UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-15006
T CELL SCIENCES, INC.
(Exact name of registrant as specified in charter)
Delaware No. 13-3191702
(State of Incorporation) (I.R.S. Employer Identification No.)
119 Fourth Avenue, Needham, Massachusetts 02194-2725
(Address of principal executive offices) (Zip code)
(617) 433-0771
(Registrant's telephone number, including area code)
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 .
--- ---
Outstanding as of
Class November 12, 1997
----- -----------------
Common Stock, par value $.001 24,967,656
T CELL SCIENCES, INC.
Table of Contents
September 30, 1997
Page
----
Part I -- Financial Information
- -------------------------------
Condensed Consolidated Balance Sheet at September 30, 1997 and December 31, 1996.....................3
Condensed Consolidated Statement of Operations for the Quarters Ended
September 30, 1997 and 1996.................................................................4
Condensed Consolidated Statement of Operations for the Nine Months Ended
September 30, 1997 and 1996.................................................................5
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1997 and 1996.................................................................6
Notes to Condensed Consolidated Financial Statements.................................................7
Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................................9
Part II -- Other Information
- ----------------------------
Item 1. Legal Proceedings..........................................................................13
Item 5. Other Information..........................................................................13
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits...............................................................................14
B. Reports on Form 8-K....................................................................14
Signatures..........................................................................................15
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
T CELL SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1997 and December 31, 1996
September 30, December 31,
1997 1996
================================================================================
ASSETS
Current Assets:
Cash and Cash Equivalents $ 8,538,000 $ 12,591,800
Accounts Receivable 19,400 19,500
Inventories 5,200 24,000
Current Portion Note Receivable -- 400,600
Prepaid Expenses and Other 474,700 241,500
- --------------------------------------------------------------------------------
Total Current Assets 9,037,300 13,277,400
- --------------------------------------------------------------------------------
Property and Equipment, Net 403,900 511,600
Restricted Cash 585,000 685,000
Long-Term Note Receivable -- 1,402,100
Other Noncurrent Assets 1,477,300 1,347,600
- --------------------------------------------------------------------------------
Total Assets $ 11,503,500 $ 17,223,700
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 309,600 $ 326,000
Accrued Expenses 1,958,600 1,278,500
Deferred Revenue -- --
- --------------------------------------------------------------------------------
Total Current Liabilities 2,268,200 1,604,500
- --------------------------------------------------------------------------------
Other Liabilities 1,500,000 --
- --------------------------------------------------------------------------------
Stockholders' Equity:
Common Stock, $.001 Par Value 25,000 25,000
Additional Paid-in Capital 76,521,200 72,791,800
Less: Common Treasury Shares at Cost (35,800) (68,900)
Accumulated Deficit (68,775,100) (57,128,700)
- --------------------------------------------------------------------------------
Total Stockholders' Equity 7,735,300 15,619,200
- --------------------------------------------------------------------------------
Total Liabilities and
Stockholders' Equity $ 11,503,500 $ 17,223,700
================================================================================
See accompanying notes to condensed consolidated financial statements
3
T CELL SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Quarters Ended September 30, 1997 and 1996
September 30, September 30,
1997 1996
================================================================================
OPERATING REVENUE:
Product Development and Licensing Agreements $ 48,500 $ 1,200
Product Sales 34,900 9,100
- --------------------------------------------------------------------------------
Total Operating Revenue 83,400 10,300
- --------------------------------------------------------------------------------
OPERATING EXPENSE:
Cost of Product Sales 16,800 6,100
Research and Development 1,269,700 1,520,800
General and Administrative 839,600 821,600
Marketing and Sales 15,400 108,700
- --------------------------------------------------------------------------------
Total Operating Expenses 2,141,500 2,457,200
- --------------------------------------------------------------------------------
Operating Loss (2,058,100) (2,446,900)
Non-Operating Income (Expense), Net (5,972,100) 171,800
- --------------------------------------------------------------------------------
Net Loss $ (8,030,200) $ (2,275,100)
================================================================================
Net Loss Per Common Share $ (0.32) $ (0.10)
================================================================================
Weighted Average Common Shares Outstanding 24,955,656 21,921,938
================================================================================
See accompanying notes to condensed consolidated financial statements
4
T CELL SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1997 and 1996
September 30, September 30,
1997 1996
================================================================================
OPERATING REVENUE:
Product Development and Licensing Agreements $ 803,900 $ 271,800
Product Sales 36,200 515,500
- --------------------------------------------------------------------------------
Total Operating Revenue 840,100 787,300
- --------------------------------------------------------------------------------
OPERATING EXPENSE:
Cost of Product Sales 17,200 357,200
Research and Development 4,088,600 4,448,900
General and Administrative 2,638,300 4,757,600
Marketing and Sales 86,300 391,700
- --------------------------------------------------------------------------------
Total Operating Expenses 6,830,400 9,955,400
- --------------------------------------------------------------------------------
Operating Loss (5,990,300) (9,168,100)
Non-Operating Income (Expense), Net (5,656,300) 733,500
- --------------------------------------------------------------------------------
Net Loss $(11,646,600) $(8,434,600)
================================================================================
Net Loss Per Common Share $ (0.47) $ (0.41)
================================================================================
Weighted Average Common Shares Outstanding 24,950,827 20,594,701
================================================================================
See accompanying notes to condensed consolidated financial statements
5
T CELL SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
September 30, September 30,
1997 1996
================================================================================
Cash Flows from Operating Activities:
Net Loss $(11,646,600) $(8,434,600)
Adjustments to Reconcile Net Loss
to Net Cash
Used by Operating Activities:
Depreciation and Amortization 272,300 373,000
Gain on Sale of Research Products and
Operations of T Cell Diagnostics, Inc. -- (283,000)
Write-off of Capitalized Patent Costs 51,100 1,751,600
Settlement of Litigation with Former Landlord 6,109,200 --
Compensation Associated with Stock Options -- 170,300
Net Change in Current Assets and
Current Liabilities (409,600) (1,379,700)
- --------------------------------------------------------------------------------
Net Cash Used by Operating Activities (5,623,600) (7,802,400)
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Acquisition of Property and Equipment (70,300) (26,900)
Other Noncurrent Assets (175,100) (321,800)
Sale of Investment in Common Stock
of Endogen, Inc. 1,802,700 --
- --------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 1,557,300 (348,700)
- --------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from Sale of Stock 12,500 11,600
Proceeds from Exercise of Stock Options -- 158,700
Proceeds from Issuance of Common Stock -- 10,068,600
- --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 12,500 10,238,900
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (4,053,800) 2,087,800
Cash and Cash Equivalents at Beginning of Period 12,591,800 12,275,200
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 8,538,000 $14,363,000
================================================================================
See accompanying notes to condensed consolidated financial statements
6
T CELL SCIENCES, INC.
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(1) Nature of Business
------------------
T Cell Sciences, Inc. (the "Company"), is a biopharmaceutical company
engaged in the discovery and development of innovative drugs targeting diseases
of the immune, inflammatory and vascular systems. The Company develops and
commercializes products on a proprietary basis and in collaboration with
established pharmaceutical partners, including Novartis Pharma AG, Astra AB and
Yamanouchi Pharmaceutical Co., Ltd. In March 1996, the Company sold
substantially all of the assets of its wholly-owned subsidiary, T Cell
Diagnostics, Inc. ("TCD"), while retaining all the rights to the TRAx(R)
diagnostic franchise.
The condensed consolidated financial statements include the accounts of
T Cell Sciences, Inc. and its wholly owned subsidiary, T Cell Diagnostics, Inc.
All intercompany transactions have been eliminated.
(2) Interim Financial Statements
----------------------------
The accompanying condensed consolidated financial statements for the
three and nine months ended September 30, 1997 and 1996 include the consolidated
accounts of the Company, and have been prepared in accordance with generally
accepted accounting principles and with the instructions to Form 10-Q and
article 10 of Regulation S-X. In the opinion of management, the information
contained herein reflects all adjustments, consisting solely of normal recurring
adjustments, that are necessary to present fairly the financial positions at
September 30, 1997 and December 31, 1996, the results of operations for the
three and nine months ended September 30, 1997 and 1996, and the cash flows for
the nine months ended September 30, 1997 and 1996. The results of operations for
the three and nine months ended September 30, 1997 are not necessarily
indicative of results for any future interim period or for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
included are adequate to make the information presented not misleading. The
condensed consolidated financial statements and the notes included herein should
be read in conjunction with footnotes contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
(3) Litigation
----------
In December 1994, the Company filed a lawsuit in the Superior Court of
Massachusetts against the landlord of its former Cambridge, Massachusetts
headquarters, to recover the damages incurred by the Company resulting from the
evacuation of the building, due to air quality problems which caused skin and
respiratory irritation to a significant number of employees. The landlord
defendant filed counterclaims, alleging the Company breached its lease
obligations. The court ordered a limited trial between the Company and the
landlord on certain factual issues which began on November 20, 1996. Closing
arguments for the limited trial were heard on January 13, 1997. In a separate
lawsuit, the landlord's mortgagee filed claims against the Company for payment
of the same rent alleged to be owed. A motion for summary judgment filed by the
bank was denied by the court. In August 1997, the Superior Court of
Massachusetts entered findings of fact and conclusions of law on a limited trial
of the Company's lawsuit
7
against the landlord. In its findings on the limited trial, the Court concluded
that the Company had not proved at the limited trial that any fireproofing
fibers contaminated the Company's space, the Company's space was not
uninhabitable because of contamination from fireproofing fibers and the Company
was not justified in terminating its lease on the grounds that its office and
laboratories were uninhabitable. In November 1997, the Company reached a
settlement of the litigation with its former landlord and the landlord's
mortgagee. The Company agreed to pay $859,200 in cash on November 17, 1997 and
issue a total of 1,500,000 shares of its common stock. In addition, the Company
will also sign two notes for $750,000 each, due and payable on November 16, 1998
and November 15, 1999, respectively. The total settlement, valued at $6,109,200,
is comprised of the cash and notes totaling $2,359,200 and common stock valued
at $3,750,000 as of October 31, 1997 and has been recorded as non-operating
expense as of September 30, 1997. The common stock to be issued is subject to
restrictions on transfer per the settlement agreement. The settlement agreement
also provides for certain "piggyback" registration rights and demand
registration of the shares of common stock to become effective no later than
September 30, 1998. Upon such registration, however, the settlement agreement
limits the number of shares that may be sold over a given period of time. As
part of the settlement agreement, the Company will pledge as collateral $750,000
cash as security for the note due November 16, 1998. In addition, the note for
$750,000 due on November 15, 1999 will be secured by 132,500 of the shares of
common stock issued. The 132,500 shares may be returned to the Company or
retained under certain terms of the agreement.
(4) Disposition of Assets
---------------------
On March 5, 1996 the Company sold to Endogen, Inc. the research products
and operations of TCD for a purchase price of approximately $2,880,000, while
retaining the TRAx diagnostic product franchise. The consideration for this sale
was paid in the form of a convertible subordinated note receivable (the
"Convertible Note") in the principal amount of $2,003,000 and a combination of
cash and a short-term note used to repay approximately $980,000 of obligations
under the Company's operating lease. On February 10, 1997, the Company converted
the remaining outstanding principal balance of the Convertible Note into shares
of Endogen common stock which it subsequently sold. Net proceeds from the sale
were $1,829,000 and included an immaterial gain.
(5) Statement of Financial Accounting Standards No. 128, "Earnings per Share"
-------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS
128 is effective for interim and annual periods ending after December 15, 1997.
The adoption of SFAS 128 is not expected to have a material impact in the
Company's net loss per share computation.
8
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Statements contained in the following, Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations, that are not
historical facts may be forward-looking statements that are subject to a variety
of risks and uncertainties. There are a number of important factors that could
cause the actual results to differ materially from those expressed in any
forward-looking statements made by the Company. These factors include, but are
not limited to: (i) the Company's and its development and marketing partners'
ability to successfully complete product research and development, including
pre-clinical and clinical studies, and commercialization; (ii) the Company's
ability to obtain substantial additional funding; (iii) the Company's ability to
obtain required governmental approvals; (iv) the Company's ability to attract
manufacturing, sales, distribution and marketing partners and other strategic
alliances; and (v) the Company's ability to develop and commercialize its
products before its competitors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-------------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Overview
The Company's lead therapeutic program is focused on developing compounds
that inhibit complement activation which is part of the body's immune defense
system. In October 1997, the Company presented positive preliminary results from
the efficacy portion of its Phase I/II clinical trial of its lead therapeutic
compound, TP10. The trial was aimed at evaluating the ability of TP10 to reduce
reperfusion injury and improve lung function in patients with end-stage
pulmonary disease who were undergoing lung transplant surgery. The trial will
conclude in the fourth quarter of 1997 when the last patient completes a
six-month safety evaluation period. The Company initiated a Phase IIa clinical
trial to evaluate the use of TP10 in patients with adult respiratory syndrome in
January 1996. Completion of the Phase IIa trial is expected in the fourth
quarter of 1997. The Company also announced, in October 1997, that it had
entered into an option agreement with Novartis Pharma AG relating to the
development of TP10 for use in xenotransplantation (animal organs into humans)
and allotransplantation (human to humans). The option agreement provides for
annual option fees and supplies of TP10 for clinical trials in return for
granting a two-year option to license TP10 with exclusive worldwide marketing
rights (except Japan) in xenotransplantation and allotransplantation. In
February 1997, the Company was awarded a second $100,000 Phase I Small Business
Innovation Research ("SBIR") grant from the National Institute of Health ("NIH")
and in September the Company was awarded a $678,000 Phase II SBIR grant from the
NIH. Funding from the Phase I grant will contribute to the Company's program for
the development of a vaccine for the management of atherosclerosis. The Phase II
grant provides funding over a two-year period which will support research and
development of a novel transgenic rat model of atherosclerosis. In June 1997,
the Company received a milestone payment from its partner, Astra AB ("Astra"),
following approval received by Astra to initiate clinical trials for one of the
products derived from the TCAR technology platform for the treatment of multiple
sclerosis. In November 1997, the Company announced that it had reached a
settlement of its outstanding litigation with its former landlord. The
settlement, valued at $6,109,200, has been recorded as non-operating expense as
of September 30, 1997.
Results of Operations
Quarter Ended September 30, 1997 Compared to Quarter Ended September 30,
1996 -- The Company reported a consolidated net loss of $8,030,200 or $.32 per
share for the quarter ended September 30, 1997 compared with a net loss of
$2,275,100 or $.10 per share for the quarter ended September 30, 1996. Included
in the loss for the quarter ended September 30, 1997 is a charge to earnings of
$6,109,200 for a settlement that was reached in November 1997, of the Company's
outstanding litigation with its former landlord and the landlord's mortgagee.
Under the terms of the settlement, the Company has agreed to pay $859,200 in
cash on November 17,1997 and issue a total of 1,500,000 shares of its common
stock valued at $3,750,000 as of October 31, 1997. In addition, the Company will
also sign two notes for $750,000 each, due and payable on November 16, 1998 and
November 15, 1999, respectively. The total
9
settlement, valued at $6,109,200, is comprised of the cash and notes totaling
$2,359,200 and common stock valued at $3,750,000 as of October 31, 1997.
Excluding the settlement charge, the loss for the quarter is $1,921,000 or $.08
per share, a decrease of $354,100 or 15.6% compared to the same period last
year. The decrease for the quarter is primarily due to lower clinical trial
costs compared to the same period last year combined with a decrease in payroll
and benefits costs.
Research and development expenses were $1,269,700 for the quarter ended
September 30, 1997 compared to $1,520,800 for the same period last year. The
decrease is primarily due to a reduction in costs associated with the Phase I/II
and Phase IIa clinical trials for the quarter compared to the same period last
year. The clinical trials were initiated in July 1996 and January 1996,
respectively. Patient accrual was completed in the Phase I/II clinical trial in
May 1997. The trial will conclude in the fourth quarter following the six month
safety portion of the trial. The Phase IIa clinical trial is expected to
conclude in the fourth quarter.
General and administrative expenses increased to $839,600 for the quarter
ended September 30, 1997 from $821,600 for the comparable period last year. The
increase is primarily attributable to increased legal fees relating to the
Company's collaborative option agreement with Novartis Pharma AG and settlement
of the litigation, partially offset by a decrease in administrative payroll and
benefits costs.
Marketing and sales expenses decreased $93,300 to $15,400 for the quarter
ended September 30, 1997 compared to $108,700 for the quarter ended September
30, 1996. The decrease in marketing and sales expenses is primarily due to the
Company's reduced direct sales efforts for the TRAx(R) product line while it
focuses on establishing a partnership for the TRAx technology combined with a
decrease in sales and marketing payroll and benefit costs.
Non-operating expense of $5,972,100 for the quarter ended September 30,
1997 includes the $6,109,200 charge to earnings for the settlement of the
Company's litigation with its former landlord and the landlord's mortgagee.
Excluding the settlement charge, non-operating income reflects a 20.2% decrease
in interest income for the quarter, compared with the same period last year. The
decrease in interest income is primarily the result of lower cash balances
during the quarter ended September 30, 1997 compared with the quarter ended
September 30, 1996 partially offset by higher interest rates.
Nine months Ended September 30, 1997 Compared to Nine months Ended
September 30, 1996 -- The Company reported a consolidated net loss of
$11,646,600 or $.47 per share for the nine months ended September 30, 1997
compared with a net loss of $8,434,600 or $.41 per share for the nine months
ended September 30, 1996. Included in the loss for the nine months ended
September 30, 1997 is the charge to earnings of $6,109,200 for the settlement of
the Company's outstanding litigation with its former landlord and the landlord's
mortgagee. The nine months ended September 30, 1996 included two months of
operations of TCD prior to the sale of its research products and operations in
March 1996 and a gain recognized from the sale. The net loss for the first nine
months of 1997 increased $3,212,000 or 38.1% compared to the same period last
year due to the charge to earnings for the settlement of the litigation,
partially offset by a $1,751,600 write-off of certain capitalized patent costs
and a $425,300 charge to earnings resulting from a severance agreement with the
Company's former President and Chief Executive Officer included in the nine
months ended September 30, 1996. Excluding the settlement charge in 1997 and the
write-off of certain capitalized patent costs and charge to earnings resulting
from a severance agreement in 1996, the net loss for the nine months ended
September 30, 1997 decreased $720,300 or 11.5% to $5,537,400 or $.22 per share
compared to $6,257,700 or $.30 per share. The decrease compared to last year is
primarily due to expenses incurred during the two months of operations of TCD in
1996 prior to the sale combined with a decrease in payroll and benefits costs in
1997 partially offset by increased clinical trial costs and legal costs for the
nine months of 1997 compared to 1996.
For the nine months ended September 30, 1997, product development and
licensing agreements revenue increased $532,100 to $803,900 compared to $271,800
for the nine months ended September 30,
10
1996. The increase is primarily attributable to milestone payments received from
Astra in accordance with the amended agreement of December 1996. In addition,
the Company recognized approximately $153,900 of revenue relating to its SBIR
grants from the NIH. Included in product development and licensing agreements
revenue in 1996 is research and development funding from Astra relating to the
Company's earlier agreement and a $100,000 non-refundable execution fee
associated with a license agreement with CytoTherapeutics, Inc. Product sales
decreased $479,300 for the first nine months of 1997 compared to the same period
last year, primarily due to the sale of the research products and operations of
TCD in March 1996.
Research and development expenses were $4,088,600 for the nine months ended
September 30, 1997 compared to $4,448,900 for the same period last year. The
decrease is primarily attributed to the sale of the research products and
operations of TCD in March 1996 partially offset by increased costs associated
with two clinical trials initiated in 1996.
General and administrative expenses decreased $2,119,300 to $2,638,300 for
the nine months ended September 30, 1997 from $4,757,600 for the comparable
period last year. The decrease is primarily due to the $425,300 charge in June
1996 resulting from a severance agreement with its former President and Chief
Executive Officer combined with the $1,751,600 write-off of certain capitalized
patent costs in June 1996.
Marketing and sales expenses decreased 78.0% to $86,300 for the nine months
ended September 30, 1997 compared to $391,700 for the nine months ended
September 30, 1996. The decrease in marketing and sales expenses is primarily
due to the sale of the research products and operations of TCD in March 1996
combined with the Company's reduced direct sales efforts for the TRAx product
line while it focuses on establishing a partnership for the TRAx technology.
For the nine months ended September 30, 1997, non-operating expense is
$5,656,300 compared to non-operating income of $733,500 for the nine months
ended September 30, 1996. Included in non-operating expense for the nine months
ended September 30, 1997 is a $6,109,200 charge from the settlement of the
Company's litigation with its former landlord and the landlord's mortgagee. The
nine months ended September 30, 1996 included a $283,000 gain recognized from
the sale of the research products and operations of TCD in March 1996. Interest
income increased 11.1% for the nine months ended September 30, 1997 compared
with the same period last year. The increase in interest income is primarily the
result of higher cash balances during the nine months ended September 30, 1997
compared with the nine months ended September 30, 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents at September 30, 1997 was
$8,538,000 compared to $12,591,800 at December 31, 1996. Cash used in operations
was $5,623,600 for the nine months ended September 30, 1997 which was partially
offset by $1,829,000 received from the conversion and subsequent sale of the
convertible subordinated note receivable from Endogen, Inc. The Company received
the convertible subordinated note receivable in connection with the sale of the
research products and operations of TCD in March 1996. On February 10, 1997 the
Company converted the remaining outstanding principal balance of $1,802,700 into
shares of common stock of Endogen and subsequently sold the shares.
As discussed in the Company's annual report, filed on Form 10-K, for the
year ended December 31, 1996, the Company filed a lawsuit in the Superior Court
of Massachusetts, in December 1994, against the landlord of its former
Cambridge, Massachusetts headquarters, to recover the damages incurred by the
Company resulting from the evacuation of the building due to air quality
problems which caused skin and respiratory irritation to a significant number of
employees. The landlord defendant filed counterclaims, alleging the Company
has breached its lease obligations. In a separate lawsuit, the
11
landlord's mortgagee filed claims against the Company for payment of the
same rent alleged to be owed. In August 1997, the Superior Court of
Massachusetts entered findings of fact and conclusions of law on a limited trial
of the Company's lawsuit against the landlord. In its findings on the limited
trial, the Court concluded that the Company had not proved at the limited trial
that any fireproofing fibers contaminated the Company's space, the Company's
space was not uninhabitable because of contamination from fireproofing fibers
and the Company was not justified in terminating its lease on the grounds that
its office and laboratories were uninhabitable. In November 1997, the Company
reached a settlement of the litigation with its former landlord and the
landlord's mortgagee. The Company agreed to pay $859,200 in cash on November
17,1997 and issue a total of 1,500,000 shares of its common stock. In addition,
the Company will also sign two notes for $750,000 each, due and payable on
November 16, 1998 and November 15, 1999, respectively. The total settlement,
valued at $6,109,200, is comprised of the cash and notes totaling $2,359,200 and
common stock valued at $3,750,000 as of October 31, 1997 and has been recorded
as non-operating expense as of September 30, 1997. The common stock to be issued
is subject to restrictions on transfer per the settlement agreement. The
settlement agreement also provides for certain "piggyback" registration rights
and demand registration of the shares of common stock to become effective no
later than September 30, 1998. Upon such registration, however, the settlement
agreement limits the number of shares that may be sold over a given period of
time. As part of the settlement agreement, the Company will pledge as collateral
$750,000 cash as security for the note due November 16, 1998. In addition, the
note for $750,000 due on November 15, 1999 will be secured by 132,500 of the
shares of common stock issued. The 132,500 shares may be returned to the Company
or retained under certain terms of the agreement.
The Company believes its current cash and cash equivalents, combined
with anticipated net cash provided by operations will be sufficient to meet
working capital requirements into 1998. These requirements will depend on
several factors including, but not limited to, the progress and costs associated
with research and development programs; preclinical and clinical studies; time
and costs associated with obtaining regulatory approval; and timing and scope of
collaborative arrangements; long term facility costs. The Company will consider
alternative sources of funding and capital when available and appropriate.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." SFAS 128 is effective for interim and annual periods ending after
December 15, 1997. The adoption of SFAS 128 is not expected to have a material
impact in the Company's net loss per share computation.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
In August 1997, the Superior Court of Massachusetts entered findings of
fact and conclusions of law on a limited trial of the Company's lawsuit against
the landlord of its former Cambridge, Massachusetts headquarters. The Company
was seeking to recover damages it incurred as a result of the evacuation of the
building due to air quality problems caused by contamination by fireproofing
fibers. The landlord defendant filed a counterclaim alleging the Company
breached its lease obligations. In its findings on the limited trial, the Court
concluded that the Company had not proved at the limited trial that any
fireproofing fibers contaminated the Company's space, the Company's space was
not uninhabitable because of contamination from fireproofing fibers and the
Company was not justified in terminating its lease on the grounds that its
office and laboratories were uninhabitable.
In November 1997, the Company reached a settlement of its outstanding
litigation with the landlord of its former Cambridge, Massachusetts headquarters
and the landlord's mortgagee. The Company agreed to pay a total of $2,359,200 in
cash with $859,200 payable on November 17, 1997 and additional payments of
$750,000 each on November 16, 1998 and November 15, 1999. In addition, the
Company will issue a total of 1,500,000 shares of its common stock to its former
landlord and the parties will exchange mutual releases (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources").
ITEM 5. OTHER INFORMATION
-----------------
In August 1997, the Company announced the election of William J. Ryan to
its Board of Directors. Mr. Ryan currently provides business, legal and
financing advice to a number of companies, principally in the fields of
healthcare and biotechnology. He serves on the Board of Directors and is
Executive Vice President for strategic planning and new business development for
Arquest, Inc., a privately held manufacturing company. Mr. Ryan's election
increased the number of board members to nine.
The Company announced the retirement of James D. Grant as Chairman and a
member of its Board of Directors on September 3, 1997. Mr. Grant had been
Chairman of the Board since November 1986 and had also served as Chief Executive
Officer of the Company from November 1986 to February 1992 and from May 1996 to
August 1996. The Company concurrently announced the retirement of John P. Munson
from the Board, a member since 1992.
The Company received a Phase II Small Business Innovation Research grant to
support research and development of a novel transgenic rat model of
atherosclerosis. The Company plans to use the model as part of its efforts to
develop a vaccine approach to preventing atherosclerosis. The grant provides
$678,000 to the Company over a two-year period. The Company announced the award
in September 1997.
Two separate announcements were made in October 1997 relating to the
Company's lead therapeutic compound, TP10. The Company presented positive
preliminary results from the efficacy portion of its Phase I/II clinical trial
using TP10. The trial was aimed at evaluating the ability of TP10 to reduce
reperfusion injury and improve lung function in patients with end-stage
pulmonary disease who were undergoing lung transplant surgery. Patient accrual
began in August 1996 and was completed in May 1997. The results showed that 24
hours after surgery significantly fewer of the patients receiving TP10 require
ventilation as compared to those receiving placebo. Moreover, a subgroup of
patients who received TP10 and also underwent cardiopulmonary bypass as part of
the transplantation procedure showed significantly decreased intubation time and
time on ventilation. Reduction in the time that a patient requires intubation
and mechanical ventilation typically translates to better clinical outcome and
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also implies an economic benefit from reduced time in the ICU. Concurrent with
the preliminary efficacy results from its clinical trial, the Company announced
that it had entered into an option agreement with Novartis Pharma AG, Basel,
Switzerland, relating to the development of TP10 for use in xenotransplantation
(animal organs into humans) and allotransplantation (human to human). In
exchange for granting Novartis a two-year option to license TP10 with exclusive
worldwide marketing rights (except Japan), in the fields of xenotransplantation
and allotransplantation, the Company will receive annual option fees and
supplies of TP10 for clinical trials, the combination of which are valued at up
to $5 million. Should Novartis exercise its option to license TP10 and continue
development, it will provide an equity investment, licensing fees and milestone
payments based upon attainment of certain development and regulatory goals. The
combined option agreement and license is valued at up to $25 million. The
Company may also receive funding for research as well as royalty payments on
eventual product sales.
In October 1997, the Company announced a collaborative agreement with
Repligen, Inc. designed to utilize the Company's proprietary screening and
functional assay technology to identify small molecule immunoregulatory
therapeutic compounds using Repligen's combinatorial chemistry library.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
A. Exhibits
10.16 Option Agreement by and between the Company and Novartis Pharma AG
dated as of October 31, 1997
B. Reports on Form 8-K
The Company reported on Form 8-K, dated August 26, 1997, the findings of
the Superior court of Massachusetts in litigation relating to the Company's
former headquarters in Cambridge, Massachusetts.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
T CELL SCIENCES, INC.
By: /s/ Norman W. Gorin
------------------------
Norman W. Gorin
Vice President, Finance
and Chief Financial Officer
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