AUTOIMMUNE, INC. FORM 10-Q

AUTOIMMUNE INC.

Date: August 13, 2003

/s/ ROBERT C. BISHOP

Robert C. Bishop

Chairman and Chief Executive Officer

10-Q 1 d10q.htm AUTOIMMUNE, INC. FORM 10-Q AUTOIMMUNE, INC. FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15 (d)

of the Securities Exchange Act of 1934

For the Quarter Ended June 30, 2003

Commission File No. 0-20948

AUTOIMMUNE INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		13-348-9062
(State of Incorporation)		(I.R.S. Employer Identification No.)

1199 Madia Street, Pasadena, CA 91103

(Address of Principal Executive Offices)

(626) 792-1235

(Registrant’s Telephone No., including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Number of shares outstanding of the registrant’s Common Stock as of July 31, 2003:

Common Stock, par value $.01 16,919,623 shares outstanding

AUTOIMMUNE INC.

QUARTER ENDED JUNE 30, 2003

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION		Page Number

Item 1—Financial Statements (unaudited)

Balance Sheet December 31, 2002 and June 30, 2003		2

Statement of Operations for the three and six months ended June 30, 2002 and 2003 and for the period from inception (September 9, 1988) through June 30, 2003		3

Statement of Cash Flows for the six months ended June 30, 2002 and 2003 and for the period from inception (September 9, 1988) through June 30, 2003		4

Notes to the Unaudited Financial Statements		5

Item 2— Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
Item 3— Quantitative and Qualitative Disclosures about Market Risk		11
Item 4—Controls and Procedures		11

PART II—OTHER INFORMATION
Item 4—Submission of Matters to a Vote of Security Holders		12
Item 6(a)—Exhibits		12
Item 6(b)—Reports on Form 8-K		12
Signatures		13

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUTOIMMUNE INC.

(A development stage company)

BALANCE SHEET

(Unaudited)

	December 31, 2002			June 30, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	5,033,000		$	8,051,000
Marketable securities		4,985,000			2,994,000
Prepaid expenses and other current assets		81,000			22,000

Total current assets		10,099,000			11,067,000
Other assets		—			—

	$	10,099,000		$	11,067,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	42,000		$	48,000
Accrued professional fees		145,000			61,000
Deferred revenue		—			3,000

Total current liabilities		187,000			112,000

Stockholders’ equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 16,919,623 shares issued and outstanding at December 31, 2002 and March 31, 2003		169,000			169,000
Additional paid-in capital		118,102,000			118,257,000
Deficit accumulated during the development stage		(108,363,000	)		(107,472,000	)
Accumulated other comprehensive income		4,000			1,000

Total stockholders’ equity		9,912,000			10,955,000

	$	10,099,000		$	11,067,000

The accompanying notes are an integral part of these financial statements.

AUTOIMMUNE INC.

(A development stage company)

STATEMENT OF OPERATIONS

(Unaudited)

	Three months ended						Six months ended					Period from inception (September 9, 1988) through June 30, 2003
	June 30, 2002			June 30, 2003			June 30, 2002			June 30, 2003
Revenue:
License rights	$	15,000		$	23,000		$	30,000		$	1,390,000	$	6,818,000
Option fees		—			—			—			—		2,200,000
Research and development revenue under collaborative agreements		—			—			—			—		955,000

Total revenues		15,000			23,000			30,000			1,390,000		9,973,000

Costs and expenses:
Research and development:
Related party		15,000			15,000			30,000			105,000		19,893,000
All other		40,000			18,000			88,000			66,000		91,907,000
General and administrative		187,000			164,000			405,000			394,000		17,978,000

Total costs and expenses		242,000			197,000			523,000			565,000		129,778,000

Total operating income (loss)		(227,000	)		(174,000	)		(493,000	)		825,000		(119,805,000	)

Interest income		50,000			32,000			101,000			66,000		12,740,000
Interest expense		—			—								(303,000	)
Other expense		—			—			—			—		(100,000	)

Net income (loss)	$	(177,000	)	$	(142,000	)	$	(392,000	)	$	891,000	$	(107,468,000	)

Net income (loss) per share-basic	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	0.05

Net income (loss) per share-diluted	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	0.05

Weighted average common shares outstanding-basic		16,919,623			16,919,623			16,919,623			16,919,623


Weighted average common shares outstanding-diluted		16,919,623			16,919,623			16,919,623			17,183,205

The accompanying notes are an integral part of these financial statements.

AUTOIMMUNE INC.

(A development stage company)

STATEMENT OF CASH FLOWS

Increase (Decrease) in Cash and Cash Equivalents

(Unaudited)

	Six months ended						Period from inception (September 9, 1988) through June 30, 2003
	June 30, 2002			June 30, 2003
Cash flows from operating activities:
Net income (loss)	$	(392,000	)	$	891,000		$	(107,468,000	)
Adjustment to reconcile net loss to net cash used by operating activities:
Interest expense related to demand notes converted into Series A mandatorily redeemable covertible preferred stock		—			—			48,000
Patent costs paid with junior convertible preferred and common stock		—			—			3,000
Valuation of warrants issued in conjunction with license revenue		—			155,000			347,000
Depreciation and amortization		—			—			4,464,000
Loss on sale/disposal of fixed assets		—			—			642,000
Decrease in capitalized patent costs		—			—			563,000
Impairment of investment valuation		—			—			100,000
(Increase) decrease in prepaid expenses and other current assets		(19,000	)		59,000			(23,000	)
Increase (decrease) in accounts payable		61,000			6,000			49,000
Increase (decrease) in accrued expenses		(15,000	)		(84,000	)		61,000
Increase (decrease) in deferred revenue		—			3,000			3,000

Net cash provided (used) by operating activities		(365,000	)		1,030,000			(101,211,000	)

Cash flows from investing activities:
Purchase of available-for-sale marketable securities		(6,923,000	)		(2,976,000	)		(308,224,000	)
Proceeds from sale/maturity of available-for-sale marketable securities		8,814,000			4,964,000			294,220,000
Proceeds from maturity of held-to-maturity marketable securities		—			—			11,011,000
Proceeds from sale of equipment		—			—			306,000
Purchase of fixed assets		—			—			(5,288,000	)
Investment in Oragen		—			—			(100,000	)
Increase in patent costs		—			—			(563,000	)
Increase in other assets		—			—			(125,000	)

Net cash provided (used) by investing activities		1,891,000			1,988,000			(8,763,000	)

Cash flows from financing activities:
Proceeds from sale-leaseback of fixed assets		—			—			2,872,000
Payments on obligations under capital leases		—			—			(2,872,000	)
Net proceeds from issuance of mandatorily redeemable
convertible preferred stock		—			—			10,011,000
Proceeds from bridge notes		—			—			300,000
Proceeds from issuance of common stock		—			—			105,514,000
Proceeds from issuance of convertible notes payable		—			—			2,200,000

Net cash provided by financing activities		—			—			118,025,000

Net increase in cash and cash equivalents		1,526,000			3,018,000			8,051,000
Cash and cash equivalents, beginning of period		3,929,000			5,033,000			—

Cash and cash equivalents, end of period	$	5,455,000		$	8,051,000		$	8,051,000

The accompanying notes are an integral part of these financial statements.

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

1. Interim Financial Data

The interim financial data as of June 30, 2003, for the three and six month periods ended June 30, 2002 and 2003 and for the period from inception (September 9, 1988) through June 30, 2003 are unaudited, however, in the opinion of AutoImmune Inc. (“AutoImmune” or the “Company”), these interim data include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the results for these interim periods. These financial statements should be read in conjunction with the financial statements and the notes thereto for the year ended December 31, 2002 included in the Company’s Form 10-K. Results for interim periods are not necessarily indicative of results for the entire year.

2. Stock Compensation

The Company accounts for stock-based compensation using the intrinsic based method prescribed in Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees. The Company applies the disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for options granted to employees with exercise prices equal to or greater than the fair market value of the common stock at the grant date. Had compensation cost been determined based on the fair value at the time of grant consistent with the provisions of SFAS No. 123, the Company’s net income (loss) and net income (loss) per share would have been changed to the pro forma amounts indicated below:

	Three months ended June 30,						Six months ended June 30,
	2002			2003			2002			2003
Net income (loss):
As reported	$	(177,000	)	$	(142,000	)	$	(393,000	)	$	891,000
Deduct: total stock-based employee compensation expense determined under the fair-value-based method for all awards		(12,000	)		5,000			(26,000	)		(66,000	)

Pro forma	$	(189,000	)	$	(137,000	)	$	(419,000	)	$	825,000

Net income (loss):
As reported per share – basic	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	0.05
Pro forma		(0.01	)		(0.01	)		(0.01	)		0.05
Net income (loss) per share – diluted
As reported	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	0.05
Pro forma		(0.01	)		(0.01	)		(0.01	)		0.05

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2002 and 2003: no dividend yield for all years; expected volatility of 70% for 2002 and 75% for 2003, risk free interest rates ranging from 1.62% to 4.49% and a weighted average expected option term ranging from 2.6 to 6 years. Because additional option grants are expected to be made in the future, the pro forma impact on the three and six month periods ended June 30, 2003 is not representative of the pro forma effects which may be expected in future periods.

3. Net Loss Per Share – Basic and Diluted

Basic earnings (loss) per share is calculated based on the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of common shares and dilutive common equivalent shares assumed outstanding during the period. Shares used to compute diluted earnings per share for the three month periods ended June 30, 2002 and 2003 excluded 30,977 and 339,676 common share equivalents, respectively, as their inclusion would have been anti-dilutive. Shares used to compute diluted earnings per share for the six month period ended June 30, 2002 excluded 38,621 common share equivalents, as their inclusion would have been anti-dilutive. For the six month period ended June 30, 2003, the difference between weighted average shares outstanding basic and diluted is due to the effect of stock options with exercise prices less than the fair value of the common stock. At June 30, 2003, stock options to purchase 632,437 weighted shares of common stock were outstanding with exercise prices greater than the fair value of the common stock.

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

4. Cash Equivalents and Marketable Securities

The following is a summary of cash equivalents held by the Company. Cash equivalents are carried at fair market value, which approximated amortized cost at December 31, 2002 and June 30, 2003:

	December 31, 2002		June 30, 2003
Money market	$	5,024,000	$	8,019,000

	$	5,024,000	$	8,019,000

The following is a summary of available-for-sale marketable securities held by the Company at December 31, 2002 and June 30, 2003:

	Maturity Term	Fair value		Unrealized gains		Unrealized losses		Amortized cost
December 31, 2002
U.S. Government debt securities	within 1 year	$	4,985,000	$	4,000	$	—	$	4,981,000

June 30, 2003
U.S. Government debt securities	within 1 year	$	2,994,000	$	1,000	$	—	$	2,993,000

All of the Company’s marketable securities are classified as current at June 30, 2003 as these funds are highly liquid and are available to meet working capital needs and to fund current operations. Gross realized gains and losses on sales of marketable securities for the three and six month periods ended June 30, 2002 and 2003 were not significant.

Marketable securities which were purchased and sold in periods prior to adoption of Statement of Financial Accounting Standards (SFAS) No. 115 on January 1, 1994, other than held-to-maturity marketable securities, are included in the category available-for-sale marketable securities in the “period from inception” column of the statement of cash flows.

5. Other Assets

Colloral LLC is a joint venture created in August 2002 between AutoImmune and Deseret Laboratories Inc., (a private company headquartered in St. George, Utah) to manufacture, market and sell Colloral^®, a product for nutritional support of patients with rheumatoid arthritis. AutoImmune’s interest in Colloral LLC is greater than 50% but AutoImmune does not have control of Colloral LLC. Therefore, the investment is accounted for using the equity method. AutoImmune contributed the equipment used to manufacture bulk product and a license to certain Colloral-related intellectual property to Colloral LLC. These assets had a net book value of $0. Deseret contributed cash and is committed to providing additional amounts, which additional amounts are refundable if the Board determines that they are no longer needed. AutoImmune is not obligated to make capital commitments, but may do so in the future.

The investment was initially recorded by AutoImmune at the carrying value of the contributed assets which was $0. Profits and losses will be allocated in accordance with the joint venture agreement. Under equity accounting, AutoImmune will not recognize a gain on this investment until AutoImmune’s share of the profits of Colloral LLC exceeds its share of the cumulative losses. As of June 30, 2003, Colloral has not generated any profit; therefore, the investment is carried at $0.

AUTOIMMUNE INC.

(a development stage company)

NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

6. License Revenue and Warrant

In March 2003, the Company received a $1,500,000 payment from a subsidiary of Elan Plc (“Elan”) for the purchase of certain patent rights related to Alzheimer’s disease. The payment from Elan was the third and final payment pursuant to an agreement between Elan and the Company dated effective January 29, 2000. In conjunction with receiving the payment, the Company issued a warrant to Elan to purchase 375,000 shares of the Company’s common stock at $0.73 per share. The warrant expires five years from the date of issuance. Therefore, the valuation of these warrants, as determined by the Black-Scholes method, of $155,000 was recorded as an offset to revenue during the first quarter of 2003. In addition, the Company paid The Brigham and Women’s Hospital (“BWH”) $75,000. This amount represents a portion of the cash payment received from the Elan as required under the current research and development agreement with BWH.

7. Accumulated Other Comprehensive Income

In the first quarter of 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. This statement requires disclosure of comprehensive income and its components in interim and annual reports. Comprehensive income includes all changes in stockholders’ equity during a period except those resulting from investments by stockholders and distributions to stockholders. Accordingly, the components of comprehensive income include net income or loss and unrealized gains and losses on available-for-sale securities.

Net unrealized gains and losses on marketable securities are comprised of the following:

	For the three months ended June 30,					For the six months ended June 30,
	2002		2003			2002		2003
Unrealized holding gain (loss) arising during the period	$	—	$	(1,000	)	$	—	$	(5,000	)
Reclassification adjustment for (gain) loss included in net income		—		—			—		—

Net unrealized gain (loss) on marketable securities	$	—	$	(1,000	)	$	—	$	(5,000	)

8. Indemnification

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally its business partners, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to its products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments that could be required under these indemnification agreements is unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, and Interpretation of Accounting Research Bulletin No. 51.” FIN 46 requires certain variable interest entities (“VIE”), to be consolidated by the primary beneficiary of the entity if the equity 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 its activities without additional subordinated financial support from other parties. FIN 46 is effective for all VIE created or acquired after January 31, 2003. For VIE created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes Colloral LLC might be considered a VIE and has included transitional disclosures required by FIN 46. The Company is currently assessing the impact that the adoption of FIN 46 will have on its financial position and results of operation.

AUTOIMMUNE INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Overview

This section, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which involve risks and uncertainties. The Company’s actual results may differ significantly from results discussed in the forward-looking statements due to a number of important factors, including, but not limited to, the Company’s extremely limited operations, the uncertainties of clinical trial results and product development, the Company’s dependence on third parties for licensing and other revenue and risks of technological change and competition. These factors are more fully discussed in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission in the section “Business—Factors to be Considered.” The discussion in the Annual Report on Form 10-K is hereby incorporated by reference into this Quarterly Report.

Since its inception through June 30, 2003, the Company has incurred ongoing losses from operations and has cumulative losses as of June 30, 2003 totaling $107,468,000. To date, the Company has not recorded any revenue from the sale of products. Revenues recorded through June 30, 2003 were earned in connection with license rights, contract research and the granting of certain short-term rights. As a result, inflation has not materially affected the Company’s revenues and income from continuing operations.

In August 2002, the Company and Deseret Laboratories, Inc. entered into a joint venture by forming an entity called Colloral LLC to manufacture, market and sell Colloral as a nutraceutical. The Company’s interest in Colloral LLC is greater than 50%, but the Company does not have control of Colloral LLC. Therefore, the investment is accounted for using the equity method. To the extent that Colloral LLC generates revenues in excess of cumulative losses, the Company will record income. In February 2003, Colloral LLC began marketing Colloral through direct mail solicitation of individuals who had previously expressed interest in obtaining the product. It is anticipated that sales channels and promotional support will be expanded in the future, but there can be no assurance that the Company will derive revenues from this arrangement. Accordingly, the Company might remain in the development stage in the future and may continue to incur substantial losses.

Results from the oral insulin arm of the NIH sponsored diabetes prevention trial (DPT-1) were presented at the ADA meeting in New Orleans. Although there was a trend in favor of the treated group versus the placebo group, the data did not reach statistical significance. It is expected the results will be submitted for publication and there remains the possibility that sub-group analysis will suggest additional trials worth considering.

Three and Six Month Periods Ended June 30, 2002 and 2003

Revenue was $15,000 and $23,000 for the three month periods ended June 30, 2002 and 2003, respectively. Revenue was $30,000 and $1,390,000 for the six month periods ended June 30, 2002 and 2003, respectively. In the first quarter of 2003, revenue was comprised of a $1,500,000 payment by a subsidiary of Elan Plc (“Elan”) for the purchase of certain patent rights related to Alzheimer’s disease net of warrants valued at $155,000 granted to Elan and monthly license payments from BioMS Medical Corporation (“BioMS”). The revenue in 2002 and the remainder of 2003 was comprised of monthly license payments from BioMS. The payment from Elan was the third and final payment pursuant to the agreement entered into between Elan and the Company dated effective January 29, 2000. Under the terms of this agreement, AutoImmune and BWH have indemnified Elan against any claim, demand or action arising from any misrepresentation made to Elan about patent rights and warranties.

AUTOIMMUNE INC.

Research and development expenses were $55,000 and $33,000 for the three month periods ended June 30, 2002 and 2003, respectively. The decrease is due to the timing of patent related legal costs. Research and development expenses were 118,000 and $171,000 for the six month periods ended June 30, 2002 and 2003, respectively. The increase is due to the amount of contractual payments to The Brigham and Women’s Hospital under a research and development agreement, including $75,000 of the payment received from Elan in the first quarter of 2003. General and administrative expenses were $187,000 and $164,000 for the three month periods ended June 30, 2002 and 2003, respectively. General and administrative expenses were $405,000 and $394,000 for the six month periods ended June 30, 2002 and 2003, respectively. The decrease is due to higher insurance costs offset by a decrease in professional service expenses.

Interest income was $50,000 and $32,000 for the three month periods ended June 30, 2002 and 2003, respectively. Interest income was $101,000 and $66,000 for the six month periods ended June 30, 2002 and 2003, respectively. The decrease is due to a lower average return on investment.

Liquidity and Capital Resources

The Company’s needs for funds have historically fluctuated from period to period as it has increased or decreased the scope of its research and development activities. Since inception, the Company has funded these needs almost entirely through sales of its equity securities. Its current needs have been significantly reduced as a result of the termination of research, development and full-time employees and other operating expenses in 1999.

As of June, 2003, the Company had not yet renewed its contractual obligation to The Brigham and Women’s Hospital to sponsor research. In addition, the Company holds an interest in an entity called Colloral LLC, which is manufacturing, marketing and selling Colloral as a nutraceutical. The Company has no obligation to make capital contributions to Colloral LLC, but may do so in the future. To the extent that Colloral LLC generates revenues in excess of cumulative losses and makes distributions, the Company will obtain income.

The Company’s working capital and capital requirements will depend on numerous factors, including the strategic direction that the Company and its shareholders choose, the level of resources that the Company devotes to the development of its patented products, the extent to which it proceeds by means of collaborative relationships with pharmaceutical or nutraceutical companies and its competitive environment. Based upon its budget for the calendar year 2003 and current expectations for future years, the Company believes that current cash and marketable securities, and the interest earned from the investment thereof, will be sufficient to meet the Company’s operating expenses and capital requirements for at least five years. At the appropriate time, the Company may seek additional funding through public or private equity or debt financing, collaborative arrangements with pharmaceutical companies or from other sources. If additional funds are necessary but not available, the Company will have to reduce or not pursue certain activities, which could include areas of research, product development, marketing activity, or otherwise modify its business strategy. Such a reduction would have a material adverse effect on the Company.

In order to preserve principal and maintain liquidity, the Company’s funds are currently invested in U.S. Treasury obligations and money market instruments. As of June 30, 2003, the Company’s cash and cash equivalents and marketable securities totaled $11,045,000. Current liabilities at June 30, 2003 were $112,000. In the future, the Company plans to invest a portion of its funds in high-grade corporate bonds to increase the yield it receives on its investments

Off-Balance Sheet Arrangements

AutoImmune has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of its business that are not consolidated into its financial statements other than Colloral LLC.

AUTOIMMUNE INC.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its financial statements:

Revenue is recognized in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements. Revenue is recognized when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured.

Contract and license fee revenue is primarily generated through collaborative license and development agreements with strategic partners for the development and commercialization of the Company’s product candidates. The terms of the agreements typically include non-refundable license fees, funding of research and development, payments based upon achievement of certain milestones, or royalties on net product sales. Revenue arrangements where multiple products or services are sold together under one contract are evaluated to determine if each element represents a separate earnings process. In the event that an element of such multiple element arrangement does not represent a separate earnings process, revenue from this element is recognized over the term of the related contract.

Where the Company has continuing performance obligations under the terms of a collaborative arrangement or associated with non-refundable license fees, revenue is recognized over the period the Company completes its performance obligations. Under the terms of one agreement, the Company and The Brigham and Women’s Hospital have indemnified a subsidiary of Elan against any claim, demand or action arising from any misrepresentation made to the subsidiary of Elan about patent rights and warranties, up to the amounts previously received by the Company under the agreement. The Company does not consider this a performance obligation that would preclude or defer revenue recognition. Option fees representing payments to be made to the Company for a right to evaluate and negotiate the terms of a potential licensing arrangement are recognized when the options are granted because such fees are non-refundable and the Company has no further obligations.

Revenues from milestone payments related to arrangements under which the Company has no continuing performance obligations are recognized upon achievement of the related milestone. Revenues from milestone payments related to arrangements under which the Company has continuing performance obligations are recognized as revenue upon achievement of the milestone only if all of the following conditions are met: the milestone payments are non-refundable; 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 the Company completes its performance obligations.

Revenue from service contracts is earned as the related services are performed.

Marketable securities are considered to be impaired when a decline in fair value below cost basis is determined to be other than temporary. The company employs a methodology in evaluating whether a decline in fair value below costs basis is other than temporary that considers available evidence regarding its marketable securities. In the event that the cost basis of a security exceeds its fair value, the Company

AUTOIMMUNE INC.

evaluates, among other factors: the duration of the period that, and extent to which, the fair value is less than the cost basis; the financial health of and business outlook for the issuer of the securities, including industry and sector performance, changes in technology and operational and financing cash flow factors; overall market conditions and trends; and the Company’s intent and ability to hold the investment. Once a decline in fair value is determined to be other than temporary, a write-down is recorded and a new cost basis in the security is established. Assessing the above factors involves inherent uncertainty. Accordingly, write-downs, if recorded, could be materially different from the actual market performance of marketable securities in the Company’s portfolio, if, among other things, relevant information related to its marketable securities was not publicly available or other factors not considered would have been relevant to the determination of impairment.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, and Interpretation of Accounting Research Bulletin No. 51.” FIN 46 requires certain variable interest entities (“VIE”), to be consolidated by the primary beneficiary of the entity if the equity 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 its activities without additional subordinated financial support from other parties. FIN 46 is effective for all VIE created or acquired after January 31, 2003. For VIE created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes Colloral LLC would be considered a VIE and has included transitional disclosures required by FIN 46. The Company is currently assessing the impact that the adoption of FIN 46 will have on its financial position and results of operation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has historically invested all of its cash in U.S. Treasury obligations and money market instruments. In the future, the Company plans to invest a portion of its funds in high-grade corporate bonds to increase the yield it receives on its investments. These investments are denominated in U.S. dollars. Due to the conservative nature of these instruments, the Company does not believe that it has material exposure to interest rate or market risk.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Within the 90-day period prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as such term is defined in Rule 13a-14(c) under the Securities Exchange Act of 1934. The evaluation of the Company’s disclosure controls and procedures was made by the Company’s Chief Executive Officer and Director of Finance and Treasurer. Based upon that review, the Company’s Chief Executive Officer and Director of Finance and Treasurer believe that the Company’s disclosure controls and procedures are effective and are adequately designed to ensure that the information that the Company is required to disclose in this report has been recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Controls

The Company’s Chief Executive Officer and Director of Finance and Treasurer have concluded that there were no significant changes in the Company’s internal controls and procedures or in other factors that could significantly affect those controls and procedures subsequent to the date of their evaluation and no corrective actions with regard to any significant deficiencies or material weaknesses have been taken or were required.

AUTOIMMUNE INC.

PART II—OTHER INFORMATION

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)

The Annual Meeting of Stockholders was held on May 22, 2003.

(b)

The following directors were elected to serve until the next Annual Meeting or until their successors are elected and qualified, by the following votes:

Name	Number of Votes For	Number of Votes Withheld
Robert C. Bishop	14,984,576	69,331
Hugh A. D’Andrade	14,984,776	69,131
Allan R. Ferguson	14,984,776	69,131
R. John Fletcher	14,984,776	69,131

ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K

Item 6(a)—Exhibits (numbered in accordance with Item 601 of Regulation S-K)

Exhibit No.		Exhibit

31.1		Certification of Chief Executive Officer required by Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Director of Finance and Treasurer required by Rule 13a-15(e) or Rule 15d-15(e) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Director of Finance and Treasurer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002

Item 6(b)—Reports on Form 8-K

A Form 8-K was filed on May 16, 2003 to report the Company’s issuance of a press release on May 14, 2003 announcing its financial results for the quarter ended March 31, 2003. No other Form 8-K has been filed during the quarter for which this report is filed.

AUTOIMMUNE INC.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

By:

/s/ HEATHER A. ELLERKAMP

Heather A. Ellerkamp

Director of Finance and Treasurer