ITEM 1. BUSINESS
GENERAL
Therapeutic Antibodies Inc. ("TAb" or the "Company"), is a development stage biopharmaceutical company specializing in the preparation of polyclonal antibodies for the treatment of disease. Headquartered in Nashville, Tennessee, with operations in the United States, the United Kingdom, Australia and New Zealand, TAb is developing and producing a line of antibody products designed primarily to treat life-threatening medical conditions for which there currently are no satisfactory therapies.
The Company was incorporated in Delaware in 1984. The Company was co-founded in 1984 by Professors John Landon and Tim Chard and Dr. Harry Browne. Both Professors Landon and Chard have been active in the development of antibodies for diagnostic purposes and the development of immunoassays. Each formerly chaired a department at St. Bartholomew's and the Royal London School of Medicine and Dentistry in London, and both have published numerous articles relating to antibody/antigen interaction and detection. Since 1984, the Company has affiliated itself with scientists at academic institutions in the United States, Europe, Australia, New Zealand and Africa, to assist in the research, testing and development of new antibody products. See "Item 1 - Principal Licensing and Other Collaborative Arrangements."
TAb has developed systems for the production and purification of a new generation of polyclonal antibodies that management believes can produce suitable therapies for neutralizing a variety of toxins, including certain venoms, cytokines and drugs. Some of TAb's innovations include the preparation of unique immunogens, the purification of specific antibodies and the digestion of antibodies into fragments. Management believes that these capabilities enable TAb to produce a broad range of specific antibodies that are safer and more effective than the antibody products currently available. The Company's antibody products are in various stages of development, ranging from preclinical testing to manufacturing and distribution.
TAb's executive offices are located in Nashville, Tennessee, in the vicinity of the Vanderbilt University Medical Center. Research, production and testing operations are conducted through the Company's subsidiaries. The Company operates its research and development laboratories through TAb London Ltd. ("TAb London"), one of its United Kingdom subsidiaries, including pilot production facilities at St. Bartholomew's and the Royal London School of Medicine and Dentistry in London, England. The Company's antibody production operations are situated in both Dyfed, Wales and Adelaide, Australia. These operations are conducted through TAb Wales Ltd.("TAb Wales"), Polyclonal Antibodies Ltd. ("PAL"), which the Company acquired in 1992, and TAb Australia Pty. Ltd. See "Item 2

ITEM 2. PROPERTIES
The Company's physical properties are primarily owned or leased through its subsidiaries. TAb London Ltd. operates the Company's research and development laboratories and its pilot manufacturing facility at St. Bartholomew's and the Royal London School of Medicine and Dentistry in London. TAb London leases 3,400 square feet of laboratory space from St. Bartholomew's. The lease has an expiration date of September 30, 1997, but permits TAb to renew the lease for an additional six year term. This option has been exercised and the landlord's response is awaited. TAb London also leases 4,000 square feet of office space at 14-15 Newbury Street in Central London, which lease expires in 1999.
TAb Wales Ltd. owns and operates production offices, quality control laboratories and a new manufacturing facility in Dyfed, Wales. In 1992, TAb acquired Polyclonal Antibodies Ltd. ("PAL"), which owned the initial Welsh facilities, including approximately 250 acres of pasture land, animal stock, and production and ancillary facilities. The Welsh facilities were established with financial support of the Welsh government in the form of grants and investments. In 1995, TAb Wales completed construction of a new 20,000 square foot manufacturing plant within its existing Welsh facilities.
In 1994, TAb organized a production subsidiary, TAb Australia Pty. Ltd., in Adelaide, Australia, which produces additional antisera. In 1995, TAb Australia leased offices and laboratories and acquired grazing rights over 250 hectares of land at the Turretfield Research Center. The flocks of sheep were moved to this location and a bleeding shed constructed. In the fourth quarter of 1996, TAb Australia Pty. Ltd. completed construction of new facilities on the property. The new facilities include offices, a cleanroom and a manufacturing plant, located adjacent to the Company's existing facilities. The lease of the Turretfield Research Center property will expire in 2015.
The Company's corporate headquarters is located in 7,941 square feet of leased office space in the vicinity of Vanderbilt University Medical Center in Nashville, Tennessee. The lease expires on January 31, 2001.
All of the Company's laboratories, production facilities and farms are suitably equipped for their intended purposes.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings involving the Company or any of its subsidiaries.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading publicly on the London Stock Exchange (under the symbol TAb) effective July 23, 1996. Prior to that date there was no public market for the Company's Common Stock. There is no public trading market for the Company's Common Stock within the United States.
The following table presents quarterly information on the price range of the Company's Common Stock. This information indicates the high and low sale prices reported by the London Stock Exchange.
As of March 14, 1997, there were approximately 900 holders of record of the Company's Common Stock. On March 14, 1997, the last sale prices reported on the London Stock Exchange for the Company's Common Stock was L.3.85 ($6.17).
The Company to date has paid no dividends on its Common Stock. The declaration and payment of future dividends will be determined by the Board of Directors in light of conditions existing in the future and are expected to depend upon earnings, financial condition, capital requirements, and other relevant factors not presently determinable. The Company does not expect to pay dividends in the foreseeable future.
- -------------------- (1) Currency translations were calculated based upon the currency exchange rates in effect on the date the price disclosed was reported on the London Stock Exchange.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data at and for each of the five years in the period ended December 31, 1996 have been derived from the Company's consolidated financial statements. The data set forth below should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein and also with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Notes:
(1) At December 31, 1996, the Company had cash and cash equivalents totaling $20,503,000 of which approximately $17,300,000 was denominated in British pounds. As a result of improvement in the exchange rate between the British pound and the U.S. dollar, the Company experienced a foreign currency transaction gain of $1,730,000 for the year ended December 31, 1996.
(2) In 1994 and 1995, the Company constructed a pilot production facility in London and a manufacturing facility in Wales. These facilities were funded through financing arrangements provided by Aberlyn Capital Management Company, Inc. and the Welsh Development Agency. See Note 4 to the consolidated financial statements for further information.
(3) On July 23, 1996, the Company completed an initial public offering of 4,190,477 shares of its common stock on the London Stock Exchange at L.5.25 ($8.14) per share. See Note 1 to the consolidated financial statements for further information.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and notes thereto. Statements made in this Annual Report on Form 10-K which are not historical fact are forward-looking statements. In addition, the Company, through its senior management, from time to time makes forward looking public statements concerning its expected future operations and performance and other developments. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are necessarily estimates reflecting the Company's best judgment based on current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. While it is impossible to identify all such factors, factors which could cause actual results to differ materially from those estimated by the Company include but are not limited to, changes on the regulation of the pharmaceutical industry, both in the United States and internationally, changes in pharmaceutical product testing or approval standards, both in the United States and internationally, competitive pressures on the pharmaceutical industry and the Company's response thereto, general conditions in the economy and capital markets, and other factors which may be identified from time to time in the Company's Securities and Exchange Commission filings and other public announcements.
GENERAL
Since its inception, Therapeutic Antibodies Inc. ("TAb" or the "Company") has been in the development stage, devoting its efforts and resources to drug discovery and development programs relating to the development of highly purified, polyclonal antibodies for the treatment of disease. Since inception the Company's revenues have been from contract agreements with corporate partners, product sales, grant income, interest income, and insurance and value added tax recoveries. Net losses have been incurred each year since its inception and the Company expects to continue to incur operating losses during at least the next year due to continued spending on research, product development and increasing requirements for process development, preclinical and clinical testing, regulatory affairs, initial manufacturing activities and administration. To fund these activities, the Company conducted additional financings in the first nine months of 1996. See "Liquidity and Capital Resources".
The Company conducts its operations from its headquarters in the United States and through subsidiaries located in the United Kingdom, Australia and New Zealand. For a discussion of the Company's international operations for the past three fiscal years, see Note 9 to the Company's financial statements.
RESULTS OF OPERATIONS
Year ended December 31, 1996 Compared to Year ended December 31, 1995
TAb's revenues for 1996 increased by 335% to $3,268,000 from $750,000 for 1995. During the year ended December 31, 1996, the Company received approximately $97,000 more in contract revenue over the amount received in the year ended December 31, 1995, which was attributable primarily to the Company's Nigerian EchiTAb(TM) contract. Grant revenue increased $79,000 due to a grant received from the Economic Development Authority of the Government of South Australia for expansion of the Company's Australian operations. Interest income in the year ended December 31, 1996, increased 527% to $607,000 from $97,000 due to additional cash and short term investment holdings from the proceeds of the UK Placement (defined below). See "Liquidity and Capital Resources". As a result of improvement in the
exchange rate between the British pound and the U.S. dollar, the Company experienced a foreign currency transaction gain of $1,730,000 for the year ended December 31, 1996. See Note 2b to the Company's financial statements included as Item 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS the years ended December 31, 1996, 1995 and 1994 and the cumulative development stage from August 10, 1984 (inception) through December 31, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors Therapeutic Antibodies Inc.
We have audited the accompanying consolidated balance sheets of Therapeutic Antibodies Inc. and Subsidiaries (A Development Stage Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996 and for the period from August 10, 1984 (inception) through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1, the Company has been in the development stage with its primary activities being research and development and has not yet commenced planned principal operations.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Therapeutic Antibodies Inc. and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 and for the period from August 10, 1984 (inception) through December 31, 1996 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Louisville, Kentucky March 7, 1997
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
The accompanying notes are an integral part of the financial statements.
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the financial statements.
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1996, 1995 and 1994 and for the Cumulative Development Stage from August 10, 1984 (inception) through December 31, 1996
The accompanying notes are an integral part of the financial statements.
THERAPEUTIC ANTIBODIES INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF THE COMPANY:
Therapeutic Antibodies Inc. (the Company) was incorporated on August 10, 1984 for the purpose of engaging in the research, development, production and marketing of therapeutic antibodies that provide protection against venoms, drugs, toxins and infectious diseases. The Company is a development stage company as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises, and is devoting substantially all of its present efforts to research and development, including pre-production activities. Certain of the Company's research and development and product testing activities are carried out through affiliations with scientists at academic institutions around the world. These affiliations include preclinical and clinical research agreements, consulting agreements, patent and royalty agreements and facility leases. Inherent in the development stage is a range of risks including the need for, and uncertainty of, future financing. The Company also faces risks stemming from the nature of the biopharmaceutical industry, such as the risk of competition, the risk of regulatory change, including potential changes in health care coverage, uncertainties associated with obtaining and enforcing patents and proprietary technology, uncertainty of the approval of products by governmental agencies and risks related to fluctuations in interest rates and foreign currencies.
Net losses have been incurred each year since its inception and the Company expects to incur operating losses during at least the next year due to continued spending on research, product development and increasing requirements for process development, preclinical and clinical testing, regulatory affairs, initial manufacturing activities, and administration. The Company will require additional financing until product sales or licensing fees are sufficient to generate positive cash flows from operations.
On July 23, 1996, the Company completed an initial public offering of 4,190,477 shares of its Common Stock on the London Stock Exchange at L.5.25 ($8.14) per share raising total gross and net proceeds of approximately $34,100,000 and $30,400,000, respectively. Approximately $4,750,000 was used to repay the Company's 15% Notes and certain other indebtedness. The remainder of the net proceeds is being utilized to fund working capital, operations and capital expenditures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
b. FOREIGN CURRENCY TRANSLATION: Assets and liabilities of foreign subsidiaries denominated in foreign currencies are translated to U.S. dollars at period-end exchange rates. Revenues and expenses denominated in foreign currencies are translated at average exchange rates for the period. Translation adjustments are reported as a separate component of stockholders' equity. The effects of translation of intercompany loans to international subsidiaries which have been designated as long-term investments are also included in the separate component of stockholders' equity. The Company's initial public offering on the London Stock Exchange raised total proceeds of L.22,000,000 of which L.8,000,000 was converted to U.S. dollars and the balance was left in sterling. At December 31, 1996, the Company had approximately L.10,000,000 which were translated to U.S. dollars at the year end currency rate of 1.71, therefore, significantly increasing foreign currency gains for 1996. At March 7, 1997, the exchange rate had fallen to 1.60. Foreign currency transaction gains for the years ended December 31, 1996, 1995 and 1994 were $1,733,357, $3,054, and $509, respectively.
c. CASH EQUIVALENTS AND SHORT TERM INVESTMENTS: All highly-liquid investments with an original maturity of three months or less when purchased are classified as cash equivalents.
Financial instruments which potentially subject the Company to concentrations of credit risk consists principally of cash and temporary cash investments. The Company places substantially all of its cash and temporary cash investments with one major financial institution. As of December 31, 1996, and at times throughout the period, cash balances were in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. The Company has not experienced any losses in such accounts and believes no significant exposure from this concentration exists with respect to cash and temporary cash investments. The Company also maintains balances at a U.S. institution denominated in British sterling pounds.
Short term investments consists of debt instruments. The carrying values of these short term investments approximates fair value at December 31, 1996.
d. INVENTORIES: Inventories are stated at the lower of cost (first-in, first-out) or market.
e. PROPERTY AND EQUIPMENT: Property and equipment is stated at cost and is depreciated using the straight-line method over the estimated useful life of the asset ranging from 5 to 20 years. Leasehold improvements are amortized over the shorter of their estimated life or the period of the related leases, including anticipated renewals for which the Company has an option.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
f. CARRYING VALUE OF LONG LIVED ASSETS: The carrying value of long lived assets is reviewed if the facts and circumstances suggest that they may be impaired. If this review indicates that the carrying value will not be recoverable, the carrying value is reduced to fair value.
g. PATENT COSTS: Patent costs consist of legal fees associated with patent applications and filings. Once a patent is granted, costs are amortized using the straight-line method over 17 years from the patent grant date. Accumulated amortization was $22,059, $10,539 and $1,987 as of December 31, 1996, 1995 and 1994, respectively.
h. REVENUE RECOGNITION: Revenues from sales of products are recognized at the time of shipment.
The Company has received grants from the United Kingdom and Australia as a result of reaching certain employment levels and constructing production facilities. Grants related to employment levels and conducting clinical trials are recognized as income at the point in time that the conditions of the grant are satisfied. Grants related to construction of production facilities are recognized over the life of the facility.
i. RESEARCH AND DEVELOPMENT COSTS: Research and development costs, costs for developing and improving manufacturing processes, pilot plant operations and inventories of products not yet approved for sale by governmental regulatory authorities are expensed when incurred.
j. NET LOSS PER SHARE: The Company's net loss per share calculations for the years ended December 31, 1996, 1995 and 1994, and from inception through December 31, 1996, are based upon the weighted average number of shares of common stock outstanding during each period. Common equivalent shares from stock options, warrants and other dilutive securities are excluded from the computations as their effect is antidilutive.
k. VALUE-ADDED TAX RECEIVABLE: The Company's operations in the United Kingdom (U.K.) are subject to value-added tax (VAT) whereby the Company pays tax at a rate of 17.5% on most goods and services purchased. These VAT taxes are subject to refund based on returns which are filed quarterly with U.K. taxing authorities. In 1994, the Company determined it could file refunds for VAT paid in prior years in the amount of $475,760 which was recorded as revenue in 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
l. FINANCIAL STATEMENTS ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 consists of the following:
Buildings and improvements includes $38,288 of capitalized interest associated with the construction of a building in Australia in 1996 and $491,408 with the construction of buildings in the United Kingdom in 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE: Notes payable at December 31 consist of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE, CONTINUED:
In August 1995, the Company initiated a private placement of its 6% Convertible Notes due October 1, 2000 (the "6% Notes"). Interest on the 6% Notes is payable semi-annually and the notes are convertible into shares of the Company's common stock at $8.00 per share at any time prior to maturity upon the election of the holder. The 6% Notes are not collateralized. In January 1996, the Company offered each holder of the 6% Notes the opportunity to exchange all or a portion of their 6% Notes for shares of the Company's common stock at the rate of $5.50 per share until February 9, 1996. Pursuant to this offer, the holders of $2,565,105 aggregate amount of principal and accrued interest on the 6% Notes elected to tender their 6% Notes to the Company in exchange for 466,383 shares of common stock. This exchange conversion resulted in a non-cash debt conversion expense of $801,597.
The Company has entered into capital lease agreements with Aberlyn Capital Management Limited Partnership under which it has financed $1,000,000 at 18% and $3,203,573 at 14.5%. Principal amounts mature from October 1998 through January 2000. Payments of $113,000 are due monthly. In connection with the agreement, the Company issued warrants in 1995 and 1994 to purchase a total of 102,514 shares of the Company's common stock at $5.00 per share. In addition, if the Company chooses to retire early any of the $1,000,000 financed under the agreements, the Company is required to issue warrants to Aberlyn to purchase up to 12,500 shares at $8.00 per share.
In 1995, the Company obtained the proceeds of an $800,000 loan from Equitas LP. The loan agreement provides for interest at an annual rate of 11.5% to be paid quarterly. Principal is due in full at maturity on July 24, 2000. The lender received warrants to purchase 22,198 shares of the Company's common stock at $8.00 per share. The loan is collateralized by accounts receivable, antisera inventory, and livestock from certain of the Company's subsidiaries as well as limited guarantees from those subsidiaries. This loan is additionally collateralized by the common shares of the Company's subsidiary, Polyclonal Antibodies, Limited (PAL).
In 1995 the Company executed a $500,000 promissory note with Lakewood Partners, a Tennessee general partnership. In connection with the financing, the Company issued warrants to purchase a total of 25,000 shares of the Company's common stock at $8.00 per share. On September 3, 1996, the Company repaid the $500,000 principal amount along with accrued interest to date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE, CONTINUED:
The Company had a 150,000 British pounds sterling note payable to Welsh Development Agency. The Welsh Development Agency had the right to convert 90,000 warrants into the Company's common stock at 1.11 British pounds sterling per share in lieu of repayment of L.100,000 of the outstanding balance. In October 1996, the Company repaid L.50,000 and accrued interest thereon and issued 90,000 shares of the Company's common stock as payment in full for the outstanding loan.
During 1995, TAb Wales, Ltd. obtained additional funds of 150,000 British pounds sterling from the Welsh Development Agency in the form of a note payable which was repayable by conversion of warrants to purchase 60,000 shares of the Company's common stock at 2.50 British pounds sterling per share. In October 1996, the Company issued 60,000 shares of its common stock as repayment in full for the note.
In January 1995, financing of $465,900 was obtained from Bank of Wales PLC collateralized by certain property in the United Kingdom. The note is repayable over 10 years beginning in February 1995. Interest is paid at 2.5% over Bank of Wales base lending rate (effective rate of 8.5% at December 31, 1996).
The Company's subsidiary, TAb Australia Pty. Ltd., has a loan agreement with the South Australian Minister for Primary Industries. The agreement allows TAb Australia Pty. Ltd. to draw up to $2,000,000 Australian dollars ($1,589,400 U.S. dollars) to assist with construction and equipment of buildings at its Turretfield location in South Australia. The loan is to be repaid over ten years in equal annual installments of principal. Interest is due annually at 11% per annum. The loan is collateralized by a mortgage on the building and equipment purchased. As of December 31, 1996, the Company had drawn approximately $1,576,000 U.S. dollars on this loan.
In June 1996, the Company completed a private placement of $5,000,000 principal amount of the Company's 15% Subordinated Promissory Notes due May 1, 1997, of which $4,250,000 were issued for cash and $750,000 were issued upon conversion of existing indebtedness. Each $250,000 unit of the 15% Notes was accompanied by a Stock Purchase Warrant to purchase 18,000 shares of Common Stock at $8.00 per share. Warrants to purchase 360,000 shares of Common Stock were issued in connection with the 15% Notes. On August 24, 1996, the Company redeemed, for cash, $4,250,000 principal amount of the 15% Notes and accrued interest thereon.
In April 1996, an officer of the Company made a short-term unsecured loan to the Company of $1,000,000. Interest was charged at 12%. In May, the officer converted $750,000 principal amount of the 12% Note into an equal amount of the Company's 15% Notes. The $250,000 principal balance on the 12% Note is payable in full together with accrued interest in December 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. NOTES PAYABLE, CONTINUED:
The Company has available lines of credit at December 31, 1996 totaling 100,000 British pounds sterling with the Bank of Scotland and its subsidiary, Bank of Wales PLC, in the United Kingdom. These lines of credit are collateralized by the guarantee of the Company and are due on demand. Interest is paid at 2.5% over the relevant bank's base lending rate (effective rate of 8.5% at December 31, 1996). At December 31, 1996, there were no outstanding borrowings on these lines of credit.
The weighted average interest rate on all short-term borrowings outstanding at December 31, 1996 and 1995 was 11.6% and 9.7%, respectively.
Aggregate maturities of fixed payment on notes payable for the next five years follow:
At December 31, 1996 and 1995, $2,250,896 and $1,345,408, respectively, of the Company's debt obligations were denominated in British pounds sterling or Australian dollars and were translated to U.S. dollars at year-end exchange rates. The Company is subject to foreign currency risk to the extent that exchange rates between the U.S. dollar and the foreign currencies change. For accounting purposes, changes in exchange rates for the debt obligations result in translation adjustments which are reported as part of the separate component of stockholders' equity. At December 31, 1996 and 1995, the amount included in the cumulative translation adjustment related to the Company's debt obligations was $97,019 of loss and $16,547 of gain, respectively. The Company does not hedge its exposure to foreign currency risks. The Company estimates that the fair value of its long-term debt is not substantially different from its book value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INCOME TAXES:
Under SFAS No. 109, Accounting for Income Taxes, deferred income taxes are recognized for future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts based on enacted laws and statutory rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company determined that at December 31, 1996 and 1995 its ability to realize future benefits of deferred tax assets did not meet the "more likely than not" criteria in SFAS No. 109. The components of the net deferred tax liability recognized in the accompanying consolidated balance sheet are as follows:
The deferred tax liability arose due to tax differences in the bases of assets and liabilities relative to the acquisition of Polyclonal Antibodies, Ltd. The deferred tax asset arises primarily from the Company's net operating loss carryforwards of approximately $39,315,000. The Company has approximately $207,000 of research and development tax credits available to offset future federal income tax. United States net operating losses carryforwards (NOLs) and research and development tax credits (R&D credits) expire as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. INCOME TAXES, CONTINUED:
United Kingdom NOLs of $10,467,000, Australian NOLs of $562,000 and New Zealand NOLs of $97,000, which are not included in the table above, may be carried forward indefinitely.
6. STOCK WARRANTS AND STOCK OPTIONS:
At December 31, 1996 there were warrants outstanding to purchase 1,726,738 shares of the Company's common stock at prices ranging from $.60 to $8.00 (average price of $3.59) per share. All outstanding warrants expire from 1997 to 2000.
Activity in stock warrants is as follows:
On April 26, 1996, the Board of Directors of the Company amended the Therapeutic Antibodies Inc. 1990 Stock Incentive Plan (the Plan). Up to 1,650,000 shares of the Company's common stock may be subject to incentives under the Plan. The Plan provides for the grant to key employees, advisors, officers and directors of the Company of stock options complying with Section 422A of the Internal Revenue Code (qualified options) or options not qualifying under such provision (nonqualified options) as well as stock appreciation rights (SARs). The Plan provides for adjustment of the number of shares available
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. STOCK WARRANTS AND STOCK OPTIONS, CONTINUED:
under the Plan in the event of stock splits, stock dividends and certain other events. The Plan also provides that if the Company shall not be the surviving corporation in a business combination, the holder of an outstanding option will be entitled to purchase stock in the surviving corporation on the same terms and conditions as the options. Options are nontransferable, and options and SARs are subject to any restrictions contained in the grant and applicable securities laws. Options to purchase 1,612,376 shares of the Company's common stock were outstanding at December 31, 1996 at prices ranging from $1.25 to $8.18 under the Plan (average price of $4.12). All options granted since 1992 have a five year contractual life. The average contractual life of all the options at December 31, 1996 is approximately 3.9 years. Generally, the Company grants options with a graded vesting requirement which typically vests ratably over one to five years. The options are issued at or above the fair value of the underlying stock at date of grant. At December 31, 1996, 927,426 options were exercisable at a weighted average price of $2.81. All options expire from 1997 to 2002.
Activity in stock options is as follows:
As permitted by SFAS No. 123, Accounting for Stock Based Compensation, the Company follows the provisions of APB Opinion 25 and related interpretations in accounting for its stock option grants. Compensation cost has not been recognized for options issued under the plan. If compensation cost had been determined based on the fair value of the awards at the grant date consistent with the provisions of SFAS No. 123 there would not have been a material impact on the reported amount of the Company's net income and net income per share.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. COMMITMENTS:
ROYALTY COMMITMENT: In 1992, the Company entered into a patent sale and royalty agreement with scientists who at the time worked at the University of Arizona. Under the agreement, the Company purchased the scientists' rights under their U.S. patent and certain U.S. patent applications. The Company agreed to pay royalties to the sellers with respect to products developed and sold under the patents. Currently, no royalty payments have yet been required under this agreement.
LEASES: The Company leases laboratory and office space under operating leases. Aggregate rent expense incurred under these leases was approximately $190,248 in 1996, $126,000 in 1995 and $62,000 in 1994. Future minimum rental commitments under noncancelable operating leases as of December 31, 1996 are as follows:
8. RELATED PARTY TRANSACTIONS:
The Company incurred interest expense and loan guarantee fees of $115,241, $17,380 and $50,695 in the years ended December 31, 1996, 1995 and 1994, respectively, on notes payable to certain directors of the Company and loan guarantees made by certain directors on behalf of the Company in order to obtain short-term loan financing.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INTERNATIONAL OPERATIONS:
The Company conducts its activities in the U.S., the United Kingdom, New Zealand and Australia. International operations are primarily located in the United Kingdom. Intercompany sales between regions are made at cost plus markup. Summarized financial data by region are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. INTERNATIONAL OPERATIONS, CONTINUED:
(a) Intercompany revenues include interest income earned by the U.S. parent company on loans made to international subsidiaries and sales of product to, and the performance of contract research and development for, the U.S. parent company by international subsidiaries on a cost plus markup basis. The intercompany account associated with this activity is eliminated in consolidation.
10. NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1994, the Company issued 95,901 shares of the Company's common stock in settlement of notes payable by the Company in the amounts of $383,604.
On February 9, 1996, the Company issued 466,383 shares of common stock in exchange for $2,500,000 of principal and $65,105 of accrued interest on the 6% Notes.
In May, 1996 an officer of the Company converted $750,000 principal of the 12% Note into an equal principal amount of the Company's 15% Notes.
On October 21, 1996 the Company issued 150,000 shares of common stock in exchange for L.250,000 of principal on the two notes payable to the Welsh Development Agency.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers and directors of the Company is incorporated by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 1997.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information with respect to the compensation of the Company's executive officers is incorporated by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 1997, except that the Comparative Performance Graph and the Compensation Committee Report on Executive Compensation included in the Proxy Statement are expressly not incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain beneficial owners of the Company's common stock and management is incorporated by reference from the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 1997.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on April 28, 1997.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a). The following documents are being filed as part of this Report.
1. Financial Statements.
See Item 8 herein.
2. Financial Statement Schedules
Independent Auditors Report (see Item 8 herein).
All schedules are omitted, because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits.
(1) Incorporated by reference to exhibits filed with the Company's Registration Statement on Form 10, filed on May 1, 1995, File No. 0-25978.
(2) Incorporated by reference to exhibits filed with the Company's Quarterly Report on From 10-Q for the quarterly period ended September 30, 1995, File No. 0-25978.
(3) Incorporated by reference to exhibits filed with the Company's Quarterly Report on From 10-Q for the quarterly period ended March 31, 1996, File No. 0-25978.
(4) Incorporated by reference to exhibits filed with the Company's Quarterly Report on From 10-Q for the quarterly period ended June 30, 1996, File No. 0-25978.
(5) Incorporated by reference to exhibits filed with the Company's Quarterly Report on From 10-Q for the quarterly period ended September 30, 1996, File No. 0-25978.
(6) Incorporated by reference to appendices filed with the Company's Proxy Statement relating to the Special Meeting of Shareholders held on July 5, 1996. File No. 0-25978.
(b). Reports on Form 8-K. None.
(c). Compensatory Plans or Arrangements.
The following is a list of all executive compensation plans and arrangements filed as exhibits to this Annual Report on Form 10-K.
(6) Incorporated by reference to appendices filed with the Company's Proxy Statement relating to the Special Meeting of Shareholders held on July 5, 1996. File No. 0-25978.
(d). Financial Statement Schedules Excluded from Annual Report to Shareholders.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THERAPEUTIC ANTIBODIES INC.
By: /s/ Martin S. Brown ----------------------------------- Martin S. Brown Chairman of the Board and Chief Executive Officer Date: MARCH 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Item 1. Business.
Spectrum Equities, Inc. (the "Company") is currently inactive, having emerged from reorganization under Chapter 11 of the Bankruptcy Code on October 5, 1995. The Company is currently searching for an operating company seeking to establish itself as a publicly reporting company through a reorganization transaction with the Company.
The Company believes that it has the potential for assisting such an operating company in entering the public marketplace on an expeditious and financially beneficial basis. However, there can be no assurance that any such reorganization transaction will take place or if it does take place, that a meaningful market for the Company's common stock will be established or maintained.
The Company was organized as a Delaware corporation in 1987 under the name Vision Capital, Inc. On March 31, 1989, it completed a public offering of 10,000 units at a price of $5.00 each which units were included in a registration statement filed with the Securities and Exchange Commission. On May 31, 1990, Vision entered into an agreement of merger with Wilmoth's Color Lab, Inc., ("Wilmoth"), a Tennessee Corporation, to acquire all of the issued and outstanding shares of common stock of Wilmoth in exchange for a total of 15,340,000 newly issued shares of Vision common stock, which merger resulted in a change in the voting control, principal business, and management of Vision. By September 1, 1990, the merger of Wilmoth into Vision was consummated and Vision changed its name to Diversified Photographic Industries, Inc. and continued the operations of Wilmouth, a photo finishing laboratory in Memphis, Tennessee. Wilmoth conducted operations in that location through the date of the merger. The Company continued its operations as a photo finishing laboratory, processing and printing film for commercial photographers and photographic studios and, including portrait studio operations, up until the time that the Company ceased operations on March 15, 1992. At that time, the secured creditors foreclosed the principal assets of the Company and the remaining unsecured assets were sold to United Color Lab, Inc. on August 21, 1992 for the sum of $85,000.00. From that time the Company has been dormant. The Company filed for reorganization under Chapter 11 of the Bankruptcy Code in U.S. Bankruptcy Court for the Northern District of Texas and its Plan of Reorganization was approved in 1995 and the Company emerged as a corporate shell with no liabilities relating to its prior business ventures. It changed its name to Spectrum Equities Inc. on February 26, 1996.
Its offices are currently located at 9942 N.W. 6th Place, Plantation, Florida 33324 and its telephone number at that address is (954) 967-4916.
Employees
At the date hereof the Company had one employee, its President.
Item 2.

Item 2. Properties
The Company's executive offices are provided as needed by its President.
Item 3.

Item 3. Legal Proceedings.
The Company filed a voluntary petition for reorganization pursuant to Chapter 11 of the Bankruptcy Code on January 5, 1994 with the U.S. Bankruptcy Court for the Northern District of Texas. Its Plan of Reorganization was approved by the Court on October 5, 1995.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
There is no known market for the Company's common stock at the present time. As of November 7, 1996, there were 65 holders of record of the Company's common stock.
The Company has not paid any dividends.
Item 6.

Item 6. Selected Financial Data.
The following data have been derived from financial statements that have been audited by Grant-Schwartz Associates, CPAs, independent accountants, and should be read in conjunction with such statements appearing herein:
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
The Company is still in the developmental stage since emerging from Chapter 11 in October 1995. The Company anticipates that it will require minimal working capital in order to continue the search for an operating company to acquire. Since emerging from bankruptcy all of its minimal working capital needs were met by its shareholders. There can be no assurance that the Company will be able to successfully complete the transition from a development stage company to an operating company.
Item 8.

Item 8. Financial Statements and Supplementary Data.
The information required by this item is listed in Part IV, Item 14(a)1 and Item (a)2 and such information is filed as part of this report.
Item 9.

Item 9. Changes in and Disagreements with Accounting and Financial Disclosures.
In 1996 the Company engaged Grant Schwartz Associates, CPAs as independent auditor to audit the financial reports for the five years ended September 30, 1995. This engagement arose out of the current managements intention to bring the Company into compliance with the current reporting requirements of the Securities Exchange Act of 1934 and not due to any disagreement with the Company's prior auditors.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant.
The directors and executive offices of the Company are as follows:
Robert Harris has been President, Secretary/Treasurer and sole Director of the Company since February 1996. From November 1994 to the present, Mr. Harris has been Director and Secretary of DGL, Inc. in the food/beverage industry. From July 1991 to the present, he has been a marketing representative for Sam's Club, a division of Wal-Mart Stores, Inc., in the retailing industry. Concurrently, for more than the last five years, Mr. Harris has been an independent financial analyst.
Item 11.

Item 11. Executive Compensation.
The Company was inactive during the three years ended September 30, 1996 and accordingly paid no compensation to its executive officers and directors during such period. There is no stock option plans, pension plans, profit sharing plans or other such plans.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of November 7, 1996, the beneficial ownership of the Company's Common Stock by (i) the only persons who own of record or are known to own, beneficially, more than 5% of the Company's Common Stock; (ii) each director of the Company; and (iii) all directors and officers as a group.
Item 13.

Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. The following financial statements are filed as part of this report:
Report of Independent Auditors
Balance Sheets, as of September 30, 1996, 1995
Statements of Income (Loss) for the two years ended September 30, 1996
Statements of Shareholders' Equity for the Period from September 30, 1995 to September 30, 1996
Statements of Cash Flows for the two years ended September 30, 1996.
Notes to the Financial Statements.
2. Financial schedules are omitted.
The following Exhibits are incorporated by reference to the Company's Registration Statement on Form S-18 (File No. 33-24464-NY):
The following Exhibits are filed herewith:
(b) There were no reports on Form 8-K filed during the quarter ended September 30, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, there-unto duly authorized.
SPECTRUM EQUITIES INC.
By: s/Robert Harris ------------------------------------ November 7, 1996 Robert Harris, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
s/Robert Harris November 7, 1996 - ---------------------------------- Robert Harris, Director (Principal Executive Officer and Principal Financial Officer)
Supplementary Information to be furnished with reports filed pursuant to Section 15(d) of the Act by Registrant which have not registered securities pursuant to Section 12 of the Act.
No Annual Report has been sent to security holders for the fiscal year ended September 30, 1996. Such Annual Report will be furnished subsequent to the filing of this Form 10-K.
GRANT-SCHWARTZ ASSOCIATES, INC. 40 Southeast 5th Street, Suite 500 Boca Raton, FL 33432
REPORT OF INDEPENDENT AUDITORS
Board of Directors Spectrum Equities, Inc.
We have audited the accompanying balance sheets of Spectrum Equities, Inc. as of September 30, 1996 and 1995 and the related statements of income, stockholders' equity and cash flows for the years then ended. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and significant estimates by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Spectrum Equities, Inc. as of September 30, 1996 and 1995 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations and currently has a shortage of working capital. These raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Boca Raton, Florida October 15, 1996 SPECTRUM EQUITIES, INC. FORMERLY DIVERSIFIED PHOTOGRAPHIC INDUSTRIES, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
See Notes to Financial Statements SPECTRUM EQUITIES, INC. FORMERLY DIVERSIFIED PHOTOGRAPHIC INDUSTRIES, INC. BALANCE SHEET SEPTEMBER 30,
See Notes to Financial Statements mk SPECTRUM EQUITIES, INC. FORMERLY DIVERSIFIED PHOTOGRAPHIC INDUSTRIES, INC. STATEMENT OF INCOME AND EXPENSE YEARS ENDED SEPTEMBER 30,
See Notes to Financial Statements SPECTRUM EQUITIES, INC. FORMERLY DIVERSIFIED PHOTOGRAPHIC INDUSTRIES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30,
See Notes to Financial Statements SPECTRUM EQUITIES, INC. FORMERLY DIVERSIFIED PHOTOGRAPHIC INDUSTRIES, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996
NOTE A THE COMPANY
Vision Capital, Inc., a Delaware Corporation, was incorporated November 9, 1987. On September 1, 1990, Vision Capital, Inc. completed a merger with Wilmoth Color Lab, Inc. Subsequent to the merger, the Company changed its name to Diversified Photographic Industries, Inc. The Company continued its operations until it ceased doing business on March 15, 1992. On January 5, 1994, the Company filed a voluntary petition for reorganization pursuant to Chapter 11 of the United States Code and emerged from reorganization on October 5, 1995. On February 26, 1996 the name of the Company was changed to Spectrum Equities, Inc. The Company is currently seeking a merger candidate.
NOTE B SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all investment instruments purchased with a maturity of three months or less to be cash equivalents.
Organization Costs
The Company will amortize organization costs over a sixty month period.
Earnings Per Common Share
Earning (Loss) per share computations are based on the average number of shares of common stock outstanding during the year.


ITEM 1. BUSINESS
GENERAL
As of August 1996, TRM Copy Centers Corporation owned and maintained over 32,000 self-service photocopiers in retail establishments such as pharmacies, stationery stores, hardware stores and gift shops in 66 metropolitan areas: 46 in the U.S., five in Canada, 14 in the U.K., and one in France. TRM installs, maintains and supplies its photocopiers and regularly monitors their usage. Each retail business collects payment from its customers, shares in the revenue generated by the Copy Center and benefits from any increase in walk-in traffic. The Company invoices and collects payment from each retailer monthly.
TRM has had in place about 400 full-color copiers since 1992. While the Company does not intend to substantially expand the number of Color Copy Centers during fiscal 1997, it is likely that the color program will be expanded at some point further in the future.
Each Copy Center consists of a photocopier, a machine stand and advertising signs. Copy Centers are identified by the Company's trapezoidal yellow and black "TRM Copies" signs.
TRM became the leading provider in self-service photocopying in many of the metropolitan areas it serves by focusing on service and convenience. The Company strives to conveniently locate high numbers of TRM Centers throughout its service areas. Operations by geographic area are presented in Note 10 to the Consolidated Financial Statements included in the Annual Report to Shareholders.
The Company services its TRM Centers and provides all necessary supplies. The retail business supplies space and electrical power for the TRM Center and supervises its use. Consumers report the number of uses of the TRM Center to the retail business cashier, who collects payment. Each month, the retail business pays TRM a percentage of the TRM Center revenue, which generally is based on a sliding scale related to usage, as recorded by the TRM Center's tamper-proof internal counter.
All training, purchasing, billing and collection functions, as well as coordination of customer service, are centralized in the Company's offices in Portland, Oregon. Generally, the only personnel outside the Portland offices are service and sales personnel. TRM minimizes costs by buying large quantities of new and used photocopiers, by rebuilding used photocopiers and by centrally purchasing large quantities of parts, paper and toner. The Company believes that its centralized operating systems and standardized operating procedures enable it to efficiently open new geographies and to install and service thousands of TRM Centers.
The Company began business in 1981. From the end of fiscal 1991 through June 30, 1996, TRM opened operations in 20 U.S., five Canadian, 14 U.K., and one French metropolitan areas.
As used in this Annual Report, the terms "the Company" and "TRM" refer to TRM Copy Centers Corporation and its subsidiaries, unless the context requires otherwise.
LOCATIONS
TRM has focused its sales efforts on a large number of small retail businesses so that no retail business accounts for a significant portion of revenues or profits. Further, TRM has diversified geographically to avoid dependence on one or more market areas. The Company does not believe that the presence of significant competition in any single geographic market would have a material adverse effect on the Company.
The Company has established a local Service Center in all its 48 major metropolitan areas. Each of these Service Centers consists of leased premises generally staffed by a service manager and one or more service technicians and salespeople. TRM locates its Service Centers in sites convenient to the TRM Centers. Service Centers include a small warehouse for the storage of photocopiers, other components, spare parts, paper and toner. The Company also has four small Service Centers where the service manager is the only technician. These small Service Centers are based in the managers' homes. Further, 13 of the most recently opened metropolitan areas (called "satellites") were opened with resources from existing Service Centers nearby and do not have stand-alone facilities.
EXPANSION
TRM installed 12,127 additional TRM Centers, net of replacements and removals, from July 1, 1993 to June 30, 1996. In addition to installing 2,724 net TRM Centers in fiscal 1996, the Company focused on improving the profit performance of the installed base of machines. During fiscal 1997, the Company plans to add between 3,000 and 4,000 additional TRM Centers in existing market areas and in new areas, and to continue to actively manage its installed base.
The Company's planned expansion will require an increase in the number of installed photocopiers, Service Centers, service technicians, salespeople and customers. TRM uses both new and used photocopiers, and as of July 31, 1996, had over 5,000 uninstalled photocopiers in its system (see "Photocopiers"). The Company will open a new Service Center in each new geographic market as it is justified. The service technicians needed for the planned expansion will be trained at TRM's Technology Center in Portland. TRM sells the TRM Center concept to retail businesses through sales lead generation programs and local door-to-door solicitation using independent and Company sales representatives, and, beginning in 1996, service technicians.
In January 1996, the Company began a program called "service selling" in selected North American cities. The program trains and rewards service technicians to sell the TRM program in their service areas. Coincident with the rollout of service selling, effective July 1, 1996, the Company streamlined field operations. Field sales responsibilities were moved into the field operations group under the Chief Operating Officer. This allows for the sharing of management teams across the expanse of North America and for a coordinated effort to grow our market share in established cities, particularly in North America.
In actively managing the profit performance of the installed base, under-performing machines are removed and put back into stock to be redeployed at better sites. Machines under-priced for the supporting copy volume are repriced to higher levels. During fiscal 1996, machines were relocated and copy prices were raised at thousands of locations.
The Company intends to continue to focus on its core photocopy business with controlled growth from new and existing U.S. market areas, from international expansion and from new products and services which can be delivered to the core customer base and similar customers.
NEW PRODUCTS AND SERVICES UNDER DEVELOPMENT
The Company is positioned to add other products or services to further optimize the use of its in-place network of sales, service, distribution and support as well as its growing installed customer base. Although sales generated from additional products currently represent less than 5% of the total sales, the Company is actively testing multiple new products and services.
During 1996, investments were made in designing an add-on electronic and receipt printing module for the Company's photocopiers, which allows for stepped volume pricing (e.g., the first copy for 10(cent), copies 2-5 for 7(cent), etc.). This will be market tested in fiscal 1997. The Company is also testing retailer-serviced coin-operated convenience copying with large format chain stores, where TRM's service quality and worldwide infrastructure is a key advantage, but where host cashiering is not a desired benefit. Also in 1996, the Company expanded its initial trial for marketing prepaid telephone cards (to our base of retailers). Another example is the design-your-own instant business cards product, which is discussed under the caption "BisCard Corporation." TRM's intent is to invest in developing and market testing these and other new products and services to identify those that clearly deserve to become country or system-wide offerings. TRM has had in place about 400 full-color copiers since 1992. While the Company does not intend to substantially expand the number of Color Copy Centers during fiscal 1997, it is likely that the color program will be expanded at some point further in the future.
COMPETITION
A person seeking photocopy services has a variety of alternatives to a TRM Center. These alternatives include specialty full-service business centers and copy and print shops, coin-operated photocopiers and other photocopiers located within retail shops. Each of these alternatives may to some extent compete with the Company. The Company does not attempt to compete directly with most alternative suppliers of photocopy services. Instead, the Company seeks to distinguish itself by blanketing its service areas with large numbers of convenient photocopiers and by providing high quality service to those locations.
Full-service business centers and copy and print shops generally serve a market more interested in high volume and sophisticated copying than in convenience of location.
Coin-operated photocopiers are sometimes located in smaller retail establishments similar to TRM's locations. While these coin-operated photocopiers provide an alternative to Copy Centers, the Company believes that they are less convenient to operate and do not pose a significant competitive threat to the majority of TRM's retailers. As indicated under the caption "New Products and Services Under Development," the Company is testing coin-operated copying with major large format chains and retail stores, which have not been targeted by TRM up to the present time.
The Company is aware of several self-service non-coin-operated photocopier businesses using the retail business concept. To the Company's knowledge, each is limited to a relatively small geographic market and a relatively small number of photocopiers. Because of barriers to entry in the Company's business, such as developing operating systems, establishing sources of supply and achieving economies of scale, the Company does not believe any of these competitors currently represents a significant threat.
Personal copiers provide a substitute for Copy Centers. While these photocopiers have been on the market for a number of years, the Company does not believe that they have had a significant adverse effect on its business. The Company is unable to predict whether a technological or price breakthrough might increase sales of personal copiers and reduce demand for the Company's copy services.
Computers with printers allow convenient production of multiple copies. The Company does not believe that computer printing will have a significant adverse effect on its Copy Center business. At present, computer duplicating is primarily used only for a document which is electronically resident on that particular computer and not for other paper originals. Both computer printers and personal copiers currently have per copy costs to the user which are similar to or higher than TRM's retail copy prices so they are not, in general, a lower cost alternative.
QUARTERLY SEASONALITY
Historically, the Company has experienced slightly higher than average production per TRM Center in its third and fourth fiscal quarters and slightly lower than average production per TRM Center in its first fiscal quarter.
PHOTOCOPIERS
As of August 1996, TRM owned more than 37,000 new and used photocopiers. Over 32,000 were revenue-producing Copy Centers in the field, and over 5,000 were in the logistics pipeline, available for future installation or waiting to be rebuilt. The Company continues to investigate new and used photocopiers available for its use. Generally, new photocopiers are shipped direct from the manufacturer to a TRM Service Center. Used photocopiers are generally rebuilt at the Company's rebuilding facility in Portland, Oregon. The Company expects to continue to use both new and used photocopiers to expand its black and white copying business.
Supply
To date in North America, the Company has primarily used two similar discontinued models of used photocopiers originally manufactured by Ricoh Company, Ltd. and its affiliates. TRM bought these photocopiers from photocopier brokers and dealers. These two models of black and white photocopiers have not been manufactured since 1979 and 1982. During fiscal 1993, TRM developed a supply relationship with Mita Copystar America, Inc. (Mita), for black and white photocopiers and related products in North America. The resulting arrangement, as updated, contains no commitment to purchase any specific number of photocopiers. The Company continues to monitor and evaluate supplies and feature/functionality of new and used photocopiers available for its use.
During fiscal 1992, the Company developed a supply relationship with Ricoh Corporation (Ricoh) for full-color photocopiers and related products. TRM is not currently adding to its inventory of full-color copiers. Ricoh ships related products directly to the appropriate TRM Service Center as directed by the Company. The Company will continue to monitor and evaluate models of full-color photocopiers available for its use.
Also during fiscal 1992, a supply arrangement was entered into with Mita Europe B.V. for black and white photocopiers and related products in Europe. Under this arrangement, photocopiers and related products are shipped from Mita directly to the Company's European Service Centers. The Company continues to monitor and evaluate supplies of new and used photocopiers in Europe available for its use.
Few of TRM's photocopiers have ever become mechanically obsolete. Because of their simplicity, the Company believes that its photocopiers are more dependable than many other models.
During fiscal 1997, the Company expects to buy and rebuild additional copiers. However, it also expects to satisfy a portion of its expansion plans with photocopiers on hand but not yet installed. Accordingly, the number of photocopiers not yet installed is expected to decrease during fiscal 1997.
Parts
The Company acquires a majority of the parts for its used photocopiers directly from various parts fabricators. Many parts are built to TRM's specifications. While TRM's strategy is to use multiple sources for its parts to reduce dependence on single sources, some parts are purchased from single sources. Temporary shortages, increased costs and quality control problems could result if parts from a single or limited source became unavailable. Currently, parts for the Mita photocopiers and the Ricoh full-color photocopiers are being supplied primarily by the photocopier manufacturers. The Company will continue to evaluate available sources of supply for parts.
PAPER
Photocopy paper is purchased centrally by the Company's corporate offices and then shipped directly from the mills to the Service Centers. A number of paper companies are capable of producing the paper usable by the Company. The Company believes that sufficient paper should be available to supply the Company's expanding business. As explained in Management's Discussion and Analysis in the Annual Report to Shareholders, the cost of paper rose significantly during fiscal 1996 compared to fiscal 1995, but, as of year end, costs were below the peak of the fall of 1995.
TONER
The Company currently purchases liquid toner for its North American black and white rebuilt photocopiers directly from one manufacturer. The Company believes that if another source of toner were needed, it could obtain suitable toner on reasonable terms from other manufacturers, although some start-up delays could occur. Currently, toner for the Mita photocopiers and the Ricoh full-color photocopiers is being supplied primarily by the photocopier manufacturers. The Company will continue to evaluate available sources of supply for toner.
EMPLOYEES
As of June 30, 1996, the Company had approximately 650 employees, most of which were full-time. Approximately 405 are in field service, 215 are in sales, marketing, customer service, purchasing, billing and administration, and 30 are in training, production and warehouse functions. None of the Company's employees are represented by unions. The Company believes it has good relations with its employees. The Company currently engages about 30 independent contractors to sell TRM Centers.
SERVICE MARKS
Most Copy Centers are identified by distinctive yellow and black trapezoidal signs bearing "TRM Copies" and "TRM Color Copies" and the program price. Most of TRM's signs are registered service marks.
COPY CENTERS INVESTMENT GROUP, LTD.
The Company serves as general partner of Copy Centers Investment Group, Ltd., an Oregon limited partnership. The partnership was formed in 1983 to acquire certain Copy Centers from the Company. The partnership owns 79 Copy Centers in the states of Oregon and Washington. The Company receives a management fee of 25% of the gross revenue from these 79 Copy Centers, plus $20 per month for each of the 79 locations for accounting and administrative functions. The Company also owns a 1% interest in the profits and losses of the partnership. The partnership will terminate December 31, 1998 according to the partnership agreement. The partnership's operations do not constitute a material part of the business of the Company.
BISCARD CORPORATION
Biscard Corporation, which was formed in 1992, has developed a self-service, design-your-own, instant business card kiosk product. Until July 1996, BisCard was 80% owned by the Company and 20% owned by a minority shareholder. At that time, the Company purchased the 20% minority interest for $50,000 cash. Currently, the Company is in phase one of a two phase test market which calls for the placement of 500 business card kiosks in selected metropolitan areas. As of June 30, 1996, about 350 of the units had been placed. It is expected that this test market will continue through at least December 31, 1996. Research and development costs have not been significant to date.
GOVERNMENTAL REGULATION
The Company is not subject to significant governmental regulation. Local zoning and sign regulations occasionally prohibit a retail business from displaying the "TRM Copies" sign on an exterior wall or window. Local zoning and use restrictions may not allow opening a Copy Center in an otherwise desirable retail business. The Company does not expect such restrictions to have a material adverse effect on the Company's expansion plans.
FORWARD-LOOKING STATEMENTS
This Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 relating to the Company's plans or expectations as to: future performance; growth opportunities; expansion; improvements in efficiencies and cost controls; new products and services; repricing machines; competition; paper costs and capital expenditures. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements: business conditions in the market areas in which the Company operates; competitive factors; customer demand for the Company's services; the Company's ability to execute its plans successfully and the volatility of paper costs. Any forward-looking statements, including other written or oral forward-looking statements made by the Company or persons acting on its behalf, should be considered in light of these factors and other factors referred to from time to time in the Company's press releases, periodic reports or communications with shareholders.
ITEM 2.

ITEM 2. PROPERTIES
The Company leases approximately 25,750 square feet of office space for its corporate offices in Portland, Oregon. The lease expires in 2010, with an option to renew for an additional five years. The Company leases 31,500 square feet for training, rebuilding, warehousing, the Portland Service Center and other office space under a lease that also expires in 2010. This facility is located next to the corporate offices.
The Company leases warehouse space for 47 Service Centers outside Portland, Oregon. A Service Center typically consists of approximately 2,000 to 7,000 square feet of non-custom warehouse space. The leases typically run for three to twelve years, some with extensions available upon exercise of renewal options. The Company does not anticipate any difficulty in locating or, if necessary, relocating Service Centers.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and legal proceedings from time to time in the ordinary course of its business. There are no pending or threatened matters which in the Company's opinion could have a material effect on the Company's operations or its financial condition.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
The information required by Part II is incorporated herein by reference from the TRM Copy Centers Corporation 1996 Annual Report to Shareholders as indicated below. Except for such information, the 1996 Annual Report to Shareholders is not to be deemed filed as part of this Report.
Annual Report Page No. --------
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND Inside back RELATED STOCKHOLDER MATTERS cover
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA 1
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 4-5
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 1, 6-15
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
The information required by Part III is incorporated herein by reference from the indicated pages of the Company's definitive Proxy Statement dated September 16, 1996 for its 1996 annual meeting of shareholders.
Proxy Statement Page No. --------
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 3-5
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION 6-10
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 1-2
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS (INCORPORATED BY REFERENCE Annual Report FROM THE COMPANY'S 1996 ANNUAL REPORT TO Page No. SHAREHOLDERS): --------
Consolidated Balance Sheets as of June 30, 1996 and 1995 6
Consolidated Statements of Operations for each of the three years in the period ended June 30, 1996 7
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 30, 1996 8
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 1996 9
Notes to Consolidated Financial Statements 10-15
Independent Auditors' Report 15
Form 10-K Page No. --------
2. FINANCIAL STATEMENT SCHEDULES: Consent and Independent Auditors' Report on Financial Statement Schedule S-1 VIII -- Valuation and Qualifying Accounts S-2
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
3. EXHIBITS:
The exhibits listed in the Index to Exhibits, which appears on page 10 herein, are filed as part of this Annual Report.
(b) NO REPORTS ON FORM 8-K WERE FILED BY THE COMPANY DURING THE LAST QUARTER OF FISCAL 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Portland, Oregon, on September 17, 1996.
TRM COPY CENTERS CORPORATION
By: ROBERT A. BRUCE -------------------------------- Robert A. Bruce Vice President, Finance and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael D. Simon and Robert A. Bruce, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on September 17, 1996 on behalf of the Registrant and in the capacities indicated:
Signature Title - ---------------------------------- -----------------------------------
MICHAEL D. SIMON President, Chief Executive Officer - ---------------------------------- and Director Michael D. Simon
ROBERT A. BRUCE Chief Financial Officer - ---------------------------------- Vice President, Finance Robert A. Bruce Corporate Secretary
FREDERICK O. PAULSELL Chairman of the Board and Director - ---------------------------------- Frederick O. Paulsell
EDWIN S. CHAN Vice-Chairman of the Board and - ---------------------------------- Director Edwin S. Chan
SHERMAN M. COE Director - ---------------------------------- Sherman M. Coe
RALPH R. SHAW Director - ---------------------------------- Ralph R. Shaw
DONALD L. VAN MAREN Director - ---------------------------------- Donald L. Van Maren
EXHIBIT INDEX Exhibit Exhibits Page No. - -------- --------
3.1 Restated Articles of Incorporation (Incorporated herein by reference to Exhibit 3.1 of Form 10-K for the fiscal year ended June 30, 1992)
3.2 Restated Bylaws
4.1 Articles V, VI and VII of the Restated Articles of Incorporation (See Exhibit 3.1)
4.2 Articles I, II, V, VII and X of the Restated Bylaws, as amended (See Exhibit 3.2)
10.1 Indemnity Agreements with Registrant's directors and executive officers (those dated November 4, 1991 Incorporated herein by reference to Exhibit 10.2 of Form S-1 dated November 8, 1991 [No. 33-43829] and those executed in fiscal 1995 Incorporated herein by reference to Exhibit 10.1 of Form 10-K for the fiscal year ended June 30, 1995)
10.2 Loan Agreement with West One Bank, Oregon, dated February 7, 1996
10.3 Loan Agreement with West One Bank, Idaho, dated February 7, 1996
10.4 a) Lease dated October 14, 1991 between Pacific Realty Associates, L.P. and Registrant (for Registrant's training facility in Portland, Oregon) (Incorporated herein by reference to Exhibit 10.7 of Form S-1 dated November 8, 1991 [No. 33-43829]) b) Lease amendment dated February 7, 1994, between Pacific Realty Associates, L.P. and Registrant (Incorporated herein by reference to Exhibit 10.7 of Form 10-K for the fiscal year ended June 30, 1994) c) Lease amendment dated August 10, 1994, between Pacific Realty Associates, L.P. and Registrant (Incorporated herein by reference to Exhibit 10.5 of Form 10-K for the fiscal year ended June 30, 1995) d) Lease dated August 10, 1994 between Pacific Realty Associates, L.P. and Registrant (for the Registrant's corporate headquarters in Portland, Oregon) (Incorporated herein by reference to Exhibit 10.4 of Form 10-K for the fiscal year ended June 30, 1995)
10.6 Restated 1986 Stock Incentive Plan (Incorporated herein by reference to Exhibit 10.8 of Form 10-K for the fiscal year ended June 30, 1994)
10.7 Employee Stock Purchase Plan (Incorporated herein by reference to Exhibit 28.1 of Form S-8 dated December 7, 1992 [No. 33-55370])
10.8 Form of Stock Option Agreements: a) For option grants before fiscal 1994 (Incorporated herein by reference to Exhibit 10.9 of Form S-1 dated November 8, 1991 [No. 33-43829]) b) For option grants during fiscal 1994 (Incorporated herein by reference to Exhibit 10.10 of Form 10-K for the fiscal year ended June 30, 1994) c) For option grants during fiscal 1995 (Incorporated herein by reference to Exhibit 10.8 of Form 10-K for the fiscal year ended June 30, 1995)
10.9 Employment Agreements: a) Employment Agreement dated January 17, 1995 with Michael D. Simon (Incorporated herein by reference to Exhibit 10.9 of Form 10-K for the fiscal year ended June 30, 1995) b) Employment Agreement dated April 25, 1996 with Michael D. Simon
10.10 Executive Supplemental Retirement Agreement with Edwin S. Chan dated January 9, 1995 (Incorporated herein by reference to Exhibit 10.9 of Form 10-K for the fiscal year ended June 30, 1995)
13.1 Portions of the 1996 Annual Report to Shareholders
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors (see Page S-1)
24.1 Power of Attorney (see Signature page)
27.1 Financial Data Schedule
Consent and Independent Auditors' Report on Financial Statement Schedule -------------------------------
The Board of Directors TRM Copy Centers Corporation:
The audits referred to in our report dated August 13, 1996 included the related financial statement schedule as of June 30, 1996 and for each year in the three-year period ended June 30, 1996, as listed in Item 14(a)(2) of Form 10-K of TRM Copy Centers Corporation. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We consent to the incorporation by reference on Form S-8 (Nos. 33-55370 and 33-74354) of TRM Copy Centers Corporation of our reports dated August 13, 1996, relating to the consolidated balance sheets of TRM Copy Centers Corporation and subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, cash flows, and related schedule for each of the years in the three-year period ended June 30, 1996, which reports appear in the June 30, 1996 annual report incorporated by reference in Form 10-K of TRM Copy Centers Corporation.
KPMG PEAT MARWICK LLP
Portland, Oregon September 10, 1996
S-1
S-2