interest thereon
into common stock, net of
financing costs - - - - - - 2,799,999 28,000
Conversion of preferred
stock into common stock (6,484,331) (64,843)(2,446,917) (24,469)(4,455,000) (44,550) 6,693,121 66,931
Exercise of stock options - - - - - - 12,146 122
Exercise of private placement
warrants - - - - - - 427,441 4,274
Net loss - - - - - - - -
------------------------------------------------------------------------------
BALANCE, December 31, 1996 - - - - - - 13,189,559 131,896
Exercise of stock options - - - - - - 78,697 787
Net loss - - - - - - - -
------------------------------------------------------------------------------
BALANCE, December 31, 1997 - $ - - $ - - $ - 13,268,256 $132,683
==============================================================================
Total
Additional Stockholders'
Paid-in Accumulated Equity
Capital Deficit (Deficit)
---------------------------------------------
<S> <C> <C> <C>
BALANCE, December 31, 1994 23,313,132 $(21,610,808) $1,839,908
Exercise of stock options 9,174 - 9,271
Net loss (5,712,717) (5,712,717)
---------------------------------------------
BALANCE, December 31, 1995 23,322,306 (27,323,525) (3,863,538)
Proceeds from initial public
offering of units, net of
$2,096,640 financing costs 20,874,610 - 20,903,360
Conversion of notes payable
and accrued interest thereon
into common stock, net of
financing costs 7,268,308 - 7,296,308
Conversion of preferred
stock into common stock 66,931 - -
Exercise of stock options 15,037 - 15,159
Exercise of private placement
warrants 3,066,320 - 3,070,594
Net loss - (4,984,799) (4,984,799)
---------------------------------------------
BALANCE, December 31, 1996 54,613,512 (32,308,324) 22,437,084
Exercise of stock options 117,261 - 118,048
Net loss - (2,351,464) (2,351,464)
---------------------------------------------
BALANCE, December 31, 1997 $ 54,730,773 $ (34,659,788) $ 20,203,668
=============================================
</TABLE>
See Accompaning Notes to Financial Statements
F-4
<PAGE>
DIACRIN, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,712,717) $ (4,984,799) $ (2,351,464)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 214,506 220,371 277,186
Changes in current assets and liabilities-
Interest receivable and other current assets 26,750 (204,100) (122,649)
Accounts payable (116,784) (28,956) 23,248
Accrued expenses 269,905 (241,643) 487,217
Deferred revenue - 618,844 (231,788)
------------ ------------ ------------
Net cash used in operating activities (5,318,340) (4,620,283) (1,918,250)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments - (6,255,507) 255,409
Purchases of property and equipment, net (107,988) (60,794) (794,440)
Decrease in note receivable from officer 37,500 - -
Increase in long-term investments - (9,917,875) (413,414)
------------ ------------ ------------
Net cash used in investing activities (70,488) (16,234,176) (952,445)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock and warrants 9,271 23,989,113 118,048
Proceeds from term loan - - 650,000
Principal payments on long-term debt (173,880) (156,448) (190,286)
Proceeds from sale leaseback of equipment 226,895 - -
Proceeds from sale of 7.5% convertible notes 7,000,000 - -
(Increase) decrease in deferred financing costs (310,831) 215,684 -
------------ ------------ ------------
Net cash provided by financing activities 6,751,455 24,048,349 577,762
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,362,627 3,193,890 (2,292,933)
CASH AND CASH EQUIVALENTS, beginning of year 2,752,193 4,114,820 7,308,710
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 4,114,820 $ 7,308,710 $ 5,015,777
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Equipment acquired under capital lease obligations $ 226,895 $ - $ -
============ ============ ============
Conversion of notes and accrued interest
into common stock, net of financing costs $ - $ 7,296,308 $ -
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 82,987 $ 90,885 $ 71,943
============ ============ ============
See Accompanying Notes to Financial Statements
</TABLE>
F-5
<PAGE>
DIACRIN, INC.
Notes to Financial Statements
(1) Operations and Basis of Presentation
Diacrin, Inc. (the "Company") was incorporated on October 10, 1989 and is
developing transplantable cells for the treatment of human diseases that are
characterized by cell dysfunction or cell death and for which current therapies
are either inadequate or nonexistent.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying statements of operations and cash flows for the years ended
December 31, 1995 and 1996 include the accounts of the Company and its
wholly-owned subsidiary, Diacrin Securities Corporation. All material
intercompany accounts and transactions were eliminated in consolidation. This
subsidiary was dissolved on June 13, 1996.
(b) Depreciation and Amortization
The Company provides for depreciation using the straight-line method by charges
to operations in amounts estimated to allocate the cost of these assets over a
five-year life. Amortization of equipment under capital leases and leasehold
improvements is computed using the straight-line method over the shorter of the
estimated useful life of the asset or the lease term.
(c) Research and Development
Collaborative revenue under the joint venture agreement with Genzyme Corporation
(see Note 4) and revenues from research grants are recognized as work is
performed and costs are incurred. Deferred revenue represents amounts received
prior to recognition of revenue. Research and development costs are expensed as
incurred.
(d) Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." At
December 31, 1997, the Company has a net operating loss carryforward for federal
income tax purposes of approximately $33,212,000. The difference from losses
reported for financial reporting purposes relates primarily to expenses
reflected in the financial statements not yet deductible for tax purposes. The
net operating loss carryforwards expire commencing in the year 2005 and are
subject to review and possible adjustment by the Internal Revenue Service. Net
operating loss and tax credit carryforwards may be limited in the event of
certain changes in the ownership interests of significant shareholders. The
Company believes issuance of the convertible notes payable in May 1995, as well
as the initial public offering in February 1996, caused a change in ownership,
as defined by the Tax Reform Act of 1986. The Company does not believe that such
ownership changes will significantly impact the Company's ability to utilize the
net operating loss and tax credit carryforwards as of the date of such ownership
changes. Ownership changes in future periods may limit the Company's ability to
utilize net operating loss and tax credit carryforwards.
F-6
<PAGE>
DIACRIN, INC.
Notes to Financial Statements (continued)
The components of the net deferred tax assets are approximately as follows:
1996 1997
---- ----
Loss carryforwards $ 12,099,000 $ 13,285,000
Start-up costs 484,000 242,000
Credit carryforwards 1,896,000 2,569,000
Other temporary differences 7,000 4,000
------------ ------------
Total deferred tax assets 14,486,000 16,100,000
Less - valuation allowance (14,486,000) (16,100,000)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
A valuation allowance has been provided as it is uncertain if the Company will
realize the deferred tax assets. The change in the total valuation allowance
during the year ended December 31, 1997 was an increase of approximately
$1,614,000 and relates to the increase in the deferred tax asset as a result of
the net operating loss and tax credits generated during 1997.
(e) Net Loss per Common Share
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share". The adoption of
SFAS No. 128 did not have a material effect on the Company's reported net loss
per common share. Net loss per common share is based on the weighted average
number of common shares outstanding. For the years ended December 31, 1995 and
1996, the weighted average number of common shares outstanding assumed the
automatic conversion of all outstanding shares of Series A, B and C convertible
preferred stock into 6,693,121 shares of common stock and the automatic
conversion of the outstanding $7,000,000 convertible notes payable into
2,799,999 shares of common stock, both of which occurred upon the closing of the
Company's initial public offering. Common stock issued after December 1, 1994
and common stock issuable pursuant to stock options or warrants granted after
December 1, 1994 have been reflected as outstanding for the 1995 period and for
the period from January 1, 1996 through the effective date of the Company's
initial public offering using the treasury stock method, as required by the
Securities and Exchange Commission. Other shares of stock issuable pursuant to
stock options and warrants have not been included as their effect would be
antidilutive.
(f) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the reporting
period. Actual results could differ from those estimates.
(g) Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
(3) Initial Public Offering
On February 12, 1996, the Company completed an initial public offering of
2,500,000 units, each unit consisting of one share of common stock and one
redeemable warrant to purchase one share of common stock for $16.00 per share,
for net proceeds of approximately $18.2 million. In addition, all outstanding
shares of Series A, B and C convertible preferred stock were automatically
F-7
<PAGE>
converted into an aggregate of 6,693,121 shares of common stock and the
outstanding $7,000,000 of convertible notes payable were automatically converted
into an aggregate of 2,799,999 shares of common stock upon the closing of the
initial public offering. On March 7, 1996, the underwriters of the offering
exercised their over-allotment option to purchase an additional 375,000 units,
resulting in additional net proceeds of approximately $2.8 million to the
Company. On August 12, 1996, the common stock and warrants underlying the units
began to trade separately.
(4) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation ("Genzyme") formed a
joint venture to develop and commercialize the Company's NeuroCell(TM)-PD and
NeuroCell(TM)-HD products for transplantation into people with advanced
Parkinson's disease and Huntington's disease, respectively. Under the terms of
the agreement, which was effective October 1, 1996, Genzyme agreed to provide
100% of the first $10 million in funding and 75% of the following $40 million in
funding for the two products. All costs incurred in excess of $50 million will
be shared equally between Genzyme and the Company in accordance with the terms
of the agreement. Any profits of the joint venture will be shared equally by the
two parties.
During the year ended December 31, 1996, the Company received $1,662,631 under
the agreement, of which $1,043,787 was recognized as revenue and $618,844 was
deferred until the work was performed in 1997. During the year ended December
31, 1997, the Company received $4,557,252 under the agreement and $4,763,270 was
recognized as revenue. In addition, $25,770 of capital equipment was acquired on
behalf of the joint venture for which the Company was reimbursed. At December
31, 1997, $387,056 of total amounts received was deferred until the work is
performed.
(5) Cash Equivalents and Investments
The Company's cash equivalents and investments are classified as
held-to-maturity and are carried at amortized cost, which approximates market
value. Cash equivalents, short-term investments and long-term investments have
maturities of less than three months, less than one year and greater than one
year, respectively. Cash and cash equivalents, short-term investments and
long-term investments at December 31, 1996 and 1997 consisted of the following:
1996 1997
----------- -----------
Cash and cash equivalents-
Cash $ 421 $ 381
Money market mutual fund 1,898,920 2,513,759
Commercial paper 2,292,335 2,501,637
Corporate notes 3,117,034 -
----------- -----------
$ 7,308,710 $ 5,015,777
=========== ===========
Short-term investments-
Commercial paper (avg. maturity of 4 months) $ 984,710 $ -
Corporate notes (avg. maturity of 8 and
12 months, respectively) 5,270,797 3,000,429
Certificate of deposit (maturity of 12 months) - 999,669
US government agency obligation (maturity
of 12 months) - 2,000,000
----------- -----------
$ 6,255,507 $ 6,000,098
=========== ===========
Long-term investments-
Corporate notes (avg. maturity of 14 months) $ 9,917,875 $10,331,289
=========== ===========
F-8
<PAGE>
(6) Accrued Expenses
Accrued expenses consisted of the following at December 31, 1996 and 1997:
1996 1997
---- ----
Accrued clinical trials costs $ 177,052 $ 466,268
Accrued professional fees 118,445 129,625
Accrued payroll 5,383 159,214
Accrued other 206,069 239,059
----------- -----------
Total $ 506,949 $ 994,166
=========== ===========
(7) Long-term Debt and Obligations Under Capital Leases
(a) Term Loan
In November 1997, the Company entered into an unsecured term loan agreement with
a bank whereby the bank loaned the Company $650,000 to construct a pilot
manufacturing facility. Interest accrues at the Prime Rate (8.5% at December 31,
1997) plus one-half of one percent and is payable monthly in arrears. The loan
is payable in sixty principal installments of $10,833 commencing December 1,
1997 and may be prepaid without penalty. The Company is required to maintain
certain covenants, including certain financial ratios and unencumbered cash
balances of not less than $1 million. As of December 31, 1997, the Company was
in compliance with all covenants.
(b) Capital Leases
On December 22, 1994, the Company sold certain laboratory equipment, with an
original cost of approximately $805,000, for $600,000. In connection with this
transaction, the Company entered into a capital lease under a master lease
agreement to lease the equipment back for payments of approximately $15,000 per
month for 48 months. Upon completion of the lease term, the Company is required
to purchase all of the equipment for $90,000 or extend the lease term for an
additional six months at approximately $15,000 per month, at which time title to
the equipment reverts back to the Company. The sale of the equipment generated a
gain of approximately $139,000 which has been offset against the cost of the
asset and will be amortized over the life of the lease in accordance with SFAS
No. 13 "Accounting for Leases". On July 1 and December 22, 1995, the Company
sold additional equipment at its original cost of approximately $142,000 and
$85,000, respectively, and entered into capital leases under the aforementioned
master lease to lease the equipment back for 48 monthly payments of
approximately $3,500 commencing July 1, 1995 and $2,100 commencing January 1,
1996. Upon completion of each lease term, the Company is required to purchase
all of the equipment for 15% of the amount financed or extend each lease term
for an additional six months, at which times title to the equipment reverts back
to the Company.
F-9
<PAGE>
The future minimum payments under all capital lease agreements as of December
31, 1997 are as follows:
1998 $ 247,333
1999 173,332
-----------
Total minimum lease payments 420,665
Less-Amount representing interest 50,235
-----------
Present value of minimum lease payments 370,430
Less-Current obligation under capital lease 207,171
-----------
$ 163,259
===========
(8) Convertible Notes Payable
On May 31, 1995, the Company completed the sale of $7,000,000 of convertible
notes. Upon completion of the Company's initial public offering discussed in
Note 3, the outstanding principal amount of convertible notes automatically
converted into an aggregate of 2,799,999 shares of the Company's common stock.
(9) Stockholders' Equity (Deficit)
(a) Reverse Stock Split and Amendment to Charter
On January 25, 1996, the Company's stockholders approved a 1-for-2 reverse stock
split of the common stock. In connection with the approved reverse stock split,
the Company filed a Certificate of Amendment to the Company's Certificate of
Incorporation. Accordingly, all share and per share amounts of common stock for
all periods before the reverse stock split have been retroactively adjusted to
reflect the reverse stock split.
(b) Preferred Stock
The outstanding Series A, Series B and Series C preferred stock automatically
converted into an aggregate of 6,693,121 shares of the Company's common stock
upon the closing of the Company's initial public offering discussed in Note 3.
In addition, all designated series of convertible preferred stock were
eliminated effective upon the closing of the Company's initial public offering.
As of December 31, 1997, the Company has an authorized class of undesignated
preferred stock consisting of 5,000,000 shares. The Company's Board of Directors
is authorized, subject to any limitations prescribed by law and without further
stockholder approval, to issue from time to time up to 5,000,000 shares of
preferred stock in one or more series. Each such series of preferred stock shall
have such number of shares, designations, preferences, voting powers,
qualifications and rights or privileges as shall be determined by the Board of
Directors.
F-10
<PAGE>
(c) Warrants
In November 1991, in connection with the sale of Series C convertible preferred
stock, the Company issued warrants to purchase 465,853 shares of common stock
exercisable at $7.20 per share. The warrants were exercisable commencing August
9, 1996 and expired on November 14, 1996. Warrants to purchase 427,441 shares of
common stock were exercised during 1996 for net proceeds to the Company of
approximately $3,071,000.
In December 1994, the Company issued a warrant for the purchase of common stock
in connection with a master lease agreement as discussed in Note 7(b). The
warrant is exercisable for 12,474 shares of common stock at an exercise price of
$7.92 per share. The warrant expires in December 1999.
As discussed in Note 3, the Company issued redeemable warrants in connection
with the Company's initial public offering to purchase 2,875,000 shares of
common stock at an exercise price of $16 per share, subject to certain
adjustments. The warrants may be exercised commencing August 12, 1996 and expire
on the earlier to occur of redemption of the warrant by the Company, which
option the Company may exercise (at a price of $.01 per warrant) if the average
closing price of the common stock for any 20 consecutive trading day period
exceeds 150% of the exercise price of the warrants, or December 31, 2000.
(10) Common Stock Options
The Company has adopted the 1990 Stock Option Plan (the "1990 Plan") under which
the Board of Directors is authorized to grant incentive stock options,
non-qualified stock options and stock appreciation rights to employees,
directors and consultants of the Company for up to 800,000 shares of the
Company's common stock. All options granted have 10-year terms, and the majority
vest in equal annual installments of 25% over four years of continued service
from the date of hire or grant. As of December 31, 1997, there were options to
purchase 58,295 shares of common stock available for future grant under the 1990
Plan.
In December 1993, the Company granted non-qualified options, not included in the
1990 Plan, to purchase 214,105 shares of common stock at a price of $2.50 per
share and 57,500 shares of common stock at a price of $4.00 per share to certain
advisors to the Company. These options have 10-year terms and were fully vested
upon the date of grant. In June 1994, the Company granted non-qualified options,
not included in the 1990 Plan, to purchase 45,000 shares of common stock at a
price of $8.50 per share to certain advisors to the Company. In April 1996, the
Company granted non-qualified options, not included in the 1990 Plan, to
purchase 25,000 shares of common stock at a price of $9.50 per share to an
executive of the Company as an inducement to his employment. The options granted
in 1994 and 1996 have 10-year terms and vest in equal annual installments of 25%
over four years of continued service from the date of grant.
In July 1994, the stockholders approved the 1994 Directors' Stock Option Plan
(the "Director Plan") which automatically grants an option to each eligible
outside director of the Company for the purchase of 7,500 shares of common stock
at an exercise price of the then fair market value. Each option granted under
the Director Plan has a 10-year term and may be exercised on a cumulative basis
as to 25% of the shares on the first anniversary of the date of grant and an
additional 25% at the end of each one-year period thereafter. In December 1996,
the Board of Directors amended the Director Plan to automatically grant 15,000
options to each new eligible outside director. The Company has reserved 30,000
shares for issuance under this plan. As of December 31, 1997, there were 28,125
options outstanding under the Director Plan at a weighted average exercise price
of $10.38 per share. As of December 31, 1997, there were no options available
for grant under the Director Plan.
F-11
<PAGE>
In June 1997, the stockholders approved the 1997 Stock Option Plan (the "1997
Plan") under which the Board of Directors is authorized to grant incentive stock
options and non-qualified stock options to employees, directors and consultants
of the Company for up to 1,200,000 shares of the Company's common stock. All
options granted have 10-year terms, and vest in equal annual installments of 25%
over four years of continued service from the date of hire or grant. As of
December 31, 1997, options to purchase 1,058,500 shares of common stock were
available for future grant under the 1997 Plan.
The following table summarizes incentive and non-qualified stock option
activity, exclusive of the warrants discussed in Note 9(c):
Number of Weighted average
options exercise price
Balance, December 31, 1994 758,158 $ 1.90
Options granted 153,000 1.50
Options exercised (9,703) .96
Options canceled (107,125) 1.41
------------
Balance, December 31, 1995 794,330 1.90
Options granted 208,000 9.11
Options exercised (12,146) 1.25
Options canceled (15,689) 1.85
------------
Balance, December 31, 1996 974,495 3.44
Options granted 209,250 11.01
Options exercised (78,697) 1.50
Options canceled (78,250) 9.33
------------
Balance, December 31, 1997 1,026,798 4.69
============
Exercisable, December 31, 1997 672,220 2.77
============
All options have been granted at the fair market value of the Company's common
stock on the date of grant.
The following table summarizes certain information about options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
Options outstanding
- ---------------------------------------------------------------------------------------------------------------------
Weighted average
Range of exercise prices Number outstanding at remaining contractual Weighted average exercise
December 31, 1997 life price
- --------------------------- -------------------------- ----------------------- ---------------------------
<S> <C> <C>
$.02 to $2.50 685,548 6.2 $ 1.95
$7.50 to $12.00 341,250 9.3 $10.22
--------------------------
Total 1,026,798
==========================
F-12
<PAGE>
<CAPTION>
Options exercisable
- ------------------------------------------------------------------------------------------------------
Number exercisable Weighted average
Range of exercise prices at December 31, 1997 exercise price
- --------------------------------- ----------------------------- ------------------------------
<S> <C> <C>
$.02 to $2.50 603,845 $ 2.00
$7.50 to $12.00 68,375 $ 9.58
-----------------------------
Total 672,220
=============================
</TABLE>
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statement of operations or disclosed in the notes
to financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees", and elected
the disclosure-only alternative under SFAS No. 123.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The
fair-value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for 1995, 1996
and 1997, respectively: risk-free interest rates of 6.5%, 6.5% and 5.5%;
dividend yield of 0% for all years; volatility factor of the expected market
price of the Company's common stock of 70% for all years; and a weighted-average
expected life of the options of 7.5 years for all years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The aggregate fair
value of options granted in 1995, 1996 and 1997 was approximately $170,000 ,
$1,400,000 and $1,689,000 respectively. The Company's pro forma information
follows:
1995 1996 1997
---- ---- ----
Net loss As reported $(5,712,717) $(4,984,799) $(2,351,464)
Pro forma (5,712,717) (5,071,094) (2,833,712)
Net loss per share: As reported (.57) (.40) (.18)
Pro forma (.57) (.41) (.21)
(11) Facility Lease
During 1991, the Company entered into a ten-year operating lease for a facility.
Minimum rental payments under the lease are as follows:
Rental
Commitment
1998 $ 710,000
1999 710,000
2000 710,000
2001 533,000
------------
$ 2,663,000
============
F-13
<PAGE>
Total rent expense for the years ended December 31, 1995, 1996 and 1997 was
approximately $639,000, $700,000 and $761,000, respectively. The amounts for the
1995 and 1996 periods are net of sublease revenue received from subtenants of
$133,000 and $58,000, respectively.
F-14
PROMISSORY NOTE
$650,000.00 Boston, Massachusetts
November 25, 1997
FOR VALUE RECEIVED, the undersigned Diacrin, Inc., a Delaware corporation
(the "Borrower") hereby promises to pay to the order of FLEET NATIONAL BANK (the
"Bank") the principal amount of Six Hundred Fifty Thousand and 00/100
($650,000.00) Dollars ("Principal"), with interest, at the rate hereinafter set
forth, on the daily balance of all unpaid Principal, from the date hereof until
payment in full of all Principal and interest hereunder. As used herein, the
term "Letter Agreement" means that certain letter agreement of even date
herewith between the Borrower and the Bank.
Interest on all unpaid Principal shall be due and payable monthly in
arrears, on the first day of each month, commencing on the first such date after
the date hereof and continuing on the first day of each month thereafter and on
the date of payment of this note in full, at a fluctuating rate per annum
(computed on the basis of a year of three hundred sixty (360) days for the
actual number of days elapsed) which shall at all times (except as described in
the next sentence) be equal to the sum of (i) one-half of one (0.5%) percent per
annum plus (ii) the Prime Rate, as in effect from time to time (but in no event
in excess of the maximum rate permitted by then applicable law), with a change
in the aforesaid rate of interest to become effective on the same day on which
any change in the Prime Rate is effective. Overdue Principal and, to the extent
permitted by law, overdue interest shall bear interest at a fluctuating rate per
annum which at all times shall be equal to the sum of (i) four (4%) percent per
annum plus (ii) the per annum rate otherwise payable under this note (but in no
event in excess of the maximum rate permitted by then applicable law),
compounded monthly and payable on demand. As used herein, "Prime Rate" means the
variable rate of interest per annum designated by the Bank from time to time as
its prime rate, it being understood that such rate is merely a reference rate
and does not necessarily represent the lowest or best rate being charged to any
customer. If the entire amount of any required Principal and/or interest is not
paid within ten (10) days after the same is due, the Borrower shall pay to the
Bank a late fee equal to five percent (5%) of the required payment, provided
that such late fee shall be reduced to three percent (3%) of any required
Principal and interest that is not paid within fifteen (15) days of the date it
is due if this note is secured by a mortgage on an owner-occupied residence of
1-4 units.
All Principal of this note shall be repaid by the Borrower to the Bank in
59 equal consecutive monthly installments of $10,833.33, such installments to
commence December 1, 1997 and to continue thereafter on the first Business Day
(as defined in the Letter Agreement) of each month thereafter through and
including October 1, 2002, plus a 60th and final payment due on November 1, 2002
in an amount equal to all then remaining Principal of the Term Loan and all
interest accrued but unpaid thereon.
The Borrower may at any time and from time to time prepay all or any
portion of the Term Loan (as defined in the Letter Agreement), without premium
or penalty. Each Principal prepayment shall be accompanied by payment of all
interest on the prepaid amount accrued but unpaid to the date of payment. Any
partial prepayment of Principal will be applied against Principal installments
in inverse order of normal maturity.
Payments of both Principal and interest shall be made, in immediately
available funds, at the office of the Bank located at 75 State Street, Boston,
Massachusetts 02109, or at such other address as the Bank may from time to time
designate.
The undersigned Borrower irrevocably authorizes the Bank to make or cause
to be made, on a schedule attached to this note or on the books of the Bank, at
or following the time of receiving any payment of Principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid balance of
Principal. Failure of the Bank to make any such notation shall not, however,
affect any obligation of the Borrower hereunder or under the Letter Agreement.
The unpaid Principal amount of this note, as recorded by the Bank from time to
time on such schedule or on such books, shall constitute presumptive evidence
(absent manifest error) of the aggregate unpaid principal amount of the Term
Loan.
To the extent permitted by applicable law, the Borrower hereby (a) waives
notice of and consents to any and all advances, settlements, compromises, favors
and indulgences (including, without limitation, any extension or postponement of
the time for payment), any and all receipts, substitutions, additions, exchanges
and releases of collateral, and any and all additions, substitutions and
releases of any person primarily or secondarily liable, (b) waives presentment,
demand, notice, protest and all other demands and notices generally in
connection with the delivery, acceptance, performance, default or enforcement of
or under this note, and (c) agrees to pay, to the extent permitted by law, all
costs and expenses, including, without limitation, reasonable attorneys' fees,
incurred or paid by the Bank in enforcing this note and any collateral or
security therefor, all whether or not litigation is commenced.
This note is the Term Note referred to in the Letter Agreement. This note
is subject to prepayment as set forth in the Letter Agreement. The maturity of
this note may be accelerated upon the occurrence of an Event of Default, as
provided in the Letter Agreement.
THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE
RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED ON THIS NOTE OR ARISING
OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY RELATED DOCUMENTS OR OUT OF
ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN)
OR ACTIONS OF ANY PERSON. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR THE
BANK TO ACCEPT THIS NOTE AND TO MAKE THE TERM LOAN AS CONTEMPLATED IN THE LETTER
AGREEMENT.
Executed, as an instrument under seal, as of the day and year first above
written.
CORPORATE SEAL DIACRIN, INC.
ATTEST:
____________________________ By:______________________________________
Assistant Secretary Name: Thomas H. Fraser
Title: President and
Chief Executive Officer
- 2 -
DIACRIN, INC.
Building 96, 13th Street
Charlestown Navy Yard
Charlestown, MA 02129
November 25, 1997
Fleet National Bank
75 State Street
Boston, MA 02109
Gentlemen:
This letter agreement will set forth certain understandings between
Diacrin, Inc., a Delaware corporation (the "Borrower"), and Fleet National Bank
(the "Bank") with respect to the Term Loan (hereinafter defined) being made by
the Bank to the Borrower. In consideration of the mutual promises contained
herein and in the other documents referred to below, and for other good and
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the Borrower and the Bank agree as follows:
I. AMOUNTS AND TERMS
1.1. References to Documents. Reference is made to that certain $650,000
original principal amount promissory note (the "Term Note") of even date
herewith made by the Borrower and payable to the order of the Bank.
1.2. The Borrowing; Term Note. At the date hereof, the Bank is making a $650,000
loan (the "Term Loan") to the Borrower. Prior to the making of the Term
Loan, and as a precondition thereto, the Borrower will provide the Bank
with~a copy of the invoice presented by PharmServices, Inc. for the
buildout costs of the facilities described in Section 1.4 below. The Term
Loan will be evidenced by the Term Note. Interest on the Term Loan shall be
payable at the times and at the rate provided for in the Term Note. Overdue
principal of the Term Loan and, to the extent permitted by law, overdue
interest shall bear interest at a fluctuating rate per annum which at all
times shall be equal to the sum of (i)~four (4%) percent per annum plus
(ii)~the per annum rate otherwise payable under the Term Note (but in no
event in excess of the maximum rate from time to time permitted by then
applicable law), compounded monthly and payable on demand. The Borrower
hereby irrevocably authorizes the Bank to make or cause to be made, on a
schedule attached to the Term Note or on the books of the Bank, at or
following the time of receiving any payment of principal, an appropriate
notation reflecting such transaction and the then aggregate unpaid
principal balance of the Term Loan. The amount so noted shall constitute
presumptive evidence (absent manifest error) as to the amount owed by the
Borrower with respect to principal of the Term Loan. Failure of the Bank to
make any such notation shall not, however, affect any obligation of the
Borrower or any right of the Bank hereunder or under the Term Note.
1.3. Principal Repayment of Term Loan. The Borrower shall repay principal of the
Term Loan in 60 equal consecutive monthly installments, commencing on
December 1, 1997 and continuing on the first Business Day of each month
thereafter. In any event, the then outstanding principal balance of the
Term Loan and all interest then accrued but unpaid thereon shall be due and
payable in full on November 1, 2002. The Borrower may prepay, at any time
or from time to time, without premium or penalty, the whole or any portion
of the Term Loan; provided that each such principal prepayment shall be
accompanied by payment of all interest under the Term Note accrued but
unpaid to the date of payment. Any partial prepayment of principal of the
Term Loan will be applied to installments of principal of the Term Loan
thereafter coming due in inverse order of normal maturity. Amounts repaid
or prepaid with respect to the Term Loan are not available for reborrowing.
1.4. Advances and Payments. The proceeds of the Term Loan shall be credited by
the Bank to Account No. maintained by the Borrower with the Bank. The
proceeds of the Term Loan will be used by the Borrower to finance the
buildout of the facility located at Blackmer Road, Southbridge, MA 01550.
The Bank may charge any general deposit account of the Borrower at the Bank
with the amount of all payments of interest, principal and other sums due,
from time to time, under this letter agreement and/or the Term Note; and
will thereafter notify the Borrower of the amount so charged. The failure
of the Bank so to charge any account or to give any such notice shall not
affect the obligation of the Borrower to pay interest, principal or other
sums as provided herein or in the Term Note. Whenever any payment to be
made to the Bank hereunder or under the Term Note shall be stated to be due
on a day which is not a Business Day, such payment may be made on the next
succeeding Business Day, and interest payable on each such date shall
include the amount thereof which shall accrue during the period of such
extension of time. All payments by the Borrower hereunder and/or in respect
of the Term Note shall be made net of any impositions or taxes and without
deduction, set-off or counterclaim, notwithstanding any claim which the
Borrower may now or at any time hereafter have against the Bank. All
payments of interest, principal and any other sum payable hereunder and/or
under the Term Note shall be made to the Bank, in lawful money of the
United States in immediately available funds, at its office at 75 State
Street, Boston, MA 02109 or to such other address as the Bank may from time
to time direct. All payments received by the Bank after 2:00 p.m. on any
day shall be deemed received as of the next succeeding Business Day. All
monies received by the Bank shall be applied first to fees, charges, costs
and expenses payable to the Bank under this letter agreement, the Term Note
and/or any of the other Loan Documents, next to interest then accrued on
account of Term Loan and only thereafter to principal of the Term Loan. All
interest and fees payable hereunder and/or under the Term Note shall be
calculated on the basis of a 360-day year for the actual number of days
elapsed.
1.5. Conditions to Advance. Prior to the making of the Term Loan, the Borrower
shall deliver to the Bank duly executed copies of this letter agreement,
the Term Note and the documents and other items listed on the Closing
Agenda delivered herewith by the Bank to the Borrower, all of which, as
well as all legal matters incident to the transactions contemplated hereby,
shall be satisfactory in form and substance to the Bank and its counsel.
Without limiting the foregoing, the Term Loan is subject to the further
conditions precedent that on the date on which the Term Loan is made (and
after giving effect thereto):
(a) All statements, representations and warranties of the Borrower made in
this letter agreement shall be correct in all material respects as of the
date of the Term Loan.
(b) All covenants and agreements of the Borrower contained herein and/or in
any of the other Loan Documents shall have been complied with in all
material respects on and as of the date of the Term Loan.
(c) No event which constitutes, or which with notice or lapse of time or
both would constitute, an Event of Default shall have occurred and be
continuing.
II. REPRESENTATIONS AND WARRANTIES
2.1. Representations and Warranties. In order to induce the Bank to enter into
this letter agreement and to make the Term Loan hereunder, the Borrower
warrants and represents to the Bank as follows:
(a) The Borrower is a corporation duly organized, validly existing and in
good standing under the laws of Delaware. The Borrower has full corporate
power to own its property and conduct its business as now conducted and as
proposed to be conducted and to enter into and perform this letter
agreement and the other Loan Documents. The Borrower is duly qualified to
do business and in good standing in Massachusetts and in each other
jurisdiction in which the Borrower maintains any plant, office, warehouse
or other facility and in each other jurisdiction where the failure so to
qualify would (singly or in the aggregate with all other such failures)
have a material adverse effect on the financial condition, business or
prospects of the Borrower, all such jurisdictions being listed on item
2.1(a)~of the attached Disclosure Schedule. At the date hereof, the
Borrower has no Subsidiaries. The Borrower is not a member of any
partnership or joint venture other than Diacrin/Genzyme LLC.
(b) At the date of this letter agreement, no person is known by the
Borrower to own (based on records as of the date hereof unless otherwise
indicated in item 2.1(b)), of record or beneficially, 5% or more of the
outstanding shares of any class of capital stock of the Borrower, except as
set forth on item 2.1(b) of the attached Disclosure Schedule.
(c) The execution, delivery and performance by the Borrower of this letter
agreement and each of the other Loan Documents have been duly authorized by
all necessary corporate and other action and do not and will not:
(i) violate any provision of, or require as a prerequisite to
effectiveness any filing, registration, consent or approval under, any
law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to the
Borrower;
(ii) violate any provision of the charter or by-laws of the Borrower,
or result in a breach of or constitute a default or require any waiver
or consent under any indenture or loan or credit agreement or any
other material agreement, lease or instrument to which the Borrower is
a party or by which the Borrower or any of its properties may be bound
or affected or require any other consent of any Person; or
(iii) result in, or require, the creation or imposition of any lien,
security interest or other encumbrance (other than in favor of the
Bank), upon or with respect to any of the properties now owned or
hereafter acquired by the Borrower.
(d) This letter agreement and each of the other Loan Documents delivered
herewith has been duly executed and delivered by the Borrower and each is a
legal, valid and binding obligation of the Borrower, enforceable against
the Borrower in accordance with its respective terms.
(e) There are no actions, suits, proceedings or investigations pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or
any Subsidiary before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, which could
hinder or prevent the consummation of the transactions contemplated hereby
or call into question the validity of this letter agreement or any of the
other Loan Documents or any action taken or to be taken in connection with
the transactions contemplated hereby or thereby or which in any single case
or in the aggregate may result in any material adverse change in the
business, prospects, condition, affairs or operations of the Borrower or
any Subsidiary.
(f) The Borrower is not in violation of any term of its charter or by-laws
as now in effect. Neither the Borrower nor any Subsidiary of the Borrower
is in material violation of any term of any mortgage, indenture or
judgment, decree or order, or any other material instrument, contract or
agreement to which it is a party or by which any of its property is bound.
(g) The Borrower has filed (and has caused each of its Subsidiaries to
file) all federal, foreign, state and local tax returns, reports and
estimates required to be filed by the Borrower and/or by any such
Subsidiary. All such filed returns, reports and estimates are proper and
accurate and the Borrower or the relevant Subsidiary has paid all taxes,
assessments, impositions, fees and other governmental charges required to
be paid in respect of the periods covered by such returns, reports or
estimates. No deficiencies for any tax, assessment or governmental charge
have been asserted or assessed, and the Borrower knows of no material tax
liability or basis therefor.
(h) The Borrower is in compliance (and each Subsidiary of the Borrower is
in compliance) with all requirements of law, federal, foreign, state and
local, and all requirements of all governmental bodies or agencies having
jurisdiction over it, the conduct of its business, the use of~its
properties and assets, and all premises occupied by it, failure to comply
with any of which would (singly or in the aggregate with all other such
failures) have a material adverse effect upon the assets, business,
financial condition or prospects of the Borrower or any such Subsidiary.
Without limiting the foregoing, the Borrower has all of the material
franchises, licenses, leases, permits, certificates and authorizations
needed for the conduct of its business and the use of its properties and
all premises occupied by it, as now conducted, owned and used.
(i) The audited financial statements of the Borrower and Subsidiaries as at
December 31, 1996 and the management-generated unaudited statements of the
Borrower and Subsidiaries as at September 30, 1997, each heretofore
delivered to the Bank, are complete and accurate and fairly present the
financial condition of the Borrower and Subsidiaries as at the respective
dates thereof and for the periods covered thereby, except that the
management-generated statements do not have footnotes and thus do not
present all of the information which would normally be contained in
footnotes to financial statements and are subject to normal year-end
adjustments, which shall not be material. Neither the Borrower nor any of
the Borrower's Subsidiaries has any liability, contingent or otherwise, not
disclosed, except for certain contingent liabilities in connection with the
Diacrin/Genzyme LLC, which are described in the Borrower's Form 10-K, in
the aforesaid financial statements or in any notes thereto, that could
materially affect the financial condition of the Borrower. Since December
31, 1996, there has been no material adverse development in the business,
condition or prospects of the Borrower, and the Borrower has not entered
into any material transaction other than in the ordinary course.
(j) The principal place of business and chief executive offices of the
Borrower are located at Building 96, 13th Street, Charlestown Navy Yard,
Charlestown, MA 02129.
(k) The Borrower owns or has a valid right to use all of the material
patents, licenses, copyrights, trademarks, trade names and franchises now
being used or necessary to conduct its business as presently conducted. To
the best of Borrower's knowledge and belief, the conduct of the Borrower's
business as now operated does not conflict with valid patents, licenses,
copyrights, trademarks, trade names or franchises of others in any manner
that could materially adversely affect the business or assets or condition,
financial or otherwise, of the Borrower.
(l) To the Borrower's knowledge, none of the executive officers or key
employees of the Borrower is subject to any agreement in favor of anyone
other than the Borrower which materially limits or restricts that person's
right to engage in the type of business activity conducted or proposed to
be conducted by the Borrower or which grants to anyone other than the
Borrower (or Diacrin/Genzyme LLC) any rights in any inventions or other
ideas susceptible to legal protection developed or conceived by any such
officer or key employee.
(m) The Borrower is not a party to any contract or agreement which now has
or, as far as can reasonably be foreseen by the Borrower at the date
hereof, would reasonably be expected to have a material adverse effect on
the financial condition, business, prospects or properties of the Borrower,
provided that any termination of the Diacrin/Genzyme joint venture
agreement may have such material adverse effect.
III. AFFIRMATIVE COVENANTS AND REPORTING REQUIREMENTS
Without limitation of any other covenants and agreements contained herein or in
any other Loan Documents, the Borrower agrees that so long as the financing
arrangements contemplated hereby are in effect or all or any portion of the Term
Loan shall be outstanding:
3.1. Legal Existence; Qualification; Compliance. The Borrower will maintain (and
will cause each Subsidiary of the Borrower to maintain) its corporate
existence and good standing in the jurisdiction of its incorporation. The
Borrower will remain qualified to do business and in good standing in
Massachusetts. In addition, the Borrower will qualify to do business and
will remain qualified and in good standing (and the Borrower will cause
each Subsidiary of the Borrower to qualify and remain qualified and in good
standing) in each other jurisdiction where the Borrower or such Subsidiary,
as the case may be, maintains any plant, office, warehouse or other
facility and in each other jurisdiction where the failure so to qualify
could (singly or in the aggregate with all other such failures) have a
material adverse effect on the financial condition, business or prospects
of the Borrower or any such Subsidiary. The Borrower will comply (and will
cause each Subsidiary of the Borrower to comply) with its charter documents
and by-laws. The Borrower will comply with (and will cause each Subsidiary
of the Borrower to comply with) all applicable laws, rules and regulations
(including, without limitation, ERISA and those relating to environmental
protection) other than (i)~laws, rules or regulations the validity or
applicability of which the Borrower or such Subsidiary shall be contesting
in good faith by appropriate proceedings and as to which adequate reserves
are maintained and (ii)~those laws, rules and regulations the failure to
comply with any of which would not reasonably be expected (singly or in the
aggregate) to have a material adverse effect on the financial condition,
business or prospects of the Borrower and its Subsidiaries taken as a
whole.
3.2. Maintenance of Property; Insurance. The Borrower will maintain and preserve
(and will cause each Subsidiary of the Borrower to maintain and preserve)
all of its fixed assets used in its business in good working order and
condition, making all necessary repairs thereto and replacements thereof.
The Borrower will maintain, with financially sound and reputable insurers,
insurance with respect to its property and business against such
liabilities, casualties and contingencies and of such types and in such
amounts as shall be reasonably satisfactory to the Bank from time to time
and in any event all such insurance as may from time to time be customary
for companies conducting a business similar to that of the Borrower in
similar locales.
3.3. Payment of Taxes and Charges. The Borrower will pay and discharge (and will
cause each Subsidiary of the Borrower to pay and discharge) all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or property, including, without limitation, taxes, assessments,
charges or levies relating to real and personal property, franchises,
income, unemployment, old age benefits, withholding, or sales or use, prior
to the date on which penalties would attach thereto, and all lawful claims
(whether for any of the foregoing or otherwise) which, if unpaid, might
give rise to a lien upon any property of the Borrower or any such
Subsidiary, except any of the foregoing which is being contested in good
faith and by appropriate proceedings and for which the Borrower has
established and is maintaining adequate reserves. The Borrower will pay,
and will cause each of its Subsidiaries to pay, in a timely manner, all
material lease obligations, material trade debt, material purchase money
obligations and material equipment lease obligations. The Borrower will
perform and fulfill all material covenants and agreements under any
material leases of real estate, material agreements relating to purchase
money debt, material equipment leases and other material contracts. The
Borrower will maintain in full force and effect, and comply with the terms
and conditions of, all permits, permissions and licenses necessary or
desirable for its business.
3.4. Accounts. The Borrower will maintain its primary operating accounts with
the Bank.
3.5. Conduct of Business. The Borrower will conduct, in the ordinary course, the
business in which it is presently engaged or which is substantially related
thereto. The Borrower will not, without the prior written consent of the
Bank, directly or indirectly (itself or through any Subsidiary) enter into
any other unrelated lines of business, businesses or ventures.
3.6. Reporting Requirements. The Borrower will furnish to the Bank (or cause to
be furnished to the Bank):
(i) Within 92 days after the end of each fiscal year of the Borrower, a
copy of the annual audit report for such fiscal year for the Borrower,
including therein consolidated and consolidating balance sheets of the
Borrower and Subsidiaries, as applicable, as at the end of such fiscal year
and related consolidated and consolidating, as applicable, statements of
income, stockholders' equity and cash flow for the fiscal year then ended.
The annual consolidated financial statements shall be certified by
independent public accountants selected by the Borrower and reasonably
acceptable to the Bank, such certification to be in such form as is
generally recognized as "unqualified". Said annual financial statements
shall be accompanied by a copy of the Borrower's budget for the then
current fiscal year approved by the Borrower's Board of Directors, which
information shall be held as confidential by the Bank in accordance with
Section 3.13 hereto.
(ii) Within 47 days after the end of each fiscal quarter of the Borrower,
consolidated and consolidating, as applicable, balance sheets of the
Borrower and its Subsidiaries and related consolidated and consolidating,
as applicable, statements of income and cash flow, unaudited but complete
and accurate and prepared in accordance with generally accepted accounting
principles consistently applied fairly presenting the financial condition
of the Borrower and Subsidiaries as at the dates thereof and for the
periods covered thereby (except that such quarterly statements need not
contain footnotes) and certified as accurate by the chief financial officer
of the Borrower, such balance sheets to be as at the end of such fiscal
quarter and such statements of income to be for such fiscal quarter and
such statements of income and cash flow to be for the year to date, in each
case together with a comparison to the results for the corresponding fiscal
period of the immediately prior fiscal year.
(iii) At the time of delivery of each annual or quarterly financial
statement of the Borrower, a certificate executed by the chief financial
officer of the Borrower stating that he or she has reviewed this letter
agreement and the other Loan Documents and has no knowledge of any default
by the Borrower in the performance or observance of any of the provisions
of this letter agreement or of any of the other Loan Documents or, if he or
she has such knowledge, specifying each such default and the nature
thereof. Each financial statement given as at the end of any fiscal quarter
of the Borrower will also set forth the calculations necessary to evidence
compliance with Sections 3.7-3.10.
(iv) Promptly after receipt, a copy of all audits or reports submitted to
the Borrower by independent public accountants in connection with any
annual, special or interim audits of the books of the Borrower and any
"management letter".
(v) As soon as possible and in any event within five days after the
occurrence of any Default or Event of Default, the statement of the
Borrower setting forth details of each such Default or Event of Default and
the action which the Borrower proposes to take with respect thereto.
(vi) Promptly after the commencement thereof, notice of all actions, suits
and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, to which the
Borrower or any Subsidiary of the Borrower is a party other than an action
in which monetary damages alone are sought and such monetary damages exceed
$100,000.
(vii) Promptly upon filing any registration statement or listing
application, a copy of same; provided that this provision shall not apply
to filings on Form S-8 (and the related listing application).
(viii) A copy of each periodic or current report of the Borrower filed with
the SEC or any successor agency and each annual report, proxy statement and
other communication sent by the Borrower to shareholders or other
securityholders generally, such copy to be provided to the Bank promptly
upon such filing with the SEC or such communication with shareholders or
securityholders, as the case may be.
(ix) Promptly after the Borrower has knowledge thereof, written notice of
any development or circumstance which would have a material adverse effect
on the Borrower or its business, properties, assets, Subsidiaries or
condition, financial or otherwise; provided, however, that the Borrower is
not required to give notice of matters relating to general economic
conditions and other matters affecting the Borrower's industry generally
(x) Promptly upon request, such other information respecting the financial
condition or operations of the Borrower or any Subsidiary as the Bank may
from time to time reasonably request.
Each financial statement of the Borrower hereafter delivered pursuant to
Section 3.6(i) or (ii) of this letter agreement will be complete and
accurate and will fairly present the financial condition of the Borrower as
at the date thereof and for the periods covered thereby.
3.7. Capital Base. The Borrower will maintain, as at the end of each fiscal
quarter of the Borrower, a consolidated Capital Base of not less than
$5,000,000.
3.8. Liquidity. The Borrower will maintain as at the end of each fiscal quarter
of Borrower (commencing with December 31, 1997), a ratio of (x) the Net
Quick Assets of the Borrower and its Subsidiaries on a consolidated basis
to (y) the total of (i)~Total Liabilities of the Borrower and its
Subsidiaries on a consolidated basis less (ii) the non-current principal
(that principal which is not due within the next 12 months) under the Line
of Credit described in Section~4.1 (vii) hereof to the extent it is
included in Total Indebtedness, which ratio shall be not less than 1.5 to
1.0.
3.9. Debt Service Ratio. As used herein, "Determination Date" means the last day
of each fiscal quarter of the Borrower. The Borrower will maintain on a
consolidated basis, as at each Determination Date (commencing with December
31, 1997), a Debt Service Coverage Ratio of not less than 2.0 to 1. As used
herein, the "Debt Service Coverage Ratio", as determined as at any
Determination Date, means the ratio of (x) Earnings Available of the
Borrower and Subsidiaries for the 12-month period ending on such
Determination Date to (y) the total of (1) all interest on any Indebtedness
(whether senior or subordinated, long-term or current), which interest was
paid or payable or accrued by the Borrower or any Subsidiary of the
Borrower during such 12-month period ending on such Determination Date,
plus (2) all payments on account of principal of any Indebtedness of the
Borrower and for any of its Subsidiaries paid or required to be paid during
such 12-month period, which payments represent current maturities of
long-term debt on the date when paid or required to be paid.
Notwithstanding the foregoing, the Borrower need not comply with the
foregoing provisions of this Sections 3.9 as at any Determination Date if
the Borrower's Unencumbered Cash Balance (which shall include the minimum
investment with the Bank described in Section 3.10 hereof) as at such
Determination Date exceeds $2,500,000.
3.10.Minimum Investment. The Borrower will maintain a minimum investment of
$1,000,000 with the Bank at all times. Such investment may be represented,
in whole or in part, by commercial paper issued by the Bank or the Bank's
parent or by investment grade securities offered by or through the Bank or
any of its affiliates, including Fleet Treasury Services.
3.11.Books and Records. The Borrower will maintain (and will cause each of its
Subsidiaries to maintain) complete and accurate books, records and accounts
which will at all times accurately and fairly reflect all of its
transactions in accordance with generally accepted accounting principles
consistently applied. Following the occurrence of a Default, the Borrower
will, at any reasonable time without necessity for notice, permit the Bank,
and any agents or representatives thereof, to examine and make copies of
and take abstracts from the records and books of account of, and visit the
properties of the Borrower and any of its Subsidiaries, and to discuss its
affairs, finances and accounts with its officers, directors and/or
independent accountants, all of whom are hereby authorized and directed to
cooperate with the Bank in carrying out the intent of this Section 3.11.
3.12.Subordination. Prior to the making of the Term Loan, the Borrower will
obtain, and will thereafter maintain in effect at all times, subordination
agreements in form and substance satisfactory to the Bank providing for
full subordination of all of the obligations (if any) of the Borrower
listed on item 4.1 of the attached Disclosure Schedule, other than
capitalized leases.
3.13.Confidentiality. Except as otherwise provided below, the Bank will not at
any time use (for any purpose other than in connection with monitoring the
within-described credit facility and/or enforcing its rights hereunder) any
confidential or proprietary information of any kind to which the Bank is
given access or which is provided to the Bank by the Borrower pursuant to
this Agreement (such information being hereinafter referred to as the
"Confidential Information"). The Bank agrees that it will use reasonable
efforts to ensure that Confidential Information will not be disclosed to
any other Person without the Borrower's consent; provided, however, that
nothing contained herein will be deemed to preclude any such disclosure:
(1) to employees, officers, directors and/or agents of the Bank in
connection with the approval of the within described credit facility; (2)
to internal or independent auditors; (3) to any examiners or other
officials, employees or agents of any federal or state governmental
regulatory agency, board, commission, public corporation or similar entity;
(4) if ordered by any court or governmental agency having or claiming
jurisdiction; (5) to any actual or proposed assignee of or participant in
the Term Loan; and/or (6) in connection with any suit, action or other
proceeding to collect the Term Loan or any other Obligations or enforce any
other right under this letter agreement and/or the Term Note.
Notwithstanding the foregoing, it is agreed that "Confidential Information"
expressly excludes: (1) any information filed with a public agency or
otherwise within the public domain, and (2) any information supplied to the
Bank by a third party under circumstances in which the recipient of such
information does not know of (and should not reasonably have known of) any
confidential relationship between such third party and the Borrower which
would restrict dissemination of such information.
Without limitation of any other covenants and agreements contained herein or
elsewhere, the Borrower agrees that so long as the financing arrangements
contemplated hereby are in effect or all or any portion of any Term Loan or any
of the other Obligations shall be outstanding:
4.1. Indebtedness. The Borrower will not create, incur, assume or suffer to
exist any Indebtedness (nor allow any of its Subsidiaries to create, incur,
assume or suffer to exist any Indebtedness), except for:
(i) Indebtedness owed to the Bank, including, without limitation, the
Indebtedness represented by the Term Note;
(ii) Indebtedness of the Borrower or any Subsidiary for taxes, assessments
and governmental charges or levies not yet due and payable;
(iii) unsecured current liabilities of the Borrower or any Subsidiary
(other than for money borrowed or for purchase money Indebtedness with
respect to fixed assets) incurred upon customary terms in the ordinary
course of business;
(iv) purchase money Indebtedness (including, without limitation,
Indebtedness in respect of capitalized equipment leases) owed to equipment
vendors and/or lessors for equipment purchased or leased by the Borrower
subsequent to the date of this letter agreement for use in the Borrower's
business, provided that the total of Indebtedness permitted under this
clause (iv) plus presently-existing equipment financing permitted under
clause (v) of this Section 4.1 will not exceed $1,000,000 in the aggregate
outstanding at any one time;
(v) other Indebtedness (not described in any of clauses (i)-(iv) above)
existing at the date hereof, but only to the extent set forth on item 4.1
of the attached Disclosure Schedule;
(vi) any guaranties or other contingent liabilities expressly permitted
pursuant to Section 4.3; and
(vii) amounts borrowed under the Genzyme Line of Credit discussed in
Section 4.2 of the Collaboration Agreement among Borrower, Genzyme Corp.
and Diacrin/Genzyme LLC dated October 1, 1996; provided, however, that any
such borrowing shall not occur until the Borrower has executed a
subordination agreement reasonably satisfactory in form and substance to
the Bank.
4.2 Liens. The Borrower will not create, incur, assume or suffer to exist (nor
allow any of its Subsidiaries to create, incur, assume or suffer to exist)
any mortgage, deed of trust, pledge, lien, security interest, or other
charge or encumbrance (including the lien or retained security title of a
conditional vendor) of any nature (collectively, "Liens"), upon or with
respect to any of its property or assets, now owned or hereafter acquired,
except that the foregoing restrictions shall not apply to:
(i) Liens for taxes, assessments or governmental charges or levies on
property of the Borrower or any of its Subsidiaries if the same shall not
at the time be delinquent or thereafter can be paid without interest or
penalty or are being contested in good faith and by appropriate proceedings
and as to which adequate reserves are maintained;
(ii) Liens imposed by law, such as carriers', warehousemen's and mechanics'
liens and other similar Liens arising in the ordinary course of business
for sums not yet due or which are being contested in good faith and by
appropriate proceedings which serve as a matter of law to stay the
enforcement thereof and as to which adequate reserves are maintained;
(iii) pledges or deposits under workmen's compensation laws, unemployment
insurance, social security, retirement benefits or similar legislation;
(iv) Liens in favor of the Bank;
(v) Liens in favor of equipment vendors and/or lessors securing purchase
money Indebtedness to the extent permitted by clause (iv) of Section 4.1;
provided that no such Lien will extend to any property of the Borrower
other than the specific items of equipment financed; or
(vi) other Liens existing at the date hereof, but only to the extent and
with the relative priorities set forth on item 4.2 of the attached
Disclosure Schedule.
4.3. Guaranties. The Borrower will not, without the prior written consent of the
Bank, assume, guarantee, endorse or otherwise become directly or
contingently liable (including, without limitation, liable by way of
agreement, contingent or otherwise, to purchase, to provide funds for
payment, to supply funds to or otherwise invest in any debtor or otherwise
to assure any creditor against loss) (and will not permit any of its
Subsidiaries so to assume, guaranty or become directly or contingently
liable) in connection with any indebtedness of any other Person, except (i)
guaranties by endorsement for deposit or collection in the ordinary course
of business, and (ii) guaranties existing at the date hereof and described
on item 4.3 of the attached Disclosure Schedule.
4.4. Dividends. The Borrower will not, without the prior written consent of the
Bank, make any distributions to its shareholders, pay any dividends (other
than dividends payable solely in capital stock of the Borrower) or redeem,
purchase or otherwise acquire, directly or indirectly any of its capital
stock; provided the Borrower may pay up to $50,000 in the aggregate during
the term of this letter agreement to redeem common stock warrants issued by
Borrower.
4.5. Loans and Advances. The Borrower will not make (and will not permit any
Subsidiary to make) any loans or advances to any Person, including, without
limitation, the Borrower's directors, officers and employees, except
advances to such directors, officers or employees with respect to expenses
incurred by them in the ordinary course of their duties and advances
against salary, all of which loans and advances will not exceed, in the
aggregate, $300,000 outstanding at any one time.
4.6. Investments. The Borrower will not, without the Bank's prior written
consent, invest in, hold or purchase any stock or securities of any Person
(nor will the Borrower permit any of its Subsidiaries to invest in,
purchase or hold any such stock or securities) except: (i)~readily
marketable direct obligations of, or obligations guarantied by, the United
States of America or any agency thereof; (ii)~other investment grade debt
securities; (iii)~mutual funds, the assets of which are primarily invested
in items of the kind described in the foregoing clauses (i)~and (ii)~of
this Section 4.6; (iv)~deposits with or certificates of deposit issued by
the Bank and any other obligations of the Bank or the Bank's parent,
including Eurodollar deposits made through the Bank or the Bank's parent;
(v) deposits in any other bank organized in the United States having
capital in excess of $100,000,000; (vi)~investments in any Subsidiaries now
existing or hereafter created by the Borrower pursuant to Section 4.7
below; and (vii) investments contemplated by and with respect to
Diacrin/Genzyme LLC; provided that in any event the Tangible Net Worth of
the Borrower alone (exclusive of its investment in Subsidiaries and any
debt owed by any Subsidiary to the Borrower) will not be less than 90% of
the consolidated Tangible Net Worth of the Borrower and Subsidiaries.
4.7. Subsidiaries; Acquisitions. The Borrower will not, without the prior
written consent of the Bank, form or acquire any Subsidiary or make any
other acquisition of the stock of any other Person or of all or
substantially all of the assets of any other Person. The Borrower will not
become a partner in any partnership.
4.8. Merger. The Borrower will not, without the prior written consent of the
Bank, merge or consolidate with any Person, or sell, lease, transfer or
otherwise dispose of any material portion of its assets (whether in one or
more transactions), other than sale of inventory in the ordinary course.
4.9. Affiliate Transactions. The Borrower will not, without prior written
consent of the Bank, enter into any transaction, including, without
limitation, the purchase, sale or exchange of any property or the rendering
of any service, with any affiliate of the Borrower, except in the ordinary
course of and pursuant to the reasonable requirements of the Borrower's
business and upon fair and reasonable terms no less favorable to the
Borrower than would be obtained in a comparable arms'-length transaction
with any Person not an affiliate; provided that nothing in this Section 4.9
shall be deemed to restrict the payment of salary or other similar payments
to any officer or director of the Borrower at a level consistent with the
salary and other payments being paid at the date of this letter agreement
and heretofore disclosed in writing to the Bank or in financial reports
previously furnished to the Bank, nor to prevent the hiring of additional
officers at a salary level consistent with industry practice, nor to
prevent reasonable periodic increases in salary. For the purposes of this
letter agreement, "affiliate" means any Person which, directly or
indirectly, controls or is controlled by or is under common control with
the Borrower; any officer or director or former officer or director of the
Borrower; any Person owning of record or beneficially, directly or
indirectly, 5% or more of any class of capital stock of the Borrower or 5%
or more of any class of capital stock or other equity interest having
voting power (under ordinary circumstances) of any of the other Persons
described above; and any member of the immediate family of any of the
foregoing. "Control" means possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of any
Person, whether through ownership of voting equity, by contract or
otherwise.
4.10.Change of Address, etc. The Borrower will not change its corporate name or
legal structure, nor will the Borrower change its chief executive offices
or principal place of business from the address described in Section 2.1(j)
above, without prior written notice to the Bank. The Borrower will not
change its fiscal year or methods of financial reporting with respect to
the financial covenants set forth in Sections 3.7-3.9 hereof unless, in
each instance, prior written notice of such change is given to the Bank and
prior to such change the Borrower enters into amendments to this letter
agreement in form and substance reasonably satisfactory to the Bank in
order to preserve unimpaired the rights of the Bank and the obligations of
the Borrower hereunder.
4.11.Hazardous Waste. Except as provided below, the Borrower will not dispose
of or suffer or permit to exist any hazardous material or oil on any site
or vessel owned, occupied or operated by the Borrower or any Subsidiary of
the Borrower, nor shall the Borrower store (or permit any Subsidiary to
store) on any site or vessel owned, occupied or operated by the Borrower or
any such Subsidiary, or transport or arrange the transport of, any
hazardous material or oil (the terms "hazardous material", "oil", "site"
and "vessel", respectively, being used herein with the meanings given those
terms in Mass. Gen. Laws,. 21E or any comparable terms in any comparable
statute in effect in any other relevant jurisdiction). The Borrower shall
provide the Bank with written notice of (i)~the intended storage or
transport of any hazardous material or oil by the Borrower or any
Subsidiary of the Borrower, (ii)~any potential or known release or threat
of release of any hazardous material or oil at or from any site or vessel
owned, occupied or operated by the Borrower or any Subsidiary of the
Borrower, and (iii)~any incurrence of any expense or loss by any government
or governmental authority in connection with the assessment, containment or
removal of any hazardous material or oil for which expense or loss the
Borrower or any Subsidiary of the Borrower may be liable. Notwithstanding
the foregoing, the Borrower and its Subsidiaries may use, store and
transport, and need not notify the Bank of the use, storage or
transportation of, (x)~oil in reasonable quantities, as fuel for heating of
their respective facilities or for vehicles or machinery used in the
ordinary course of their respective businesses (y)~hazardous materials that
are solvents or cleaning agents used in the ordinary course of the
respective business operations of the Borrower and its Subsidiaries and (2)
other materials used in the ordinary course of the respective business
operations of the Borrower or any Subsidiary, in reasonable quantities, as
long as in any case the Borrower or the Subsidiary concerned (as the case
may be) has obtained and maintains in effect any necessary governmental
permits, licenses and approvals, complies with all requirements of
applicable federal, state and local law relating to such use, storage or
transportation, follows the protective and safety procedures that a prudent
businessperson conducting a business the same as or similar to that of the
Borrower or such Subsidiary (as the case may be) would follow, and disposes
of such materials (not consumed in the ordinary course) only through
licensed providers of hazardous waste removal services.
4.12.No Margin Stock. No proceeds of the Term Loan shall be used directly or
indirectly to purchase or carry any margin security.
4.13.Subordinated Debt. The Borrower will not directly or indirectly make any
optional or voluntary prepayment or purchase of Subordinated Debt or
modify, alter or add any provisions with respect to payment of Subordinated
Debt. In any event, the Borrower will not make any payment of any principal
of or interest on any Subordinated Debt at any time when there exists, or
if there would result therefrom, any Default or Event of Default hereunder.
V. DEFAULT AND REMEDIES
5.1. Events of Default. The occurrence of any one of the following events shall
constitute an Event of Default hereunder:
(a) The Borrower shall fail to make any payment of principal of or interest
on the Term Note on or before the date when due; or
(b) Any representation or warranty of the Borrower contained herein shall
at any time prove to have been incorrect in any material respect when made
or any representation or warranty made by the Borrower in connection with
the Term Loan shall at any time prove to have been incorrect in any
material respect when made; or
(c) The Borrower shall default in the performance or observance of any
agreement or obligation under, the first sentence of Section 3.3 or under
any of Sections 3.6, 3.7, 3.8, 3.9 or 3.10 or any provision of Article IV;
or
(d) The Borrower shall be in default for 30 days after having knowledge of
such default in the performance or observance of any agreement or
obligation under Section 3.1 or in the last 4 sentences of Section 3.3 and
such default shall continue unremedied for 30 days after Borrower's
knowledge thereof.
(e) The Borrower shall be default in the performance of any other term,
covenant or agreement contained in this letter agreement and such default
shall continue unremedied for 30 days after written notice thereof shall
have been given to the Borrower; or
(f) Any default on the part of the Borrower or any Subsidiary of the
Borrower shall exist, and shall remain unwaived or uncured beyond the
expiration of any applicable notice and/or grace period, under any other
contract, agreement or undertaking now existing or hereafter entered into
with or for the benefit of the Bank (or any affiliate of the Bank); or
(g) Any default shall exist and remain unwaived or uncured with respect to
any Subordinated Debt of the Borrower or with respect to any instrument
evidencing, guaranteeing or otherwise relating to any such Subordinated
Debt, or any such Subordinated Debt shall not have been paid when due,
whether by acceleration or otherwise, or shall have been declared to be due
and payable prior to its stated maturity, or any event or circumstance
shall occur which permits, or with the lapse of time or the giving of
notice or both would permit, the acceleration of the maturity of any
Subordinated Debt by the holder or holders thereof; or
(h) Any default shall exist and remain unwaived or uncured with respect to
any other Indebtedness of the Borrower or any Subsidiary of the Borrower
for borrowed money or representing the deferred purchase price of the
property in excess of $250,000 in aggregate principal amount or with
respect to any instrument evidencing, guaranteeing, securing or otherwise
relating to any such Indebtedness, or any such Indebtedness in excess of
$250,000 in aggregate principal amount shall not have been paid when due,
whether by acceleration or otherwise, or shall have been declared to be due
and payable prior to its stated maturity, or any event or circumstance
shall occur which permits, or with the lapse of time or the giving of
notice or both would permit, the acceleration of the maturity of any such
Indebtedness by the holder of holders thereof; or
(i) The Borrower shall be dissolved, or the Borrower or any Subsidiary of
the Borrower shall become insolvent or bankrupt or shall cease paying its
debts as they mature or shall make an assignment for the benefit of
creditors, or a trustee, receiver or liquidator shall be appointed for the
Borrower or any Subsidiary of the Borrower or for a substantial part of the
property of the Borrower or any such Subsidiary, or bankruptcy,
reorganization, arrangement, insolvency or similar proceedings shall be
instituted by or against the Borrower or any such Subsidiary under the laws
of any jurisdiction (except for an involuntary proceeding filed against the
Borrower or any Subsidiary of the Borrower which is dismissed within 60
days following the institution thereof); or
(j) Any attachment, execution or similar process shall be issued or levied
against any property of the Borrower or any Subsidiary and such attachment,
execution or similar process shall not be paid, stayed, released, vacated
or fully bonded within 30 days after its issue or levy; or
(k) Any final uninsured judgment in excess of $250,000 shall be entered
against the Borrower or any Subsidiary of the Borrower by any court of
competent jurisdiction; or
(l) The Borrower or any Subsidiary of the Borrower shall fail to meet its
minimum funding requirements under ERISA with respect to any employee
benefit plan (or other class of benefit which the PBGC has elected to
insure) or any such plan shall be the subject of termination proceedings
(whether voluntary or involuntary) and there shall result from such
termination proceedings a liability of the Borrower or any Subsidiary of
the Borrower to the PBGC which, in each case, in the reasonable opinion of
the Bank may have a material adverse effect upon the financial condition of
the Borrower or any such Subsidiary; or
(m) Any Loan Document shall for any reason (other than due to payment in
full of all amounts secured or evidenced thereby or due to discharge in
writing by the Bank) not remain in full force and effect; or
(n) If, at any time, more than 50% of any class of voting stock of the
Borrower shall be held, of record and/or beneficially, by any Person or by
any "group" (as defined in the Securities Exchange Act of 1934, as amended,
and the regulations thereunder) other than any Person listed on item 5.1(n)
of the attached Disclosure Schedule or a group consisting of such Persons;
or
5.2. Rights and Remedies on Default. Upon the occurrence of any Event of
Default, in addition to any other rights and remedies available to the Bank
hereunder or otherwise, the Bank may exercise any one or more of the
following rights and remedies (all of which shall be cumulative):
(a) Declare the entire unpaid principal amount of the Term Note then
outstanding, all interest accrued and unpaid thereon and all other amounts
payable under this letter agreement, and all other Indebtedness of the
Borrower to the Bank, to be forthwith due and payable, whereupon the same
shall become forthwith due and payable, without presentment, demand,
protest or notice of any kind, all of which are hereby expressly waived by
the Borrower.
(b) Exercise all rights and remedies hereunder, under the Term Note and
under each and any other agreement with the Bank; and exercise all other
rights and remedies which the Bank may have under applicable law.
5.3. Set-off. In addition to any rights now or hereafter granted under
applicable law and not by way of limitation of any such rights, upon the
occurrence and during the continuance of any Event of Default, the Bank is
hereby authorized at any time or from time to time, without presentment,
demand, protest or other notice of any kind to the Borrower or to any other
Person, all of which are hereby expressly waived, to set off and to
appropriate and apply any and all deposits other than those held in tax
accounts or other similar trust fund or payroll accounts, and any other
Indebtedness at any time held or owing by the Bank or any affiliate thereof
to or for the credit or the account of the Borrower against and on account
of the obligations and liabilities of the Borrower to the Bank under this
letter agreement or otherwise irrespective of whether or not the Bank shall
have made any demand hereunder and although said obligations, liabilities
or claims, or any of them, may then be contingent or unmatured and without
regard for the availability or adequacy of other collateral.
VI. MISCELLANEOUS
6.1. Costs and Expenses. The Borrower agrees to pay, on demand and delivery of a
Bank Certificate therefor, all costs and expenses (including, without
limitation, reasonable legal fees) reasonably incurred by the Bank in
connection with the preparation, execution and delivery of this letter
agreement, the Term Note and all other instruments and documents to be
delivered in connection with the Term Loan and any amendments or
modifications of any of the foregoing, as well as the costs and expenses
(including, without limitation, the reasonable fees and expenses of legal
counsel) reasonably incurred by the Bank in connection with preserving,
enforcing or exercising, upon default, any rights or remedies under this
letter agreement, the Term Note and all other instruments and documents
delivered or to be delivered hereunder or in connection herewith, all
whether or not legal action is instituted. In addition, the Borrower shall
be obligated to pay any and all stamp and other taxes payable or determined
to be payable in connection with the execution and delivery of this letter
agreement, the Term Note and all other instruments and documents to be
delivered in connection with any Obligation. Any fees, expenses or other
charges which the Bank is entitled to receive from the Borrower under this
Section shall bear interest from the date ten (10) days following any
demand therefor until the date when paid at a rate per annum equal to 4%
per annum plus the per annum rate otherwise payable under the Term Note
(but in no event in excess of the maximum rate permitted by then applicable
law).
6.2. Capital Adequacy. If the Bank shall have determined that the adoption or
phase-in after the date hereof of any applicable law, rule or regulation
regarding capital requirements for banks or bank holding companies, or any
change therein after the date hereof, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration
thereof, or compliance by the Bank with any request or directive of such
entity regarding capital adequacy (whether or not having the force of law)
has or would have the effect of reducing the return on the Bank's capital
with respect to the Term Loan to a level below that which the Bank could
have achieved (taking into consideration the Bank's policies with respect
to capital adequacy immediately before such adoption, phase-in, change or
compliance and assuming that the Bank's capital was then fully utilized)
but for such adoption, phase-in, change or compliance by any amount deemed
by the Bank to be material: (i)~the Bank shall promptly after its
determination of such occurrence give notice thereof to the Borrower; and
(ii)~the Borrower shall pay forthwith to the Bank as an additional fee such
amount as the Bank certifies to be the amount that will compensate the Bank
for such reduction with respect to the Term Loan.
A certificate of the Bank claiming compensation under this Section shall be
conclusive in the absence of manifest error. Such certificate shall set
forth the nature of the occurrence giving rise to such compensation, the
additional amount or amounts to be paid to it hereunder and the method by
which such amounts were determined. In determining such amounts, the Bank
may use any reasonable averaging and attribution methods. No failure on the
part of the Bank to demand compensation on any one occasion shall
constitute a waiver of its right to demand such compensation on any other
occasion and no failure on the part of the Bank to deliver any certificate
in a timely manner shall reduce any obligation of the Borrower to the Bank
under this Section.
6.3. Facility Fee. The Borrower will pay to the Bank at the date of execution
and delivery of this letter agreement a non-refundable facility fee in the
amount of $3,250. The fee described in this Section is in addition to any
balances and fees required by the Bank or any of its affiliates in
connection with any other services now or hereafter made available to the
Borrower.
6.4. Other Agreements. The provisions of this letter agreement are not in
derogation or limitation of any obligations, liabilities or duties of the
Borrower under any of the other Loan Documents or any other agreement with
or for the benefit of the Bank. No inconsistency in default provisions
between this letter agreement and any of the other Loan Documents or any
such other agreement will be deemed to create any additional grace period
or otherwise derogate from the express terms of each such default
provision. No covenant, agreement or obligation of the Borrower contained
herein, nor any right or remedy of the Bank contained herein, shall in any
respect be limited by or be deemed in limitation of any inconsistent or
additional provisions contained in any of the other Loan Documents or any
such other agreement.
6.5. Governing Law. This letter agreement and the Term Note shall be governed
by, and construed and enforced in accordance with, the laws of The
Commonwealth of Massachusetts.
6.6. Addresses for Notices, etc. All notices, requests, demands and other
communications provided for hereunder shall be in writing and shall be
mailed or delivered to the applicable party at the address indicated below:
If to the Borrower:
Diacrin, Inc.
Building 96, 13th Street
Charlestown Navy Yard
Charlestown, MA 02129
Attention: Mark Fitzpatrick, Chief Financial Officer
Telephone: (617) 242-9100
Telecopy: (617) 242-0070
with a copy to:
Steven D. Singer, Esquire
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Telephone: (617) 526-6000
Telecopy: (617) 526-5000
If to the Bank:
Fleet National Bank
High Technology Group
75 State Street
Boston, MA 02109
Attention: Kimberly Martone, Vice President
Telephone: (617) 346-1630
Telecopy: (617) 346-1633
or, as to each of the foregoing, at such other address as shall be
designated by such Person in a written notice to the other party complying
as to delivery with the terms of this Section. All such notices, requests,
demands and other communications shall be deemed delivered on the earlier
of (i)~the date received or (ii)~the date of delivery, refusal or
non-delivery indicated on the return receipt if deposited in the United
States mails, sent postage prepaid, certified or registered mail, return
receipt requested, addressed as aforesaid.
6.7. Binding Effect; Assignment; Termination. This letter agreement shall be
binding upon the Borrower and the Bank and their respective successors and
assigns and shall inure to the benefit of the Borrower and the Bank and
their respective permitted successors and assigns. The Borrower may not
assign this letter agreement or any rights hereunder without the express
written consent of the Bank. The Bank may, in accordance with applicable
law, from time to time assign or grant participations in this letter
agreement, the Term Loan or the Term Note. Without limitation of the
foregoing generality,
(i) The Bank may at any time pledge all or any portion of its rights under
the Loan Documents (including any portion of the Term Note) to any of the
12 Federal Reserve Banks organized under Section 4 of the Federal Reserve
Act, 12 U.S.C. Section 341. No such pledge or the enforcement thereof shall
release the Bank from its obligations under any of the Loan Documents.
(ii) The Bank shall have the unrestricted right at any time and from time
to time, and without the consent of or notice to the Borrower, to grant to
one or more banks or other financial institutions (each, a "Participant")
participating interests in the Bank's obligation to lend hereunder and/or
any or all of the Term Loan held by the Bank hereunder. In the event of any
such grant by a Bank of a participating interest to a Participant, whether
or not upon notice to the Borrower, the Bank shall remain responsible for
the performance of its obligations hereunder and the Borrower shall
continue to deal solely and directly with the Bank in connection with the
Bank's rights and obligations hereunder. The Bank may furnish any
information concerning the Borrower in its possession from time to time to
prospective assignees and Participants; provided that the Bank shall
require any such prospective assignee or Participant to agree in writing to
maintain the confidentiality of such information to the same extent as the
Bank would be required to maintain such confidentiality.
The Borrower may terminate this letter agreement and the financing
arrangements made herein by giving written notice of such termination to
the Bank, provided that no such termination will release or waive any of
the Bank's rights or remedies or any of the Borrower's obligations under
this letter agreement or any of the other Loan Documents unless and until
the Borrower has paid in full the Term Loan and all interest thereon and
all fees and charges payable in connection therewith.
6.8. Consent to Jurisdiction. The Borrower irrevocably submits to the
non-exclusive jurisdiction of any Massachusetts court or any federal court
sitting within The Commonwealth of Massachusetts over any suit, action or
proceeding arising out of or relating to this letter agreement and/or the
Term Note. The Borrower irrevocably waives, to the fullest extent permitted
by law, any objection which it may now or hereafter have to the laying of
venue of any such suit, action or proceeding brought in such a court and
any claim that any such suit, action or proceeding has been brought in an
inconvenient forum. The Borrower agrees that final judgment in any such
suit, action or proceeding brought in such a court shall be enforced in any
court of proper jurisdiction by a suit upon such judgment, provided that
service of process in such action, suit or proceeding shall have been
effected upon the Borrower in one of the manners specified in the following
paragraph of this Section 6.8 or as otherwise permitted by law.
The Borrower hereby consents to process being served in any suit, action or
proceeding of the nature referred to in the preceding paragraph of this
Section 6.8 either (i)~by mailing a copy thereof by registered or certified
mail, postage prepaid, return receipt requested, to it at its address set
forth in Section 6.6 (as such address may be changed from time to time
pursuant to said Section 6.6) or (ii)~by serving a copy thereof upon it at
its address set forth in Section 6.6 (as such address may be changed from
time to time pursuant to said Section 6.6).
6.9. Severability. In the event that any provision of this letter agreement or
the application thereof to any Person, property or circumstances shall be
held to any extent to be invalid or unenforceable, the remainder of this
letter agreement, and the application of such provision to Persons,
properties or circumstances other than those as to which it has been held
invalid and unenforceable, shall not be affected thereby, and each
provision of this letter agreement shall be valid and enforced to the
fullest extent permitted by law.
6.10.Replacement Note. Upon receipt of an affidavit of an officer of the Bank
as to the loss, theft, destruction or mutilation of the Term Note or of any
other Loan Document which is not of public record and, in the case of any
such mutilation, upon surrender and cancellation of such Term Note or other
Loan Document, the Borrower will issue, in lieu thereof, a replacement Term
Note or other Loan Document in the same principal amount (as to the Term
Note) and in any event of like tenor.
6.11.Usury. All agreements between the Borrower and the Bank are hereby
expressly limited so that in no contingency or event whatsoever, whether by
reason of acceleration of maturity of the Term Note or otherwise, shall the
amount paid or agreed to be paid to the Bank for the use or the forbearance
of the Indebtedness represented by the Term Note exceed the maximum
permissible under applicable law. In this regard, it is expressly agreed
that it is the intent of the Borrower and the Bank, in the execution,
delivery and acceptance of the Term Note, to contract in strict compliance
with the laws of The Commonwealth of Massachusetts. If, under any
circumstances whatsoever, performance or fulfillment of any provision of
the Term Note or any of the other Loan Documents at the time such provision
is to be performed or fulfilled shall involve exceeding the limit of
validity prescribed by applicable law, then the obligation so to be
performed or fulfilled shall be reduced automatically to the limits of such
validity, and if under any circumstances whatsoever the Bank should ever
receive as interest an amount which would exceed the highest lawful rate,
such amount which would be excessive interest shall be applied to the
reduction of the principal balance evidenced by the Term Note and not to
the payment of interest. The provisions of this Section 6.11 shall control
every other provision of this letter agreement and of the Term Note.
6.12.WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY MUTUALLY WAIVE THE RIGHT TO A TRIAL BY JURY
IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS LETTER AGREEMENT, THE TERM NOTE OR ANY OTHER LOAN
DOCUMENTS OR OUT OF ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER ORAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES
A MATERIAL INDUCEMENT FOR THE BANK TO ENTER INTO THIS LETTER AGREEMENT AND
TO MAKE THE TERM LOAN AS CONTEMPLATED HEREIN.
VII. DEFINED TERMS
7.1. Definitions. In addition to terms defined elsewhere in this letter
agreement, as used in this letter agreement, the following terms have the
following respective meanings:
"Business Day" - Any day which is not a Saturday, nor a Sunday nor a public
holiday under the laws of the United States of America or The Commonwealth
of Massachusetts applicable to a national bank.
"Capital Base" - At any time, the sum of (i) the consolidated Tangible Net
Worth of the Borrower and Subsidiaries then existing, plus (ii) the
principal amount of Subordinated Debt of the Borrower then outstanding
(nothing contained herein being deemed to authorize the incurrence of any
such Subordinated Debt).
"Cash-Equivalents" - Each of the following: (i) readily marketable direct
obligations of, or obligations guarantied by, the United States of America
or any agency thereof and entitled to the full faith and credit of the
United States of America, (ii) demand deposits with the Bank or with any
other commercial bank chartered by the United States or by any state and
having undivided capital and surplus of not less than $1,000,000,000, or
(iii) interests in mutual funds, substantially all of the assets of which
shall be governmental obligations of the type described in clause (i) of
this sentence.
"Default" - Any event or circumstance which, with the passage of time or
the giving of notice or both, could become an Event of Default under this
letter agreement.
"Earnings Available" - The consolidated Net Income (or consolidated Net
Loss) of the Borrower and Subsidiaries for any period, plus, without
duplication of any item, (i) all interest on any Indebtedness (whether
senior debt or subordinated debt) paid or accrued by the Borrower and/or
any of its Subsidiaries for such period and actually deducted on the
consolidated books of the Borrower for the purposes of computation of
consolidated Net Income (or consolidated Net Loss) for the period involved,
and (ii) the amount of the provision for depreciation and/or amortization
actually deducted on the consolidated books of the Borrower for the
purposes of computation of consolidated Net Income (or consolidated Net
Loss) for the period involved, but minus all cash taxes paid during such
period by the Borrower and/or any of its Subsidiaries.
"ERISA" - The Employee Retirement Income Security Act of 1974, as amended.
"Expiration Date" - November 1, 2002.
"Indebtedness" - All obligations of a Person, whether current or long-term,
senior or subordinated, which in accordance with generally accepted
accounting principles would be included as liabilities upon such Person's
balance sheet at the date as of which Indebtedness, is to be determined,
and shall also include guaranties, endorsements (other than for collection
in the ordinary course of business) or other arrangements whereby
responsibility is assumed for the obligations of others, whether by
agreement to purchase or otherwise acquire the obligations of others,
including any agreement, contingent or otherwise, to furnish funds through
the purchase of goods, supplies or services for the purpose of payment of
the obligations of others.
"Loan Documents" - Each of this letter agreement, the Term Note, and each
other instrument, document or agreement evidencing, securing, guaranteeing
or relating in any way to any of the Term Loan, all whether now existing or
hereafter arising or entered into.
"Net Income" (or "Net Loss") - The book net income (or book net loss, as
the case may be) of a Person for any period, after all taxes actually paid
or accrued and all expenses and other charges determined in accordance with
generally accepted accounting principles consistently applied.
"Net Quick Assets" - Such current assets of the Borrower as consist of
cash, Cash-Equivalents, readily-marketable securities and Receivables (less
an allowance for bad debt consistent with the Borrower's prior experience).
"Obligations" - All Indebtedness, covenants, agreements, liabilities and
obligations, now existing or hereafter arising, made by the Borrower with
or for the benefit of the Bank or owed by the Borrower to the Bank in any
capacity.
"PBGC" - The Pension Benefit Guaranty Corporation or any successor thereto.
"Person" - An individual, corporation, partnership, limited liability
company, joint venture, trust or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Receivables" - As to any Person, all of such Person's present and future
accounts receivable for goods sold or for services rendered.
"SEC" - The Securities and Exchange Commission or any successor thereto.
"Subordinated Debt" - Any Indebtedness of the Borrower which is expressly
subordinated, pursuant to a subordination agreement in form and substance
satisfactory to the Bank, to all Indebtedness now or hereafter owed by the
Borrower to the Bank.
"Subsidiary" - Any corporation or other entity of which the Borrower and/or
any of its Subsidiaries, directly or indirectly, owns, or has the right to
control or direct the voting of, fifty (50%) percent or more of the
outstanding capital stock or other ownership interest having general voting
power (under ordinary circumstances); provided, however, in no event shall
Diacrin/Genzyme LLC constitute a "Subsidiary" for purposes of this
Agreement.
"Tangible Net Worth" - An amount equal to the total assets of any Person
(excluding (i)~the total intangible assets of such Person, (ii) any
minority interests in Subsidiaries and (iii)~any assets representing
amounts due from any officer or employee of such Person or from any
Subsidiary of such Person) minus the total liabilities of such Person.
Total intangible assets shall be deemed to include, but shall not be
limited to, the excess of cost over book value of acquired businesses
accounted for by the purchase method, formulae, trademarks, trade names,
patents, patent rights and deferred expenses (including, but not limited
to, unamortized debt discount and expense, organizational expense,
capitalized software costs and experimental and development expenses).
"Total Liabilities" - All Indebtedness of the Borrower and/or any
Subsidiary of the Borrower (secured or unsecured, senior or subordinated)
which would properly be included in liabilities shown on a balance sheet of
the Borrower prepared in accordance with generally accepted accounting
principles.
"Unencumbered Cash Balance" - At any time, the total of all cash and
Cash-Equivalents of the Borrower which are not subject to any pledge, lien,
encumbrance or other restriction, other than any set-off right in favor of
the Bank.
Any defined term used in the plural preceded by the definite article shall
be taken to encompass all members of the relevant class. Any defined term
used in the singular preceded by "any" shall be taken to indicate any
number of the members of the relevant class.
This letter agreement is executed, as an instrument under seal, as of the day
and year first above written. Very truly yours,
DIACRIN, INC.
By
Name: Thomas H. Fraser
Title: President and
Chief Executive Officer
Accepted and agreed:
FLEET NATIONAL BANK
By
Its
By
Its
DISCLOSURE SCHEDULE
Item 2.1(a) Jurisdictions in which Borrower is qualified; Subsidiaries
Item 2.1(b) 50% Stock Ownership
Item 2.1(e) Litigation
Item 4.1 Existing Indebtedness
Item 4.2 Existing Liens
Item 4.3 Existing Guaranties
Item 5.1(n) Permitted 50% stockholders
EXHIBIT 11
DIACRIN, INC.
COMPUTATION OF NET LOSS PER COMMON SHARE (1)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Loss $ (5,712,717) $ (4,984,799) $ (2,351,464)
============ ============ ============
Weighted Average Common and
Common Equivalent Shares:
Weighted Average Common Stock
Outstanding During the Period 379,131 11,286,074 13,235,286
Conversion of Preferred Stock
into Common Stock 6,693,121 841,212 -
Conversion of Convertible Notes Payable
into Common Stock 2,799,999 351,912 -
Dilutive Effect of Common Equivalent Shares
Issued Subsequent to December 1, 1994 (2) 181,426 21,315 -
------------ ------------ ------------
10,053,677 12,500,513 13,235,286
============ ============ ============
Net Loss Per Common Share $ (.57) $ (.40) $ (.18)
============ ============ ============
</TABLE>
(1) Fully diluted net loss per share has not been separately presented, as the
amounts would not be meaningful.
(2) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, stock options and warrants issued at prices below the initial public
offering price per share ("cheap stock") during the twelve month period
immediately preceding the initial filing date of the Company's Registration
Statement for its initial public offering have been included as outstanding for
all periods prior to the effectiveness of the Registration Statement. The
dilutive effect of the common and common stock equivalents was computed in
accordance with the treasury stock method.
Exhibit 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 33-80773, 333-19571, 333-19573, 333-19615 and
333-31541.
Arthur Andersen LLP
Boston, Massachusetts
February 9, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 5,015,777
<SECURITIES> 6,000,098
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,454,631
<PP&E> 1,847,784
<DEPRECIATION> 853,911
<TOTAL-ASSETS> 22,779,793
<CURRENT-LIABILITIES> 1,903,699
<BONDS> 672,426
0
0
<COMMON> 132,683
<OTHER-SE> 20,070,985
<TOTAL-LIABILITY-AND-EQUITY> 22,779,793
<SALES> 0
<TOTAL-REVENUES> 4,763,270
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,862,528
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 93,280
<INCOME-PRETAX> (2,351,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,351,464)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
