UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File No. 0-20139
Diacrin, Inc.
(Exact name of registrant as specified in its charter)
Delaware 22-3016912
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 96 13th Street, Charlestown Navy Yard, Charlestown, MA 02129
(Address of principal executive offices, including zip code)
(617) 242-9100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Title of each class
Common Stock, $.01 par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO .
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES NO X .
---- -----
The approximate aggregate market value of the voting stock held by non-
affiliates of the registrant (based on the closing price of the Common Stock on
June 28, 2002) was $15,472,000.
As of March 17, 2003, 17,937,204 shares of the registrant's Common Stock
were outstanding.
Documents Incorporated by Reference
The Registrant's definitive Proxy Statement for the 2003 Annual Meeting
of Stockholder's to be filed with the Commission no later than 120 days after
the close of the Registrant's fiscal year, has been incorporated by reference
in whole or in part, into Part III of this Annual Report on Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking
statements within the meaning of the Private Securities Litigation Reform
Act of 1995 concerning our business, operations and financial condition,
including statements with respect to planned timetables for the initiation
and completion of clinical trials. All statements, other than statements of
historical facts included in this Annual Report on Form 10-K regarding our
strategy, future operations, timetables for product testing, financial
position, costs, prospects, plans and objectives of management are forward-
looking statements. When used in this Annual Report on Form 10-K, the
words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate"
and similar expressions are intended to identify forward looking statements,
although not all forward-looking statements contain these identifying
words. Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those expressed or
implied by these forward-looking statements for a number of important
reasons, including those discussed under "Certain Factors That May Affect
Future Results," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Annual Report
on Form 10-K.
You should read these statements carefully because they discuss our
expectations about our future performance, contain projections of our
future operating results or our future financial condition, or state other
"forward-looking" information. You should be aware that the occurrence of
any of the events described in these risk factors and elsewhere in this
Annual Report on Form 10-K could substantially harm our business, results
of operations and financial condition and that upon the occurrence of any
of these events, the trading price of our common stock could decline.
We cannot guarantee any future results, levels of activity, performance
or achievements. The forward-looking statements contained in this Annual
Report on Form 10-K represent our expectations as of the date this Annual
Report on Form 10-K was first filed with the Securities and Exchange
Commission and should not be relied upon as representing our expectation
as of any other date. Subsequent events and developments will cause our
expectations to change. However, while we may elect to update these
forward-looking statements, we specifically disclaim any obligation to do so
even if our expectations change.
PART I
Item 1. Business
Overview
We are developing cell transplantation technology for treating human
diseases that are characterized by cell dysfunction or cell death and for
which current therapies are either inadequate or nonexistent. We believe
cell transplantation products will address important unmet medical needs
and that we will play a leading role in developing these products. We
continue to be world leaders in the area of cell transplantation research. We
have transplanted cells into approximately 67 patients in FDA approved
clinical trials. We are currently focusing most of our efforts towards the
development of our cell transplantation technology for the treatment of
cardiac disease.
We were incorporated in October 1989. Our principal executive offices
are located at Building 96, 13th Street, Charlestown Navy Yard,
Charlestown, MA 02129, and our telephone number at that location is (617)
242-9100.
Diacrin is our trademark. All other trademarks and service marks used in
this Annual Report are the property of their respective owners.
Human Muscle Cells for Cardiac Disease
Coronary heart disease is the leading cause of death in the United States,
responsible for approximately 1 of every 5 deaths, or approximately
500,000 deaths each year. According to the American Heart Association,
approximately 1 million heart attacks occur annually in the United States.
Of the 800,000 patients who survive, approximately 200,000 will die within
a year. The disease is caused by the accumulation of plaque, consisting of
lipid deposits, macrophages and fibrous tissue, on the walls of vessels
supplying blood to the heart muscle. Rupture of unstable plaques exposes
substances that promote platelet aggregation and clot formation. The clot is
composed of platelets, blood cells and fibrin that can block one or more of
the coronary vessels, resulting in an inadequate supply of oxygen to the
heart muscle. This highly active muscle is quickly damaged and the lesions
are irreversible because heart muscle cells are not capable of cell division.
The end result is an infarct, a damaged area of heart muscle in which scar
tissue and fibrosis replace dead heart muscles, lowering the ability of the
heart to contract and function.
Treatments to prevent tissue damage after a heart attack include drugs
that break down fibrin clots and open up blocked arteries. These drugs have
greatly influenced morbidity and mortality, but must be administered within
a short interval after a heart attack to be effective. Even with current
medical management, over one third of acute heart attacks are fatal. Cardiac
catheterization and angioplasty to dislodge the clot and open the blocked
vessel have proved effective in restoring blood flow, but cannot reverse
preexisting tissue damage.
Our scientists have isolated and expanded muscle cells from human
tissue and are studying the use of these cells for transplantation into
damaged heart muscle. We believe that patients suffering from heart attacks
would benefit if these muscle cells could repair their damaged hearts. These
cells would be isolated from a muscle biopsy of a patient who had suffered
a heart attack, thereby allowing transplantation of a patient's own muscle
cells into his or her heart, which would avoid any rejection. In April 2001,
we and our collaborators published the results of a muscle cell
transplantation preclinical study in the journal Circulation. This study
showed that transplantation of muscle cells after myocardial infarction in an
animal model attenuated deleterious cardiac remodeling and improved
cardiac function.
We've completed patient recruitment in two Phase 1 clinical trials
treating patients with damaged heart muscle. One of these trials involved
transplanting muscle cells into a patient's heart at the same time that the
patient received a left ventricular assist device (LVAD). The LVAD is
implanted in these patients as a bridge to heart transplant. Our clinical trial
involved the implantation of 300 million myoblasts in six patients. This
clinical trial was conducted at Temple University, University of Michigan
and the Bryant LGH Heart Institute. Once a patient receives a new heart in
this trial, we are able to histologically examine their old heart. This
allows us to evaluate cell survival and new blood vessel formation after
transplantation. In March 2003, we and our collaborators published the
results from the review of four explanted hearts in the Journal of
American College of Cardiology. Upon examination we noted skeletal muscle
cells survived and differentiated into mature myofibers in three of the
four hearts and in one heart we noticed an increase in small vessel
formation at the site of surviving myotubes.
A second Phase 1 clinical trial involved transplanting muscle cells into
the heart at the same time that a patient underwent coronary artery bypass
surgery (CABG). This was a 12-patient dose escalation trial with safety
being evaluated at doses ranging from 10 million to 300 million cells. This
clinical trial was conducted at Arizona Heart Institute, UCLA, The
Cleveland Clinic and Ohio State University. In September 2002, we entered
into a development and license agreement with Terumo Corporation. Under
the terms of the agreement, we licensed to Terumo our human muscle cell
transplantation technology for cardiac disease in Japan. Terumo will fund
all development in Japan while we continue to independently develop our
cardiac repair technology for commercialization in the U.S. and elsewhere.
The agreement includes an upfront non-refundable license fee of $2.0
million which we received in October 2002, milestone payments and a
royalty on product sales. The FDA recently cleared our IND for an
additional clinical trial involving the transplantation of human muscle cells
into the heart at the same time that a patient undergoes CABG. Through this
trial, with the involvement of imaging specialists, we plan to define the
primary endpoint for a pivotal clinical trial.
Other Development Efforts
When we began operations thirteen years ago we focused most of our
effort on developing porcine (pig) cells for transplantation. In 1995, the
United States Food and Drug Administration cleared our IND for the first
ever clinical trial to evaluate porcine cells in humans. Since then we've
evaluated in human clinical trials the ability of porcine cells to treat many
different diseases including Parkinson's disease, stroke, spinal cord injury,
focal epilepsy and Huntington's disease. As part of our development of
porcine cells we obtained an exclusive, worldwide license from MGH for
immunomodulation technology. This technology involved the treatment of
isolated cell populations prior to transplantation with antibody fragments
directed against MHC class I antigens in order to obviate the need for
generalized immunosuppression using agents such as cyclosporin. For years
we were encouraged by the results of preclinical and clinical data that
showed the cells were safe and could provide a clinical benefit.
Unfortunately, the development of our porcine cell product candidates
has experienced clinical and regulatory setbacks. In March 2001, we
announced the results of an 18-patient, pivotal, randomized, double-blinded,
placebo-controlled Phase 2 clinical trial involving the use of fetal porcine
neural cells for the treatment of Parkinson's disease. We did not see a
statistically significant difference between the treated patients and the
patients in the control group and, therefore, did not meet the primary
endpoint in the trial. Additionally, in April 2000, our Phase 1 trial using
porcine neural cells for the treatment of stroke was suspended by the FDA
to allow the investigation of two serious adverse events. We and an
independent group of experts convened by us feel the adverse events were
most likely caused by the procedure to implant the cells and not the cells
themselves. However, we were not able to obtain approval from the FDA to
continue recruiting patients into the trial.
While we continue to believe that porcine cells could be developed as
viable products, it is clear that the path to product approval will be longer
than any of us originally anticipated. There are currently no signs that the
challenging regulatory environment surrounding porcine cells is going to
ease. We believe that the underlying regulatory concern stems from the
possibility that porcine endogenous retrovirus (PERV) could theoretically
infect humans, despite the fact that no human has ever been infected. As a
result, we have suspended the development of products involving the use of
porcine cells. We plan to focus our resources in areas that we believe are
more likely to add shareholder value while we continue to monitor the
environment surrounding xenotransplantation.
Manufacturing
We isolate and prepare cell populations in our own clinical production
facilities in Charlestown, Massachusetts. Our long-range plan is to expand our
internal manufacturing capabilities, including the facilities necessary to
test, isolate and package an adequate supply of finished cell products in
order to meet our long-term clinical manufacturing needs.
Patents and Licenses
We intend to aggressively seek patent protection for any products we
develop. We also intend to seek patent protection or rely upon trade secrets
to protect certain of our technologies which will be used in discovering and
evaluating new products. We have 19 issued U.S. patents and 18 patent
applications pending with the United States Patent and Trademark Office.
We have also filed foreign counterparts in the European Union and other
selected countries. These applications seek composition-of-matter and use
protection for the various products we have in development.
To protect our trade secrets and other proprietary information, we require
all employees, consultants, advisors and collaborators to enter into
confidentiality agreements with us.
Sales and Marketing
We have not yet developed sales and marketing capabilities for our
product candidates. We may form strategic alliances with established
pharmaceutical or biotechnology companies in order to finance the
development of certain of our products and, assuming successful
development, to market such products. These alliances may enable us to
expand or accelerate our product development efforts and also may provide
us with access to established marketing organizations. Alternatively, we
may decide to market some of our products on our own.
Government Regulation
Regulation by governmental authorities in the United States, the
European Union member states and other foreign countries is a significant
factor in the development, manufacture and marketing of our product
candidates and in our ongoing research and product development activities.
All of our products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human therapeutic
products are subject to rigorous testing and approval procedures by the FDA
and similar authorities in foreign countries. Various statutes and regulations
govern the preclinical and clinical testing, manufacturing, labeling,
distribution, advertising and sale of these products. The process of obtaining
these approvals and the subsequent compliance with applicable statutes and
regulations require the expenditure of substantial time and financial and
other resources.
Preclinical testing is generally conducted in the laboratory on animals to
evaluate the potential efficacy and the safety of a product. In the United
States, the results of these studies are submitted to the FDA as part of an
IND application, which must receive FDA clearance before human clinical
testing can begin. Clinical trials are typically conducted in three phases
which may overlap. Generally, in Phase 1, clinical trials are conducted with
a small number of human subjects to determine the early safety profile. In
Phase 2, clinical trials are conducted with groups of patients afflicted with
the specific disease in order to determine preliminary efficacy, optimal
treatment regimens and expanded evidence of safety. Where a product
candidate is found to have an effect at an optimal dose and to have an
acceptable safety profile in Phase 2, larger scale, multi-center, randomized
and blinded Phase 3 clinical trials are conducted with patients afflicted with
the target disease to further test for safety, to further evaluate clinical
effectiveness and to obtain additional information for labeling. In addition,
the FDA may request post-marketing (Phase 4) monitoring of the approved
product, during which clinical data are collected on selected groups of
patients to monitor longer-term safety.
Upon completion of Phase 3, for products regulated by the FDA's Center
for Biologic Evaluation and Research, commonly referred to as CBER, the
results of preclinical and clinical testing are submitted to the FDA in the
form of a Biologics License Application, commonly referred to as BLA, for
approval to manufacture and commence commercial sales. In responding to
these applications, the FDA may grant marketing approval, request
additional information or deny the application if it determined that the
application does not satisfy the agency's regulatory approval criteria. We
expect that CBER will regulate all of our product candidates.
The nature of the marketing claims we will be permitted to use for
labeling and advertising will be limited to those allowed in the FDA's
approval. Claims beyond those approved would constitute a violation of the
Food, Drug & Cosmetic Act or the FD&C Act. Noncompliance with the
provisions of the FD&C Act or Public Health Service Act can result in,
among other things, loss of approval, voluntary or mandatory product recall,
seizure of products, fines, injunctions and civil or criminal penalties. Our
advertising is also subject to regulation by the Federal Trade Commission
under the FTC Act, which prohibits unfair methods of competition and
unfair or deceptive acts or practices in or affecting commerce. Violation can
result in a variety of enforcement actions including fines, injunctions and
other remedies.
In the European member states and other foreign countries, our ability to
market a product is contingent upon receiving marketing authorization from
the appropriate regulatory authorities. The requirements governing the
conduct of clinical trials, marketing authorization, pricing and
reimbursement vary widely from country to country. Generally, we intend
to apply for foreign marketing authorizations at a national level. However,
within the European Union, procedures are available to companies wishing
to market a product in one or all European Union member states. This
centralized process is conducted through the European Medicines
Evaluation Agency, known as the EMEA. The EMEA coordinates the
regulatory process, while a body of experts drawn from member states
undertakes the scientific assessment of the product and recommends
whether a product satisfies the criteria of safety, quality and efficacy for
approval. If the authorities are satisfied that adequate evidence of safety,
quality and efficacy has been presented, a marketing authorization will be
granted. This foreign regulatory approval process includes all of the risks
associated with FDA approval set forth above. We may rely on licensees to
obtain regulatory approval for marketing certain of our products in certain
European Union member states or other foreign countries.
We are also subject to various federal, state and local laws, regulations
and recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including
radioactive compounds, infectious disease agents and recombinant DNA
materials used in connection with our research work.
We may take advantage of the regulatory pathways which may
provide expedited review of our cell transplantation products and allow
limited cost recovery during the clinical research phase. These include: (1)
expedited review for more effective or better tolerated therapies for serious
conditions, commonly referred to as fast track designation, and (2) seeking
approval for limited cost recovery during clinical testing under treatment
IND status.
Fast Track Designation. In 1997, Congress enacted the Food and Drug
Administration Modernization Act, in part, to ensure the availability of safe
and effective drugs by expediting the FDA review process for new
products. This act establishes a statutory program for the approval of fast
track products. A fast track product is defined as a new drug intended for
the treatment of a serious or life-threatening condition, which demonstrates
the potential to address unmet medical needs. Under the fast track program,
the sponsor of a new drug may request the FDA to designate the drug as a
fast track product at the time of the IND submission or after. If a
preliminary review of the clinical data suggests that a fast track product
may be effective, the FDA may initiate review of sections of a marketing
application for a fast track product before the sponsor completes the
application.
Treatment IND. Treatment IND is a mechanism established by the
FDA in 1987 which allows a company to distribute promising
investigational therapies to patients outside of the established clinical
trials and to charge a reasonable fee for such therapy. The disease must be
serious or life-threatening and there must not be satisfactory alternative
treatments. Treatment IND status has been applied to a variety of diseases
including cancer, AIDS, Parkinson's disease, Alzheimer's disease and
multiple sclerosis and to several anti-infectives for renal transplant
patients. We may pursue this designation, where appropriate.
Competition
We believe that our ability to compete successfully will be based on our
ability to create and maintain scientifically advanced technology, develop
proprietary products and attract and retain qualified scientific personnel. In
addition, we have to obtain adequate financing, patents, orphan drug
designation or other protection for our products, and required regulatory
approvals, and to manufacture and successfully market our products both
independently and through collaborators.
The biopharmaceutical and pharmaceutical industries are characterized
by intense competition. We compete against numerous companies, many of
which have substantially greater financial and other resources than we do.
Private and public academic and research institutions also compete with us
in the research and development of human therapeutic products. In addition,
many of our competitors have significantly greater experience than we do in
the testing of pharmaceutical and other therapeutic products and obtaining
FDA and other regulatory approvals of products for use in health care.
Accordingly, our competitors may succeed in obtaining FDA approval for
products more rapidly than we do. If we commence significant commercial
sales of our products, we will also be competing with respect to
manufacturing efficiency and marketing capabilities, areas in which we
have limited or no experience.
Our products under development will compete with products and
therapies which are either currently available or currently under
development. Competition will be based, among other things, on efficacy,
safety, reliability, price, availability of reimbursement and patent position.
We are aware of other companies which are pursuing research and
development of alternative products or technologies addressing the same
disease categories as our development programs.
Employees
As of February 15, 2003, we had 29 full-time employees, 21 of whom
were engaged in research, development, clinical and quality
assurance/quality control activities. None of our employees are represented
by a labor union or covered by a collective bargaining agreement.
Item 2. Properties
We lease a facility which contains approximately 25,000 square feet of
space in Charlestown, Massachusetts. The current lease has a five-year term
ending in 2006, providing for a base rental rate of approximately $76,000
per month, plus applicable property taxes and insurance. We have the right
to extend the lease an additional five years commencing in 2006. Our
facilities are equipped with laboratory and cell culture capabilities
sufficient to satisfy our research and development requirements for the
foreseeable future and cell isolation capabilities sufficient to satisfy
our current clinical production requirements. To the extent that additional
similar facilities may be required, we may be required to secure
additional facilities or seek outside contractors to provide such
capabilities.
Item 3. Legal Proceedings
We are currently not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders, through
solicitation of proxies or otherwise, during the last quarter of the fiscal
year ended December 31, 2002.
Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the
directors, executive officers and other key employees of the Company:
Name Age Position
Thomas H. Fraser, Ph.D. 55 President and Chief Executive Officer;
Director
E. Michael Egan 49 Chief Operating Officer
Kevin Kerrigan 32 Controller
Jonathan H. Dinsmore, Ph.D. 41 Senior Director of Cell Transplantation
Roger J. Gay, Ph.D. 49 Senior Director of Process Development
Abdellah Sentissi, Ph.D. 53 Senior Director of Quality Control
and Quality Assurance
Douglas B. Jacoby, Ph.D. 42 Director of Research
Zola P. Horovitz, Ph.D. (1) 68 Director
John W. Littlechild (2) 51 Director
Stelios Papadopoulos, Ph.D.(1)(2) 54 Director
Joshua Ruch (1) 53 Director
(1) Member of Audit Committee
(2) Member of Compensation Committee
Thomas H. Fraser, Ph.D., has served as our President and Chief
Executive Officer and as a Director since 1990. Dr. Fraser was previously
Executive Vice President, Corporate Development, for Repligen
Corporation, a biopharmaceutical company. Dr. Fraser was the founding
Vice President for Research and Development at Repligen in 1981 and
served as Executive Vice President from 1982 through 1990 as well as
Chief Technical Officer from 1982 through 1988. Prior to joining Repligen,
Dr. Fraser headed the recombinant DNA research group in Pharmaceutical
Research and Development at The Upjohn Company, a pharmaceutical
company. Dr. Fraser received his Ph.D. in Biochemistry from the
Massachusetts Institute of Technology and was a Damon Runyon-Walter
Winchell Cancer Fund Postdoctoral Fellow at The University of Colorado.
E. Michael Egan was promoted to Chief Operating Officer in January
2001. Prior to that, Mr. Egan had served as our Senior Vice President,
Corporate Development, since 1993. Mr. Egan joined us from Repligen,
where he was employed from 1983 to 1993, and since 1989 had been Vice
President of Business Development. He was also a member of the Board of
Directors of Repligen Clinical Partners, L.P., and the Secretary/Treasurer of
Repligen Sandoz Research Corporation. Mr. Egan's previous positions at
Repligen include Director of Business Development and Manager of
Business Development. Prior to joining Repligen in 1983, Mr. Egan was a
laboratory supervisor at Dana-Farber Cancer Institute, Division of
Medicine. He received a B.S. in biology from Boston College and a
Certificate of Special Studies in Administration and Management from
Harvard University in 1986.
Kevin Kerrigan has served as our Controller since November 1998. Mr.
Kerrigan joined us in 1997 as Accounting Manager. From 1993 to 1997 Mr.
Kerrigan was a member of the professional staff of Price Waterhouse LLP,
an accounting firm. Mr. Kerrigan received a B.S. degree in accounting from
Merrimack College and was awarded a CPA certificate from the
Commonwealth of Massachusetts in 1996.
Jonathan H. Dinsmore, Ph.D., has been Senior Director of Cell
Transplantation Research since April 1999. He joined Diacrin in 1992 as a
Research Scientist and was subsequently promoted to Principal Investigator
and then Director of Cell Transplantation Research. Dr. Dinsmore was
previously a Postdoctoral Fellow of the American Cancer Society in the
Biology department at the Massachusetts Institute of Technology from 1988
to 1992. He received a Ph.D. in biology from Dartmouth College, where he
was a Presidential Scholar and recipient of a Kramer Fellowship. Dr.
Dinsmore has worked on National Science Foundation-sponsored research
projects at the Marine Biological Laboratories in Woods Hole,
Massachusetts and at a United States research base in Antarctica.
Roger J. Gay, Ph.D., has been Senior Director of Process Development
since February 2000. Dr. Gay was hired by Diacrin in 1993 as Director of
Process Development. From 1986 through 1993, he was Director of
Product Development at Organogenesis, Inc. Dr. Gay's previous positions
were Manager of a Contract Research and Cytotoxicity Testing Laboratory
and Director of Product Development at Bioassay Systems Research
Corporation from 1982 to 1986. He received a B.A. in chemistry from the
College of the Holy Cross in 1975 and a Ph.D. in biochemistry from the
University of Rochester in 1981. From 1981 through 1983, he was a
postdoctoral research fellow in the Department of Microbiology and
Molecular Genetics at Harvard Medical School.
Abdellah Sentissi, Ph.D., has been Senior Director of Quality Control
and Quality Assurance since February 2000. Dr. Sentissi came to Diacrin
in 1995 as Director of Quality Control and Quality Assurance. Prior to
joining Diacrin, from 1992 to 1995, he served as the Director of QC/QA
and Technical Affairs at Endocon, Inc. From 1985 through 1992, he was
the Chief of Quality Control at Massachusetts Biologics Laboratories. He
received a pharmacy degree in 1973 and a biology degree in 1976 from the
University of Paul Sabatier, Toulouse, France, and a Ph.D. in biomedical
sciences from Northeastern University in 1984. From 1984 through 1985,
he was a postdoctoral research fellow in the Department of Clinical
Chemistry at Northeastern University. He has been a lecturer in
pharmaceutical biotechnology at the School of Pharmacy at Northeastern
University since 1990.
Douglas B. Jacoby, Ph.D., was appointed Director of Research in April
1999. He joined Diacrin in 1993 as a Research Scientist and was
subsequently promoted to Principal Investigator. While a postdoctoral
fellow in the Biochemistry department at Brandeis University, Dr. Jacoby
was awarded a fellowship from the NIH. He received his Ph.D. in
Biochemistry from the University of Minnesota with awards from the NIH
and a Doctoral Dissertation Fellowship. He was graduated with an A.B. in
Biology from Kenyon College.
Zola P. Horovitz, Ph.D., has served as a Director of Diacrin since 1994.
Dr. Horovitz was Vice President, Business Development and Planning at
Bristol-Myers Squibb Pharmaceutical Group from 1991 until 1994 and was
Vice President, Licensing from 1989 to 1991. Prior to 1989, Dr. Horovitz
spent 30 years as a member of the Squibb Institute for Medical Research,
most recently as Vice President, Research Planning. Dr. Horovitz is also a
director of 3-Dimensional Pharmaceuticals, Inc., Avigen, Inc., BioCryst
Pharmaceuticals, Genaera Pharmaceuticals, Paligent, Synaptic
Pharmaceuticals, Inc. and Palatin Technologies. Dr. Horovitz received his
Ph.D. from the University of Pittsburgh.
John W. Littlechild has been a Director of Diacrin since 1992. Mr.
Littlechild is associated with several venture capital partnerships managed
by HealthCare Ventures LLC, including HealthCare Ventures II, L.P.,
HealthCare Ventures III, L.P., and HealthCare Ventures IV, L.P. Mr.
Littlechild currently serves as Vice Chairman of HealthCare Ventures LLC.
From 1984 to 1991, Mr. Littlechild was a Senior Vice President of Advent
International Corporation, a venture capital company in Boston and
London. Prior to working at Advent in Boston, Mr. Littlechild was involved
in establishing Advent in the United Kingdom. From 1980 to 1982, Mr.
Littlechild served as Assistant Vice President for Citicorp Venture
Corporation, a venture capital company, in London, prior to which he
worked with ICI Ltd., an agro-chemical company, and Rank Xerox, an
office equipment company, in marketing and financial management. Mr.
Littlechild holds a B.Sc. (1st class honors) from the University of
Manchester and an MBA from Manchester Business School. Mr. Littlechild
serves on the board of directors of various health care and biotechnology
companies, including Dyax, a biotechnology company, and Orthofix
International N.V., a medical device company. Mr. Littlechild also serves
on several Boards for the Harvard Medical School including the Executive
Committee of the Board of Fellows, the Science and Technology
Committee, and is Chairman of the Microbiology Department Advisory
Board.
Stelios Papadopoulos, Ph.D., has been a Director of Diacrin since 1991.
Dr. Papadopoulos is a Managing Director in the investment banking
division at SG Cowen Securities Corporation focusing on the biotechnology
and pharmaceutical sectors. Prior to joining SG Cowen Securities
Corporation in February 2000, he spent 13 years as an investment banker at
PaineWebber, where he was most recently Chairman of PaineWebber
Development Corp., a PaineWebber subsidiary. Prior to becoming an
investment banker he spent two years as a biotechnology analyst, first at
Donaldson, Lufkin & Jenrette and subsequently at Drexel Burnham
Lambert, where he was elected to the Institutional Investor 1987 All-
American Research Team. Before coming to Wall Street in 1985, Dr.
Papadopoulos was on the faculty of the Department of Cell Biology at New
York University Medical Center. He continues his affiliation with NYU
Medical Center as an Adjunct Associate Professor of Cell Biology. Dr.
Papadopoulos holds a Ph.D. in biophysics and an MBA in finance, both
from New York University. He is a founder and Chairman of the Board of
Exelixis, Inc., and sits on the board of several private companies in the
biotechnology sector.
Joshua Ruch has been a Director of Diacrin since March 1998. Mr.
Ruch is the Chairman and Chief Executive Officer of Rho Capital Partners,
Inc., an international investment management firm which he co-founded in
1981. Prior to founding Rho, Mr. Ruch was employed in investment
banking at Salomon Brothers and Bache Halsey Stuart, Inc. Mr. Ruch
received a B.S. degree in electrical engineering from the Israel Institute of
Technology (Technion) and an MBA from the Harvard Business School.
Mr. Ruch also serves on the board of directors of 3-Dimensional
Pharmaceuticals, Inc. as well as several private companies in the technology
sector.
Directors are elected annually by our stockholders and hold office until
the next annual meeting of stockholders or until their resignation or
removal. Each executive officer serves at the discretion of the board of
directors and holds office until his or her successor is elected and qualified
or until his or her earlier resignation or removal. There are no family
relationships among any of our directors or executive officers.
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters
Our common stock is traded on the NASDAQ National Market
under the symbol DCRN. The following table sets forth for the
periods indicated the high and low sale prices for the common stock
during 2001 and 2002 as reported on the Nasdaq National Market:
High Low
Fiscal Year 2001
First Quarter 6.5000 1.1250
Second Quarter 2.9700 1.0500
Third Quarter 2.2000 1.5000
Fourth Quarter 2.1500 1.5000
Fiscal Year 2002
First Quarter 2.3100 1.7500
Second Quarter 1.9500 1.3100
Third Quarter 1.6100 1.0000
Fourth Quarter 1.4500 .9900
As of March 10, 2003 there were approximately 90 record holders of
our common stock and approximately 3,000 beneficial owners of our
common stock.
We have never declared or paid cash dividends on our capital stock. We
intend to retain earnings, if any, for use in our business and do not
anticipate declaring or paying any cash dividends in the foreseeable future.
We did not sell any equity securities during the quarter ended December
31, 2002 that were not registered under the Securities Act.
Item 6. Selected Financial Data
The selected financial data set forth below as of December 31, 2002 and
for the year ended December 31, 2002 are derived from our financial
statements which have been audited by PricewaterhouseCoopers LLP,
independent accountants, and which are included elsewhere in this Annual
Report on Form 10-K. The selected financial data set forth below as of
December 31, 2001 and for the years ended December 31, 2000 and 2001
are derived from our financial statements which have been audited by
Arthur Andersen LLP also included elsewhere in this Annual Report on
Form 10-K. The selected financial data set forth below as of December 31,
1998, 1999 and 2000 and for the years ended December 31, 1998 and 1999
are derived from our financial statements audited by Arthur Andersen LLP
and are not included herein. The data set forth below should be read in
conjunction with our financial statements, related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31,
-------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Statement of Operations Data: (in thousands, except share and per share data)
REVENUES:
Research and development $ 3,623 $ 2,971 $ 2,082 $ 737 $ 346
------- ------- ------- ------ -------
OPERATING EXPENSES:
Research and development 7,372 5,921 5,997 6,350 6,124
General and administrative 1,484 1,398 1,348 1,624 1,535
-------- ------ ------- ------ -------
Total operating expenses 8,856 7,319 7,345 7,974 7,659
-------- ------ ------- ------ -------
OPERATING INCOME (EXPENSE):
Equity in operations of joint venture (1,084) (1,688) (1,369) (547) (103)
Investment income 1,576 1,323 3,125 3,150 1,359
Interest expense (89) (47) (30) (14) (3)
-------- ------ ------- ------ -------
Total other income (expense) 403 (412) 1,726 2,589 1,253
-------- ------ ------- ------ -------
Net loss $ (4,830) $(4,760) $(3,537) $(4,648) $(6,060)
======== ======= ======= ======== ========
Net loss per common share:
Basic and diluted $ (.34) $ (.33) $ (.21) $ (.26) $ (.34)
========= ======= ======== ======== =======
Weighted average shares outstanding(1):
Basic and diluted 14,156,179 14,364,154 17,073,194 17,914,889 17,937,204
========== ========== ========== ========== ==========
At December 31,
--------------------------------------------------------
Balance Sheet Data: 1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Cash, cash equivalents and investments $ 26,270 $ 21,420 $ 54,607 $ 49,727 $ 44,956
Working capital 21,812 17,133 32,502 41,078 35,696
Total assets 27,484 22,366 55,793 50,681 45,748
Long-term debt 392 249 119 - -
Stockholders' equity 24,845 20,145 53,766 49,146 43,086
---------------------------------------
(1) Computed as described in Note 2 (e) of Notes to Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Since our inception, we have principally focused our efforts and
resources on research and development of cell transplantation technology
for treating human diseases that are characterized by cell dysfunction or cell
death and for which current therapies are either inadequate or nonexistent.
Our primary source of working capital to fund those activities has been
proceeds from the sale of equity and debt securities. In addition we have
received funding from our collaboration with Terumo Corporation
("Terumo") and our joint venture with Genzyme. We do not expect to
derive a material amount of revenues from our joint venture with Genzyme
in the future. We have not received any revenues from the sale of products
to date and do not expect to generate product revenues for the next several
years. We have experienced fluctuating operating losses since inception
and expect that the additional activities required to develop and
commercialize our products will result in increasing operating losses for the
next several years. At December 31, 2002, we had an accumulated deficit
of $58.5 million.
In September 2002, we entered into a development and license
agreement with Terumo. Under the terms of the agreement, we licensed to
Terumo our human muscle cell transplantation technology for cardiac
disease in Japan. Terumo will fund all development in Japan while we
continue to independently develop our cardiac repair technology for
commercialization in the U.S. and elsewhere. The agreement includes an
upfront non-refundable license fee of $2.0 million, milestone payments and
a royalty on product sales.
Critical Accounting Policies
We believe our most critical accounting policies are those that dictate
how we account for our development and license agreement with Terumo
and joint venture with Genzyme. On October 1, 2002 we received an
upfront non-refundable license fee of $2.0 million from Terumo. We
recorded this fee as deferred revenue and recognize revenue over the
development period of the agreement in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB
101 requires companies to recognize certain upfront non-refundable fees
over the period in which the Company completes its performance
obligations under the related agreement when such fees are received in
conjunction with an agreement which includes performance obligations.
Determination of the length of the development period requires
management's judgment. Any significant changes in the assumptions
underlying our estimates used while applying the percentage of completion
method could impact our revenue recognition. Revenue from milestone
payments under which we have continuing performance obligations are
recognized as revenue upon the achievement of the milestone only if all of
the following conditions are met: the milestone payments are non-
refundable; achievement of the milestone was not reasonably assured at the
inception of the arrangement; substantive effort is involved in achieving the
milestone; and the amount of the milestone is reasonable in relation to the
effort expended or the risk associated with achievement of the milestone. If
any of these conditions are not met, the milestone payments are deferred
and recognized as revenue over the term of the arrangement as we complete
our performance obligations. Payments received under these arrangements
prior to the completion of the related work are recorded as deferred revenue.
In 1996, we formed a joint venture with Genzyme to develop and
commercialize two product candidates. We record as research and
development expense all costs related to the joint venture's product
candidates incurred by us on behalf of the joint venture. We then recognize
research and development revenue equal to the amount of reimbursement
received by us from the joint venture out of funds contributed by Genzyme.
We do not recognize research and development revenue for amounts we
receive from the joint venture out of funds contributed by us. As Genzyme
incurs costs on behalf of the joint venture that we are obligated to fund, we
recognize an expense in our statement of operations captioned "Equity in
operations of joint venture."
Results of Operations
Year Ended December 31, 2002 Versus Year Ended December 31, 2001
Research and development revenues were $346,000 for the year ended
December 31, 2002 and $737,000 for the year ended December 31, 2001.
The decrease in revenues was primarily a result of a decrease in revenue
from our joint venture with Genzyme offset in part by an increase in
revenue of $245,000 related to our collaboration with Terumo. The decrease
in revenues from our joint venture with Genzyme is due to efforts by us to
decrease the costs associated with the joint venture's product candidates.
We do not expect to derive a material amount of revenues from our joint
venture with Genzyme in the future.
Research and development expenses were $6.1 million and $6.4 million
for the years ended December 31, 2002 and 2001, respectively. The
decrease in research and development expenses was primarily due to a
decrease in costs related to the development of several xenotransplantation
related product candidates offset in part by an increase in costs related
to the development of our cell transplantation technology for cardiac
repair.
General and administrative expenses of $1.5 million and $1.6 million for
the year ended December 31, 2002 and 2001, respectively, remained
relatively unchanged.
For the year ended December 31, 2002 and 2001, the Company recorded
an expense of $103,000 and $547,000, respectively, related to its equity in
operations of the joint venture. This expense was due to funds contributed
by the Company to the joint venture that were used to fund expenses
incurred by Genzyme on behalf of the joint venture. The decreased charge
in the current year period was primarily due to a decrease in clinical activity
performed by Genzyme on behalf of the joint venture.
Investment income was $1.4 million and $3.2 million for the year ended
December 31, 2002 and 2001, respectively. The decrease in investment
income was due to lower cash balances available for investment in the
current year period and a lower return on investment due to the decline in
interest rates.
Interest expense was $3,000 for the year ended December 31, 2002 and
$14,000 for the year ended December 31, 2001. The decrease in 2002 was
due to the scheduled pay down of loan debt outstanding.
The Company incurred a net loss of approximately $6.1 million for the
year ended December 31, 2002 versus a net loss of approximately $4.6
million for the year ended December 31, 2001.
Year Ended December 31, 2001 Versus Year Ended December 31, 2000
Research and development revenues were approximately $737,000 for
the year ended December 31, 2001 and $2.1 million for the year ended
December 31, 2000. Revenues for both years were comprised entirely of
revenue from the joint venture. The decrease in revenues was primarily a
result of a decrease in clinical production activity related to our joint
venture with Genzyme.
Research and development expenses were $6.4 million for the year
ended December 31, 2001 versus $6.0 million for the year ended December
31, 2000. The increase in research and development expenses was primarily
due to an increase in the costs associated with sponsoring and managing our
clinical trials.
General and administrative expenses were $1.6 million for the year
ended December 31, 2001 versus $1.3 million for the year ended December
31, 2000. The increase in general and administrative expenses was
primarily due to an increase in personnel costs related to an executive
retention plan and an increase in professional fees incurred as we evaluated
strategic relationships.
For the year ended December 31, 2001, we recorded a $547,000 charge
related to our equity in the operations of the joint venture compared to a
$1.4 million charge for the year ended December 31, 2000. This expense
related to funds contributed by us to the joint venture that were used to fund
expenses incurred by Genzyme on behalf of the joint venture. The
decreased charge in 2001 was primarily due to a decrease in clinical activity
performed by Genzyme on behalf of the joint venture.
Investment income of approximately $3.2 million for the years ended
December 31, 2001 and 2000 remained relatively unchanged.
Interest expense was $14,000 for the year ended December 31, 2001 and
$30,000 for the year ended December 31, 2000. The decrease in 2001 was
due to the scheduled pay down of lease and loan debt outstanding.
We incurred a net loss of approximately $4.6 million for the year ended
December 31, 2001 versus a net loss of approximately $3.5 million for the
year ended December 31, 2000.
Liquidity and Capital Resources
We have financed our activities primarily with the net proceeds from the
sale of equity and debt securities aggregating $102.0 million and with
interest earned thereon. In addition, we have recorded approximately $15.3
million in revenue from our joint venture since it commenced on October 1,
1996. At December 31, 2002, we had cash and cash equivalents, short-term
investments and long-term investments aggregating approximately $45.0
million.
We believe that our existing funds will be sufficient to fund our
operating expenses and capital requirements as currently planned for the
foreseeable future. However, our cash requirements may vary materially
from those now planned because of results of research and development, the
scope and results of preclinical and clinical testing, relationships with
future strategic partners, changes in the focus and direction of our
research and development programs, competitive and technological
advances, the FDA's regulatory process, the market acceptance of
any approved products and other factors.
We expect to incur substantial additional costs, including costs related
to ongoing research and development activities, preclinical studies, clinical
trials, expanding our cell production capabilities and the expansion of our
laboratory and administrative activities. Therefore, in order to achieve
commercialization of our potential products, we may need substantial
additional funds. We cannot assure you that we will be able to obtain the
additional funding that we may require on acceptable terms, if at all.
Net cash used in operating activities was $4.6 million for the year
ended December 31, 2002, $3.9 million for the year ended December 31, 2001
and $2.5 million for the year ended December 31, 2000. Cash used in
operations for the year ended December 31, 2002 was primarily attributable
to our net loss, offset in part by an increase in deferred revenue of $1.8
million related primarily to an upfront payment by Terumo. Cash used in
operations for the years ended December 31, 2001 and 2000 was primarily
attributable to our net loss, offset in part by our equity in operations of
the joint venture.
Net cash provided by investing activities was $390,000 and $1.4 million
for the years ended December 31, 2002 and 2001, respectively. Net cash
used in investing activities was $25.6 million for the year ended December
31, 2000. Net cash provided by investing activities for the years ended
December 31, 2002 and 2001 was primarily attributable to a decrease in
long-term investments offset by an increase in short-term investments. Net
cash used in investing activities for the year ended December 31, 2000 was
primarily attributable to an increase in short-term investments and long-
term investments. The increase in investments was due to our public
offering of Common Stock in March 2000.
Net cash used in financing activities was $119,000 and $102,000 for the
years ended December 31, 2002 and 2001, respectively. Net cash provided
by financing activities was $37.0 million for the year ended December 31,
2000. Net cash used in financing activities for the years ended December
31, 2002 and 2001 was primarily attributable to principal payments made on
our long-term debt. Net cash provided by financing activities for the year
ended December 31, 2000 was primarily attributable to net proceeds from the
sale of common stock in a public offering in March 2000.
Our only material commitment at December 31, 2002 was a lease for a
facility. In October 2000, we exercised the first of two options we have to
extend this lease an additional five years. Minimum rental payments under
the lease are as follows:
Rental
Commitment
2003 $ 908,000
2004 908,000
2005 908,000
2006 681,000
----------
Total $ 3,405,000
============
Diacrin/Genzyme LLC Financial Statements
For the year ended December 31, 2000, our equity in operations of the
joint venture exceeded 20% of our net loss. Accordingly, pursuant to the
rules of the Securities and Exchange Commission, our prior year Annual
Report on Form 10-K included separate audited financial statements for the
joint venture. For the years ended December 31, 2001 and 2002, our equity
in operations of the joint venture did not exceed 20% of our net loss. As a
result, the financial information with respect to the joint venture presented
in this Annual Report on Form 10-K is unaudited.
Recently Issued Accounting Pronouncements
In July 2002, the FASB issued SFAS 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at its fair market value when the liability is incurred, rather than at the
date of an entity's commitment to an exit plan. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS 146 has not had a material effect on our
financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation
of FASB Statements No. 5, 57, and 107 and Rescission of FASB
Interpretation No. 34. FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as
standby letters of credit and warranty obligations. It also clarifies that at
the time a company issues a guarantee, a company must recognize an initial
liability for the fair value of the obligations it assumes under the guarantee
and must disclose that information in its interim and annual financial
statements. The provisions of FIN 45 relating to initial recognition and
measurement must be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. We do not expect the adoption of the
initial recognition and measurement provisions in the first quarter of 2003
to have a significant impact on our financial condition or results of
operations. The disclosure requirements of FIN 45, which are effective for
both interim and annual periods that end after December 15, 2002, were
adopted by us for the year ended December 31, 2002.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation as
originally provided by SFAS No. 123, Accounting for Stock-Based
Compensation. Additionally, SFAS 148 amends the disclosure requirements
of SFAS 123 to require prominent disclosure in both the annual and interim
financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The
transitional requirements of SFAS 148 will be effective for all financial
statements for fiscal years ending after December 15, 2002. The disclosure
requirements shall be effective for financial reports containing condensed
financial statements for interim periods beginning after December 15, 2002.
The transitional disclosure requirements were adopted by us for the year
ended December 31, 2002. We expect to adopt the disclosure portion of this
statement for the quarter ending March 31, 2003. The application of this
standard will have no impact on our financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the entity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance it activities without additional subordinated financial
support from other parties. FIN 46 is required to be applied to preexisting
entities of the Company as of the beginning of the first quarter after June
15, 2003. FIN 46 is required to be applied to all new entities with which the
Company becomes involved beginning February 1, 2003. Based upon the
accounting guidance and other information available, we do not believe our
joint venture meets the definition of a variable interest entity. We currently
believe adoption of FIN 46 will not have a significant impact on the
Company. We believe the interpretive accounting guidance necessary for
FIN 46 will continue to evolve. Additional interpretive guidance could
affect the accounting for our joint venture.
Certain Factors That May Affect Future Results
The following important factors, among others, could cause actual
results to differ materially from those contained in forward-looking
statements made in this Annual Report on Form 10-K or presented
elsewhere by management from time to time. The forward-looking
statements contained in this Annual Report on Form 10-K represent our
expectations as of March 26, 2003, the date our Annual Report on Form 10-
K was filed with the SEC. Subsequent events will cause our expectations to
change. However, while we may elect to update these forward-looking
statements, we specifically disclaim any obligation to do so. See
"Cautionary Note Regarding Forward-Looking Statements."
Risks Related to Our Business, Industry and Strategy
We have not successfully commercialized any products to date and,
if we do not successfully commercialize any products, we will not be
profitable
Neither we nor any other company has received regulatory approval to
market the types of products we are developing. The products that we are
developing will require additional research and development, clinical trials
and regulatory approval prior to any commercial sale. Our product
candidates are currently in early phase clinical trials or in the preclinical
stage of development. Our products may not be effective in treating any of
our targeted disorders or may prove to have undesirable or unintended side
effects, toxicities or other characteristics that may prevent or limit their
commercial use.
We currently have no products for sale and do not expect to have any
products available for sale for several years. If we are not successful in
developing and commercializing any products, we will never become
profitable.
We are focusing our resources on cell transplantation technology
which is complex and novel and there are uncertainties as to its
effectiveness
We have concentrated our efforts and therapeutic product research on
cell transplantation technology, and our future success depends on the
successful development of this technology. Currently, we are focusing most
of our resources on the development of our cell transplantation technology
for cardiac disease.
Our technological approaches may not enable us to successfully develop
and commercialize any products. Our decision to focus on one technology
as opposed to multiple increases the risk associated with our stock. If our
approaches are not successful, we may be required to change the scope and
direction of our product development activities. In that case, we may not be
able to identify and implement successfully an alternative product
development strategy.
We face substantial competition, which may result in others
discovering, developing or commercializing products before or more
successfully than we do
The products we are developing compete with existing and new products
being developed by pharmaceutical, biopharmaceutical and biotechnology
companies, as well as universities and other research institutions. Many of
our competitors are substantially larger than we are and have substantially
greater capital resources, research and development staffs and facilities than
we have. Efforts by other biotechnology or pharmaceutical companies could
render our products uneconomical or result in therapies for the disorders we
are targeting that are superior to any therapy we develop. Furthermore,
many of our competitors are more experienced in product development and
commercialization, obtaining regulatory approvals and product
manufacturing. As a result, they may develop competing products more
rapidly and at a lower cost. These competitors may discover, develop and
commercialize products which render non-competitive or obsolete the
products that we are seeking to develop and commercialize.
If the market is not receptive to our products upon introduction, our
products may not achieve commercial success
The commercial success of any of our products will depend upon their
acceptance by patients, the medical community and third-party payors.
Among the factors that we believe will materially affect acceptance of our
products are:
- the timing of receipt of marketing approvals and the countries in which
those approvals are obtained;
- the safety and efficacy of our products;
- the need for surgical administration of our products;
- the success of physician education programs;
- the cost of our products which may be higher than conventional
therapeutic products because our products involve surgical
transplantation of living cells; and
- the availability of government and third-party payor reimbursement of
our products.
Risks Relating to Clinical and Regulatory Matters
If our clinical trials are not successful for any reason, we will not be
able to develop and commercialize any related products
In order to obtain regulatory approvals for the commercial sale of our
product candidates, we will be required to complete extensive clinical trials
in humans to demonstrate the safety and efficacy of the products. We have
limited experience in conducting clinical trials.
The submission of an investigational new drug application, or IND, may
not result in FDA authorization to commence clinical trials. If clinical trials
begin, we may not complete testing successfully within any specific time
period, if at all, with respect to any of our product candidates. Furthermore,
we or the FDA may suspend clinical trials at any time on various grounds,
including a finding that the patients are being exposed to unacceptable
health risks. Clinical trials, if completed, may not show any potential
product to be safe or effective. Thus, the FDA and other regulatory
authorities may not approve any of our product candidates for any disease
indication.
The rate of completion of clinical trials depends in part upon the rate of
enrollment of patients. Patient enrollment is a function of many factors,
including the size of the patient population, the proximity of patients to
clinical sites, the eligibility criteria for the study, the existence of
competitive clinical trials and the availability of alternative treatments. In
particular, the patient population for some of our clinical trials could be
small. Delays in planned patient enrollment may result in increased costs
and program delays.
We rely on third-party clinical investigators to conduct our clinical
trials. As a result, we may encounter delays outside of our control.
The regulatory approval process is costly and lengthy and we may
not be able to successfully obtain all required regulatory approvals
We must obtain regulatory approval for each of our product candidates
before we can market or sell it. We may not receive regulatory approvals to
conduct clinical trials of our products or to manufacture or market our
products. In addition, regulatory agencies may not grant approvals on a
timely basis or may revoke previously granted approvals. Any delay in
obtaining, or failure to obtain, approvals could adversely affect the
marketing of our products and our ability to generate product revenue.
The process of obtaining FDA and other required regulatory approvals is
lengthy and expensive. The time required for FDA and other clearances or
approvals is uncertain and typically takes a number of years, depending on
the complexity and novelty of the product. We have only limited experience
in filing and prosecuting applications necessary to gain regulatory
approvals.
Our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities which
could delay, limit or prevent regulatory approval. Any regulatory approval
to market a product may be subject to limitations on the indicated uses for
which we may market the product. These limitations may limit the size of
the market for the product.
We also are subject to numerous foreign regulatory requirements
governing the design and conduct of the clinical trials and the
manufacturing and marketing of our future products. The approval
procedure varies among countries. The time required to obtain foreign
approvals often differs from that required to obtain FDA approvals.
Moreover, approval by the FDA does not ensure approval by regulatory
authorities in other countries.
Even if we obtain marketing approval, our products will be subject
to ongoing regulatory oversight which may affect the success of our
products
Any regulatory approvals that we receive for a product may be subject to
limitations on the indicated uses for which the product may be marketed or
contain requirements for costly post-marketing follow-up studies. After we
obtain marketing approval for any product, the manufacturer and the
manufacturing facilities for that product will be subject to continual review
and periodic inspections by the FDA and other regulatory authorities. The
subsequent discovery of previously unknown problems with the product or
with the manufacturer or facility, may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions, and criminal prosecution.
Risks Relating to Financing Our Business
We have incurred substantial losses, we expect to continue to incur
losses and we may never achieve profitability
We have incurred losses in each year since our founding in 1989. At
December 31, 2002, we had an accumulated deficit of $58.5 million. We
expect to incur substantial operating losses for the foreseeable future. We
have no material sources of revenue from product sales or license fees. We
anticipate that it will be a number of years, if ever, before we develop
significant revenue sources or become profitable, even if we are able to
commercialize products.
We expect to increase our spending significantly as we develop our
research and development programs, expand our clinical trials, apply for
regulatory approvals and begin commercialization activities.
We may require additional financing, which may be difficult to
obtain and may dilute your ownership interest
We will require substantial funds to conduct research and development,
including clinical trials of our product candidates, and to manufacture and
market any products that are approved for commercial sale. Our future
capital requirements will depend on many factors, including the following:
- continued progress in our research and development programs, as well
as the magnitude of these programs;
- the resources required to successfully complete our clinical trials;
- the time and costs involved in obtaining regulatory approvals;
- the cost of manufacturing and commercialization activities;
- the cost of any additional facilities requirements;
- the timing, receipt and amount of milestone and other payments from
future collaborative partners;
- the timing, receipt and amount of sales and royalties from our potential
products in the market; and
- the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs and the costs of obtaining any required licenses to
technologies.
We may seek additional funding through collaborative arrangements and
public or private financings. Additional financing may not be available to us
on acceptable terms or at all.
If we raise additional funds by issuing equity securities further dilution
to our then existing stockholders may result. In addition, the terms of the
financing may adversely affect the holdings or the rights of our
stockholders. If we are unable to obtain funding on a timely basis, we may
be required to significantly curtail one or more of our research or
development programs.
We also could be required to seek funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, or products which we
would otherwise pursue independently.
Risks Relating to Intellectual Property
We may not be able to obtain patent protection for our discoveries
and we may infringe patent rights of others
The patent positions of pharmaceutical and biotechnology companies,
including us, are generally uncertain and involve complex legal, scientific
and factual issues.
Our success depends significantly on our ability to:
- obtain patents;
- protect trade secrets;
- operate without infringing upon the proprietary rights of others; and
- prevent others from infringing on our proprietary rights.
Patents may not issue from any patent applications that we own or
license. If patents do issue, the claims allowed may not be sufficiently broad
to protect our technology. In addition, issued patents that we own or license
may be challenged, invalidated or circumvented. Our patents also may not
afford us protection against competitors with similar technology. Because
patent applications in the United States may be maintained in secrecy until
patents issue, others may have filed or maintained patent applications for
technology used by us or covered by our pending patent applications
without our being aware of these applications.
We may not hold proprietary rights to some patents related to our
proposed products. In some cases, others may own or control these patents.
As a result, we or our collaborative partners may be required to obtain
licenses under third-party patents to market some of our proposed products.
If licenses are not available to us on acceptable terms, we will not be able to
market these affected products.
If we are not able to keep our trade secrets confidential, our
technology and information may be used by others to compete against
us
We rely significantly upon unpatented proprietary technology,
information, processes and know how. We seek to protect this information
by confidentiality agreements with our employees, consultants and other
third-party contractors as well as through other security measures. These
confidentiality agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may otherwise
become known or be independently developed by competitors.
We may become involved in expensive patent litigation or other
intellectual property proceedings which could result in liability for
damages or stop our development and commercialization efforts
There has been substantial litigation and other proceedings regarding the
complex patent and other intellectual property rights in the pharmaceutical
and biotechnology industries. We may become a party to patent litigation or
other proceedings regarding intellectual property rights.
The types of situations in which we may become involved in patent
litigation or other intellectual property proceedings include:
- we may initiate litigation or other proceedings against third parties to
enforce our patent rights;
- we may initiate litigation or other proceedings against third parties to
seek to invalidate the patents held by these third parties or to obtain a
judgment that our products or services do not infringe the third parties'
patents;
- if our competitors file patent applications that claim technology also
claimed by us, we may participate in interference or opposition
proceedings to determine the priority of invention; and
- if third parties initiate litigation claiming that our processes or
products infringe their patent or other intellectual property rights, we
will need to defend against such claims.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be
able to sustain the cost of such litigation or proceedings more effectively
than we can because of their substantially greater financial resources. If a
patent litigation or other intellectual property proceeding is resolved
unfavorably to us, we may be enjoined from manufacturing or selling our
products and services without a license from the other party and be held
liable for significant damages. We may not be able to obtain any required
license on commercially acceptable terms or at all.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could have a material adverse effect on our
ability to compete in the marketplace. Patent litigation and other
proceedings may also absorb significant management time.
If we breach any of the agreements under which we license
technology from others we could lose license rights that are important
to our business
We are a party to technology in-licenses that are important to our
business and expect to enter into additional licenses in the future. These
licenses impose commercialization, sublicensing, royalty, insurance and
other obligations on us. If we fail to comply with these requirements, the
licensor will have the right to terminate the license.
Risks Relating to Product Manufacturing, Marketing and Sales
Since we have no sales and marketing experience or infrastructure,
we must rely on third parties
We have no sales, marketing and distribution experience or
infrastructure. We plan to rely significantly on sales, marketing and
distribution arrangements with third parties for the products that we are
developing. For example, under our development and license agreement
with Terumo, we have granted to Terumo sales and marketing rights to our
human muscle cell transplantation technology for cardiac disease in Japan.
We may have limited or no control over the sales, marketing and
distribution activities of Terumo in Japan or other collaborative partners.
Our future revenues may be materially dependent upon the success of these
third parties.
If in the future we determine to perform sales, marketing and distribution
functions ourselves, we would face a number of additional risks, including:
- we may not be able to attract and build a significant marketing or sales
force;
- the cost of establishing a marketing or sales force may not be
justifiable in light of any product revenues; and
- our direct sales and marketing efforts may not be successful.
Disruptions in our manufacturing process may delay or disrupt our
development efforts
We are the only manufacturers of our product candidates. For the next
several years, we expect that we will conduct all of our manufacturing in
our facility in Charlestown, Massachusetts. If this facility or the equipment
in this facility is significantly damaged or destroyed, we will not be able to
replace quickly or inexpensively our manufacturing capacity.
We have no experience manufacturing our product candidates in the
volumes that will be necessary to support large clinical trials or commercial
sales. Our present manufacturing process may not meet our initial
expectations as to scheduling, reproducibility, yield, purity, cost, potency or
quality.
Risks Related to Ongoing Operations
If we fail to obtain an adequate level of reimbursement for our
future products by third party payors, there may be no commercially
viable markets for our products
Our products may be more expensive than conventional treatments
because they involve the surgical transplantation of living cells. The
availability of reimbursement by governmental and other third-party payors
affects the market for any pharmaceutical product. These third-party payors
continually attempt to contain or reduce the costs of health care by
challenging the prices charged for medical products. In some foreign
countries, particularly the countries of the European Union, the pricing of
prescription pharmaceuticals is subject to governmental control. We may
not be able to sell our products profitably if reimbursement is unavailable or
limited in scope or amount.
In both the United States and some foreign jurisdictions, there have been
a number of legislative and regulatory proposals to change the health care
system. Further proposals are likely. The potential for adoption of these
proposals may affect our ability to raise capital, obtain additional
collaborative partners and market our products.
If we obtain marketing approval for our products, we expect to
experience pricing pressure due to the trend toward managed health care,
the increasing influence of health maintenance organizations and additional
legislative proposals.
We could be exposed to significant liability claims if we are unable to
obtain insurance at acceptable costs or otherwise to protect us against
potential product liability claims
We may be subjected to product liability claims that are inherent in the
testing, manufacturing, marketing and sale of human health care products.
These claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products.
Product liability claims could require us to spend significant time and
money in litigation or to pay significant damages. Product liability
insurance is generally expensive for biopharmaceutical companies such as
ours. Although we maintain limited product liability insurance coverage for
the clinical trials of our products, it is possible that we will not be able to
obtain further product liability insurance on acceptable terms, if at all, and
that our present insurance levels and any insurance we subsequently obtain
will not provide adequate coverage against all potential claims.
Our success could be limited if we are unable to attract and retain
key personnel and consultants
Our success depends substantially on our ability to attract and retain
qualified scientific and technical personnel for the research and
development activities we conduct or sponsor. If we lose one or more of the
members of our senior management or other key employees or consultants,
our business and operating results could be seriously harmed.
Our growth or expansion into areas and activities requiring additional
expertise, such as regulatory compliance, manufacturing and marketing,
will require the addition of new management personnel. The pool of
personnel with the skills that we require is limited. Competition to hire from
this limited pool is intense, and we may be unable to hire, train, retain or
motivate such additional personnel.
Risks Relating to our Common Stock
Our officers and directors may be able to control the outcome of
most corporate actions requiring stockholder approval
Our directors and officers and entities with which they are affiliated
control approximately 41% of our outstanding common stock. Due to this
concentration of ownership, this group may be able to prevail on all matters
requiring a stockholder vote, including:
- the election of directors;
- the amendment of our organizational documents; or
- the approval of a merger, sale of assets or other major corporate
transaction.
Our stock price could be volatile, which could cause you to lose part
or all of your investment
The market price of our common stock, like that of the common stock of
many other development stage biotechnology companies, may be highly
volatile. In addition, the stock market has experienced extreme price and
volume fluctuations. This volatility has significantly affected the market
prices of securities of many biotechnology and pharmaceutical companies
for reasons frequently unrelated to or disproportionate to the operating
performance of the specific companies. These broad market fluctuations
may adversely affect the market price of our common stock. Prices for our
common stock will be determined in the market place and may be
influenced by many factors, including variations in our financial results and
investors' perceptions of us, changes in recommendations by securities
analysts as well as their perceptions of general economic, industry and
market conditions.
We have antitakeover defenses that could delay or prevent an
acquisition and could adversely affect the price of our common stock
Provisions of our certificate of incorporation, our bylaws, and Delaware
law may have the effect of deterring unsolicited takeovers or delaying or
preventing changes in control of our management, including transactions in
which our stockholders might otherwise receive a premium for their shares
over then current market prices. In addition, these provisions may limit the
ability of stockholders to approve transactions that they may deem to be in
their best interest.
Our certificate of incorporation permits our board of directors to issue
preferred stock without shareholder approval upon such terms as the board
of directors may determine. The rights of the holders of our common stock
will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of our outstanding common stock.
The issuance of a substantial number of preferred shares could adversely
affect the price of our common stock.
Our common stock may be delisted from The Nasdaq National Market,
which could cause the price to fall further and decrease it liquidity
Our common stock trades on The Nasdaq National Market. In order
to continue trading on Nasdaq, we must comply with The Nasdaq National
Market's continued listing requirements, which require that we either
maintain a minimum stockholder's equity of $10 million and a minimum
closing bid price of $1.00 per share or, if we fall below the minimum
stockholder's equity requirement, maintain a minimum closing bid price
of $3.00 per share. At December 31, 2002, we had stockholder's equity of
approximately $19.6 million. However, our stockholder's equity may
decline. If our stockholder's equity falls below $10.0 million, we
will need to maintain a minimum closing bid price of $3.00 rather
than $1.00.
If we do not satisfy Nasdaq's continued listing requirements, our
common stock may be delisted from The Nasdaq National Market. The
delisting of our common stock may result in the trading of the stock
on the Nasdaq Small Cap Market, the over-the-counter markets in the
so-called "pink sheets" or the NASD's electronic bulletin board.
Consequently, a delisting of our common stock from The Nasdaq National
Market would materially reduce the liquidity of our common stock, not
only in the number of shares that could be bought and sold, but also
through delays in the timing of the transaction and reductions in
securities analysts and media coverage. This may reduce the demand
for our stock and significantly destabilize the price of our stock.
In addition, a delisting would materially adversely affect our ability
to raise additional necessary capital.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We own financial instruments that are sensitive to market risks as part of
our investment portfolio. The investment portfolio is used to preserve our
capital until it is required to fund operations, including our research and
development activities. None of these market-risk sensitive instruments are
held for trading purposes. We do not own derivative financial instruments
in our investment portfolio. Our investment portfolio contains instruments
that are subject to the risk of a decline in interest rates. For example, if
the annualized interest rate on our interest bearing investments were to
change 1%, investment income would have hypothetically increased or decreased
by approximately $473,000 during the year ended December 31, 2002. This
hypothetical analysis does not take into consideration the effects of the
economic conditions that would give rise to such an interest rate change or
our response to such hypothetical conditions.
Our investment portfolio includes investment grade debt instruments.
These bonds are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Due to the short duration and conservative nature of
these instruments, we do not believe that it has a material exposure to
interest rate risk.
Item 8. Financial Statements
The financial statements required to be filed hereunder are filed as an
exhibit hereto, are listed under item 14(a)(1) and are incorporated herein by
reference.
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure
There have been no disagreements on accounting and financial
disclosure matters.
PART III
Item 10 - 13.
The information required for Part III of this Annual Report on Form
10-K is hereby incorporated by reference from portions of our definitive
proxy statement relating to the 2003 annual meeting of stockholders, which
statement will be filed with the Commission not later than 120 days after
the end of our 2002 fiscal year. Such information will be contained in the
sections of such proxy statement captioned "Election of Directors,"
"Meetings of Board of Directors and Committees," "Executive
Compensation," "Certain Relationships and Related Transactions,"
"Section 16(a) Beneficial Ownership Reporting Compliance,"
"Compensation Committee Interlocks and Insider Participation," and
"Principal Stockholders." Information regarding executive officers of the
Company is furnished in Part I of this Annual Report on Form 10-K under
the heading, "Executive Officers of the Registrant."
Item 14. Controls and Procedures
1. Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
and Exchange Act of 1934) as of a date within 90 days of the filing
date of this Annual Report on Form 10-K, the Company's Chief
Executive Officer and Controller have concluded that the
Company's disclosure controls and procedures are designed to
ensure that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods
specified in the SEC's rules and forms and are operating in an
effective manner.
2. Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their
most recent evaluation.
PART IV
Item 15. Exhibits, Financial Statements and Reports on Form 8-K
(a) (1) Index to Financial Statements
The following Financial Statements are included in this Annual Report on
Form 10-K.
Financial Statements: Page
(a.) Diacrin, Inc.
1. Report of Independent Public Accountants F-1
2. Balance Sheets as of December 31, 2001 and 2002 F-3
3. Statements of Operations for each of the three years in the period
ended December 31, 2002 F-4
4. Statements of Stockholders' Equity (Deficit) for each of the three
years in the period ended December 31, 2002 F-5
5. Statements of Cash Flow for each of the three years in the period
ended December 31, 2002 F-6
6. Notes to Financial Statements F-7
(b.) Diacrin/Genzyme LLC (A Development Stage Enterprise)
1. Balance Sheets as of December 31, 2001 and 2002 F-18
2. Statements of Operations for the years ended December 31, 2001 and
2002 and for the period from October 1, 1996 (date of inception)
to December 31, 2002 F-19
3. Statements of Cash Flows for the years ended December 31, 2001 and
2002 and for the period from October 1, 1996 (date of inception)
to December 31, 2002 F-20
4. Statements of Change in Venturers' Capital (Deficit) for the period
from October 1, 1996 (date of inception) to December 31, 2002 F-21
5. Notes to Financial Statements F-22
(2) Exhibits
The following is a list of exhibits filed as part of this Annual
Report on Form 10-K:
Exhibit No. Title Page
---------- ----- ----
3.1 - Amended and Restated Certificate of Incorporation of Diacrin as
amended to date (5)
3.2 - Amended and Restated By-laws of Diacrin (4)
+10.1 - Employment Agreement dated February 6, 1990 by and between Diacrin
and Dr. Thomas H. Fraser (2)
10.2 - Rights Agreement dated July 29, 1991 by and among Diacrin and the
holders of the preferred stock as amended on September 27, 1991 (2)
10.2(a) - Consent and Agreement to Amend dated April 26, 1995 by and among
Diacrin and certain investors named therein (1)
10.2(b) - Consent and Agreement to Amend dated as of January 4, 1996 by and
among Diacrin and certain investors named therein (4)
+10.3 - 1990 Stock Option Plan, as amended (3)
10.4 - Sublease dated January 24, 1991 by and among Diacrin and Building 79
Associated Limited Partnership and Building 96 Associates Limited
Partnership (2)
10.4(a) - Amendment to Sublease dated April 30, 2002 *
+10.5 - 1994 Directors' Stock Option Plan, as amended (7)
10.6 - Registration Rights Agreements dated May 31, 1995 by and among
Diacrin and the investors listed on Schedules I and II attached
thereto (1)
10.6(a) - Amendment No. 1 to Registration Rights Agreement dated as of January
4, 1996 by and among Diacrin and certain investors named therein (4)
10.7 - Collaboration Agreement among Diacrin, Inc., Genzyme Corporation and
Diacrin/Genzyme LLC dated as of October 1, 1996 (6)
10.8 - Operating Agreement of Diacrin/Genzyme LLC (6)
Exhibit No. Title Page
---------- ----- ----
+10.9 - 1997 Stock Option Plan (8)
10.10 - $650,000 Promissory Note dated November 25, 1997 made by Diacrin to
the order of Fleet National Bank (9)
10.10(a) - Letter Agreement dated November 25, 1997 by and between Diacrin and
Fleet National Bank (9)
21 - Subsidiaries *
23.1 - Consent of PricewaterhouseCoopers LLP *
99.1 - Chief Executive Officer - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. *
99.2 - Controller - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
-----------------------------
* Filed herewith
(1) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended June 30, 1995 and incorporated herein by reference.
(2) Filed as an exhibit to our Form 10, as amended (File No. 0-20139), on April
29, 1992, and incorporated herein by reference.
(3) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended September 30, 1994 and incorporated herein by reference.
(4) Filed as an exhibit to our Registration Statement on Form S-2, as amended
(Registration No. 33-80773) on December 22, 1995, and incorporated herein by
reference.
(5) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139) for
the fiscal year ended December 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to our Quarterly Report on Form 10-Q, as amended on Form
10-Q/A (File No. 0-20139) for the quarter ended September 30, 1996 and
incorporated herein by reference.
(7) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139) for
the fiscal year ended December 31, 1996 and incorporated herein by reference.
(8) Filed as an exhibit to our Quarterly Report on Form 10-Q (File No. 0-20139)
for the quarter ended June 30, 1997 and incorporated herein by reference.
(9) Filed as an exhibit to our Annual Report on Form 10-K (File No. 0-20139) for
the fiscal year ended December 31, 1997 and incorporated herein by reference.
+ Management contract or compensatory plan or arrangement filed as an exhibit
to this Form pursuant to Items 14(a) and 14(c) of Form 10-K.
(b) Reports on Form 8-K.
We did not file any current reports on Form 8-K during the last quarter of
the period covered by this report.
(c) Description of Exhibits.
See Item 14 (a)
(d) Description of Financial Statement Schedules.
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIACRIN, INC.
By: /s/ Thomas H. Fraser
------------------------------------
Thomas H. Fraser
President and Chief Executive Officer
Date: March 26, 2002
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Date Title
/s/ Thomas H. Fraser March 26, 2003 President, Chief Executive
--------------------- Officer and Director
Thomas H. Fraser (Principal Executive Officer)
/s/ Kevin Kerrigan March 26, 2003 Controller
--------------------- (Principal Financial and
Kevin Kerrigan Accounting Officer)
/s/ Zola P. Horovitz March 26, 2003 Director
---------------------
Zola P. Horovitz
/s/ John W. Littlechild March 26, 2003 Director
---------------------
John W. Littlechild
/s/ Stelios Papadopoulos March 26, 2003 Director
---------------------
Stelios Papadopoulos
/s/ Joshua Ruch March 26, 2003 Director
---------------------
Joshua Ruch
CERTIFICATIONS
I, Thomas H. Fraser, President and Chief Executive Officer certify that:
1. I have reviewed this annual report on Form 10-K of Diacrin, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee
of the registrant's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Thomas H. Fraser
--------------------
Thomas H. Fraser
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATIONS
I, Kevin Kerrigan, Controller, certify that:
1. I have reviewed this annual report on Form 10-K of Diacrin, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the Audit Committee of
the registrant's Board of Directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/ Kevin Kerrigan
-------------------
Kevin Kerrigan
Controller
(Principal Financial Officer)
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Diacrin, Inc.
In our opinion, the accompanying balance sheet and the related
statements of operations, stockholders' equity and cash flows present fairly,
in all material respects, the financial position of Diacrin, Inc.
at December 31, 2002, and the results of its operations and
its cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
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 audit. We conducted our audit of these statements
in accordance with auditing standards generally accepted in the United
States of America 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 audit provides a reasonable basis for our opinion. The
financial statements of Diacrin, Inc. as of December 31, 2001, and for each
of the two years in the period ended December 31, 2001 were audited by
other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements
in their report dated February 21, 2002.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 21, 2003
F-1
The following report is a copy of a report issued by Arthur Andersen LLP
and has not been reissued by Arthur Andersen LLP.
Report of Independent Public Accountants
To the Board of Directors of
Diacrin, Inc.:
We have audited the accompanying balance sheets of Diacrin, Inc. (a
Delaware corporation) as of December 31, 2000 and 2001 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001. These financial
statements are the responsibility of Diacrin, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Diacrin, Inc. as of
December 31, 2000 and 2001 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 21, 2002
F-2
DIACRIN, INC.
Balance Sheets
At December 31,
---------------------------
2001 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 8,534,426 $ 4,189,700
Short-term investments 33,410,736 33,484,274
Interest receivable and other current assets 668,020 683,473
------------ -----------
Total current assets 42,613,182 38,357,447
------------ -----------
Property and equipment, at cost:
Laboratory and manufacturing equipment 1,660,963 1,679,436
Furniture and office equipment 324,913 327,382
Leasehold improvements 77,529 86,597
----------- -----------
2,063,405 2,093,415
Less - Accumulated depreciation and amortization 1,861,110 1,985,364
----------- -----------
202,295 108,051
----------- -----------
Long-term investments 7,782,035 7,282,169
Investment in joint venture 83,984 -
----------- -----------
Total other assets 7,866,019 7,282,169
----------- -----------
Total assets $ 50,681,496 $ 45,747,667
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 117,663 $ 147,633
Accrued expenses 1,269,278 726,168
Deferred revenue 29,238 1,787,483
Current portion of long-term debt 119,167 -
------------ -----------
Total current liabilities 1,535,346 2,661,284
------------ -----------
Commitments (Notes 4 and 10)
Stockholders' equity:
Preferred stock, $0.01 par value; authorized--5,000,000 shares;
none issued and outstanding - -
Common stock, $0.01 par value; authorized--30,000,000 shares;
issued and outstanding--17,937,204 shares at
December 31, 2001 and 2002 179,372 179,372
Additional paid-in capital 101,401,822 101,401,822
Accumulated deficit (52,435,044) (58,494,811)
----------- -----------
Total stockholders' equity 49,146,150 43,086,383
----------- -----------
Total liabilities and stockholders' equity $ 50,681,496 $ 45,747,667
=========== ===========
The accompanying notes are an integral part of these
financial statements.
F-3
DIACRIN, INC.
Statements of Operations
Year Ended December 31,
------------------------------------------------
2000 2001 2002
---- ---- ----
REVENUES:
Research and development $ 2,081,795 $ 737,290 $ 346,316
------------ ----------- ----------
OPERATING EXPENSES:
Research and development 5,996,550 6,350,190 6,123,580
General and administrative 1,348,072 1,624,470 1,535,507
----------- ---------- ---------
Total operating expenses 7,344,622 7,974,660 7,659,087
----------- ---------- ---------
OTHER INCOME (EXPENSE):
Equity in operations of joint venture (1,368,945) (546,562) (103,069)
Investment income 3,124,929 3,149,543 1,358,692
Interest expense (29,898) (13,861) (2,619)
----------- ---------- ---------
Total other income (expense) 1,726,086 2,589,120 1,253,004
----------- ---------- ---------
NET LOSS $(3,536,741) $(4,648,250) $(6,059,767)
=========== ========== =========
NET LOSS PER COMMON SHARE:
Basic and diluted $ (.21) $ (.26) $ (.34)
=========== ========== =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic and diluted 17,073,194 17,914,889 17,937,204
=========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
F-4
DIACRIN, INC.
Statements of Stockholders' Equity
Common Stock
-------------------
Number $.01 Additional Total
of Par Paid-In Accumulated Stockholders'
Shares Value Capital Deficit Equity
---------- ------- ---------- ----------- ----------
BALANCE, December 31, 1999 14,386,183 143,862 64,250,741 (44,250,053) 20,144,550
Proceeds from public offering of
common stock, net of $2,765,500
financing costs 3,450,000 34,500 36,875,000 - 36,909,500
Exercise of stock options and warrants 78,521 785 248,181 - 248,966
Net loss - - - (3,536,741) (3,536,741)
---------- ------- ----------- ---------- ----------
BALANCE, December 31, 2000 17,914,704 179,147 101,373,922 (47,786,794) 53,766,275
Exercise of stock options 22,500 225 27,900 - 28,125
Net loss - - - (4,648,250) (4,648,250)
---------- ------- ----------- ---------- ----------
BALANCE, December 31, 2001 17,937,204 179,372 101,401,822 (52,435,044) 49,146,150
Net loss - - - (6,059,767) (6,059,767)
---------- ------- ----------- ---------- ----------
BALANCE, December 31, 2001 17,937,204 179,372 101,401,822 (58,494,811) 43,086,383
========== ======= =========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
F-5
DIACRIN, INC.
Statements of Cash Flows
Year Ended December 31,
2000 2001 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,536,741) $ (4,648,250) $ (6,059,767)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 213,969 209,492 124,254
Equity in operations of joint venture 1,368,945 546,562 103,069
Changes in current assets and liabilities-
Interest receivable and other current assets (451,041) 112,386 (15,453)
Accounts payable (29,461) 8,356 29,970
Accrued expenses 55,866 160,687 (555,967)
Deferred revenue from joint venture (94,259) (315,230) 1,758,245
---------- --------- ---------
Net cash used in operating activities (2,472,722) (3,925,997) (4,615,649)
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in short-term investments (5,903,423) (10,925,061) (73,538)
Purchases of property and equipment, net (102,510) (10,706) (30,010)
(Increase) decrease in long-term investments (18,333,856) 13,195,905 499,867
Investment in joint venture (1,947,422) (1,086,545) (40,000)
Return of capital for services provided on behalf
of joint venture 693,932 245,589 33,771
----------- ---------- ----------
Net cash (used in) provided by investing activities (25,593,279) 1,419,182 390,090
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 36,909,500 - -
Net proceeds from the exercise of stock options and
warrants 248,966 28,125 -
Principal payments on long-term debt (143,350) (130,000) (119,167)
----------- ---------- ---------
Net cash provided by (used in) financing 37,015,116 (101,875) (119,167)
----------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 8,949,115 (2,608,690) (4,344,726)
CASH AND CASH EQUIVALENTS, beginning of year 2,194,001 11,143,116 8,534,426
----------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $11,143,116 $ 8,534,426 $ 4,189,700
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 30,946 $ 15,547 $ 3,148
========= ======== ========
The accompanying notes are an integral part of these
financial statements.
F-6
Diacrin, Inc.
Notes to Financial Statements
(1) Operations and Basis of Presentation
Diacrin, Inc. (the "Company") was incorporated on October 10, 1989 and is
developing cell transplantation technology for the treatment of human diseases
that are characterized by cell dysfunction or cell death and for which current
therapies are either inadequate or nonexistent. The Company operates in a
single segment.
The Company is subject to risks common to companies in the biotechnology
industry including, but not limited to, development by the Company or its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, reliance on corporate partners to
successfully research, develop and commercialize products based on the
Company's technologies, and compliance with FDA government regulations
and approval requirements as well as the ability to grow the Company's business
and obtain adequate financing to fund this growth.
(2) Summary of Significant Accounting Policies
(a) Depreciation and Amortization
The Company provides for depreciation using the straight-line method by
charges to operations in amounts estimated to allocate the cost of these assets
over a five-year life. Amortization of leasehold improvements is computed
using the straight-line method over the shorter of the estimated useful life
of the asset or the lease term.
(b) Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or
less are consider cash equivalents. Cash and cash equivalent balances consist
of deposits, commercial paper and investments in a money market mutual fund.
At December 31, 2002 and 2001, the Company has classified as cash equivalent
approximately $4.2 million and $8.5 million, respectively. These investments
are stated at amortized cost, which approximates fair value.
(c) Revenue Recognition
Revenues under the collaboration agreement with Terumo Corporation (see
Note 4) and the joint venture agreement with Genzyme Corporation
("Genzyme") (see Note 5) are recognized as work is performed. Revenues
related to the Terumo collaboration are recognized as the Company completes
its performance obligations under the related agreement. Revenues under the
joint venture agreement are recognized as revenue to the extent that the
Company's research and development costs are funded by Genzyme through the
joint venture. The Company receives non-refundable monthly advances from
the joint venture. Deferred revenue represents amounts received prior to
recognition of revenue. Research and development costs are expensed as
incurred.
Revenue from milestone payments under which we have continuing
performance obligations are recognized as revenue upon the achievement of
the milestone only if all of the following conditions are met: the
milestone payments are non-refundable; achievement of the milestone was
not reasonably assured at the inception of the arrangement; substantive
effort is involved in achieving the milestone; and the amount of the
milestone is reasonable in relation to the effort expended or the risk
associated with achievement of the milestone. If any of these conditions
are not met, the milestone payments are deferred and recognized as revenue
over the term of the arrangement as we complete our performance
obligations. Payments received under these arrangements prior to the
completion of the related work are recorded as deferred revenue.
F-7
Diacrin, Inc.
Notes to Financial Statements (Continued)
(d) Income Taxes
The Company records income taxes using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
income tax bases, and operating loss and tax credit carry forwards. Deferred
income tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences,
operating losses, or tax credit carry forwards are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date. Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, requires the establishment of a valuation allowance to reflect
the likelihood of realization of deferred tax assets. Significant management
judgment is required in determining the Company's provision for income taxes,
its deferred tax assets and liabilities and any valuation allowance recorded
against its net deferred tax assets. The Company evaluates the weight of all
available evidence to determine whether it is more likely than not that some
portion or all of the deferred income tax assets will not be realized.
See Note 11.
(e) Net Loss per Common Share
In accordance with SFAS No. 128, Earnings per Share, basic and diluted net
loss per share is calculated by dividing the net loss by the weighted average
number of common shares outstanding for all periods presented. Diluted
weighted average shares outstanding for all periods presented exclude the
potential common shares from stock options of 1,258,247, 1,263,872 and
1,461,557 at December 31, 2000, 2001, and 2002, respectively, because to
include such shares would have been antidilutive.
(f) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
(g) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income ("SFAS 130") establishes
standards for reporting and display of comprehensive income and its
components, including net loss and equity from non-shareholder sources, in a
full set of general-purpose financial statements. There are no differences
between the Company's reported income and comprehensive income for all
periods presented.
(h) Fair Value of Financial Instruments
Financial instruments consist mainly of cash and cash equivalents,
short-term investments, long-term investments, accounts payable and current
portion of long-term debt. The carrying amounts of these instruments
approximate their fair value.
(i) Stock-Based Compensation
Stock options issued to employees under the Company's stock option and
employee stock purchase plans are accounted for under APB Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations, including
FASB Interpretation No. 44 (see Note 10). All stock-based awards to non-
employees are accounted for at their fair value in accordance with SFAS No.
123, Accounting for Stock-Based Compensation, and Emerging Issues Task
Force (EITF) Issue No. 96-18, Accounting for Equity Instruments that are
Issued to Other than Employees.
F-8
Diacrin, Inc.
Notes to Financial Statements (Continued)
Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, requires that companies either
recognize compensation expense for grants of stock options and other equity
instruments based on fair value, or provide pro forma disclosure of net loss
and net loss per share in the notes to the financial statements. At December
31, 2002, the Company has three stock-based compensation plans, which are
described more fully in Note 10. The Company accounts for those plans under
the recognition and measurement principles of Account Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, no compensation cost has been recognized under SFAS 123 for the
Compnay's employee stock option plans. Had compensation cost for the awards
under those plans been determined based on the grant date fair values,
consistent with the method required under SFAS 123, the Company's net loss and
net loss per share would have been reduced to the pro forma amounts indicated
below:
For the year ended December 31,
2000 2001 2002
---------- ---------- ---------
Net loss applicable to common
stockholders as reported (3,536,741) (4,648,250) (6,059,767)
Deduct: Stock-based compensation
expense determined under fair value
based method for all award (1,178,182) (964,544) (646,554)
--------- --------- ---------
Net loss applicable to common
stockholders, pro forma (4,714,923) (5,612,794) (6,706,321)
========= ========= =========
Basic and diluted net loss per share:
As reported $(.21) $(.26) $(.34)
======= ======= ======
Pro forma $(.28) $(.31) $(.37)
======= ======= ======
(j) Reclassification
Investment income has been reclassified in the prior period financial
statements into Other Income / (Expense) to conform with the current period
presentation.
(k) New Accounting Standards
In July 2002, the FASB issued SFAS 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at its fair market
value when the liability is incurred, rather than at the date of an entity's
commitment to an exit plan. The provisions of SFAS 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. The adoption
of SFAS 146 has not had a material effect on our financial statements.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an interpretation of
FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No.
34. FIN 45 elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit and
warranty obligations. It also clarifies that at the time a company issues a
guarantee, a company must recognize an initial liability for the fair value of
the obligations it assumes under the guarantee and must disclose that
information in its interim and annual financial statements. The provisions of
FIN 45 relating to initial recognition and measurement must be applied on a
prospective basis to guarantees issued or modified after December 31, 2002.
We do not expect the adoption of the initial recognition and measurement
provisions in the first quarter of 2003 to have a significant impact on our
financial condition or results of operations. The disclosure requirements
of FIN 45, which are effective for both interim and annual periods that end
after December 15, 2002, were adopted by us for the year ended
December 31, 2002.
F-9
Diacrin, Inc.
Notes to Financial Statements (Continued)
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, Accounting for Stock-
Based Compensation - Transition and Disclosure. SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation as originally
provided by SFAS No. 123, Accounting for Stock-Based Compensation.
Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to
require prominent disclosure in both the annual and interim financial
statements about the method of accounting for stock-based compensation and
the effect of the method used on reported results. The transitional
requirements of SFAS 148 will be effective for all financial statements for
fiscal years ending after December 15, 2002. The disclosure requirements
shall be effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The
transitional disclosure requirements were adopted by us for the year ended
December 31, 2002. We expect to adopt the disclosure portion of this
statement for the quarter ending March 31, 2003. The application of this
standard will have no impact on our financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the entity investors in the entity do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk
for the entity to finance it activities without additional subordinated
financial support from other parties. FIN 46 is required to be applied to
preexisting entities of the Company as of the beginning of the first quarter
after June 15, 2003. FIN 46 is required to be applied to all new entities
with which the Company becomes involved beginning February 1, 2003. Based
upon the accounting guidance and other information available, we do not
believe our joint venture meets the definition of a variable interest entity.
We currently believe adoption of FIN 46 will not have a significant impact
on the Company. We believe the interpretive accounting guidance necessary
for FIN 46 will continue to evolve. Additional interpretive guidance could
affect the accounting for our joint venture.
(3) Sale of Common Stock
In March 2000, the Company completed a public offering of 3,450,000
shares of its common stock for $11.50 per share for net proceeds of
approximately $36.9 million.
(4) Terumo Agreement
In September 2002, the Company entered into a development and license
agreement with Terumo Corporation ("Terumo"). Under the terms of the
agreement, Diacrin licensed to Terumo its human muscle cell transplantation
technology for cardiac disease in Japan. Terumo will fund all development in
Japan while Diacrin continues to independently develop its cardiac repair
technology for commercialization in the U.S. and elsewhere. On October 1,
2002, the Company received an upfront non-refundable license fee of $2.0
million. The agreement also includes payments by Terumo to Diacrin for
development milestones and a royalty on product sales. The Company
recorded the upfront license fee as deferred revenue and recognizes revenue
over the development period of the agreement in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition" ("SAB 101"). SAB 101
requires companies to recognize certain upfront non-refundable fees over the
period in which the Company completes its performance obligations under the
related agreement when such fees are received in conjunction with an agreement
which includes performance obligations. Determination of the length of the
development period requires management's judgment. Any significant changes
in the assumptions underlying our estimates used while applying the percentage
of completion method could impact our revenue recognition. Included in
research and development revenue for the year ended December 31, 2002 is
$245,000 in revenue related to performance obligations completed by December
31, 2002.
F-10
Diacrin, Inc.
Notes to Financial Statements (Continued)
Revenue from milestone payments under which we have continuing
performance obligations are recognized as revenue upon the achievement of the
milestone only if all of the following conditions are met: the milestone
payments are non-refundable; achievement of the milestone was not reasonably
assured at the inception of the arrangement; substantive effort is involved
in achieving the milestone; and the amount of the milestone is reasonable
in relation to the effort expended or the risk associated with achievement
of the milestone. If any of these conditions are not met, the milestone
payments are deferred and recognized as revenue over the term of the
arrangement as we complete our performance obligations. Payments received
under these arrangements prior to the completion of the related work are
recorded as deferred revenue. If any of these conditions are not met, the
milestone payments are deferred and recognized as revenue over the term
of the arrangement as we complete our performance obligations.
(5) Joint Venture Agreement
In September 1996, the Company and Genzyme Corporation formed a joint
venture to develop and commercialize two product candidates. Under the
terms of the joint venture agreement, which was effective October 1, 1996,
Genzyme agreed to provide 100% of the first $10 million in funding and 75%
of the following $40 million in funding for the two products. All costs
incurred in excess of $50 million will be shared equally between Genzyme
and the Company in accordance with the terms of the agreement. Any profits
of the joint venture will be shared equally by the two parties. As of
December 31, 2002, Genzyme had provided $33.0 million to the joint venture
and the Company had provided $7.6 million.
The Company records as research and development expense all costs related
to developing the joint venture's product candidates incurred by it on behalf
of the joint venture. The Company recognizes research and development revenue
equal to the amount of reimbursement received by it from the joint venture out
of funds contributed by Genzyme. The Company does not recognize research and
development revenue for amounts received from the joint venture out of funds it
contributed. As Genzyme incurs costs on behalf of the joint venture that the
Company is obligated to fund, it recognizes an expense in its statement of
operations captioned "Equity in operations of joint venture."
Genzyme agreed to make financing available to Diacrin from and after the
date that Genzyme provides the initial $10 million of funding to the joint
venture. Genzyme agreed to make available to Diacrin an unsecured,
subordinated line of credit of up to an aggregate amount of $10 million.
Diacrin may draw on the line only in the event that Diacrin's cash and cash
equivalents are insufficient to fund Diacrin's budgeted operations for a
specified period of time, and the funds may be used by Diacrin only to fund
capital contributions to the joint venture. The line will be available through
the date five years after the date Diacrin first draws on the line, and all
outstanding principal and interest will be due on that fifth anniversary.
Advances will be interest-bearing, evidenced by a promissory note and
subject to other considerations and the aggregate amount of draws in any
calendar year may not exceed $5 million. Diacrin did not make any draws on
the line through December 31, 2002.
The Company accounts for its investment in the joint venture on the equity
method. The detail of the Company's investment in the joint venture is as
follows:
2000 2001 2002
---- ---- ----
Balance, beginning of year $103,730 $ 4,785 $ 83,984
Contributions to joint venture 1,947,422 1,086,545 40,000
Return of capital (693,932) (245,589) (33,772)
Funding of operations of joint venture (1,352,435) (761,757) (103,069)
---------- --------- -------
Balance, end of year $4,785 $83,984 $(12,857)
========== ========= =======
F-11
Diacrin, Inc.
Notes to Financial Statements (Continued)
Contributions to the joint venture represent cash contributions. The return
of capital represents cash payments made to the Company by the joint venture for
research and development costs that are funded by the Company. Funding of
operations of the joint venture represents costs incurred by Genzyme on behalf
of the joint venture, which are funded by the Company.
A summary of the revenue and expenses from the joint venture are as
follows:
2000 2001 2002
---- ---- ----
Revenue recognized (see note 2c) $2,081,795 $737,290 $101,316
Research and development
expense (see note 2c) $2,775,727 $983,054 $135,087
Equity in operations of joint venture $1,368,945 $546,562 $103,069
(6) Cash, Cash Equivalents and Investments
The Company's cash equivalents and investments are classified as held-to-
maturity and are carried at amortized cost, which approximates market value.
Cash equivalents test is done at purchase date. Investments classification is
determined at balance sheet date. Short-term investments and long-term
investments have maturities of less than one year and greater than one year,
respectively. Cash and cash equivalents, short-term investments and long-term
investments at December 31, 2001 and 2002 consisted of the following:
2001 2002
---- ----
Cash and cash equivalents-
Cash $ 1,003 $ 400
Money market mutual fund 8,533,423 4,189,300
----------- -----------
$ 8,534,426 $ 4,189,700
=========== ===========
Short-term investments-
Corporate notes (remaining avg. maturity of 6 mos. at Dec. 31, 2002) $26,651,221 $29,981,389
US Gov't Obligations (remaining maturity of 1 mos. at Dec. 31, 2002) 6,510,826 3,502,885
Commercial paper 248,689 -
----------- -----------
$33,410,736 $33,484,274
=========== ===========
Long-term investments-
Corporate notes (remaining avg. maturity of 13 mos. at Dec. 31, 2002) $ 4,198,142 $ 7,282,169
US Gov't Obligations 3,583,893 -
----------- -----------
$ 7,782,035 $ 7,282,169
=========== ===========
During the year ended December 31, 2001 the Company sold two of its held-
to-maturity investments due to significant evidence of deterioration in the
issuers' creditworthiness. The cost of the two investments was approximately
$5.5 million and the sale resulted in a realized gain of approximately $96,000,
which is included in Investment income on the statement of operations for the
year ended December 31, 2001. This sale represents a change in circumstances
as defined in SFAS No. 115 Accounting for Certain Investments in Debt and
Equity Securities and does not impact the classification of the remaining
portfolio as held-to-maturity investments as the Company continues to have
the intent and ability to hold its investments to maturity.
F-12
Diacrin, Inc.
Notes to Financial Statements (Continued)
(7) Accrued Expenses
Accrued expenses consisted of the following at December 31, 2001 and 2002:
2001 2002
---- ----
Accrued clinical trials costs $ 499,341 $ 223,145
Accrued professional fees 138,364 137,879
Accrued payroll 288,813 163,000
Accrued contract research costs 98,934 72,590
Accrued other 243,826 129,554
-------- ---------
Total $1,269,278 $ 726,168
=========== ==========
(8) Long-term Debt
In November 1997, the Company entered into an unsecured term loan
agreement with a bank whereby the bank loaned the Company $650,000 to construct
a pilot manufacturing facility. The loan was paid in 60 principal
installments of $10,833 commencing December 1, 1997 and ending
November 1, 2002.
(9) Preferred Stock
The Company has authorized 5,000,000 shares of undesignated preferred
stock. The Company's Board of Directors is authorized, subject to any
limitations prescribed by law and without further stockholder approval, to
issue from time to time up to 5,000,000 shares of preferred stock in one or
more series. Each such series of preferred stock shall have such number of
shares, designations, preferences, voting powers, qualifications and rights
or privileges as shall be determined by the Board of Directors. There have
been no shares of preferred stock issued by the Company.
(10) Common Stock Options
In 1990, the Company established the 1990 Stock Option Plan (the "1990
Plan") which authorized the Board of Directors to grant incentive stock
options, non-qualified stock options and stock appreciation rights to employees,
directors and consultants of the Company for up to 800,000 shares of the
Company's common stock. All options granted have 10-year terms, and the
majority vest in equal annual installments of 25% over four years of continued
service from the date of hire or grant. In 2000, the 1990 Plan expired and no
further grants have been made. All options outstanding on the expiration date
remain in effect.
In July 1994, the stockholders approved the 1994 Directors' Stock Option
Plan (the "Director Plan") which automatically grants an option to each
eligible outside director of the Company for the purchase of 7,500 shares of
common stock at an exercise price of the then fair market value. Each option
granted under the Director Plan has a 10-year term and may be exercised on a
cumulative basis as to 25% of the shares on the first anniversary of the date
of grant and an additional 25% at the end of each one-year period thereafter.
In December 1996, the Board of Directors amended the Director Plan to
automatically grant 15,000 options to each new eligible outside director. The
Company has reserved 30,000 shares for issuance under this plan. As of
December 31, 2002, there were 15,000 options outstanding under the Director
Plan at a weighted average exercise price of $9.50 per share. As of December
31, 2002, there were options to purchase 13,125 shares of commons stock
available for future grant under the Director Plan.
In June 1997, the stockholders approved the 1997 Stock Option Plan (the
"1997 Plan") under which the Board of Directors is authorized to grant
incentive stock options and non-qualified stock options to employees,
directors and consultants of the Company for up to 1,200,000 shares of the
Company's common stock. All options granted have 10-year terms, and vest in
equal annual installments of 25% over four years of continued service from the
date of hire or grant. As of December 31, 2002, options to purchase 336,000
shares of common stock were available for future grant under the 1997 Plan.
F-13
Diacrin, Inc.
Notes to Financial Statements (Continued)
The following table summarizes incentive and non-qualified
stock option activity:
Number of Weighted average
options Exercise price
Balance, December 31, 1999 1,236,523 5.14
Options granted 154,750 5.56
Options exercised (75,526) 2.66
Options canceled (57,500) 8.91
--------- ----
Balance, December 31, 2000 1,258,247 5.15
Options granted 32,000 2.18
Options exercised (22,500) 1.25
Options canceled (3,875) 6.27
--------- ----
Balance, December 31, 2001 1,263,872 $ 5.14
Options granted 302,000 2.00
Options exercised - -
Options canceled (104,315) 5.20
--------- ----
Balance, December 31, 2002 1,461,557 $ 4.49
========= ====
Exercisable, December 31, 2002 1,046,557 $ 5.12
========= ====
Exercisable, December 31, 2001 988,996 $ 5.08
======== ====
Exercisable, December 31, 2000 860,869 $ 4.68
======== ====
All options have been granted at the fair market value of the Company's
common stock on the date of grant.
The following table summarizes certain information about
options outstanding and exercisable at December 31, 2002:
Options outstanding
--------------------------------------------------------------------------------
Number of options Weighted Weighed average
outstanding at average remaining exercise
Range of exercise prices December 31, 2002 contractual life price
------------------------ ----------------- ---------------- --------------
$1.22 to $2.50 787,057 4.12 $2.09
$4.63 to $7.50 435,250 6.67 $5.76
$7.88 to $12.00 239,250 4.79 $10.06
--------- -----
1,461,557 $4.49
========= =====
F-14
Diacrin, Inc.
Notes to Financial Statements (Continued)
Options exercisable
--------------------------------------------------------------------------------
Number exercisable Weighted average
Range of exercise prices At December 31, 2002 exercise price
------------------------ ---------------------- ----------------
$1.25 to $2.50 478,057 $2.15
$4.63 to $7.50 341,250 $5.91
$7.88 to $12.00 227,250 $10.18
------- -----
1,046,557 $5.12
========= =====
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company has continued to
account for employee stock options in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and has
included the pro forma disclosure required by SFAS No. 123 for all periods
presented.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee and director stock options under the fair value
method of SFAS No. 123. The fair-value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
assumptions for 2000, 2001 and 2002: risk-free interest rates of 6.0%, 6.0% and
3.0% for 2000, 2001 and 2002; dividend yield of 0% for all years; volatility
factor of the expected market price of the Company's common stock of 95% for
all years; and a weighted-average expected life of the options of 7.5 years for
all years. The weighted average fair value of options granted in 2000, 2001 and
2002 was $4.71, $1.85 and $1.66, respectively.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. The aggregate
fair value of options granted in 2000, 2001 and 2002 was approximately $729,000,
$59,000 and $500,000, respectively. See Note 2(i).
F-15
Diacrin, Inc.
Notes to Financial Statements (Continued)
(11) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income
Taxes. The Company has recorded no provision for federal and state income
taxes. As of December 31, 2002 the Company has federal and state tax NOL
carryforwards of $57,748,000 and $25,029,000, respectively. These NOL
carryforwards begin to expire in 2005 and 2003, respectively. The net
operating loss carryforwards are subject to review and possible adjustment
by the Internal Revenue Service.
Net operating loss and tax credit carryforwards may be limited in the
event of certain changes in the ownership interests of significant
shareholders. The Company believes the issuance of the convertible
notes payable in May 1995, as well as the initial public offering in February
1996, caused a change in ownership, as defined by the Tax Reform Act of 1986
(the "Act"). Additionally, the Company's private placement in 1998 and
secondary offering in 2000 may have caused a change in ownership, as defined by
the Act. Ownership changes in future periods may further limit the Company's
ability to utilize net operating loss and tax credit carryforwards.
The components of the net deferred tax assets are approximately as follows:
2001 2002
---- ----
Loss carryforwards $21,360,000 $21,204,000
Credit carryforwards 4,250,000 6,062,000
Other temporary differences 43,500 (3,000)
----------- ----------
Total deferred tax assets 25,653,500 27,263,000
Less - valuation allowance (25,653,500) (27,263,000)
---------- ----------
Net deferred tax asset $ - $ -
=========== ==========
The Company has determined that it is more likely than not that the
deferred tax assets will not be realized, therefore, a valuation allowance
has reduced all of the deferred tax assets to zero. The change in the
total valuation allowance during the year ended December 31, 2002 was an
increase of approximately $1,609,500 and relates to the increase in the
deferred tax asset which is primarily due to the net operating loss
generated during 2002.
(12) Facility Lease
During 1991, the Company entered into a 10-year operating lease for a
facility. In October 2000, the Company exercised the first of two options to
extend the lease an additional five years commencing October 2001. Minimum
rental payments under the lease are as follows:
Rental
Commitment
----------
2003 $ 908,000
2004 908,000
2005 908,000
2006 681,000
---------
$3,405,000
=========
Total rent expense for the years ended December 31, 2000, 2001 and 2002
was approximately $751,000, $758,000 and $981,000, respectively.
F-16
Diacrin, Inc.
Notes to Financial Statements (Continued)
(13) Employment Retirement / Savings Plan
The Company maintains an employee retirement / savings plan (the "Plan")
which permits participants to make tax deferred contributions by salary
reduction pursuant to section 401(k) of the Internal Revenue Code. All active
employees, 21 years of age or older, who have completed a calendar quarter of
service are eligible to participate in the Plan. The Company pays all
administrative costs of the Plan. During 2000, 2001 and 2002 the Company
made discretionary contributions of $28,500, $54,700 and $57,600, respectively,
to the Plan.
(14) Quarterly Results of Operations (Unaudited)
The following table presents, in thousands, a condensed summary of
quarterly results of operations for the years ended December 31, 2002 and 2001:
Year Ended December 31, 2002
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $ 33 $ 47 $ 92 $ 174
======= ======= ====== ======
Net loss $(1,523) $(1,780) $(1,537) $(1,220)
======= ======= ======= ======
Basic and diluted net loss per
common share $ (.08) $ (.10) $ (.09) $ (.07)
======= ====== ====== ======
Year Ended December 31, 2001
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Total revenue $ 383 $ 158 $ 69 $ 127
======= ======= ====== ======
Net loss $ (811) $(1,334) $(1,175) $(1,328)
======= ======= ======= ======
Basic and diluted net loss per
common share $ (.05) $ (.07) $ (.07) $ (.07)
======= ====== ====== ======
F-17
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Balance Sheets
December 31, 2001 and 2002
Unaudited
2001 2002
Assets
Current assets:
Cash $ 498,093 $ 91,527
Prepaid to Diacrin, Inc. (Note C) 50,014 53,260
Other current assets 11,267 1,667
----------- ----------
Total current assets 559,374 146,454
Property and equipment, net (Note D) 106,365 -
----------- ----------
Total assets $ 665,739 $ 146,454
=========== ==========
Liabilities and Venturers' Capital (Deficit)
Payable to Genzyme Corporation (Note C) $ 77,699 $ 8,742
Accrued expenses - 3,334
----------- ----------
Total liabilities 77,699 12,076
Commitments and contingencies (Note C)
Venturers' capital (deficit) (including deficit accumulated
during the development stage of $40,655,182);
Venturers' capital - Genzyme Corporation 485,654 145,408
Venturers' capital - Diacrin, Inc. 102,386 (11,030)
----------- ---------
Total Venturers' capital (deficit) 588,040 134,378
----------- ---------
Total liabilities and Venturers' capital (deficit) $ 665,739 $ 146,454
=========== =========
The accompanying notes are an integral part of
these financial statements.
F-18
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Operations
(Unaudited)
For the period
from
October 1, 1996
(date of inception)
to December 31,
2001 2002 2002
Operating costs and expenses:
Research and development - Genzyme Corporation $ 2,178,191 $ 361,186 $ 22,100,466
Research and development - Diacrin, Inc. 983,054 135,087 18,164,962
General and administrative 64,959 54,667 397,379
Loss from disposal of fixed assets - 66,299 66,299
----------- ---------- -----------
Total operating costs and expenses 3,226,204 617,239 40,729,106
Interest income 56,902 3,577 73,924
---------- ---------- ----------
Net loss $(3,169,302) $ (613,662) $(40,655,182)
========== ========== ==========
The accompanying notes are an integral part of
these financial statements.
F-19
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Cash Flows
(Unaudited)
For the period
from
October 1, 1996
(date of inception)
to December 31,
2001 2002 2002
Cash flows from operating activities:
Net loss $ (3,169,302) $ (613,662) $ (40,655,182)
Reconciliation of net loss to net cash used
Depreciation 49,811 40,066 246,462
Loss on disposal of fixed assets - 66,299 66,299
Increase (decrease) in cash from working
Prepaid to Diacrin, Inc. 315,230 (4,913) (54,927)
Payable to Genzyme Corporation (2,072,790) (68,957) 8,742
Other current assets - 11,267 -
Accrued expenses (23,900) 3,334 3,334
---------- ---------- ----------
Net cash used by operating activities (4,900,951) (566,566) (40,385,272)
Cash flows from investing activities:
Acquisition of property and equipment - - (312,761)
Cash flows from financing activities:
Capital contributed by Genzyme Corporation 3,280,155 120,000 33,136,794
Capital contributed by Diacrin, Inc. 1,086,719 40,000 7,652,766
---------- --------- ----------
Net cash provided by financing activities 4,366,874 160,000 40,789,560
---------- --------- ----------
(Decrease) increase in cash (534,077) (406,566) 91,527
Cash at beginning of period 1,032,170 498,093 -
---------- --------- ----------
Cash at end of period $ 498,093 $ 91,527 $ 91,527
========== ========= ==========
The accompanying notes are an integral part of
these financial statements.
F-20
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Statements of Changes in Venturers' Capital (Deficit)
For the Period from October 1, 1996 (Date of Inception) to December 31, 2002
(Unaudited)
Total
Unpaid Venturers' capital Venturers'
Genzyme Genzyme Diacrin, capital
Corporation Diacrin, Inc. Corporation Inc. (deficit)
1996 capital contributions $ 1,911,968 $ - $ - $ - $ 1,911,968
1996 net loss (1,542,374) - - - (1,542,374)
----------- ----------- --------- --------- ----------
Balance at December 31, 1996 369,594 - - - 369,594
1997 capital contributions 6,819,536 - - - 6,819,536
1997 net loss (6,809,012) - - - (6,809,012)
----------- ----------- --------- ---------- -----------
Balance at December 31, 1997 380,118 - - - 380,118
1998 capital contributions 7,709,137 2,085,079 (704,415) (175,838) 8,913,963
1998 net loss (7,608,663) (1,986,683) - - (9,595,346)
----------- ---------- -------- --------- -----------
Balance at December 31, 1998 480,592 98,396 (704,415) (175,838) (301,265)
1999 capital contributions 8,068,415 2,691,774 (60,267) (22,390) 10,677,532
1999 net loss (8,035,058) (2,678,353) - - (10,713,411)
---------- ---------- --------- --------- ----------
Balance at December 31, 1999 513,949 111,817 (764,682) (198,228) (337,144)
2000 capital contributions 6,089,247 2,029,749 (96,982) (82,327) 7,939,687
2000 net loss (6,159,056) (2,053,018) - - (8,212,074)
---------- ---------- -------- --------- ----------
Balance at December 31, 2000 444,140 88,548 (861,664) (280,555) (609,531)
2001 capital contributions 2,418,491 806,164 861,664 280,555 4,366,874
2001 net loss (2,376,977) (792,326) - - (3,169,303)
---------- ---------- -------- --------- ----------
Balance at December 31, 2001 $ 485,654 $ 102,386 $ - $ - $ 588,040
2002 capital contributions 120,000 40,000 - - 160,000
2002 net loss (460,246) (153,416) - - (613,662)
---------- ---------- -------- --------- ----------
Balance at December 31, 2002 $ 145,408 $ (11,030) $ - $ - $ 134,378
========== ========== ======== ========= ==========
The accompanying notes are an integral part of
these financial statements.
F-21
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to December 31, 2002 Financial Statements
(Unaudited)
A. Nature of Business and Organization
On October 1, 1996, Diacrin/Genzyme LLC ("the Joint Venture") was
established as a joint venture between Genzyme Corporation ("Genzyme")
and Diacrin, Inc. ("Diacrin") (collectively, the "Venturers"), to develop and
commercialize products and processes for use in the treatment of
Parkinson's disease and Huntington's disease in humans using porcine fetal
cells. Under the terms of the Collaboration Agreement among Diacrin,
Genzyme and the Joint Venture (the "Collaboration Agreement"), all
funding is provided by the Venturers, and all payments for work performed
are made to the Venturers. Genzyme provided the initial $10.0 million of
the funding requirements, and the next $40.0 million of the funding
requirements are to be provided 75% by Genzyme and 25% by Diacrin.
After $50.0 million has been funded, any additional funding will be
provided equally by the Venturers. Profits and losses from the Joint
Venture will be shared in proportion to the then current capital contribution
ratio of each Venturer. The Joint Venture reimburses the Venturers for
costs incurred based upon the dollar amount of work, at a defined cost, that
each Venturer performs an behalf of the Joint Venture. All general and
administrative expenses recorded on the statements of operations are for
costs incurred by and reimbursed to the Venturers. See also Note C.
The Steering Committee of the Joint Venture is comprised of
representatives of each Venturer. The Steering Committee is responsible
for approving the budget of the Joint Venture, reviewing costs incurred by
the Venturers and monitoring the scientific progress of the Joint Venture.
The Joint Venture is subject to risks common to companies in the
biotechnology industry, including but not limited to, the results of clinical
trials, development by its competitors of new technological innovations,
protection of proprietary technology, health care cost containment
initiatives, product liability and compliance with government regulations,
including those of the United States Department of Health and Human
Services and the United States Food and Drug Administration.
In addition, either Venturer may terminate the Collaboration Agreement
for any reason upon 180 days notice to the other Venturer. During the 180-
day period, the obligations of the Venturers, including without limitation
obligations with respect to capital contributions, will continue in full force
and effect. A decision by one or both of the Venturers to discontinue the
Collaboration Agreement for any reason could lead to the discontinuation of
the Joint Venture.
The intangible assets and technological know-how contributed by
Diacrin to the Joint Venture are not included as an asset in these financial
statements, because generally accepted accounting principles require that
the Joint Venture record contributed assets at the book value of the
Venturer, at the time of the asset transfer the book value was $0.
B. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
F-22
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to December 31, 2002 Financial Statements (Continued)
(Unaudited)
Cash and Cash Equivalents
Cash and cash equivalents, consisting principally of money market funds
and municipal notes purchased with initial maturities of three months or
less, are valued at cost plus accrued interest, which approximates market.
Property and Equipment
Depreciation expense is computed on a straight-line basis over the useful
life of the property and equipment (3 to 10 years), and over the lesser of the
life of the lease or the life of the leasehold improvement. When assets are
retired or otherwise disposed of, the assets and the related accumulated
depreciation are removed from the accounts and any resulting gains or
losses are included in the results of operations.
Research and Development Expenses
Research and development costs are expensed as incurred. The research
and development efforts are being conducted by the Venturers. The costs
incurred by these related parties, which are subject to an annual budget
approved by the Joint Venture's Steering Committee, are then charged to the
Joint Venture, at a defined cost, or at amounts agreed to by the Venturers.
Income Taxes
The Joint Venture is organized as a pass-through entity; accordingly, the
financial statements do not include a provision for income taxes. Taxes, if
any, are the liability of Genzyme and Diacrin, as Venturers.
C. Agreements with Venturers
Funding
Genzyme agreed to make available to Diacrin an unsecured,
subordinated line of credit (the "Line") of up to an aggregate amount of
$10.0 million after the date that Genzyme provided the initial $10.0 million
of funding to the Joint Venture. Diacrin may draw on the Line only in the
event that Diacrin's cash and cash equivalents are insufficient to fund
Diacrin's budgeted operations for a specified period of time, and the funds
may be used by Diacrin only to fund capital contributions to the Joint
Venture. The Line will be available through the date five years after the
date Diacrin first draws on the Line, and all outstanding principal and
interest will be due on that fifth anniversary. Advances will be interest
bearing, evidenced by a promissory note and subject to other
considerations; and the aggregate amount of draws in any calendar year
may not exceed $5.0 million. As of December 31, 2002, Diacrin had not
made any draws on the Line.
During the year ended December 31, 1998, Genzyme provided its initial
$10.0 million of funding to the Joint Venture. After the initial $10.0
million, Genzyme and Diacrin provide 75% and 25%, respectively, of the
next $40.0 million of funding to the Joint Venture. Thereafter, all funding
will be shared equally by the two parties. As of December 31, 2002,
Genzyme and Diacrin have funded $33.0 million and $7.6 million,
respectively.
F-23
Diacrin/Genzyme LLC
(A Development Stage Enterprise)
Notes to December 31, 2002 Financial Statements (Continued)
(Unaudited)
Other Agreements
The payable to Genzyme Corporation will be settled by cash payment
and represents costs incurred by Genzyme that are reimbursable under the
Collaboration Agreement. The prepaid to Diacrin is an estimate of the
reimbursable costs Diacrin expects to incur on behalf of the Joint Venture in
the next calendar quarter.
Genzyme charged the Joint Venture for use of certain research and
development facilities under a three-year agreement which commenced July
1, 1998. The charges were $182,082 and $1,520,820 for the year ended
December 31, 2001 and from inception through December 31, 2001,
respectively. There were no charges for rent during the year ended
December 31, 2002.
D. Property and Equipment
Property and equipment is stated at cost. At December 31, 2001,
property and equipment consisted of the following:
2001
(Unaudited)
Lab equipment $200,199
Computer equipment 71,991
Leasehold improvements 27,608
Furniture and fixtures 12,963
--------
312,761
Less: accumulated depreciation (206,396)
--------
Property and equipment, net $106,365
========
Depreciation expense was $49,811 and $40,066 for the years ended
December 31, 2001 and 2002, respectively, and $246,462 from inception
through December 31, 2002. During the year ended December 31, 2002,
the joint venture disposed of its property and equipment and recorded a loss
of $66,299 related to this disposal.
F-24