1
EXHIBIT 99.2
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Aquila
Biopharmaceuticals, Inc. and its subsidiary ("the Company") at December 31, 1999
and December 31, 1998, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS, LLP
Boston, Massachusetts
February 8, 2000
(except for Notes 1 and 19, as to
which the date is November 16th, 2000)
2
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- ------------ -----------
Revenue:
Product Sales.................................... $ 564,170 $ 955,321 $ 1,319,260
Research and development......................... 1,503,494 4,642,088 5,608,977
----------- ------------ -----------
2,067,664 5,597,409 6,928,237
Cost and expenses:
Cost of Sales.................................... 858,200 969,484 1,023,268
Research and development......................... 6,642,407 7,447,359 5,019,775
Purchased incomplete technology (Note 18)........ -- 9,927,227 --
General and administrative....................... 3,026,129 3,800,806 4,521,035
----------- ------------ -----------
10,526,736 22,144,876 10,564,078
Other income, net (Notes 6, 12 and 13)............. 264,296 1,947,832 4,370,107
----------- ------------ -----------
Income/(loss) from continuing operations........... (8,194,776) (14,599,635) 734,266
Discontinued operations (Note 3):
Gain on sale..................................... -- -- 191,250
----------- ------------ -----------
Net Income/(loss).................................. $(8,194,776) $(14,599,635) $ 925,516
----------- ------------ -----------
Unrealized holding gains on available-for-sale
securities.................................... 483,190 79,434 --
Less: reclassification adjustment for gain
included in net income........................ (136,434) -- --
----------- ------------ -----------
Total other comprehensive income................. 346,756 79,434 --
----------- ------------ -----------
Comprehensive Income/(loss)........................ $(7,848,020) $(14,520,201) $ 925,516
=========== ============ ===========
Income/(loss) per weighted average number of common
shares:
Basic earnings per share:
Income/(loss) from continuing operations......... $ (1.11) $ (2.22) $ 0.15
Net Income/(loss)................................ $ (1.11) $ (2.22) $ 0.18
Diluted earnings per share:
Income/(loss) from continuing operations......... $ (1.11) $ (2.22) $ 0.14
Net Income/(loss)................................ $ (1.11) $ (2.22) $ 0.18
Weighted average number of common shares
outstanding:
Basic............................................ 7,394,147 6,580,602 5,003,703
Diluted.......................................... 7,394,147 6,580,602 5,141,815
The accompanying notes are an integral part of these financial statements.
3
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
1999 1998
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 524,070 $ 5,270,460
Marketable securities (Notes 2, 4 and 6).................. 6,493,044 9,885,090
Accounts and other receivables (less allowance for
doubtful accounts of $47,000 in 1998).................. 636,555 1,027,711
Inventories (Note 5)...................................... 497,853 434,849
Prepaid expenses and other current assets................. 280,041 353,448
------------- -------------
Total current assets.............................. 8,431,563 16,971,558
Investments (Note 6)........................................ 244,500 319,500
Property, Plant, and Equipment, Net (Note 7)................ 6,191,244 6,372,345
Patents and Purchased Technology, Net (Note 8).............. 46,891 116,270
Other Assets (Note 13)...................................... 827,738 848,726
------------- -------------
Total Assets...................................... $ 15,741,936 $ 24,628,399
============= =============
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts Payable.......................................... $ 554,159 $ 485,974
Accrued Royalties......................................... -- 134,263
Accrued professional fees................................. 164,967 298,684
Accrued expenses and other (Note 9)....................... 883,588 1,970,703
Current maturities of long-term debt (Note 10)............ 1,577,036 2,191,284
------------- -------------
Total current liabilities......................... 3,179,750 5,080,909
Deferred Revenue (Note 6)................................... 150,000 225,000
Long Term Debt (Note 10).................................... 2,607,397 3,669,494
------------- -------------
Total Liabilities................................. 5,937,147 8,975,403
------------- -------------
Commitments and Contingencies (Note 13)
Shareholders' Equity (Note 14):
Preferred stock, authorized: 5,000,000 shares, none
issued................................................. -- --
Common stock, par value: $.01 per share, authorized:
30,500,000 shares, issued: 7,888,446 and 6,992,483
shares in 1999 and 1998, respectively.................. 78,884 69,924
Additional paid in capital................................ 141,802,488 139,811,635
Accumulated other comprehensive income.................... 426,190 79,434
Treasury stock at cost: 7,631 shares in 1999 and 1998..... (34,339) (34,339)
Accumulated deficit....................................... (132,468,434) (124,273,658)
------------- -------------
Total Shareholders' Equity........................ 9,804,789 15,652,996
------------- -------------
Total Liabilities and Shareholders' Equity........ $ 15,741,936 $ 24,628,399
============= =============
The accompanying notes are an integral part of these financial statements.
4
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- ------------ ------------
Cash Flows From Operating Activities:
Net Income/(loss).................................... $(8,194,776) $(14,599,635) $ 925,516
Adjustments to reconcile net income/(loss) to net
cash used in operating activities:
Depreciation and amortization...................... 816,427 292,650 402,555
Provision (recovery) for doubtful accounts......... (39,500) 40,000 (25,000)
Purchased incomplete technology.................... -- 9,927,227 --
Non cash compensation expense...................... -- -- 10,000
Gain on sale of property, plant and equipment...... (14,300) (25,115) (2,340,983)
Gain on sale of discontinued businesses............ -- -- (191,250)
Issuance of common shares.......................... -- -- 15,871
Changes in assets and liabilities:
Accounts and other receivables..................... 430,656 557,434 765,774
Inventories........................................ (63,004) 243,742 (448,440)
Deferred revenue................................... (75,000) -- (917,600)
Prepaid and other current assets................... 73,407 (115,475) 540,954
Accounts payable, accrued expenses and other....... (1,246,795) 265,186 (1,720,026)
----------- ------------ ------------
Net cash used by operating activities....... (8,312,885) (3,413,986) (2,982,629)
Cash Flows From Investing Activities:
Purchases of available-for-sale securities......... (8,789,784) (20,693,209) --
Purchases of held-to-maturity securities........... -- -- (12,163,261)
Proceeds from maturities of marketable
securities....................................... 12,595,957 20,507,296 11,181,249
Other noncurrent assets............................ 28,616 (737,814) 22,120
Purchases of property, plant and equipment......... (565,947) (5,968,118) (371,176)
Proceeds from the sale of property, plant and
equipment, net................................... 14,300 25,115 6,100,583
Proceeds from the sale of discontinued
businesses....................................... -- -- 412,123
----------- ------------ ------------
Net cash (used)/provided by investing
activities............................... 3,283,142 (6,866,730) 5,181,638
Cash Flows From Financing Activities:
Issuance of stock.................................. 1,511,015 3,845,965 18,000
Proceeds from debt................................. -- 5,000,000 208,017
Payment of debt.................................... (1,227,662) (647,239) (4,184,667)
----------- ------------ ------------
Net cash provided/(used) by financing
activities............................... 283,353 8,198,726 (3,958,650)
----------- ------------ ------------
Net increase/(decrease) in cash and cash
equivalents........................................ (4,746,390) (2,081,990) (1,759,641)
----------- ------------ ------------
Cash and cash equivalents at the beginning of the
year............................................... 5,270,460 7,352,450 9,112,091
----------- ------------ ------------
Cash and cash equivalents at the end of the year..... $ 524,070 $ 5,270,460 $ 7,352,450
=========== ============ ============
Supplemental disclosures:
Interest paid........................................ $ 683,775 $ 37,682 $ 397,776
Issuance of treasury stock in settlement of
liability.......................................... -- 13,028 --
Issuance of warrants in conjunction with debt........ -- 90,000 --
Issuance of stock in settlement of debt and accrued
interest........................................... $ 488,798 $ -- $ --
The accompanying notes are an integral part of these financial statements
5
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN COMPREHENSIVE TREASURY
SHARES AMOUNT CAPITAL INCOME STOCK DEFICIT TOTAL
--------- ------- ------------ ------------- -------- ------------- -----------
BALANCE, DECEMBER 31, 1996.......... 5,000,000 $50,000 $127,514,223 $ 0 $(47,367) $(110,599,539) $16,917,317
Exercises of options................ 4,000 40 17,960 -- -- -- 18,000
Stock issued to creditors pursuant
to Reorganization plan............ 3,527 35 15,836 -- -- -- 15,871
Compensation expense................ -- -- 10,000 -- -- -- 10,000
Net income.......................... -- -- -- -- -- 925,516 925,516
--------- ------- ------------ -------- -------- ------------- -----------
BALANCE, DECEMBER 31, 1997.......... 5,007,527 50,075 127,558,019 0 (47,367) (109,674,023) 17,886,704
Stock issued for private
placement......................... 769,000 7,690 3,543,520 -- -- -- 3,551,210
Stock issued for employee stock
purchase.......................... 11,331 113 48,724 -- -- -- 48,837
Acquisition of Vactex, Inc.......... 1,150,000 11,500 8,326,000 -- -- -- 8,337,500
Exercises of options................ 54,625 546 245,372 -- -- -- 245,918
Warrants issued for debt
obligation........................ -- -- 90,000 -- -- -- 90,000
Unrealized gain on
available-for-sale securities..... -- -- -- 79,434 -- -- 79,434
Treasury stock issued in settlement
of Chapter 11 claim............... -- -- -- -- 13,028 -- 13,028
Net loss............................ -- -- -- -- -- (14,599,635) (14,599,635)
--------- ------- ------------ -------- -------- ------------- -----------
BALANCE, DECEMBER 31, 1998.......... 6,992,483 69,924 139,811,635 79,434 (34,339) (124,273,658) 15,652,996
Stock issued for private
placement......................... 666,667 6,667 1,473,254 -- -- -- 1,479,921
Stock issued for employee stock
purchase.......................... 12,322 123 30,971 -- -- -- 31,094
Stock issued for debt............... 216,974 2,170 486,628 -- -- -- 488,798
Unrealized gain on
available-for-sale securities..... -- -- -- 346,756 -- -- 346,756
Net loss............................ -- -- -- -- -- (8,194,776) (8,194,776)
--------- ------- ------------ -------- -------- ------------- -----------
BALANCE, DECEMBER 31, 1999.......... 7,888,446 $78,884 $141,802,488 $426,190 $(34,339) $(132,468,434) $ 9,804,789
========= ======= ============ ======== ======== ============= ===========
The accompanying notes are an integral part of these financial statements.
6
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Aquila Biopharmaceuticals, Inc. (the "Company" or "Aquila"), engages in
discovery, product development and commercialization of products to prevent,
treat or control infectious diseases, autoimmune disorders and cancers. Aquila
is subject to risks common to companies in the biotechnology industry including,
but not limited to, development by Aquila or its competitors of new
technological innovations, dependence on key personnel, protection of
proprietary technology, the ability to raise additional capital and compliance
with FDA government regulations.
On November 16, 2000, the Company was acquired by Antigenics Inc.
("Anitigenics"), a United States incorporated public company. The acquisition
was structured as a merger of a wholly owned subsidiary of Antigenics with and
into Aquila pursuant to an Agreement and Plan of Merger among Antigenics, St
Marks Acquisition Corp. and Aquila dated as of August 18, 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The Consolidated Financial Statements
include Aquila Biopharmaceuticals, Inc. and VacTex, Inc. ("VacTex") its wholly
owned subsidiary. VacTex was acquired on April 14, 1998 (See Note 18). All
significant intercompany transactions and accounts have been eliminated.
Segment Information -- Aquila's reportable segments are development and
manufacturing. All research programs are aggregated in the development segment.
Revenues from the sale of the Company's one commercial product, the feline
leukemia vaccine, the QS-21 material supplied to research partners, and license
fees relating to these products are reported in the manufacturing segment.
Aquila allocates resources among segments primarily on the basis of labor
utilization. Aquila's business is conducted entirely within the United States.
The financial results of the Company's segments are presented on the same
accounting basis as the Company's consolidated results. There are no
inter-segment activities. The table below presents revenue and net income data
for the two segments for the years 1997, 1998 and 1999. Asset information by
segment is not reported because we do not produce such information internally.
CONSOLIDATED
DEVELOPMENT MANUFACTURING RECONCILING TOTALS
------------------ ----------------------- ITEMS -----------------------
REVENUE NET LOSS REVENUE NET INC./LOSS NET INC./LOSS REVENUE NET INC./LOSS
------- -------- ------- ------------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
1997................. $1,134 $(4,962)(1) $5,794 $2,548(2) $ 3,339 $6,928 $ 926
1998................. $ 872 $(8,317)(1) $4,725 $2,285(2) $(8,568) $5,597 $(14,600)
1999................. $ 460 $(7,952)(1) $1,608 $ (436)(2) $ 193 $2,068 $ (8,195)
- ---------------
(1) Includes non-recurring license fees of $3.5 million, $3.0 million and $0.8
million in 1997, 1998 and 1999 respectively. Total export sales of this
segment were approximately $0.8 million, $1.4 million and $1.2 million in
1999, 1998 and 1997, respectively.
(2) Includes $2.3 million gain from the sale of real estate, net royalty income
of $0.9 million, net interest income of $0.6 million and rental income of
$0.5 million in 1997; a charge for incomplete technology of $9.9 million,
net interest income of $0.9 million, net royalty income of $0.5 million and
$0.3 million real estate tax rebate in 1998, and net interest expense of
$0.1 million and income from the sale of available-for-sale securities of
$0.2 in 1999.
One corporate partner, SmithKline Beecham, has historically been our
principle source of research and development revenue. Research and development
revenues from this corporate partner, included in the manufacturing segment,
represented 5%, 62% and 61% of Aquila's total revenue in 1999, 1998 and 1997,
respectively. This includes compensation to Aquila for producing QS-21 clinical
trial material for use in its product development programs. In 1998, this
partner made a payment of $3.0 million, the last scheduled payment under a
license agreement.
7
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, Aquila received license fee revenue from Elan Corporation and
Progenics Pharmaceuticals. The research and development revenue from these two
partners, included in the manufacturing segment, represents 24% and 16%,
respectively, of Aquila's total revenue in 1999.
A marketing partner, Virbac S.A., represents all of the Company's product
sales and a substantial portion of the Company's research and development
revenue. Product sales to this partner are included in the manufacturing segment
and represented 27%, 17% and 19% of total revenues in 1999, 1998 and 1997,
respectively. Revenue from development agreements with this partner are included
in the development segment and represented 11% of total revenues in 1999, and
16% of total revenues in 1998 and 1997.
Aquila depends on a number of corporate collaborators for reimbursement for
the supply of its adjuvant for use in their clinical trials and for research
revenues.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
certain estimates and assumptions that effect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Such estimates include, but are not limited to, valuation
allowance against deferred tax assets. Actual results could differ from those
estimates.
Cash and Cash Equivalents -- Aquila considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents include money market accounts, certificates of
deposit, commercial paper and short-term investments.
Marketable Securities -- Aquila classifies its marketable securities at the
time of purchase in accordance with the Statement of Financial Accounting
Standards No. 115 ("SFAS 115") "Accounting for Certain Investments in Debt and
Equity Securities". At December 31, 1999, all marketable securities were
classified as available-for-sale.
Concentrations of Credit Risk -- Financial instruments that potentially
subject Aquila to concentration of credit risk are primarily cash investments
and accounts receivable. Cash investments are restricted to financial
institutions and corporations with high credit standings. Credit risk on
accounts receivable is minimized by the strong financial position of the
entities with which the Company does business. Write-offs for 1999, 1998 and
1997 were $7,500, $72,620 and $76,000, respectively.
Inventories -- Inventories are stated at the lower of cost or market. Cost
has been determined using standard costs which approximate the first-in,
first-out method.
Property, Plant and Equipment -- Property, plant and equipment are recorded
at cost. Depreciation for financial accounting purposes is computed by the
straight-line method over their estimated useful lives. The estimated useful
lives of the assets are as follows:
USEFUL LIFE
------------------------
Furniture, fixtures and equipment........................... 3 -- 10
Leasehold and building improvements......................... Lesser of Useful Life
or the Term of the Lease
Maintenance and repairs are charged to operations as incurred, whereas additions
and improvements are capitalized. Upon retirement or disposal of assets, the
cost and the related accumulated depreciation are removed from the balance sheet
and any gain or loss is reflected in earnings.
Long-Lived Assets -- The Company reviews long-lived assets for impairment
by comparing the cumulative undiscounted cash flows from the assets with their
carrying amount. Any write-downs are to be treated as permanent reductions in
the carrying amount of the assets. Management's policy regarding long-lived
assets is
8
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to evaluate the recoverability of its assets when the facts and circumstances
suggest that these assets may be impaired. This analysis relies on a number of
factors, including operating results, business plans, budgets, economic
projections and changes in management's strategic direction or market emphasis.
The test of such recoverability is a comparison of the asset value to its
expected cumulative net operating cash flow over the remaining life of the
asset.
Patents and Purchased Technology -- Purchased technology related to the
acquisition of completed technology is recorded at fair market value at
acquisition date. Capitalized patent costs relate to patented technologies from
which the Company is deriving economic benefit. Purchased technology and patents
are amortized on a straight-line basis over their estimated useful lives ranging
from three to seven years.
Revenue Recognition -- Revenue from product sales is recognized at the time
of product shipment. Revenue from research and development contracts is deferred
and recognized over the contractual periods as services are performed or as
distinct milestones are met. The initial fee in alliance agreements is
recognized as revenue when a definitive agreement is reached and no contingent
factors are present.
Research and Development Costs -- Research and development costs are
charged to operations as incurred.
Income Taxes -- Aquila uses the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities using
current statutory tax rates.
Net Income/(Loss) Per Share -- Aquila applies Statement of Financial
Accounting Standards No. 128, ("SFAS 128") Earnings Per Share to compute loss
per share. Under SFAS 128, basic EPS is calculated by dividing net earnings
(loss) by the weighted-average common shares outstanding during the period.
Diluted EPS reflects the potential dilution to basic EPS that could occur upon
conversion or exercise of securities, options, or other such items, to common
shares using the treasury stock method based upon the weighted-average fair
value of our common shares during the period.
Common stock equivalents consisting of stock options and warrants have been
excluded from the computation of diluted earnings/(loss) per share in 1999 and
1998 since inclusion would be anti-dilutive because Aquila was in a loss
position. Warrants to purchase 60,680 shares of common stock with an exercise
price of $4.12 and a term of 5 years were outstanding at December 31, 1999 and
1998. Options to purchase 1,136,288 and 1,091,560 shares of common stock at
weighted average exercise prices of $3.37 and $3.89, respectively, were
outstanding at December 31, 1999 and 1998, respectively. Options to purchase
180,375 shares of common stock at a weighted average exercise price of $5.16
were outstanding at December 31, 1997 and not included in the computation of
diluted income per share in 1997 because their exercise price was greater than
average market price making inclusion anti-dilutive (see also Note 19).
Basic and diluted earnings per share from discontinued operations were
$0.04 for 1997.
Accounting Pronouncements
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition issues,
as well as examples of how the staff applies revenue recognition guidance to
specific circumstances. Accordingly, no later than the second quarter of 2000
Aquila will change its accounting for initial license fees. Through 1999 revenue
was recognized when the agreement was reached and no contingent factors were
present. Under the new guidance of SAB 101, revenue will be deferred and
recognized ratably over the appropriate life. No later
9
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
than the second quarter of 2000, a cumulative adjustment will be recorded to
create deferred revenue that will be recognized over future years.
In June 1998, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedging accounting. SFAS 133 will be effective for the Company's
year ending December 31, 2001. The Company believes the adoption of SFAS No. 133
will not have a material effect on the financial statements.
3. DISCONTINUED OPERATIONS
During 1996, Aquila disposed of two separate diagnostics businesses
encompassing its diagnostic assets and operations for cash proceeds of
approximately $12.2 million. The accompanying financial statements include a
gain from the disposal of $0.2 million in 1997. Net revenue from discontinued
operations was $0.4 million in 1997.
4. MARKETABLE SECURITIES
Available-for-sale marketable securities are carried at fair market value
based on quoted market prices. Held-to-maturity marketable securities are
carried at amortized cost, which approximates fair value. At December 31, 1999,
all marketable securities were classified as available-for-sale. Marketable
securities consisted of the following at December 31:
UNREALIZED
FAIR --------------- AMORTIZED
VALUE GAINS LOSSES COST
------ ----- ------ ---------
(DOLLARS IN THOUSANDS)
1999
Available-for-sale at fair market value
Common stock........................................... $ 550 $475 $ -- $ 75
Corporate debt securities.............................. 492 -- (7) 499
Government-backed obligations.......................... 5,451 -- (49) 5,500
------ ---- ---- ------
Total.......................................... $6,493 $475 $(56) $6,074
1998
Available-for-sale at fair market value
Common stock........................................... $ 139 $ 64 $ -- $ 75
Corporate debt securities.............................. 6,746 15 -- 6,731
Government-backed obligations.......................... 2,000 -- -- 2,000
Held-to-maturity at amortized cost
Corporate debt security................................ 1,000 -- -- 1,000
------ ---- ---- ------
Total.......................................... $9,885 $ 79 $ -- $9,806
10
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INVENTORIES
Inventories consisted of the following at December 31:
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Finished goods.............................................. $157 $231
Work in process............................................. 236 122
Raw materials and supplies.................................. 105 82
---- ----
$498 $435
==== ====
6. INVESTMENTS
Aquila holds 270,000 shares of Protein Sciences Corporation stock as
payment for a paid up license and for royalties due and payable under terms of a
technology sublicense agreement. The shares are carried at a cost of $.35 per
share.
Aquila received 45,000 shares of Progenics Pharmaceutical's Inc.
("Progenics") common stock in partial payment of a license fee under an
agreement executed in 1995. As Progenics attains certain milestones as defined
in the agreement, these shares are released from restriction and Aquila earns
permanent ownership of the shares. The value of the stock was determined to be
$0.3 million and was recorded in Investments and Deferred Revenue. The Company
earned the first milestone in 1996 and subsequently sold the unrestricted shares
for $0.2 million in 1999. In 1999, the Company earned the second milestone,
reclassified another 11,250 shares of Progenics common stock from Investments to
Marketable Securities, and recorded revenue of $75,000, which represented the
cost of these shares. At December 31, 1999, these shares had a market value of
$0.5 million and were classified as available-for-sale. The remaining 22,500
restricted shares are carried at cost of $150,000 and Deferred Revenue of the
same amount. In the first quarter of 2000, the Company sold the 11,250 shares of
unrestricted Progenics common stock for proceeds of $0.6 million.
7. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of the following at December 31:
1999 1998
--------- ---------
(DOLLARS IN THOUSANDS)
Furniture, fixtures, and equipment.......................... $ 3,594 $ 3,274
Leasehold and building improvements......................... 5,358 5,112
------- -------
Sub-total................................................... 8,952 8,386
Less accumulated depreciation and amortization.............. (2,761) (2,014)
------- -------
$ 6,191 $ 6,372
======= =======
Total depreciation expense during 1999, 1998 and 1997 was $0.7 million,
$0.2 million and $0.3 million, respectively. Interest cost of $0.1 million out
of total interest costs of $0.2 million was capitalized in 1998 in connection
with the fit-out of our new facility.
11
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PATENTS AND PURCHASED TECHNOLOGY
Purchased technology and intangibles consist of the following at December
31:
1999 1998
------ ------
(DOLLARS IN THOUSANDS)
Purchased technology........................................ $ 240 $ 240
Patents and patent support.................................. 746 746
----- -----
Sub-total................................................... 986 986
Less accumulated amortization............................... (939) (870)
----- -----
$ 47 $ 116
===== =====
Total amortization expense was $0.1 million, in each of in 1999, 1998 and
1997.
9. OTHER ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
1999 1998
----- -------
(DOLLARS IN THOUSANDS)
Fit-out of new facility..................................... $ 40 $ 700
Research contract obligations............................... 152 674
Compensation................................................ 433 283
Other....................................................... 259 314
---- ------
$884 $1,971
==== ======
10. DEBT
In August 1997, Aquila entered into a three year $1 million credit facility
fully collateralized by equipment purchased. In December 1998, the balance of
$138,000, including interest was paid and the credit facility terminated.
In April 1998, Aquila issued $1.3 million of debt as part of the purchase
of VacTex, Inc. (See Note 18). The debt bears interest of 7% and was callable as
of April 14, 1999. In 1999, Aquila redeemed $0.8 million of outstanding
debentures including accrued interest for 216,974 shares of common stock and
$0.3 million in cash. As of December 31, 1999, Aquila had $0.5 million in
outstanding debentures. In the first quarter of 2000 Aquila redeemed $0.3
million including accrued interest for cash.
In July 1998, Aquila entered into a loan agreement (the "Agreement") with
Transamerica Business Credit Corporation. The Agreement made available $5.0
million for the build-out of the new facility in Framingham, Massachusetts and
for the purchase of new equipment. The Agreement calls for interest at 13
percent with a repayment term of four years and a 10 percent balloon payment at
the end of the loan term. Collateral for the loan consists of equipment and
leasehold improvements with a net book value of $4.5 million. Warrants to
purchase 60,680 shares of Aquila's common stock were issued in connection with
the loan agreement. The warrants have an exercise price of $4.12 and a term
ending July 1, 2003. The warrants were valued at $90,000 and will be amortized
over the life of the loan. As of December 31, 1999, the full amount had been
borrowed and $3.7 million was outstanding under the loan. At current interest
rates available to the Company, the fair value of the debt approximates the
carrying value. Repayment of the loan and related interest will require payments
of $1.5 million in each of the years 2000 through 2002.
12
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES
The components of the deferred tax assets and liabilities at December 31,
1999 and 1998 are as follows:
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
Current:
Inventory................................................. $ 110 $ 44
Other..................................................... 157 294
-------- --------
Total current............................................... 267 338
Noncurrent:
Capital Loss Carryover.................................... 3,318 3,318
Depreciation and Amortization............................. (156) 72
Impairment of Long Lived Assets........................... 719 --
Other..................................................... (15) 635
Federal and State NOL's................................... 34,199 30,251
Federal and State tax credits............................. 1,421 1,617
-------- --------
Total noncurrent............................................ 39,486 35,893
-------- --------
Sub-total................................................... 39,752 36,231
Less: valuation allowance................................... (39,752) (36,231)
-------- --------
Net deferred tax asset...................................... $ 0 $ 0
======== ========
Management has assessed the evidence relating to recoverability of the
deferred tax asset and has determined that it is more likely than not that the
deferred tax benefit will not be realized due to the uncertainty of future
earnings. Accordingly, a valuation reserve has been established for the full
amount of the deferred tax asset.
As of December 31, 1999, the Company had federal net operating loss (NOL)
carryforwards of approximately $89.0 million. These loss carryforwards begin to
expire in the year 2000 and expire fully by the year 2018. The Company has state
loss carryforwards of approximately $41.4 million. These state loss
carryforwards begin to expire in 1999 and expire fully by 2005. Utilization of
these NOL's may be limited pursuant to the provisions of Section 382 of the
Internal Revenue Code of 1986.
12. OTHER INCOME, NET
At December 31, Other Income, Net consists of the following:
1999 1998 1997
----- ------ ------
(DOLLARS IN THOUSANDS)
Gain on sale of Rockville real estate..................... $ -- $ -- $2,332
Royalty income, net....................................... 65 527 854
Interest income........................................... 544 1,021 1,044
Interest (expense)........................................ (623) (100) (399)
Rental income, net........................................ -- -- 500
Miscellaneous income, net................................. 278 500 39
----- ------ ------
$ 264 $1,948 $4,370
===== ====== ======
In 1999, Aquila recorded $0.2 million of income (included in miscellaneous)
from the gain on the sale of available-for-sale securities. In December 1998,
Aquila received $0.3 million (included in miscellaneous) as a
13
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rebate of taxes paid on its former leased facility in Worcester, Massachusetts.
In November, 1997, Aquila sold the Rockville, Maryland facilities for $6.5
million and recorded a gain of $2.3 million. Proceeds from the sale were used to
retire the mortgage. Royalty income represents royalties earned under license
and sublicense agreements related primarily to diagnostic technologies, net of
expenses due to third-party licensors. In 1997, rental income derived from the
rental of our real estate in Rockville, Maryland ceased upon the sale of the
Rockville facilities.
13. COMMITMENTS AND CONTINGENCIES
Leases -- Costs incurred under facility leases are recorded as rent expense
and totaled $0.8 million, $0.9 million and $1.2 million in 1999, 1998 and 1997,
respectively, (net of sublease income of $28,500 in 1999). In 1998, Aquila
entered into a new operating, facility lease agreement for its executive
offices, research laboratories and manufacturing facilities in Framingham,
Massachusetts. The base lease period for this lease is twelve years and the
lease contains renewal options for two additional five-year periods. In
connection with the facility lease, the Company maintains a fully collateralized
letter of credit of $0.8 million. No amounts have been drawn on the letter of
credit. As of December 31, 1999, the future minimum lease payments (net of
sublease income of $85,000 in 2000) required under the operating lease are as
follows:
YEAR ENDING DECEMBER 31, (DOLLARS IN THOUSANDS)
- ------------------------ ----------------------
2000............................................ $ 792
2001............................................ 877
2002............................................ 896
2003............................................ 939
2004............................................ 939
Thereafter...................................... 5,583
-------
Total........................................... $10,111
=======
Employment and Consulting Agreements -- Aquila has agreements with various
consultants and key employees, with terms ranging from one to three years. These
agreements provide for future aggregate annual payments of approximately $1.0
million. Costs incurred and charged to operations under these contracts
aggregated $1.1 million, $1.3 million and $1.2 million in 1999, 1998 and 1997,
respectively.
Other Agreements -- Aquila has licensed fibronectin binding technology from
a Swedish company, for use in mastitis research and development. Aquila recorded
$0.3 million and $0.6 million of expense in 1999 and 1998, respectively, for
milestone payments relating to patent issuance. The agreement provides for
additional payments upon the first commercial sale of future vaccines at $1.3
million per vaccine, and up to $0.6 million upon the granting of additional
patents in the United States and Europe on the technology acquired.
Contingencies -- Five civil actions commenced in 1993 in the United States
District Court, District of Massachusetts against Cambridge Biotech Corporation
("CBC") a predecessor of Aquila, certain of its officers, and in three of the
actions, CBC's former auditors -- Deloitte & Touche, LLP ("Deloitte"), have all
been settled. The settlement of claims against CBC and the individual defendants
was approved by the court in July, 1996. Under the terms of the Settlement, the
class members received 1,250,000 shares of Aquila common stock. In the fourth
quarter of 1998, the class members received 90% of the recoveries from
prosecution of claims against Aquila's former auditors, with the balance of $0.1
million in recoveries paid to Aquila.
In March 1995, an Adversary Proceeding was commenced by Institut Pasteur
and Genetic Systems Corporation against CBC alleging patent infringement and
asking for damages and injunctive relief. Institut Pasteur appealed the
Bankruptcy Court's ruling in favor of CBC, and the United District Court's
affirmation
14
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
thereof, to the Federal Circuit Court of Appeals, which on July 7, 1999, ruled
in favor of CBC. The time in which to file an appeal from this decision has
expired.
In 1998, using treasury stock valued at $13,028, Aquila settled the last
claim previously identified as Liabilities Subject to Chapter 11 Proceedings.
Aquila had been named a potentially responsible party ("PRP") by the
Environmental Protection Agency ("EPA") at a waste disposal site. On July 16,
1999 the EPA sent Aquila a letter stating its intent to take no further action
against Aquila or its business regarding this matter.
CSL International ACN ("CSL") and Seed Capital Inc., filed an opposition
with the European Patent Office ("EPO") on the issuance of Aquila's Stimulon(TM)
patent in Europe. A hearing before the EPO was held in October of 1998. The
Company prevailed against all points raised in the opposition. The period of
time in which to file an appeal from this decision has expired. There can be no
assurance that Aquila will prevail in any future actions taken to attack the
validity of its Stimulon(TM) patents.
Aquila has received a letter from CBC in February 1999 alleging that we
must indemnify CBC under a Master Acquisition Agreement among Aquila, CBC and
bioMerieux, Inc. for potential losses from the termination of CBC's rights under
a license agreement. The Company has evaluated this claim and in the opinion of
management, any potential liability will not have a material adverse effect on
the Company's financial position, liquidity, or results of operations.
Aquila has been and is engaged in negotiations of various contracts with
other parties regarding issues generally incidental to the normal course of
business. While the outcome of these negotiations and the ultimate liability
from these discussions is difficult to determine, in the opinion of management
any additional liability will not have a material adverse effect on our
financial position, liquidity, or results of operations.
14. STOCKHOLDERS' EQUITY
Capital Stock -- Aquila has 5,000,000 shares of preferred stock and
30,500,000 shares of common stock authorized at December 31, 1999. No terms have
been established for the preferred stock and none has been issued.
15. STOCK BASED COMPENSATION PLANS
Aquila's 1996 Employee Stock Purchase Plan which was approved in 1997,
allows full time employees, as defined in this plan, to purchase our stock at
85% of the lesser of beginning or ending fair market value at six month
intervals. Under this plan 200,000 shares of stock are authorized for issuance
of which 12,322 and 11,331 shares were issued in 1999 and 1998, respectively,
for gross proceeds of $31,094 and $48,837, respectively. A total of 176,347
shares remain available for issuance at December 31, 1999. No compensation
expense has been recorded related to this plan.
At December 31, 1998, Aquila had two stock option plans. Under the 1996
Stock Award and Option Plan (the "Employee plan"), Aquila may grant incentive
stock options, nonqualified stock options, discounted stock options, deferred
stock awards, restricted stock awards, or Stock Appreciation Rights to its
employees for up to 2 million shares of common stock. Under the 1996 Directors
Stock Award and Option Plan (the "Directors plan"), Aquila may grant the same
types of options and awards as under the Employee plan, except that certain
additional restrictions apply to the grant of Stock Appreciation Rights under
the Directors plan. Up to 200,000 shares of common stock may be issued under the
Directors plan. In general, options granted under these plans vest over 4 years
and have maximum terms of 10 years. The Company has applied APB 25 and related
interpretations in accounting for these plans. Accordingly, no compensation cost
has been recorded for activity under these plans for options issued to employees
at fair market value.
15
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Had compensation expense for our stock-based compensation plans been
determined based on the fair value at the grant dates, the Company's net
income/(loss) and earnings/(loss) per share for the years ended December 31,
1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated
below:
1999 1998 1997
-------------------------- --------------------------- ------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NET BASIC DILUTED NET BASIC DILUTED NET BASIC DILUTED
LOSS EPS EPS LOSS EPS EPS INCOME EPS EPS
------- ------ ------- -------- ------ ------- ------ ----- -------
As Reported.............. $(8,195) $(1.11) $(1.11) $(14,600) $(2.22) $(2.22) $926 $0.18 $0.18
Pro Forma................ $(8,718) $(1.18) $(1.18) $(15,185) $(2.31) $(2.31) $532 $0.11 $0.10
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future effects. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated. The weighted average fair
value of options granted in 1999, 1998 and 1997 is $1.28, $1.78 and $3.08,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1999, 1998 and 1997, respectively; expected
volatility of 85.19%, 63.60% and 63.74%, risk-free interest rates of 5.50%,
4.67% and 6.25%, expected lives of 5 years and no dividend yield. The fair value
of the employees' purchase rights was estimated using the Black-Scholes model
with the following assumptions in 1999, 1998 and 1997, respectively, expected
volatility of 85.19%, 63.74% and 63.74%, risk-free interest rate of 4.81%, 5.56%
and 5.56%; expected life of six months and no dividend yield. The weighted
average fair value of those purchase rights granted in 1999, 1998 and 1997,
respectively, is $0.79, $0.82 and $0.82.
A summary of the status of Aquila's two stock option plans as of December
31, 1999, 1998 and 1997 respectively, and changes during those years are
presented below:
1999 1998 1997
---------------------------- ---------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- ------- ----------------
Beginning outstanding..... 1,091,560 $3.89 831,655 $4.28 712,655 $4.09
Options granted at fair
market value............ 267,250 1.82 336,000 3.08 194,375 5.12
Options exercised......... -- -- (54,625) 4.51 (4,000) 4.50
Options forfeited......... (222,522) 4.08 (21,470) 4.56 (71,375) 4.68
--------- ----- --------- ----- ------- -----
Balance, December 31,..... 1,136,288 $3.37 1,091,560 $3.89 831,655 $4.28
========= ===== ========= ===== ======= =====
The following table summarizes information about Aquila stock options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ----------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AT REMAINING EXERCISE AT EXERCISE
PRICES 12/31/99 CONTRACTUAL LIFE PRICE 12/31/99 PRICE
------------ ----------- ---------------- -------- ----------- --------
$1.63-$2.75 468,884 9.25 $2.25 147,710 $2.18
$2.80-$4.50 545,155 6.70 $3.93 519,655 $3.91
$4.94-$7.38 122,249 7.72 $5.16 68,927 $5.17
--------- -------
$1.63-$7.38 1,136,288 7.86 $3.37 736,292 $3.68
At December 31, 1999, there were 1,005,087 shares available for option grants.
Compensation expense of $10,000 was recorded in 1997 related to options granted
to consultants during the year. No compensation expense was recorded in 1999 and
1998.
16
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. EMPLOYEE BENEFITS PLAN
Aquila has a savings plan for its employees pursuant to Section 401(k) of
the Internal Revenue Code. Substantially all employees can participate, and the
plan allows for a minimum deferral of 1% to a maximum deferral of 15% percent of
compensation, as permitted by law or as limited by the plan administrator.
Commencing on January 1, 1997 the Company matches 25% of the first 6% of the
employees compensation contributed to the plan. Any contributions made by Aquila
are vested at 33% for each year of employment. The amount charged to operations
for employer contributions to the plan was $37,750, $44,300 and $48,500 in 1999,
1998 and 1997, respectively.
17. AGREEMENTS
Aquila has a comprehensive agreement with a corporate partner that allows
the partner to use our proprietary Stimulon adjuvant ("QS-21") in numerous
vaccines including hepatitis, lyme disease, human immunodeficiency virus (HIV),
influenza and malaria. The agreement grants exclusive worldwide rights in some
fields of use, and co-exclusive or non-exclusive rights in others. Aquila
recognized $3.0 million in license fees under this agreement in 1998, and $3.5
million in 1997. The agreement calls for royalties to be paid by the partner on
its future sales of licensed vaccines that include Aquila's adjuvant and for
Aquila to manufacture QS-21 for the partner.
Aquila has product development agreements and supply agreements with Virbac
S.A. and a supply agreement with the Virbac S.A.'s U.S. subsidiary that cover a
collaboration on the development of products for feline immune deficiency virus
("FIV") and bovine mastitis and the supply of vaccine and adjuvant for feline
leukemia ("FeLV"). Aquila recorded $0.2 million, $0.9 million and $1.1 million
in research revenues under the product development agreements during 1999, 1998
and 1997, respectively. Sales to the partner under the terms of the supply
agreements were $0.6 million, $1.0 million and $1.3 million in 1999, 1998 and
1997, respectively.
In 1999, the Company was awarded a grant from the National Institutes of
Health to support the development of novel vaccines for tuberculosis based on
the CD1 immune enhancement technology. The grant will provide funding of
$870,000 over a two year period. Aquila recorded $0.2 million in research and
development revenues to reimburse costs incurred under this grant during 1999.
Aquila entered into a license agreement with Neuralab Limited, a wholly
owned subsidiary of Elan Corporation, p.l.c., that grants exclusive, worldwide
rights to use its lead Stimulon adjuvant ("QS-21") with an undisclosed antigen
in the field of Alzheimer's Disease. Aquila also signed a supply agreement for
the adjuvant. Aquila recorded $0.5 million in license fees under the agreement
during 1999 and could receive additional license fees and royalties on future
product sales.
18. ACQUISITION OF VACTEX
In 1998, with the acquisition of VacTex, Aquila issued 1,150,000 shares of
common stock and $1.3 million in notes payable for all the outstanding shares of
VacTex. The notes payable carry interest at 7% and were callable April 14, 1999.
The acquisition has been accounted for using the purchase method.
VacTex was a development stage company advancing the recent discovery of a
novel antigen presentation system. At the date of acquisition, research had been
conducted in animals only and the linkage to protection in a human vaccine had
not been established. This remains an active area of pre-clinical research. The
time to human clinical trials and product approval is expected to be typical for
a biological development project and to entail the typical risks. The
tuberculosis project will require several hundreds of millions of dollars over
ten to fifteen years. It is Aquila's intent to establish the proof of principle
that this system provides protection from tuberculosis and then to partner the
program. Though we expect to expend a substantial portion of its resources to
develop this technology over the next several years, the pace and level of
development will largely
17
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be determined by the science, which is complex, and by Aquila's ability to
obtain research partners to share the development expense. Due to the early
stage of the technology and the expected efforts to develop it, the entire
purchase price of $9.9 million, which included stock, notes payable and assumed
liabilities was charged to purchased incomplete technology.
The following summary represents unaudited pro forma results of operations
as if the VacTex acquisition had occurred at the beginning of 1997. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations that would have actually
resulted had the combination been in effect and are not intended to be
indicative of future results.
UNAUDITED PRO FORMA
YEAR ENDED
----------------------
1998 1997
---------- --------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
Revenues.................................................... $ 5,597 $6,928
Net loss.................................................... $(14,790) $ (74)
Basic loss per share........................................ $ (2.25) $(0.01)
19. SUBSEQUENT EVENTS
In February 2000, Aquila received $0.6 million in license fees from two of
its corporate partners pursuant to license agreements that allow the partners to
use Aquila's lead Stimulon(TM) adjuvant QS-21 in their product development
programs. Aquila also sold 11,250 shares of Progenics common stock for $0.6
million. These shares were carried at a cost of $0.1 million and were classified
as available-for-sale. The Company received $0.5 million from the exercise of
employee stock options and redeemed $0.3 million of VacTex debentures including
accrued interest. In March 2000, the Company sold 500,000 shares of Common Stock
to the State of Wisconsin Investment Board in a self-directed private placement
for proceeds of $3.0 million.
On November 16, 2000, the Company was acquired by Antigenics Inc.
("Anitigenics"), a United states incorporated public company. The acquisition
was structured as a merger of a wholly owned subsidiary of Antigenics with and
into Aquila pursuant to an Agreement and Plan of Merger among Antigenics, St
Marks Acquisition Corp. and Aquila dated as of August 18, 2000.
As consideration for the merger, the stockholders of Aquila received
0.2898 shares of common stock, $.01 par value, of Antigenics in exchange for
each of their shares of common stock, $.01 par value, of Aquila. Cash is
payable in lieu of any fractional shares of Antigenics common stock otherwise
issuable in the merger for a price equal to the fraction times $13.63. An
outstanding warrant and all outstanding options to purchase shares of Aquila
common stock were automatically converted into a warrant and options to
purchase Antigenics common stock at the exchange ratio described above.
18
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
Assets 9/30/00 12/31/99
------- --------
Current Assets:
Cash and cash equivalents....................... $ 1,972 $ 524
Marketable securities........................... 4,486 6,493
Receivables..................................... 930 637
Inventories..................................... 666 498
Prepaid expenses & other
current assets................................. 175 280
Total current assets...................... 8,229 8,432
Investments...................................... 244 244
Property, Plant, and Equipment, Net.............. 5,656 6,191
Patents and Purchased Technology, Net............ 19 47
Other Assets..................................... 844 828
Total Assets.............................. $ 14,992 $ 15,742
--------- ---------
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts payable............................... $ 366 $ 554
Accrued professional fees...................... 103 165
Other accrued expenses......................... 1,393 884
Current maturities of long-term debt........... 1,360 1,577
Total Current Liabilities................... 3,222 3,180
Deferred Revenue................................. 150 150
Long Term Debt................................... 1,728 2,607
Total Liabilities......................... 5,100 5,937
--------- ---------
Shareholders' Equity:
Preferred stock, authorized:
5,000,000 shares, none issued................. 0 0
Common stock, par value: $.01 per
share, authorized: 30,500,000
shares, issued: 8,607,748 at
September 30, 2000 and 7,888,446
at December 31, 1999.......................... 86 79
Treasury Stock................................. (34) (34)
Additional paid in capital..................... 145,716 141,802
Accumulated other comprehensive
income........................................ 27 426
Accumulated Deficit............................ (135,903) (132,468)
Total Shareholders' Equity.................... 9,892 9,805
Total Liabilities and Shareholders' Equity....... $ 14,992 $ 15,742
--------- ---------
The accompanying notes are an integral part of these unaudited statements
19
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(unaudited)
(in thousands, except per share amounts)
Nine Months Ended
September 30,
-------------------
2000 1999
---- ----
Revenue:
Product sales.................... $ 1,207 $ 378
Research and development......... 2,316 1,078
3,523 1,456
Cost and expenses:
Cost of sales.................... 1,040 712
Research and development......... 4,526 4,862
General & administrative......... 2,045 2,330
Total costs and expenses...... 7,611 7,904
Other income, net.................. 653 240
Net Loss........................... $(3,435) $(6,208)
Unrealized holding
gains on available
-for-sale securities............. 76 20
Less: re-classification
for gain included in net
income........................... (475) (151)
Total other comprehensive
income/(loss)................. (399) (131)
Comprehensive loss................. $(3,834) $(6,339)
------- -------
Basic and diluted loss
per weighted average share:
Net loss........................... $ (0.41) $ (0.86)
------- -------
Weighted average number of
common shares outstanding:
Basic and diluted.................. 8,341 7,229
------- -------
The accompanying notes are an integral part of these unaudited statements.
20
AQUILA BIOPHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited),(in thousands)
For the nine months
ended September 30,
-------------------
2000 1999
---- ----
Cash Flows From Operating Activities:
Net Loss................................................ $(3,435) $(6,208)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization........................... 587 624
Issuance of non-employee options........................ 50 --
Realized gains on sale of marketable securities....... -- (151)
Changes in assets and liabilities:
Receivables........................................... (293) 647
Inventories........................................... (168) 42
Prepaid expenses and other current assets............... 105 166
Accounts payable and other accrued expenses........... 259 (1,261)
Net cash used by operating activities................... (2,895) (6,141)
Cash Flows From Investing Activities:
Purchases of marketable securities.................... (3,996) (8,000)
Proceeds from maturities
of marketable securities............................ 5,571 9,955
Other noncurrent assets and liabilities............... 17 5
Purchases of property, plant, and equipment........... (24) (527)
Net cash provided by investing activities........... 1,568 1,433
Cash Flows From Financing Activities:
Payment of long-term obligations...................... (1,096) (976)
Issuance of common stock.............................. 3,871 1,510
Net cash provided by financing activities............. 2,775 534
Net increase/(decrease) in cash and cash
equivalents........................................ 1,448 (4,174)
Cash and cash equivalents at the beginning
of the year........................................ 524 5,270
Cash and cash equivalents at the end
of the period...................................... $ 1,972 $ 1,096
------- -------
The accompanying notes are an integral part of these unaudited statements.
21
AQUILA BIOPHARMACEUTICALS, INC.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying interim financial statements are unaudited and have been
prepared on a basis substantially consistent with the audited financial
statements. Certain information and footnote disclosures normally included in
the Company's annual financial statements have been condensed or omitted
pursuant to the Securities and Exchange Commission's rules and regulations. The
interim financial statements, in the opinion of management, reflect all
adjustments (including normal recurring accruals) necessary for a fair statement
of the results for the interim periods.
The results of operations for the interim periods are not necessarily indicative
of the results of operations to be expected for the fiscal year. These interim
financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 1999, which are contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999, filed
with the Securities and Exchange Commission.
The year-end balance sheet data was derived from audited financial statements,
but does not include all disclosures required by generally accepted accounting
principles.
2. Segment information:
The Company has determined that its reportable segments are development and
manufacturing. All research programs are aggregated in the development segment.
Revenues from the sale of the feline leukemia vaccine, the QS-21 material
supplied to research partners, and QS-21 license fees are reported in the
manufacturing segment. Financial results of segments are presented on the same
accounting basis as the Company's consolidated results. There are no
inter-segment activities. The Company's business is conducted entirely within
the United States.
Nine Months
Ended
September 30,
-------------
2000 1999
---- ----
Development
Revenue.................. $ 131 $ 343
Net Loss................. (5,390) (5,807)
Manufacturing
Revenue.................. 3,392 1,113
Net income/(loss)........ 1,356 (554)
Reconciling items
Net income(1)............ 599 153
Consolidated totals
Revenue.................. 3,523 1,456
Net loss................. $(3,435) $(6,208)
------- -------
(1) 2000 includes a gain of $475,000 on the sale of an investment,
$126,000 of royalty income, $85,000 of rental income and $32,000 refund of
insurance premium offset by net interest expense of $64,000 and an
unabsorbed overhead charge of $54,000. 1999 includes $62,000 of royalty
income, a gain of $14,000 on disposal of an asset, $35,000 refund of
insurance premium, $41,000 of net interest expense, income tax expense of
$10,000, income from the sale of available-for-sale securities of $151,000,
rental income of $10,000 and a charge for excess facilities of $44,000.
22
3. Inventories:
Inventories consist of the following:
(000'S)
9/30/00 12/31/99
------- --------
Finished goods............ $ 397 $ 157
Work-in-process........... 131 236
Raw materials & supplies.. 138 105
------ ------
$ 666 $ 498
4. Earnings Per Share:
The common stock equivalents of the Company consist of stock options and
warrants. The Company was in a net loss position at September 30, 2000 and
September 30, 1999; therefore, common stock equivalents were not used to compute
diluted loss per share since the effect would have been anti-dilutive. Options
to purchase 910,520 and 1,300,780 shares of common stock at weighted-average
prices of $3.45 and $3.47, respectively, were outstanding at September 30, 2000
and 1999, respectively. Warrants to purchase 68,680 shares of common stock at an
exercise price of $4.12 were outstanding at September 30, 2000.
5. Contingencies:
The Company received a letter from Cambridge Biotech corporation (CBC) in
February 1999 alleging that the Company must indemnify CBC under a Master
Acquisition Agreement among the Company, CBC, and bioMerieux, Inc.
for potential losses from the termination of CBCs rights under a license
agreement. The Company has not received any further communication from CBC and
upon review does not feel that adverse settlement of this matter would have a
material effect on its financial position or results of operations.
6. Accounting Pronouncement:
In December 1999, the United States Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 provides the staffs views in applying generally
accepted accounting principles to selected revenue recognition issues, as well
as examples of how the staff applies revenue recognition guidance to specific
circumstances. In June 2000, the SEC issued Staff Accounting Bulletin 101B
delaying the implementation of SAB 101 for six months. Accordingly, in the
fourth quarter of 2000 Aquila will change its accounting for initial license
fees. Through the first nine months of 2000 revenue was recognized when the
agreement was reached and no contingent factors were present. Under the new
guidance of SAB 101, revenue will be deferred and recognized ratably over the
appropriate life or as effort is incurred. In the fourth quarter of 2000, a
cumulative adjustment will be recorded retroactive to January 1, 2000 to create
deferred revenue that will be recognized over future years.
The Company has adopted FASB Interpretation No. 44 (FIN 44), Accounting for
Certain Transactions Involving Stock Compensation: an interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of certain aspects of APB
Opinion No. 25 (APB 25), including the following: the definition of an employee
for purposes of applying APB 25, the criteria for determining whether a plan
qualifies as a non- compensatory plan; the accounting consequences of various
modifications to the terms of previously fixed stock options or awards; and the
accounting for an exchange of stock compensation awards in a business
combination.
7. Subsequent Events
On November 16, 2000, the Company was acquired by Antigenics Inc.
("Anitigenics"), a United States incorporated public company. The acquisition
was structured as a merger of a wholly owned subsidiary of Antigenics with and
into Aquila pursuant to an Agreement and Plan of Merger among Antigenics, St
Marks Acquisition Corp. and Aquila dated as of August 18, 2000.
As consideration for the merger, the stockholders of Aquila received 0.2898
shares of common stock, $.01 par value, of Antigenics in exchange for each of
their shares of common stock, $.01 par value, of Aquila. Cash is payable in
lieu of any fractional shares of Antigenics common stock otherwise issuable in
the merger for a price equal to the fraction times $13.63. An outstanding
warrant and all outstanding options to purchase shares of Aquila common stock
were automatically converted into a warrant and options to purchase Antigenics
common stock at the exchange ratio described above.