-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CBGLTvTAilPVHuIjARSSspTvahzihL/Rrsx4YxHSoVUZa0AgExW1uWNmMI+XM+S+ dhf35D5wgUiT5T2t5Z9cOw== 0000950134-99-002206.txt : 19990331 0000950134-99-002206.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950134-99-002206 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMARILLO BIOSCIENCES INC CENTRAL INDEX KEY: 0001014763 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 751974352 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-20791 FILM NUMBER: 99577405 BUSINESS ADDRESS: STREET 1: 800 W 9TH AVE CITY: AMARILLO STATE: TX ZIP: 79101-3206 BUSINESS PHONE: 8063761741 MAIL ADDRESS: STREET 1: AMARILLO BIOSCIENCES INC STREET 2: 800 W 9TH AVE CITY: AMARILLO STATE: TX ZIP: 79101-3206 10KSB40 1 FORM 10KSB FOR PERIOD OF DECEMBER 31, 1998 1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-20791 AMARILLO BIOSCIENCES, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) TEXAS 75-1974352 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 WEST 9TH AVENUE, AMARILLO, TEXAS 79101 (Address of principal executive offices) (Zip Code) ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (806) 376-1741 Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, Par Value $.01 (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Revenues for its most recent fiscal year were $222,289 As of March 9, 1999, there were outstanding 5,414,232 shares of the registrant's common stock, par value $.01, which is the only class of common or voting stock of the registrant. As of that date, the aggregate market value of the shares of common stock held by nonaffiliates of the registrant (based on the closing price for the common stock on the NASDAQ SmallCap Market) was approximately $6,458,412. 2 PART I The following contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth in "Management's 1999 Plan of Operations" as well as those discussed elsewhere in this Form 10-KSB. The following discussion should be read in conjunction with the Financial Statements and the Notes thereto included elsewhere in this Form 10-KSB. ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Amarillo Biosciences, Inc. (the "Company" or "ABI"), a development-stage company incorporated in 1984, is engaged in developing biologics for the treatment of human and animal diseases. The Company is currently focusing its research on human health indications for the use of low dose oral natural interferon alpha (IFN[alpha]), particularly for the treatment of Sjogren's syndrome, fibromyalgia, hepatitis B, hepatitis C and oral warts in HIV+ patients. The Company believes that significant worldwide opportunities exist for the development of low dose oral natural IFN[alpha] as a cost effective, non-toxic, efficacious alternative to the treatment of disease by injection of high doses of IFN[alpha]. In addition, the Company believes that low dose oral natural IFN[alpha] will be an effective treatment for diseases or conditions for which current therapies are inadequate. The Company owns or licenses 19 United States patents relating to low dose oral natural IFN[alpha]. Since 1992, the Company has filed with the U.S. Food and Drug Administration ("FDA"), and there now are in effect, eight Investigational New Drug ("IND") Applications covering indicated uses for low dose oral IFN[alpha], including treatment of Sjogren's syndrome and fibromyalgia. The Company is seeking regulatory approvals in certain foreign countries to test low dose oral IFN[alpha] in the treatment of hepatitis B and C. The Company's objective is to exploit its proprietary technology to become a leader in the field of low dose oral IFN[alpha] applications. The Company's business strategy is to pursue those indications for low dose oral IFN[alpha] treatment for which initial clinical research has indicated the treatment is efficacious and which, in the opinion of the Company, have the greatest commercial potential and are most likely to be approved by the FDA. To the extent possible, the Company will attempt to minimize the cost to the Company of obtaining FDA approval by utilizing forms of IFN[alpha] already approved (in other dosage forms and for different indications) by the Japanese Ministry of Health and Welfare for human use. The Company believes that cost savings will result. The Company will attempt to gain market share for approved products by forming alliances with strong marketing partners. The Company has 10 full-time employees and three part-time employees. The Company makes extensive use of consultants in business and research and development. 2 3 HUMAN HEALTH APPLICATIONS Sjogren's Syndrome. Sjogren's syndrome is a chronic autoimmune disorder characterized by dryness of the eyes and mouth. It can exist as a primary disorder or in association with other autoimmune diseases such as rheumatoid arthritis, systemic lupus erythematosus and scleroderma. Patients with primary Sjogren's syndrome may have clinical signs such as rash, arthritis, pneumonitis and nephritis. Typical symptoms include the sensation of burning in the eyes, dryness of the mouth, skin, nose and vagina, difficulty swallowing, painful throat and fatigue. Oral candidiasis (a fungus infection of the mouth) may also arise as a result of reduced saliva flow. Although Sjogren's syndrome is not life threatening, it can cause extreme discomfort and seriously impair quality of life. The Sjogren's Syndrome Foundation, Inc. estimates that there are approximately two to four million people in the United States who suffer from Sjogren's syndrome. The Company believes that the incidence of Sjogren's syndrome worldwide is similar to its incidence in the United States. Women constitute 90% of Sjogren's patients. Topical use of artificial tears is the prevailing treatment for the dry eye symptom of the disease. Artificial tears must be used on a regular basis. Intensive oral hygiene is prescribed to prevent progressive oral problems that may develop as a result of the disease. Topical and systemic means of increasing salivary flow may provide transient relief of symptoms. The Company believes that oral IFN[alpha] therapy helps to relieve the dryness associated with Sjogren's syndrome, improves secretory function, and may effectively supplement, or be used in lieu of, existing treatments. In a study conducted by the Company from October 1994 to January 1996 at two universities, the Company found that oral IFN[alpha] therapy administered to Sjogren's syndrome patients led to increased saliva production in six of 14 patients. The Company has filed, and there is now in effect, an IND for the use of oral IFN[alpha] to treat Sjogren's syndrome. A Phase II trial was completed in late 1997. At the end of 12 weeks, ninety patients who took placebo or interferon were evaluable. Patients given 150 IU three times per day had a significant (p<0.014) increase in stimulated saliva production. Subjective measures of relief of dryness also favored the same interferon group. A Phase III pivotal trial was approved and launched in November 1998. A total of 500 patients will be given either 150 IU oral IFN[alpha] or placebo for a 24 week period. Endpoints will be significant relief of oral dryness and increased saliva output. Hepatitis C. The Company is conducting a clinical trial in Canada to evaluate oral IFN[alpha] pre-treatment as a means of increasing the effectiveness of parenteral IFN[alpha] therapy in hepatitis C patients. An estimated 40 million worldwide chronic cases of HCV are believed by the Company to be candidates for this treatment. HIV. ABI is continuing an open label trial in California of HIV+ patients with persistent oral warts. A number of patients have shown marked improvement, with regression of the warts and without relapse. Further studies are planned to confirm and extend these encouraging results. Fibromyalgia. A second Phase II trial in fibromyalgia patients is ongoing. A total of 120 patients will be enrolled to receive interferon or placebo in an effort to reproduce the positive effects noted in our previous study and to define further the most effective dose schedule. 3 4 STRATEGIC ALLIANCE WITH HBL Hayashibara Biochemical Laboratories, Inc. ("HBL") was established in 1970 to engage in biotechnical research and development. It is a subsidiary of Hayashibara Company, Ltd., a privately-owned Japanese holding corporation with diversified subsidiaries. For more than 100 years the Hayashibara Company, Ltd. and its predecessors have been applying microbiological technology in the starch industry for the production of maltose and other sugars. In 1981, HBL established the Fujisaki Institute to accelerate development of industrial methods for the production of biologics and to sponsor clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center to support basic research. In 1987, HBL successfully accomplished the mass production of human cells in an animal host by producing human cells in hamsters. This made it possible to economically produce a natural form of human IFN[alpha] and other biologics. HBL also has developed and obtained patents for technology relating to the production of IFN[alpha]-containing lozenges by which the stability of the IFN[alpha] activity can be maintained for up to 18 months at room temperature and up to three years if the product is refrigerated. The Company believes that the use of such lozenges gives it advantages over competitive technologies in terms of cost, taste and ease of handling. In September 1997, HBL and ABI entered license agreements granting exclusive rights to ABI to develop interferon gamma for oral use in humans and for all routes of administration in animals, and tumor necrosis factor alpha for oral and topical uses in humans and for all routes of administration in animals; the rights were granted worldwide, except Japan. The Company is dependent on HBL as the sole supplier of products in human health. AGREEMENTS In October 1989, the Company entered into a Manufacturing and Supply Agreement with Interferon Sciences, Inc. ("ISI"), under which ISI granted to the Company an exclusive worldwide license to market ISI IFN[alpha] for oral use in animals and agreed to supply ISI IFN[alpha] for such use exclusively to the Company. Pursuant to the agreement, ISI receives a specified price for ISI IFN[alpha] sold to the Company. ISI is also entitled to receive royalties on net sales as well as a percentage of any license fee, option fee or other payment, except royalty or specific research or patent expense reimbursements, which the Company receives for the assignment or sublicense of the Company's rights under the license agreement. Since 1994, the Company has been required to expend a minimum of $50,000 per year toward development of products under the Manufacturing and Supply Agreement in order to keep it in force. The Company has done so, and currently intends to continue to make such expenditures. The Manufacturing and Supply Agreement will continue for seven years after the Company's first purchase order for Manufactured Products under the Agreement, and will be automatically renewed for successive three-year terms thereafter, subject to termination by the Company, with or without cause, and subject to termination by ISI at any time after the first renewal term if net sales for a calendar year do not exceed $100,000. The seven-year term has not yet commenced, since the Company has not yet placed an order with ISI for Manufactured Products. "Manufactured Products" is defined in the 4 5 agreement as ISI IFN[alpha], packaged in accordance with FDA approved dosage forms. The FDA has not yet approved any dosage form within the meaning of the agreement. In October 1989, the Company and ISI entered into a license agreement pursuant to which the Company granted to ISI a license (co-exclusive with the Company) of the Company's patented technology for the use and sale of IFN[alpha]-containing products for use in humans worldwide, except for Japan (where the Company has granted to HBL an exclusive license), for a royalty on net sales of licensed products made during the term of the agreement. The original term of the license agreement was to expire on October 20, 1994, but ISI extended its term as therein permitted. As amended in April 1995, the agreement will continue in force for the life of the licensed patents, subject only to ISI's right to terminate the agreement with or without cause (in which case ISI must cease any use or sale of the licensed products), and the Company's right to terminate for breach of the agreement by ISI, or upon certain other events. In April 1995, in connection with the settlement of certain patent and infringement litigation brought by the Company in New Zealand against Fernz Corporation Limited, Pharma Pacific Management Pty. Ltd. ("PPM") and certain other companies and certain opposition proceedings brought by PPM against the Company and certain of the Company's licensors in Australia and Europe, the Company entered into a non-exclusive license agreement with PPM. Pursuant to such agreement, the Company licenses to PPM worldwide, except in Japan, the right to use the Company's patented technology for the use and sale of IFN[alpha]-containing products in humans and PPM is obligated to pay the Company a royalty based on sales of the product in countries where any of the licensed patents has issued. To the Company's knowledge, PPM is not selling products covered by the license in any such country. PPM also paid to the Company $500,000 as a reimbursement of a portion of the Company's research and expenses related to the licensed technology and a $50,000 license fee to be credited against future royalties. In connection with the settlement, ISI and the Company agreed to an amendment of ISI's license from the Company pursuant to which ISI granted back to the Company any right to sublicense the licensed technology (except that ISI retained the right to sublicense such technology in connection with the use and sale of ISI IFN[alpha] products) and the Company purchased 312,500 shares of the common stock of ISI, a public company, for $625,000. Following a 4:1 reverse split in March 1997, the Company sold 65,000 shares of ISI stock, leaving a balance of 13,125 shares at December 31, 1998. On October 13, 1998, the Company engaged Trust Company of the South (TCOS) to act as its Executive Advisor. TCOS's services in connection with this engagement will include assisting the Company, in (1) Preparation of a corporate profile suitable for use with brokers and investors (research, write, design, print and distribute), (2) Designing and implementation of a plan for both the short and long term promotion of investor interest in the Company, (3) Interfacing with the investment community on behalf of the Company and publicly promoting investor interest in the Company, (4) Preparation of press releases, upon request, and introduction of the Company to appropriate financial writers and media persons, (5) Enlistment of additional market makers for the Company's stock, (6) Development of a list of key brokers that can be cultivated on behalf of the Company and its stock, and seek to enhance the interest of these brokers in the Company, (7) Assistance, when requested, in the preparation of presentations to broker and investor groups, (8) Development, with Company's officers of an ongoing in-house program for investor relations, (9) Coordination with management and other board members in the selection of additional outside board members, (10) Evaluation of the benefits of listing the Company's securities on the American Stock 5 6 Exchange when and if appropriate, (11) Evaluation and recommendations regarding utilizing personal and corporate trust services provided by TCOS. The Company agrees to promptly reimburse TCOS for all expenses incurred by TCOS pursuant to this engagement. Such expenses shall include but not be limited to, transportation, lodging, mileage, meals, parking, tips, copying, printing, telephone, overnight delivery, computer research, postage, telecopy and other miscellaneous items. The Company shall have the right to pre-approve expense charges which would exceed $7,500 in one calendar month. The term of this Engagement will be through October 12, 2003; however, the Company may terminate the Engagement prior to the expiration of said term by giving written notice of termination to TCOS at least ten days prior to any six months anniversary of the letter agreement. At the inception of the Engagement TCOS received 112,000 options at $1 3/4 and will be paid $6,000 per month in fees each month thereafter. PATENTS AND PROPRIETARY RIGHTS In July 1997, ABI and Hoffmann-La Roche (HLR) entered a license agreement whereby ABI was granted patent rights to make, have made, use and sell natural interferon alpha in the USA, under US Patent No. 4,503,035, owned by HLR. This license will require ABI to pay a royalty to HLR on sales in the USA until March 2002. Three patents issued in October and December, 1998 with claims valid until the year 2015. Those patents are "Treatment of Bacterial Infection with Oral Interferon-Alpha" (US Patent No. 5,817,307), "Treatment of Neoplastic Disease with Oral Interferon" (US Patent No. 5,824,300) and "Treatment of Autoimmune Disorders with Oral Interferon" (US Patent No. 5,846,526). Another patent (US Patent No. 5,830,056) issued November 3, 1998 entitled "Treatment of Viral Disease with Oral Interferon-Alpha"; because of a terminal disclaimer, this patent has claims valid until May 28, 2008. A Notice of Allowance of Claims was received in November 1998 on US Patent Application Serial No. 07/875/630 filed April 28, 1992; claims were granted with a terminal disclaimer such that claims will be valid until December 13, 2002. COMPETITION The pharmaceutical industry is an expanding and rapidly changing industry characterized by intense competition. The Company believes that its ability to compete will be dependent in large part upon its ability to continually enhance and improve its products and technologies. In order to do so, the Company must effectively utilize and expand its research and development capabilities and, once developed, expeditiously convert new technology into products and processes which can be commercialized. Competition is based primarily on scientific and technological superiority, technical support, availability of patent protection, access to adequate capital, the ability to develop, acquire and market products and processes successfully, the ability to obtain governmental approvals and the ability to serve the particular needs of commercial customers. Corporations and institutions with greater resources than the Company may, therefore, have a significant competitive advantage. The Company's potential competitors include entities that develop and produce therapeutic agents for 6 7 treatment of human and animal disease. These include numerous public and private academic and research organizations and pharmaceutical and biotechnology companies pursuing production of, among other things, biologics from cell cultures, genetically engineered drugs and natural and chemically synthesized drugs. Almost all of these potential competitors have substantially greater capital resources, research and development capabilities, manufacturing and marketing resources and experience than the Company. The Company's competitors may succeed in developing products or processes that are more effective or less costly than any that may be developed by the Company, or that gain regulatory approval prior to the Company's products. The Company also expects that the number of its competitors and potential competitors will increase as more IFN[alpha] products receive commercial marketing approvals from the FDA or analogous foreign regulatory agencies. Any of these competitors may be more successful than the Company in manufacturing, marketing and distributing its products. There can be no assurance that the Company will be able to compete successfully. GOVERNMENT REGULATION The Company's research and development activities are subject to comprehensive regulation by numerous governmental authorities in the United States and other countries. If the Company is able to produce and market products, such production and marketing will place the Company under continued regulation. Among the applicable regulations in the United States, pharmaceutical products are subject to the Federal Food, Drug and Cosmetic Act, the Public Health Service Act, other federal statutes and regulations, and certain state and local regulations. These statutes and regulations govern the development, testing, formulation, manufacture, labeling, storage, record keeping, quality control, advertising, promotion, sale, distribution and approval of pharmaceutical products. Failure to comply with applicable requirements can result in fines, recall or seizure of products, total or partial suspension of production, refusal by the government to approve marketing of the product and criminal prosecution. A new drug may not be legally marketed for commercial use in the United States without FDA approval. In addition, upon approval, a drug may only be marketed for the indications, in the formulations and at the dosage levels approved by the FDA. The FDA also has the authority to withdraw approval of drugs in accordance with applicable statutes and regulations. Analogous foreign regulators impose similar approval requirements relating to commercial marketing of a drug in their respective countries and may impose similar restrictions and limitations after approval. In order to obtain FDA approval of a new product, the Company and its strategic partners, if any, must submit proof of safety, efficacy, purity, and stability, and the Company must demonstrate validation of its manufacturing process. The testing and application process is expensive and time consuming, often taking years to complete. There is no assurance that the FDA will act favorably or quickly in reviewing applications. With respect to patented products, processes or technologies, delays imposed or caused by the governmental approval process may materially reduce the period during which the Company will have the exclusive right to exploit them. Delays could also affect the commercial advantages derived from proprietary processes. There is no assurance that the regulatory agencies will find present or future submissions of the Company to be adequate. The FDA approval process for a pharmaceutical product such as oral IFN[alpha] includes review of (i) preclinical laboratory and animal studies to enable FDA review of an Investigational New Drug 7 8 ("IND") or Investigational New Animal Drug ("INAD") applications, (ii) initial clinical studies to define safety and dose parameters and (iii) well-controlled clinical trials to demonstrate product efficacy and safety, followed by submission and FDA approval of a Product License Application ("PLA") concerning biologics and a New Drug Application ("NDA") with respect to drugs. FDA approval of the NDA and/or PLA is required prior to any commercial sale or shipment of the product, except as to certain exports. Preclinical studies involve laboratory evaluation of product characteristics and animal studies to assess the safety of the product. The results of the preclinical tests are submitted to the FDA as part of the IND or INAD application and are reviewed by the FDA. Unless the FDA objects to an IND, the application will become effective 30 days following its receipt by the FDA. INADs need only be filed prior to the shipment of the drug or biologic for testing. There can be no certainty that the FDA will not object to the commencement of clinical studies concerning any drug or biologic. Human clinical trials are typically conducted in three sequential phases with some amount of overlap allowed. Phase I trials normally consist of testing the product in a small number of patient volunteers for establishing safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and clinical pharmacology. In Phase II, the continued safety and initial efficacy of the product are evaluated in a somewhat larger patient population, and appropriate dosage amounts and treatment intervals are determined. Phase III trials typically involve more definitive testing of the appropriate dose for safety and clinical efficacy in an expanded patient population at multiple clinical testing centers. A clinical plan, or "protocol," accompanied by the approval of the institution participating in the trials, must be submitted to the FDA prior to commencement of each clinical trial. Each clinical study must be conducted under the auspices of an Institutional Review Board ("IRB") at the institution performing the clinical study. An IRB may require changes in a protocol, and there can be no assurance that an IRB will permit any given study to be initiated or completed. In addition, the FDA may order the temporary or permanent discontinuation of clinical trials at any time. In light of this process, the Company must necessarily rely on other persons and institutions to conduct studies. The Company cannot guarantee that such persons and institutions will conduct studies properly. There also can be no assurance that Phase I, Phase II and Phase III testing of the Company's products will be completed successfully within any specified time period, if at all. All the results of the preclinical and clinical studies on a pharmaceutical product are submitted to the FDA in the form of a PLA or NDA, for approval to commence commercial distribution. Submission of a PLA or NDA does not assure FDA approval for marketing. The application review process takes more than two years on average to complete. However, the process may take substantially longer if the FDA has questions or concerns about a product or studies regarding the product. In general, the FDA requires at least two adequate and well-controlled clinical studies demonstrating efficacy with sufficient levels of statistical assurance. However, additional support may be required. The FDA also may request additional information relating to safety or efficacy, such as long-term toxicity studies. In responding to a PLA or NDA, the FDA may grant marketing approval, require additional testing and/or information or deny the application. Accordingly, there can be no assurance about any specific time frame for approval, if any, of products by the FDA. The FDA also may require post-marketing testing and surveillance to monitor the safety record of a product and its continued compliance with regulatory requirements. 8 9 The facilities of each pharmaceutical manufacturer must be registered with and approved by the FDA as compliant with the agency's good manufacturing practice regulations ("GMP"). For biologics, except certain well-characterized ones, this requires the filing of an establishment license application ("ELA") that must be approved by the FDA for the facility in which the product is maintained. While the ELA and PLA are separate documents, they must be submitted at the same time and both documents must be approved before the sale of the biologic. Continued registration also requires compliance with the FDA's GMP regulations. Products must be formulated in accordance with the FDA's GMP requirements and preclinical tests must be conducted by laboratories that comply with FDA regulations governing the testing of drugs in humans and animals. In order to comply with GMP, manufacturers must continue to expend time, money and effort in production, record keeping and quality control. In addition, manufacturers must comply with regulations promulgated by the United States Drug Enforcement Administration and similar state and local regulatory authorities if they handle controlled substances, and they must be registered with the United States Environmental Protection Agency and similar state and local regulatory authorities if they generate toxic or dangerous waste streams. The Company asserts that the manufacture or use of IFN[alpha] does not pose an environmental hazard. Other regulatory agencies, such as the Occupational Safety and Health Administration, also monitor manufacturing facilities for compliance with workplace safety regulations. Each of these organizations conducts periodic establishment inspections to confirm continued compliance with its regulations. Failure to comply with any of these regulations could mean fines, interruption of production and even criminal prosecution. For foreign markets, a pharmaceutical company is subject to regulatory requirements, review procedures and product approvals which, generally, may be as extensive, if not more extensive, as those in the United States. Although the technical descriptions of the clinical trials are different, the trials themselves are often substantially the same as those in the United States. Approval of a product by regulatory authorities of foreign countries must be obtained prior to commencing commercial product marketing in those countries, regardless of whether FDA approval has been obtained. The time and cost required to obtain market approvals in foreign countries may be greater than required for FDA approval and may be subject to delay. There can be no assurance that regulatory authorities of foreign countries will grant approval. RESEARCH AND DEVELOPMENT During the years ended December 31, 1998 and 1997, the Company incurred expenses of $1,372,850 and $1,650,415, respectively, resulting from Company-sponsored research and development activities. Research and development is expected to remain a significant component of the Company's business. The Company has arranged for others to perform substantially all of its clinical research and intends to continue to do so while utilizing its staff for monitoring such research. See also ITEM 6, "MANAGEMENT'S 1999 PLAN OF OPERATIONS - - Research and Development". 9 10 ITEM 2. DESCRIPTION OF PROPERTY. The Company's executive and administrative offices are located at 800 West 9th Avenue, Amarillo, Texas in a 5,200 square foot facility owned by the Company. The building contains offices, meeting rooms and a biologic storage area. The Company believes that the facility is adequate for its present and anticipated use. The facility is insured against hazards in the amount of its market value. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 10 11 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Since August 8, 1996, the Company's common stock has traded on the NASDAQ SmallCap Market under the symbol AMAR. The range of high and low sales prices as quoted on the NASDAQ SmallCap Market for each quarter of 1998 and 1997 are as follows:
1998 1997 -------------------- ------------------- Quarter High Low High Low ------- ----- ----- ----- ----- First 5.500 3.000 9.875 3.750 Second 5.375 2.750 4.500 3.375 Third 4.000 1.000 4.250 3.500 Fourth 2.250 .313 6.500 3.250
As of March 5, 1999, the Company had 310 shareholders of record and approximately 594 beneficial shareholders. ITEM 6. MANAGEMENT'S 1999 PLAN OF OPERATIONS The Company's Management has developed a Plan of Operations for 1999. As a development stage company, the Company continues to engage in research and development activities focused on developing biologics for the treatment of human and animal diseases. The Company has not commenced any significant product commercialization and, until such time as it does, will not generate significant product revenues. The Company's accumulated deficit has continued to grow, from $9,045,000 at December 31, 1997, to $11,378,000 at December 31, 1998. Operating losses are expected to continue for the foreseeable future and until such time as the Company is able to attain sales levels sufficient to support its operations. In 1999 the Company will continue its research and development activities, as well as the activities necessary to develop commercial partnerships and licenses. The Company's expenditure of financial resources in 1999 will fall principally into six broad categories, as follows: Research and Development; Personnel; Consulting and Professional (other than legal and accounting); Legal; Public Relations, Investor Relations, and Shareholder Relations; and Liquidity Needs. The Company's expectations and goals with respect to these categories are addressed separately below, by category: RESEARCH AND DEVELOPMENT Until it achieves commercial product sales, the Company's business is research and development, and this is the area where the Company's principal efforts will be expended in 1999. The Company has budgeted approximately $5.2 million for expenditure in 1999 on research and development, inclusive of amounts to be expended on the Company's Phase III Sjogren's syndrome clinical trial, which commenced at the end of 1998. A contract research organization is managing the study. 11 12 The budgeted amount for Research and Development in 1999 includes approximately $250,000 for fibromyalgia studies, and approximately $100,000 for other human clinical trials, which includes some final costs relating to completed studies. Other indications which will receive attention by the Company in 1999 are hepatitis B and the treatment of oral warts in HIV-infected patients. PERSONNEL In addition to its intellectual property, the Company's principal assets are its personnel. The Company has been successful in controlling its personnel costs, both by maintaining its principal location in Amarillo, Texas, and by ensuring maximum efficiency and utilization of existing personnel. Important new management team members have been hired to complete the progression from a research and development organization to a company with commercially viable products. The Company has budgeted approximately $1 million for personnel expenses in 1999, including salaries, payroll taxes, worker's compensation insurance, directors and officers general liability insurance, and group life, health, dental, and liability insurance. At the present time, the President and CEO of the Company, Joseph M. Cummins, is also serving as the Company's Chief Financial Officer. Management foresees a need to recruit a qualified individual to serve the company in the finance and accounting areas. The Company's 1999 personnel budget therefore includes salary and fringe benefits for such a person. CONSULTING AND PROFESSIONAL (EXCEPT LEGAL AND ACCOUNTING) The Company has budgeted approximately $150,000 for expenditure on professional consultants in 1999. Consulting fees are expected to be paid to the Company's scientific advisory board; to certain directors who perform specific consulting tasks at the Company's request; and to a number of independent consultants, in connection with the operation of the Company. The Company will continue to use the services of consultants to complement the Company's small full-time staff, where such is a more efficient utilization of the Company's resources. LEGAL AND ACCOUNTING Although the Company is not involved in litigation, it has budgeted legal expenses of approximately $180,000 in 1999. Almost 40% of the Company's legal expenditures will be for preparation and filing of patents and for maintenance of existing patents in a number of countries. Other legal expenses will be related to compliance with laws and regulations affecting public companies, licensing and contracting, and general corporate matters. The Company does not presently have an in-house legal staff, nor does it intend to put such a staff in place in 1999. The Company will maintain Ernst & Young as its auditors. PUBLIC RELATIONS, INVESTOR RELATIONS AND SHAREHOLDER RELATIONS The Company recognizes that its ability to raise capital will depend, to some extent, upon its relations with both potential future investors and its existing shareholders. In turn, such relationships are built upon the foundation of adequate, timely, and comprehensible communications. Accordingly, the Company has budgeted approximately $125,000 for expenditure on these items in 1999. The expenditures will include payments to the Company's public relations consultants, as well as the 12 13 Company's expenses in attending a number of meetings with analysts and institutional investors. The Company has also budgeted sufficient amounts to maintain its comprehensive web site (www.amarbio.com). LIQUIDITY NEEDS The principal budget items discussed above, along with other miscellaneous costs and expenses, will cause the Company to expend approximately $6.8 million in 1999, including the substantial expense of the Company's Phase III Sjogren's syndrome trial, and the additional personnel costs referred to under "Personnel", above. At December 31, 1998, the Company had available cash of $4,776,000. The Company will need to raise additional funds in order to completely execute its 1999 Plan. Should a commitment for additional funds not be obtained during the second quarter of 1999, the Company will take steps to curtail clinical trial expenditures and to reduce staff and administrative expenses. Management believes that based on the Company's ability to curtail clinical trial expense and to reduce staff and administration expenses, available funds are sufficient to meet its anticipated cash requirements for at least the next twelve months. THE YEAR 2000 ISSUE ABI'S STATE OF READINESS IT Systems. The Company owns relatively few information technology ("IT") systems, consisting of approximately twelve (12) computers. The basic input/output system ("BIOS") of each computer has been checked using publicly available utilities designed for that purpose. With one exception, the BIOS of each computer was found to be Year 2000 compliant. The non-compliant computer was brought into compliance with software, and in a subsequent test, proved to be Year 2000 compliant. The software used on the computers owned by ABI is all commercially available, off-the-shelf software; ABI does not own any custom-made software. The Year 2000 compliance of each of the programs has been verified with the vendors of those programs, and all software used by the Company is either Year 2000 compliant or compliant with minor issues. Non-IT Systems. The Company does not own any machines (other than the computers mentioned above) that contain microprocessors or microcontrollers. Therefore, the Company does not need to assess or plan for Year 2000 issues pertaining to non-IT systems. Third Parties. The Company is investigating the Year 2000 preparedness of those third parties with which it has a material relationship. As the principal business of the Company is testing the effectiveness of new drugs, the Company sees two categories of third-party Year 2000 issues. First, the Company is investigating those third parties who are essential in the production, packaging, and delivery of the test drugs ("clinical supplies") to the clinical trial sites. If any steps along the chain of production of the drugs were interrupted by a Year 2000 issue, then the supply of the clinical supplies to the clinical trial sites could be interrupted. This would delay the clinical trials, and consequently delay ultimate FDA approval for the drugs. The Company is in the 13 14 process of investigating the Year 2000 preparedness of each of the companies that plays a key role in the production, packaging, and distribution of the drug. Second, the Company is taking steps to insure that clinical trial data is not lost due to a Year 2000 issue. This requires an investigation of the company that is managing the clinical trial, as well as the procedures used at the various clinical trial sites, and the process by which the clinical data is stored and transmitted back to the Company. We have already had initial contact with PPD Pharmaco, the clinical trial manager, and they assure us that they expect full Year 2000 compliance by the end of the first quarter of 1999. The Company has employed a consultant, Mr. James Corti, who is responsible for assessing the Year 2000 preparedness of those third parties with which the Company has a material relationship. While the responsiveness of those third parties to our inquires is beyond the Company's control, we estimate that Mr. Corti will conclude his Year 2000 assessment by the end of April, 1999. The Company has not yet encountered any actual Year 2000 problems, except for one computer BIOS (see "IT Systems", above), which was corrected with publicly available shareware at no cost to the Company. The Company therefore has not spent any money on remediation. All of the costs incurred to date have been related to the investigation of potential Year 2000 issues. All of the Year 2000 related costs should be incurred before the end of April, 1999. We anticipate that these costs will not exceed $10,000. THE RISK OF THE COMPANY'S YEAR 2000 ISSUES There are two ways in which the Company would be adversely affected by a worst-case Year 2000 scenario. First, Year 2000 problems could interrupt the supply of clinical supplies to clinical testing sites. If clinical supplies became corrupted and had to be replaced, or if the supplies otherwise became temporarily unavailable, this would cause a 3-6 month delay in the clinical trial. Such a delay would delay the ultimate profits to the Company from sales of the drug by the same amount of time. Second, a Year 2000 problem could result in damage to the clinical trial data. Because the data is originally entered on hardcopy, that is, actual pieces of paper, and because that hardcopy data is not destroyed, clinical trial data can never by completely lost due to a Year 2000 problem. At most, the computer data could be lost due to a Year 2000 problem, and the Company would incur additional expense and delay to have the data re-entered from the original hardcopies. The same is true for the study codes that reveal which trial subjects used placebo: if a code were lost due to a computer error, then the clinical trial data could be reconstructed from the hardcopies of the code kept at the Company. CONTINGENCY PLANS Drug Supply. The Company has only one supplier for the drug itself, but does have a second source for the processing and packaging of the drug into a usable clinical trial form. The Company 14 15 plans to establish a stockpile of each drug before beginning clinical trials. This will provide a buffer against any possible interruption of supply due to a Year 2000 problem. But stockpiling alone is not enough to guarantee a supply of the drug during the clinical trials. In order to afford the greatest amount of stability, clinical study supplies are refrigerated. Conceivably, a Year 2000 problem could cause the failure of the refrigeration system and ruin the supply of the drug. Central storage of clinical supplies will be temporary only, pending distribution to study sites, and will be at a location with adequate backup systems, meaning those with the capability to generate electrical power with fossil fuel fired generators, though the individual clinical trial sites may not have these precautions. In the event of loss of trial supplies at one or more trial sites, the Company will have the capability to replace such supplies, within certain limits. Specifically, the Company orders 10% more of all clinical supplies than will be required for conduct of the study, assays, and other requirements. By way of example, the Company's Phase III Sjogren's syndrome trial will involve 50 separate trial sites. Accordingly, the Company will have sufficient clinical supplies to replace lost clinical supplies at five of those trial sites. If the losses of clinical supplies exceeded that amount, the Company would then be dependent upon its suppliers to replace such trial supplies. If such suppliers had also experienced interruptions in their manufacturing capability, the commencement of the trials at certain sites could be delayed. Data Integrity. Clinical trial data and the study codes used in the study will be stored both in hardcopy form and on diskette. While the hardcopies should provide the ultimate in data safety, the diskettes should also be safe from any Year 2000 harm. The diskettes will provide a less expensive way of restoring lost clinical trial data and study codes in the event of a Year 2000 problem. FORWARD-LOOKING STATEMENTS Certain statements made in this Plan of Operations and elsewhere in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance, achievements, costs or expenses and may contain words such as "believe", "anticipate", "expect", "estimate", "project", "budget", or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties are detailed from time to time in reports filed by the Company with the SEC, including Forms 8-K, 10-QSB and 10-KSB, and include among others the following: promulgation and implementation of regulations by the U.S. Food and Drug Administration ("USFDA"); promulgation and implementation of regulations by foreign governmental instrumentalities with functions similar to those of the USFDA; costs of research and development and clinical trials, including without limitation, costs of clinical supplies, packaging and inserts, patient recruitment, trial monitoring, trial evaluation, and publication; and possible difficulties in enrolling a sufficient number of qualified patients for certain clinical trials. The Company is also dependent upon a broad range of general economic and financial risks, such as possible increases in the costs of employing and/or retaining qualified personnel and consultants, possible Year 2000 issues, and possible inflation which might affect the Company's ability to remain within its budget forecasts. The principal uncertainties to which the Company is presently subject are its inability to ensure that the results of the Sjogren's syndrome Phase III trial, or any other trials performed by the Company, will be sufficiently favorable to ensure eventual regulatory approval for commercial sales, and its inability to accurately budget at 15 16 this time the possible costs associated with hiring and retaining of additional personnel to assist the Company both with its finance and accounting functions. The risks cited here are not exhaustive. Other sections of this report may include additional factors which could adversely impact the Company's business and future prospects. Moreover, the Company is engaged in a very competitive and rapidly changing industry. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those projected in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual future events. ITEM 7. FINANCIAL STATEMENTS. The financial statements of the Company are set forth beginning on page F-1 immediately following the signature page of this report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. As of March 8, 1999, the directors and executive officers of the Company were as follows:
NAME AGE POSITION - --------------------------------------------------- ----- --------------------------------- Joseph Cummins, DVM, PhD (1)(3).................... 56 Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Director Stephen Chen, PhD (2)(4)........................... 49 Director James Cook (1)(3)(5)............................... 64 Director Thomas D'Alonzo (1)(2)............................. 55 Director Katsuaki Hayashibara (3)(4)(5)..................... 55 Director Brian McLean, MD (3)(5)............................ 39 Director Dennis Moore, DVM (1)(4)(5)........................ 52 Director James Page, MD (1)(2)(5)........................... 72 Director Kathleen L. Kelleher............................... 51 Chief Operating Officer, Vice President Business Development
16 17
NAME Age Position - --------------------------------------------------- ---- ---------------------------------- The following are not executive officers, but are expected by the Company to make a significant contribution to the business: Philip C. Fox, DDS................................. 51 Director Research and Development John M. Smith...................................... 62 Director of Marketing and International Business Development Martin J. Cummins.................................. 32 Clinical Projects Director
(1) Member of the Executive Committee. (2) Member of the Compensation Committee. (3) Member of the Finance Committee. (4) Member of the Audit Committee. (5) Member of the Stock Option Plans Administration Committee. Joseph Cummins has been the Chairman of the Board of the Company since he founded it in June 1984. Dr. Cummins has also served as President of the Company since December 1994, and as Chief Financial Officer since October 1998. He received a PhD degree in microbiology from the University of Missouri in 1978 and a doctor of veterinary medicine degree from Ohio State University in 1966. Dr. Cummins has been conducting research concerning IFN since 1969. Stephen Chen has been a director of the Company since February 1996. He has been President and Chief Executive Officer of STC International, Inc., a health care investment firm, since May 1992. From August 1989 to May 1992 he was Director of Pharmaceutical Research and Development for the Ciba Consumer Pharmaceuticals Division of Ciba-Geigy. James Cook has been a director of the Company since 1988. He has been President and Chief Executive Officer of the First National Bank of Arvada since January 1992 and from April 1987 to December 1991 he was Executive Vice President of First National Bank of Amarillo. Thomas D'Alonzo has been a director of the Company since 1997. He has been President of Pharmaceutical Product Development, Inc., a global clinical research organization, since 1996, was President of GENVEC, Inc., from 1993 to 1996, and was President of Glaxo, Inc. from 1983 to 1993. Katsuaki Hayashibara has been a director of the Company since 1994. Mr. Hayashibara was named Director of the Overseas Business Development Division of Hayashibara Company, Ltd. in January 1997. Prior to 1997, Mr. Hayashibara served as Director of Research and Development for HBL. Brian McLean has been a director of the Company since September 1996. Dr. McLean is an M.D. and received an MBA degree from UCLA in 1992. He is a partner in a venture capital firm in New York City. Dennis Moore has been a director of the Company since 1986. Dr. Moore has been a doctor of veterinary medicine since 1972 and was in private practice from 1972 to 1995. Since 1995, Dr. Moore has been involved in managing his personal investments. 17 18 James Page has been a director of the Company since February 1996. Prior to retiring in 1991 as a Vice President with Adria Laboratories, Inc., a pharmaceutical company specializing in therapy given to cancer and AIDS patients, Dr. Page held various upper management level positions with Carter Wallace, Inc., Merck Sharpe & Dohme Research Laboratories and Wyeth Laboratories. Kathleen Kelleher has been an officer of the Company since January 1999. Ms. Kelleher holds a Bachelor's Degree and a Master's Degree in Biology. In addition, she holds a MBA from the University of Chicago. Ms. Kelleher has spent the last twenty years working in the pharmaceutical and biopharmaceutical industry. She has held senior management positions in marketing, business development, licensing, product planning, strategic marketing, strategic planning and operations. Most recently, Ms. Kelleher was employed as senior director of licensing at G.D. Searle, the pharmaceutical division of Monsanto. Philip Fox joined Amarillo Biosciences as Director, Research and Development in January 1999. Prior to that, he was at the National Institutes of Health, National Institute of Dental and Craniofacial Research since 1976. During his NIH tenure, he served as Clinical Director of the Intramural Research Program, and Chief of the Clinical Investigations Section, Gene Therapy and Therapeutics Branch. Dr. Fox is an oral/maxillofacial surgeon and a diplomate of the American Board of Oral Medicine. John Smith has been an officer of the Company since December 1998. During a long career in pharmaceutical marketing, he has held senior marketing/business development positions with Pfizer and Bristol-Myers Squibb as well as small companies in the U.S., Europe, Indonesia, China and Hong Kong. Martin Cummins has held several positions within Amarillo Biosciences since joining the Company full-time in June 1992. Mr. Cummins currently oversees all research studies involving human participants as Clinical Project Director. The Company's directors are elected at the annual meeting of shareholders to hold office until the annual meeting of shareholders for the ensuing year or until their successors have been duly elected and qualified. The Company pays directors who are not employees of the Company a fee of $1,000 per regularly scheduled Board meeting attended, or $250 for participation in a regularly scheduled Board meeting by conference telephone. The Company reimburses all directors for their expenses in connection with their attendance at such meetings. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. COMPLIANCE WITH SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires directors and officers of the Company and persons who own more than 10 percent of the Company's common stock to file with the Securities and Exchange Commission (the "Commission") initial reports of ownership and reports of changes in ownership of the common stock. Directors, officers and more than 10 percent shareholders are required by the Exchange Act to furnish the Company with copies of all Section 16(a) forms they file. 18 19 To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during the year ended December 31, 1998, all filings applicable to its directors, officers and more than 10 percent beneficial owners were timely filed. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth for the three years ended December 31, 1998 compensation paid by the Company to its Chairman of the Board, President and Chief Executive Officer; to its former Executive Vice-President and Chief Financial Officer and to its Director of Marketing and International Business Development. None of the Company's other executive officers had annual salary and bonus in excess of $100,000 for services rendered during any of the three years ended December 31, 1998. SUMMARY COMPENSATION TABLE
Annual Compensation ------------------------------------------------------------ NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER COMPENSATION - ------------------------------------------ ---- ----------------- ------------ -------------------- Dr. Joseph Cummins, Chairman -- of the Board, President and Chief Executive Officer.............. 1998 $ 120,000 $ -- $ 1997 120,000 20,000 12,000(3) 1996 120,000 -- 252,000(4) Charles Hughes, Executive Vice- President and Chief Financial Officer (1).......................... 1998 -- -- -- 1997 147,435 (2) -- 10,333(3) 1996 75,000 10,000 157,575(5) John Smith, Director of Marketing and International Business Development.......................... 1998 100,000 - --
(1) Mr. Hughes terminated his employment with the Company on September 8, 1997. (2) Includes both 1997 salary and severance payments. (3) Represents a Company contribution to the Simplified Employee Pension Plan. (4) Represents the value of 30,000 shares of common stock issued at $5.00 per share and payment of withholding tax requirements in settlement of restricted stock grants and a Company contribution of $12,000 to the Simplified Employee Pension Plan. (5) Represents the value of 19,000 shares of common stock issued at $5.00 per share and payment of withholding tax requirements in settlement of restricted stock grants and a Company contribution of $7,500 to the Simplified Employee Pension Plan. 19 20 OPTION GRANTS IN 1998 The following table sets forth certain information relating to options granted in 1998 to the executive officers named above, to purchase shares of common stock of the Company.
NUMBER OF SHARES OF COMMON STOCK % OF TOTAL UNDERLYING OPTIONS GRANTED EXERCISE OR OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION NAME GRANTED(#) IN 1997 ($/SH) DATE - ----------------------------------------- ------------ --------------- ----------- ---------- John Smith............................... 40,000 67.8% $1.75 (1) 09/13/2008
(1) The fair market value of the common stock on the date of the grant. AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1998 AND YEAR-END OPTION VALUES The following table sets forth information for the executive officers named above, regarding the exercise of options during 1998 and unexercised options held at the end of 1998.
NUMBER OF SHARES OF VALUE OF UNEXERCISED COMMON STOCK UNDERLYING IN-THE-MONEY SHARES UNEXERCISED OPTIONS AT OPTIONS AT ACQUIRED ON VALUE DECEMBER 31, 1998(#) DECEMBER 31, 1998($)(1) NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ------------------------------- ------------- ------------ ------------------------- ------------------------- Joseph Cummins -- -- 5,500 / 9,000 None / None John Smith - - - / 40,000 None / None
(1) Calculated based on the closing price of the common stock ($1.25) as reported by NASDAQ on December 30, 1998. DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
Cash Compensation Security Grants ------------------------------------ --------------- NUMBER OF SECURITIES MEETING CONSULTING UNDERLYING NAME FEES(1) FEES(2) OPTIONS - ----------------------------------------------------- ----------- ------------ ------------- Stephen Chen, PhD $ 2,000 $ 45,950 5,000 James Cook 2,000 3,000 5,000 Thomas D'Alonzo 2,000 - 5,000 Katsuaki Hayashibara 2,000 -- 5,000 Brian McLean, MD 2,000 -- 5,000 Dennis Moore, DVM 2,000 4,500 5,000 James Page, MD 1,000 1,200 5,000
(1) Each director receives a fee of $1,000 for in-person attendance at each regular directors' meeting. (2) Each director receives $1,200 per day for employment on special projects or assignments. 20 21 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of December 31, 1998, there were 5,414,232 shares of the Company's common stock outstanding. The following table sets forth as of December 31, 1998, the beneficial ownership of each person who owns more than 5% of such outstanding common stock:
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF TOTAL - ----------------------------------------------- ---------------- ---------------- Hayashibara Biochemical Laboratories, Inc. 2-3 Shimoishii 1-chome Okayama 700, Japan 1,232,856 22.8 Dr. Joseph Cummins 800 West 9th Avenue Amarillo, Texas 79101 676,814(1) 12.5 Mesa Operating Limited Partnership P.O. Box 2009 Amarillo, Texas 79189-2009 315,120 5.8 Mochida Pharmaceutical Co., Ltd. 7, Yotsuya 1-chome Shinjuku-Ku Tokyo 160, Japan 300,000 5.5
(1) Includes an aggregate of 337,668 shares of common stock held by Joseph Cummins as trustee under certain trusts for the benefit of his children and 10,590 shares owned by Dr. Cummins' wife. The following table sets forth the beneficial ownership of the Company's stock as of December 31, 1998 by each director, and by all executive officers and directors as a group:
DIRECTORS NUMBER OF SHARES PERCENT OF TOTAL - --------------------------------------------- ---------------- ---------------- Joseph Cummins 676,814(1) 12.5 Dennis Moore 149,616 2.8 James Cook 66,600(2) 1.2 Katsuaki Hayashibara 48,240 1.0 Stephen Chen 7,900 * Thomas D'Alonzo 3,000 * Brian McLean -- -- James Page -- -- Total Group (all directors and 952,170 17.5 executive officers - 8 persons)
* Less than 1% (1) Includes an aggregate of 337,668 shares of common stock held by Joseph Cummins as trustee under certain trusts for the benefit of his children and 10,590 shares owned by Dr. Cummins' wife. (2) All of such shares are owned jointly with Mr. Cook's wife. 21 22 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has relied significantly on HBL, the largest shareholder of the Company, for a substantial portion of its capital requirements. From 1989 to 1996, HBL has provided an aggregate of $9,000,000 of funding pursuant to the Development Agreement, purchased from the Company an aggregate of 661,620 shares of common stock for a total purchase price of $2,444,300 and made loans to the Company aggregating $3,600,000, of which $1,000,000 loaned after March 31, 1996 was repaid simultaneously with the consummation of the IPO. As of December 31, 1998, the outstanding amount of the Company's indebtedness to HBL (including accrued interest) was $2,808,356. HBL owns 1,232,856 shares, approximately 23% of the Company's common stock. In addition to the Development Agreement, HBL and the Company are parties to various license and manufacturing and supply agreements pursuant to which the Company licenses certain technology to or from HBL and HBL supplies formulations of its IFN[alpha] to the Company. Pursuant to a Stock Purchase Agreement entered into in September 1987 between the Company and Mesa, Inc. ("Mesa"), which owns 315,120 shares of common stock, the Company has agreed that for as long as Mesa is a shareholder of the Company, the Company shall not without the prior written approval of Mesa engage in any repurchase or redemption of its issued and outstanding shares of common stock, unless such repurchase or redemption is offered, pro rata, to all then existing shareholders. During the years ended December 31, 1998 and 1997, the Company paid $74,000 and $88,000, respectively, for legal services rendered by Morris, Moore, Moss and Douglass, P.C. Edward Morris, the Secretary of the Company, is a member of such firm. Although the Company believes that the foregoing transactions were on terms no less favorable to the Company than would have been available from unaffiliated third parties in arm's length transactions, there can be no assurance that this is the case. All future transactions and loans between the Company and its officers, directors and 5% shareholders will be on terms no less favorable to the Company than could be obtained from independent third parties. There can be no assurance, however, that future transactions or arrangements between the Company and its affiliates will be advantageous, that conflicts of interest will not arise with respect thereto or that if conflicts do arise, that they will be resolved in favor of the Company. 22 23 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBIT INDEX
NUMBER DESCRIPTION - -------------- --------------------------------------------------------------------------- 3.1* Restated Articles of Incorporation of the Company. 3.2* Articles of Amendment of Restated Articles of Incorporation of the Company. 3.3* Bylaws of the Company. 4.1* Specimen Common Stock Certificate. 4.2* Form of Underwriter's Warrant. 10.1* Agreement dated as of April 1, 1984 between University Patents, Inc. and the Company. 10.2* License Agreement dated as of March 22, 1988 between the Company and The Texas A&M University System. 10.3* License Agreement dated October 20, 1989 between the Company and ISI. 10.4* Manufacturing and Supply Agreement dated October 20, 1989 between the Company and ISI. 10.5* Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and HBL, as amended. 10.6* Amended and Restated Agreement dated as of November 24, 1992 between Mitsubishi and the Company. 10.7* Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL. 10.9* Employment Agreement dated as of March 4, 1994 between the Company and Dr. Joseph M. Cummins, as amended. 10.11* Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL. 10.12* Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited. 10.13* Amendment of ACC/ISI License Agreement dated April 27, 1995 between the Company and ISI. 10.14* PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the Company. 10.15* License and Supply Agreement dated July 10, 1995 between Veldona Africa, Inc. ("VAF") and Innovative Therapeutics, Ltd. ("ITL"). 10.16* Pricing Amendment, dated December 5, 1995 between VAF and ITL. 10.18* Form of Consulting Agreement between the Company and the Underwriter. 10.19* Research Agreement dated March 25, 1996 between the Company and Ajinomoto Co., Inc. 10.20 1996 Employee Stock Option Plan, Amended and Restated as of September 12, 1998. 10.21 Outside Director and Advisor Stock Option Plan, Amended and Restated as of September 12, 1998.
23 24
NUMBER DESCRIPTION - -------------- --------------------------------------------------------------------------- 10.22* Form of Indemnification Agreement between the Company and officers and directors of the Company. 10.23* Indemnification Agreement between HBL and the Company. 10.24* Stock Purchase Agreement dated as of September 21, 1987 between Mesa Operating Limited Partnership and the Company. 10.26** License Agreement dated July 22, 1997, between Hoffmann-La Roche Inc., and the Company. 10.27** Distribution Agreement dated January 12, 1998, between Global Damon Pharmaceutical and the Company. 10.28** Distribution Agreement dated September 17, 1997, between HBL and the Company (TNF-A). 10.29** Distribution Agreement dated September 17, 1997, between HBL and the Company (IFN-G). 10.30 Amendment No. 1 dated September 28, 1998 to License Agreement of March 22, 1988, between The Texas A&M University System and the Company. 10.31 Employment Agreement dated as of November 29, 1998 between the Company and Kathleen L. Kelleher. 10.32 Employment Agreement dated as of September 14, 1998 between the Company and Dr. Philip C. Fox. 10.33 Employment Agreement dated as of September 14, 1998 between the Company and John Smith. 10.34 Engagement Agreement dated as of October 15, 1998 between Trust Company of the South and the Company. 21. Subsidiaries of the Company. The following sets forth the name and jurisdiction of incorporation of each subsidiary of the Company. All of such subsidiaries are wholly-owned by the Company.
NAME JURISDICTION OF INCORPORATION ----------------------------- ----------------------------- VANGUARD BIOSCIENCES, INC. TEXAS VELDONA USA, INC. TEXAS VELDONA AFRICA, INC. TEXAS VELDONA POLAND, INC. TEXAS ABI TAIWAN, INC. TEXAS AMARILLO CELL OF CANADA, INC. TEXAS 27. Financial Data Schedule
*The Exhibit is incorporated by reference to the exhibit of the same number to the Company's Registration Statement on Form SB-2 filed with and declared effective by the Commission (File No. 333-4413) on August 8, 1996. **The Exhibit is incorporated by reference to the Company's 1997 Annual Report on Form 10-KSB filed with the Commission on or before March 31, 1998. 24 25 REPORTS ON FORM 8-K No reports on Form 8-K have been filed for the quarter ended December 31, 1998. 25 26 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. AMARILLO BIOSCIENCES, INC. By: /s/ JOSEPH M. CUMMINS -------------------------------------------- Joseph M. Cummins, Chairman of the Board, President, Chief Financial Officer and Chief Executive Officer Date: March 26, 1999 ------------------------- 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.
Signature Title Date - --------- ----- ---- /s/ JOSEPH M. CUMMINS March 26, 1999 - --------------------------------------- Chairman of the Board, ------------------------------ Joseph M. Cummins President, Chief Financial Officer, Director and Chief Executive Officer /s/ JAMES COOK March 26, 1999 - --------------------------------------- Director ------------------------------ James Cook /s/ DENNIS MOORE March 26, 1999 - --------------------------------------- Director ------------------------------ Dennis Moore /s/ JAMES PAGE March 26, 1999 - --------------------------------------- Director ------------------------------ James Page /s/ BRIAN MCLEAN March 26, 1999 - --------------------------------------- Director ------------------------------ Brian McLean
27 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Consolidated Financial Statements Year ended December 31, 1998 CONTENTS
Report of Independent Auditors ...................................F-1 Audited Consolidated Financial Statements Consolidated Balance Sheets ......................................F-2 Consolidated Statements of Operations.............................F-3 Consolidated Statements of Stockholders' Equity (Deficit).........F-4 Consolidated Statements of Cash Flows ............................F-7 Notes to Consolidated Financial Statements........................F-9
28 Report of Independent Auditors The Board of Directors Amarillo Biosciences, Inc. We have audited the accompanying consolidated balance sheets of Amarillo Biosciences, Inc. and subsidiaries (companies in the development stage) as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit) 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 audits. The financial statements for the period June 25, 1984, (inception) through December 31, 1991, were audited by other auditors whose report dated July 12, 1992, which has been furnished to us, expressed an unqualified opinion on those statements. The financial statements for the period June 25, 1984, (inception) through December 31, 1991, include total revenues and net loss of $643,566 and $3,901,236, respectively. Our opinion on the statements of operations, stockholders' equity (deficit), and cash flows for the period June 25, 1984, (inception) through December 31, 1998, insofar as it relates to amounts for prior periods through December 31, 1991, is based solely on the report of other auditors. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amarillo Biosciences, Inc. and subsidiaries as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the years then ended, and the period from June 25, 1984 (inception) through December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas February 11, 1999 F-1 29 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Consolidated Balance Sheets
DECEMBER 31, ------------------------------ 1998 1997 ASSETS Current assets: Cash and cash equivalents $ 4,776,328 $ 879,170 Marketable securities -- 6,007,182 Other current assets 43,415 70,779 ------------ ------------ Total current assets 4,819,743 6,957,131 Property and equipment, net 116,761 125,179 Patent license, net of accumulated amortization of $81,177 and $73,824 in 1998 and 1997, respectively 43,823 51,176 Organizational costs, net of accumulated amortization of $6,084 and $4,962 in 1998 and 1997, respectively -- 1,122 Investment in ISI common stock 5,735 114,023 ------------ ------------ Total assets $ 4,986,062 $ 7,248,631 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 88,920 $ 74,754 Accrued interest expense 208,356 91,356 Accrued legal expense 1,609 28,341 Accrued vacation 19,000 19,000 Other accrued expense 113 617 ------------ ------------ Total current liabilities 317,998 214,068 Notes payable 2,600,000 2,600,000 ------------ ------------ Total liabilities 2,917,998 2,814,068 Commitments and contingencies Stockholders' equity Common stock, $.01 par value: Authorized shares -10,000,000 Issued shares- 5,414,232 in 1998 and 1997 54,142 54,142 Additional paid-in capital 13,392,138 13,392,138 Deficit accumulated during the development stage (11,378,216) (9,045,415) Accumulated other comprehensive income -- 33,698 ------------ ------------ Total stockholders' equity 2,068,064 4,434,563 ------------ ------------ Total liabilities and stockholders' equity $ 4,986,062 $ 7,248,631 ============ ============
See accompanying notes. F-2 30 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Consolidated Statements of Operations
CUMULATIVE FROM JUNE 25, 1984 (INCEPTION) YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1998 ------------ ------------ ------------ Revenues: Contract revenues $ -- $ -- $ 9,000,000 Interferon sales -- 396 420,974 Interest income 296,819 411,700 1,414,637 Sublicense fees -- -- 113,334 Royalty income -- -- 31,544 Gain (loss) on sale of ISI stock (74,590) 188,562 113,972 Other 60 52,000 604,431 ------------ ------------ ------------ 222,289 652,658 11,698,892 Expenses: Research and development expenses 1,372,850 1,650,415 11,352,444 Selling, general, and administrative expenses 1,065,240 1,355,435 10,872,720 Interest expense 117,000 118,060 816,944 ------------ ------------ ------------ 2,555,090 3,123,910 23,042,108 ------------ ------------ ------------ Loss before income taxes (2,332,801) (2,471,252) (11,343,216) Income tax expense -- -- 35,000 ------------ ------------ ------------ Net loss $ (2,332,801) $ (2,471,252) $(11,378,216) ============ ============ ============ Basic and diluted net loss per share $ (0.43) $ (0.46) ============ ============ Weighted average shares outstanding 5,414,232 5,414,232 ============ ============
See accompanying notes. F-3 31 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Consolidated Statements of Stockholders' Equity (Deficit) Cumulative from June 25, 1984 (Inception) through December 31, 1998
DEFICIT ACCUMULATED COMMON STOCK ADDITIONAL DURING THE ISSUANCE ------------------------- PAID IN DEVELOPMENT PRICE SHARES AMOUNT CAPITAL STAGE ---------- ---------- ---------- ------------ -------------- 1984 Initial issuance for cash $ 0.29 84,000 $ 840 $ 23,660 $ -- Initial issuance in exchange for legal fees 0.29 30,000 300 8,450 -- Initial issuance in exchange for services research and development costs and 0.01 1,086,000 10,860 (9,955) -- 1985 Issuance for cash 0.83 102,000 1,020 83,980 -- Issuance in exchange for professional fees salaries and research services 0.83 10,800 108 8,892 -- 1986 Issuance in exchange for professional fees salaries and services 0.83 22,800 228 18,772 -- Treasury stock purchase; 11,040 shares at cost -- -- -- -- Issuance for cash 0.83-1.25 182,352 1,824 154,626 -- Issuance in exchange for professional fees salaries and research services 0.83 19,020 190 15,660 -- 1987 Issuance for cash 1.25-2.08 309,648 3,096 445,974 -- Treasury stock purchase; 2,400 shares at cost -- -- -- -- 1988 Issuance for cash 1.88 120,972 1,210 225,613 -- 1989 Issuance for cash 2.08 2,568 26 5,324 -- Issuance for cash 2.50 227,748 2,277 567,093 -- 1990 Issuance for cash 1.72-2.50 592,584 5,926 1,108,634 -- Issuance for cash 4.17 174,000 1,740 723,260 -- Issuance in exchange for note receivable from stockholder 2.50 54,540 545 135,805 -- 1991 Repayment of note receivable from stockholder -- -- -- -- Net loss and total comprehensive loss cumulative from June 25, 1984 (inception) through December 31, 1991 -- -- -- (3,901,236) NOTE UNREALIZED RECEIVABLE TOTAL GAIN (LOSS) FROM TREASURY STOCKHOLDERS' ON INVESTMENT STOCKHOLDER STOCK EQUITY ------------- ----------- ---------- --------------- 1984 Initial issuance for cash $ -- $ -- $ -- $ 24,500 Initial issuance in exchange for legal fees -- -- -- 8,750 Initial issuance in exchange for services research and development costs and -- -- -- 905 1985 Issuance for cash -- -- -- 85,000 Issuance in exchange for professional fees salaries and research services -- -- -- 9,000 1986 Issuance in exchange for professional fees salaries and services -- -- -- 19,000 Treasury stock purchase; 11,040 shares at cost -- -- (22,500) (22,500) Issuance for cash -- -- -- 156,450 Issuance in exchange for professional fees salaries and research services -- -- -- 15,850 1987 Issuance for cash -- -- -- 449,070 Treasury stock purchase; 2,400 shares at cost -- -- (3,500) (3,500) 1988 Issuance for cash -- -- -- 226,823 1989 Issuance for cash -- -- -- 5,350 Issuance for cash -- -- -- 569,370 1990 Issuance for cash -- -- -- 1,114,560 Issuance for cash -- -- -- 725,000 Issuance in exchange for note receivable from stockholder -- (136,350) -- -- 1991 Repayment of note receivable from stockholder -- 136,350 -- 136,350 Net loss and total comprehensive loss cumulative from June 25, 1984 (inception) through December 31, 1991 -- -- -- (3,901,236)
F-4 32 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Consolidated Statements of Stockholders' Equity (Deficit) Cumulative from June 25, 1984 (Inception) through December 31, 1998
DEFICIT ACCUMULATED COMMON STOCK ADDITIONAL DURING THE ISSUANCE -------------------------- PAID IN DEVELOPMENT PRICE SHARES AMOUNT CAPITAL STAGE ---------- ---------- ----------- ------------- -------------- 1992 Net loss and total comprehensive loss for year ended December 31, 1992 -- $ -- $ -- $ (505,558) --------- --------- ------------- ------------ Balance at December 31, 1992 3,019,032 30,190 3,515,788 (4,406,794) 1993 Net loss and total comprehensive loss for year ended December 31, 1993 -- -- -- (108,363) --------- --------- ------------- ------------ Balance at December 31, 1993 3,019,032 30,190 3,515,788 (4,515,157) 1994 Net loss and total comprehensive loss for year ended December 31, 1994 -- -- -- (129,239) Adjustment to unrealized loss on investments -- -- -- -- Total comprehensive loss --------- --------- ------------- ------------ Balance at December 31, 1994 3,019,032 30,190 3,515,788 (4,644,396) 1995 Issuance for stock grant 2.50 29,640 297 73,803 -- Net loss for year ended December 31, 1995 -- -- -- (311,579) Adjustment to unrealized loss on investments -- -- -- -- Total comprehensive loss --------- --------- ------------- ------------ Balance at December 31, 1995 3,048,672 30,487 3,589,591 (4,955,975) 1996 Issuance for cash 5.00 2,300,000 23,000 9,354,502 -- Issuance for stock grant 5.00 79,000 790 394,210 -- Warrants issued for cash -- -- 200 -- Cancellation of treasury stock (13,440) (135) (25,865) -- Net loss for year ended December 31, 1996 -- -- -- (1,618,188) Adjustment to unrealized loss on investments -- -- -- -- Total comprehensive loss --------- --------- ------------- ------------ Balance at December 31, 1996 5,414,232 54,142 13,312,638 (6,574,163) 1997 Net loss for year ended December 31, 1997 -- -- -- (2,471,252) Adjustment to unrealized gain (loss) on investment -- -- -- -- Total comprehensive loss Options issued for professional services -- -- 79,500 -- --------- --------- ------------- ------------ Balance at December 31, 1997 5,414,232 $ 54,142 $ 13,392,138 $ (9,045,415) ========= ========= ============= ============ NOTE UNREALIZED RECEIVABLE TOTAL GAIN (LOSS) FROM TREASURY STOCKHOLDERS' ON INVESTMENT STOCKHOLDER STOCK EQUITY ------------- ----------- ---------- --------------- 1992 Net loss and total comprehensive loss for year ended December 31, 1992 $ -- $ -- $ -- $ (505,558) --------- --------- --------- --------------- Balance at December 31, 1992 -- -- (26,000) (886,816) 1993 Net loss and total comprehensive loss for year ended December 31, 1993 -- -- -- (108,363) --------- --------- --------- --------------- Balance at December 31, 1993 -- -- (26,000) (995,179) 1994 Net loss and total comprehensive loss for year ended December 31, 1994 -- -- -- (129,239) Adjustment to unrealized loss on investments (57,316) -- -- (57,316) --------------- Total comprehensive loss (186,555) --------- --------- --------- --------------- Balance at December 31, 1994 (57,316) -- (26,000) (1,181,734) 1995 Issuance for stock grant -- -- -- 74,100 Net loss for year ended December 31, 1995 -- -- -- (311,579) Adjustment to unrealized loss on investments 57,316 -- -- 57,316 --------------- Total comprehensive loss (254,263) --------- --------- --------- --------------- Balance at December 31, 1995 -- -- (26,000) (1,361,897) 1996 Issuance for cash -- -- -- 9,377,502 Issuance for stock grant -- -- -- 395,000 Warrants issued for cash -- -- -- 200 Cancellation of treasury stock -- -- 26,000 -- Net loss for year ended December 31, 1996 -- -- -- (1,618,188) Adjustment to unrealized loss on investments (3,500) -- -- (3,500) --------------- Total comprehensive loss (1,621,688) --------- --------- --------- --------------- Balance at December 31, 1996 (3,500) -- -- 6,789,117 1997 Net loss for year ended December 31, 1997 -- -- -- (2,471,252) Adjustment to unrealized gain (loss) on investment 37,198 -- -- 37,198 --------------- Total comprehensive loss (2,434,054) --------------- Options issued for professional services -- -- -- 79,500 --------- --------- --------- --------------- Balance at December 31, 1997 $ 33,698 $ -- $ -- $ 4,434,563 ========= ========= ========= ===============
F-5 33 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Consolidated Statements of Stockholders' Equity (Deficit) Cumulative from June 25, 1984 (Inception) through December 31, 1998
DEFICIT ACCUMULATED COMMON STOCK ADDITIONAL DURING THE ISSUANCE ----------------------- PAID IN DEVELOPMENT PRICE SHARES AMOUNT CAPITAL STAGE ---------- ---------- ---------- -------------- -------------- Net loss for year ended December 31, 1998 -- $ $ -- $ -- $ (2,332,801) Adjustment to unrealized gain (loss) on investment -- -- -- -- Total comprehensive loss --------- ---------- -------------- -------------- Balance at December 31, 1998 5,414,232 $ 54,142 $ 13,392,138 $ (11,378,216) ========= ========== ============== ============== NOTE UNREALIZED RECEIVABLE TOTAL GAIN (LOSS) FROM TREASURY STOCKHOLDERS' ON INVESTMENT STOCKHOLDER STOCK EQUITY ------------- ----------- ---------- --------------- Net loss for year ended December 31, 1998 $ -- $ -- $ -- $ (2,332,801) Adjustment to unrealized gain (loss) on investment (33,698) -- -- (33,698) --------------- Total comprehensive loss (2,366,499) ------------- ----------- ---------- --------------- Balance at December 31, 1998 $ -- $ -- $ -- $ 2,068,064 ============= =========== ========== ===============
See accompanying notes. F-6 34 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Consolidated Statements of Cash Flows
CUMULATIVE FROM JUNE 25, 1984 (INCEPTION) YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1998 ------------- ------------- ------------- OPERATING ACTIVITIES Net loss $ (2,332,801) $ (2,471,252) $ (11,378,216) Adjustments to reconcile net loss to net cash used in operating activities: Loss on impairment of ISI stock 74,590 -- 74,590 Depreciation 19,486 21,388 190,466 Amortization 8,475 7,648 92,217 Discount on investment in ISI -- (125,325) 24,675 Recognition of deferred sub-license fees -- -- (32,844) Organization costs -- (1,087) (11,040) Gain (loss) on sale of assets -- 1,002 (7,373) Common stock issued for stock grant -- -- 469,100 Common stock issued for services -- -- 53,505 Options issued for services -- 79,500 79,500 Changes in operating assets and liabilities: Other current assets 27,364 36,756 (43,415) Accounts payable 14,166 (63,544) 88,920 Accrued expenses 89,764 (199,339) 229,078 ------------- ------------- ------------- Net cash used in operating activities (2,098,956) (2,714,253) (10,170,837) INVESTING ACTIVITIES Sale (purchase) of marketable securities 6,007,182 (22,812) -- Capital expenditures (11,068) (12,688) (322,925) Proceeds from sale of equipment -- 9,626 23,071 Purchase of patent license -- -- (125,000) Sale of (investment in) ISI common stock -- 520,000 (105,000) ------------- ------------- ------------- Net cash used in investing activities $ 5,996,114 $ 494,126 $ (529,854)
F-7 35 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Consolidated Statements of Cash Flows (continued)
CUMULATIVE FROM JUNE 25, 1984 (INCEPTION) YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1998 ------------- ------------- ------------- FINANCING ACTIVITIES Receipt of sub-license fees $ -- $ -- $ 32,844 Proceeds from notes payable -- 300,000 2,600,000 Repayment of note receivable from stockholder for purchase of common stock -- -- 136,350 Issuance of common stock -- -- 12,733,825 Acquisition of treasury stock -- -- (26,000) ------------- ------------- ------------- Net cash provided by financing activities -- 300,000 15,477,019 ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 3,897,158 (1,920,127) 4,776,328 Cash and cash equivalents at beginning of period 879,170 2,799,297 -- ------------- ------------- ------------- Cash and cash equivalents at end of period $ 4,776,328 $ 879,170 $ 4,776,328 ============= ============= ============= SUPPLEMENTAL INFORMATION Cash paid for income taxes $ -- $ -- $ 37,084 ============= ============= ============= Cash paid for interest $ -- $ -- $ 6,466 ============= ============= =============
See accompanying notes. F-8 36 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements December 31, 1998 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES ORGANIZATION Amarillo Biosciences, Inc. (the Company), is a development stage company, developing and marketing within the United States and internationally applications of low dose oral IFN[alpha] in both humans and animals. The Company is currently conducting clinical studies as part of the process of obtaining regulatory approval from the United States Food and Drug Administration (FDA), so that commercial marketing can begin in the United States. The Company's viability is dependent upon successful commercialization of products resulting from its research and product development activities. All of the Company's products will require significant additional development, laboratory and clinical testing and investment prior to obtaining regulatory approval to commercially market its product(s). Accordingly, for at least the next few years, the Company will continue to incur research and development and general and administrative expenses and likely will not generate sufficient revenues from product sales to support its operations. The Company has been dependent upon financing from its stockholders. The Company's development-stage-through-1991 activities were financed primarily through the issuance of common stock. From 1991 to August 1996, such activities were financed under an agreement (described in Note 4) with a major stockholder. In August 1996, the Company completed its initial public offering receiving net proceeds of approximately $9,378,000. The Company's 1999 Plan of Operations calls for the Company to expend approximately $6.8 million in 1999, including the substantial expense of the Company's Phase III Sjogren's syndrome trial (see "Management's 1999 Plan of Operations" elsewhere herein). At December 31, 1998, the Company had available cash of $4,776,000. The Company will need to raise additional funds in order to completely execute its 1999 Plan. The Company is presently negotiating with a major investor in an attempt to raise additional funds. Should a commitment for additional funds not be obtained during the second quarter of 1999, the Company will take steps to curtail clinical trial expenditures and to reduce staff and administrative expenses. Management believes that based on the Company's ability to curtail clinical trial expense and to reduce staff and administration expenses, available funds are sufficient to meet its anticipated cash requirements for at least the next twelve months. The Company has no current arrangements with respect to further sources of financing and there can be no assurance that any of its officers, directors or stockholders (including the major stockholder) will provide any portion of the Company's future financing requirements. F-9 37 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED) The possible inability to obtain further financing would have a material adverse effect on the Company, including possibly requiring the Company to cease operations. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Amarillo Cell of Canada, Inc., Veldona Africa, Inc., Veldona Poland, Inc., Veldona USA, Inc., Vanguard Biosciences, Inc. and ABI Taiwan, Inc. (all Texas corporations). All significant intercompany balances and transactions have been eliminated in consolidation. The effect of translation of foreign currencies is not material. MARKETABLE SECURITIES AND INVESTMENT IN ISI COMMON STOCK Marketable securities and the investment in ISI common stock are classified as held-to-maturity and available-for-sale, respectively. Held-to-maturity securities are carried at amortized cost and matured in September 1998. Available-for-sale securities are carried at fair value, with any unrealized gain or loss reported as a separate component of stockholders' equity. CONCENTRATION OF CREDIT RISK At December 31, 1998, the Company's cash equivalents were invested principally in money market accounts, a substantial portion of which are uninsured. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using methods that approximate the declining balance method over the estimated useful lives of the assets. PATENT LICENSE The patent license represents payments made under one of the license agreements described in Note 5. The agreement remains in effect over the life of the underlying patents. Accordingly, the patent license fee is being amortized over 17 years using the straight-line method. F-10 38 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED) INCOME TAXES The Company files a consolidated income tax return with its domestic subsidiaries, Amarillo Cell of Canada, Inc., Veldona Africa, Inc., Veldona Poland, Inc., Veldona USA, Inc., Vanguard Biosciences, Inc. and ABI Taiwan, Inc. On January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by Statement of Financial Accounts Standards No. 109, Accounting for Income Taxes (Statement No. 109). As permitted by the new rules, prior years' financial statements have not been restated. The effect of adopting Statement No. 109 was not material. REVENUE RECOGNITION Contract revenue for research and development performed under the manufacturing and supply agreement with Hayashibara Biochemical Laboratories, Inc. (HBL) (see Note 4) was recorded as earned based on research and administrative costs incurred. Amounts received in advance of services to be performed were recorded as deferred revenue until expenses were incurred. The remaining balance of all contract revenue received from HBL was recorded as earned in 1996. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. USE OF 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. STOCK SPLIT In May 1993, the Company approved a ten-for-one stock split for all issued and outstanding shares. As described in Note 7, during 1996 a six-for-five stock split was effected. All references to common stock and per share data have been restated to give effect to these splits. F-11 39 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED) STOCK-BASED COMPENSATION The Company accounts for stock-based compensation utilizing Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). In October 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Number 123, Accounting for Stock Based Compensation (SFAS 123). Under the provisions of SFAS 123, the Company has elected to continue to apply the provisions of APB 25 to its stock-based compensation arrangements and provide supplementary financial statement disclosures as required under SFAS 123. BASIC AND DILUTED NET LOSS PER SHARE Net loss per share is based on the number of weighted average shares outstanding. The effect of warrants and options outstanding (see Note 7) is anti-dilutive. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Financial Accounting Standards Board Statement No. 130 (Statement 130), Reporting Comprehensive Income. Statement 130 establishes new rules for the display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's results of operations or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's available-for-sale securities, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. 2. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and consist of the following:
DECEMBER 31, --------------------- 1998 1997 Land $ 8,000 $ 8,000 Building 94,532 94,532 Furniture and equipment 128,157 117,943 Automobile 13,688 13,688 -------- -------- 244,377 234,163 Less accumulated depreciation 127,616 108,984 -------- -------- $116,761 $125,179 ======== ========
F-12 40 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 3. NOTES PAYABLE In September 1991 the Company borrowed $1,000,000 under a note payable agreement with HBL. In September 1992, the Company borrowed an additional $1,000,000 under a similar note agreement with HBL. The $1,000,000 note plus accrued interest of $300,000 due September 25, 1996 was renewed in a new note to HBL for $1,300,000 due September 25, 2001 which accrues interest at the rate of 4 1/2%. The $1,000,000 note plus accrued interest of $300,000 due September 16, 1997 was renewed in a new note to HBL for $1,300,000 due September 16, 2002 which accrues interest at the rate of 4 1/2%. Each of the notes provide that the principal and accrued interest be paid only from 10% of the Company's gross revenues from sales of interferon. All payments are to be applied first to accrued interest. As repayment of the notes is dependent on future sales, management is unable to estimate the fair value of the notes at December 31, 1998. Because material amounts of sales are not expected in the next twelve months, the notes continue to be classified as non-current liabilities. 4. MANUFACTURING AND SUPPLY AGREEMENTS The Company was a party to the following manufacturing and supply agreements at December 31, 1998: On March 13, 1992, the Company entered into a Joint Development and Manufacturing/Supply Agreement with HBL (the Development Agreement), a major stockholder (see Note 7) under which HBL will formulate, manufacture, and supply HBL interferon for the Company or any sub-licensee. In exchange, HBL is entitled to receive a transfer fee, specified royalties and a portion of any payment received by the Company for sub-license of rights under this agreement. The agreement further provides that the Company sub-license to HBL the right to market HBL interferon for oral use in humans and in non-human, warm-blooded species in Japan, in exchange for the Company receiving a royalty fee based on net sales. On June 1, 1994, the Company entered into an additional agreement with HBL to make the Company HBL's exclusive agent for the development of HBL interferon for non-oral use in humans and in non-human, warm-blooded species in North America. In exchange, HBL is entitled to receive a transfer fee based on units of interferon supplied. Under the Development Agreement, HBL provided $9,000,000 in research funding to the Company. The agreement also provides that a royalty fee be paid to HBL. The initial term of the agreement is for seven years, but it will be renewed automatically for successive three-year terms subject to prior written agreement. HBL can terminate the agreement at any time after the end of the first renewal term if certain conditions are not met. F-13 41 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 4. MANUFACTURING AND SUPPLY AGREEMENTS (CONTINUED) On October 20, 1989, the Company entered into a manufacturing and supply agreement with Interferon Sciences, Inc. (ISI), then a 1% stockholder of the Company under which ISI will manufacture and utilize ISI interferon to formulate and supply interferon-containing compositions to the Company for use in non-human species. Under the Agreement, ISI is entitled to receive certain transfer fees, manufacturing and supply fees, and a portion of any payments received by the Company related to the use of ISI interferon. The agreement will be in force for seven years after ISI's receipt of the first purchase order from the Company and thereafter as long as net sales of such products by the Company meet certain levels. As of December 31, 1998, the Company has not submitted a purchase order to ISI. 5. LICENSE AND SUBLICENSE AGREEMENTS The Company holds patent rights for which the Company has paid certain license fees under three license agreements. Under these agreements, the Company will pay the licensor a portion of any sub-license fee received by the Company with respect to the manufacturing, use or sale of a licensed product, as well as a royalty fee based on the net selling price of licensed products, subject to a minimum annual royalty. The Company has also entered into various sub-license agreements under which the Company is entitled to receive royalties based on the net sales value of licensed products. 6. RESEARCH AGREEMENTS The Company contracts with third parties throughout the world to conduct research including studies and clinical trials. These agreements are generally less than one year in duration. At December 31, 1998, the Company had commitments to provide additional funding of approximately $192,000 under these agreements. 7. COMMON STOCK In May 1993, the stockholders of the Company approved an amendment to the Articles of Incorporation to increase the total number of authorized shares of common stock of the Company from one million shares to ten million shares. The stockholders also approved a ten-for-one stock split for the currently issued and outstanding shares of the Company. Since 1984, the Company has issued common stock in exchange for various professional, research, and consulting services. The stock issued for non-cash consideration was assigned a value based on the fair value of the services received. F-14 42 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 7. COMMON STOCK (CONTINUED) In December 1989, the Company issued 218,400 shares of stock to HBL for $2.50 per share. In February 1990, an additional 174,000 shares were issued to HBL for $4.17 per share, and in November 1990, an additional 69,120 shares were issued to HBL for $2.50 per share. These shares, combined with purchases from various other stockholders and the 200,100 shares purchased by HBL in the public offering, give HBL control of 23% of the outstanding common stock, or 1,232,856 shares at December 31, 1998. In July 1992, the Board of Directors approved restricted stock grants to three employees which allowed the Company to issue, under certain conditions, up to 180,000 shares of its authorized but unissued shares of common stock. In May 1994 the Board of Directors approved restricted stock grants to an additional employee which allowed the Company to issue, under certain conditions, up to 30,000 shares of its authorized but unissued shares of common stock. In January 1995, 29,640 shares of common stock (net of required federal withholdings of 12,360 shares) were issued to a former employee under a Contract Termination and Severance Agreement. The issuance and withholding were in full satisfaction of the employee's original 84,000 shares in stock grants. In August 1996, 79,000 shares of common stock (net of required federal withholdings of 47,000 shares) were issued to the other three employees. The issuance and withholding were in full satisfaction of the three employees original 126,000 shares in stock grants. Total charges to compensation expense recognized by the Company cumulative from June 25, 1984 (inception) through December 31, 1998 was $735,000. In August 1996, the Company completed its initial public offering and issued 5,300,000 shares of common stock resulting in net proceeds of approximately $9,377,702. In addition to stock options discussed in Note 8, the Company has 200,000 shares of Common Stock reserved for issuance upon exercise of warrants granted to the Company's Underwriter (exercisable through August 2000 at $8.10 per share). During 1997, the Company granted 30,000 options to outside professionals for services which vested immediately at an exercise price of $4.25 (fair market value of the common stock at the date of the grant). The Company recognized $79,500 (representing the fair value of the options) in expense relating to these grants. Under a stock purchase agreement with a stockholder. Mesa. Inc. (Mesa), the Company is prohibited from repurchasing or redeeming any of its issued and outstanding shares without the prior written approval of Mesa unless such redemption or repurchase is offered pro rata to all stockholders. F-15 43 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 8. STOCK OPTION PLAN The Company has elected to follow APB 25 and related interpretations in accounting for its stock-based compensation. Under APB 25, because the exercise price of the Company's stock options has been equal to or greater than the market price of the underlying stock on the date of grant, no compensation expense has been recognized. During 1996, the Company introduced two stock option plans: the 1996 Employee Stock Option Plan (Employee Plan) and the Outside Director and Advisor Stock Option Plan (Director Plan). The Employee Plan has authorized the grant of options to employees for up to a maximum of 390,000 shares of the Company's common stock. All options granted have five to ten year terms and become exercisable over a four to five year period. The option price is equal to 100% to 110% of the fair value of the common stock on the date of grant depending on the percentage of common stock owned by the optionee on the grant date. The Director Plan allows options to purchase a maximum of 210,000 shares of the Company's common stock to be granted to outside directors and scientific advisors to the Company at an exercise price equivalent to 100% of the fair market value of the common stock on the date of grant. The ten year options become exercisable over a period of five years. Supplemental information regarding net loss and net loss per share is required by SFAS 123 and has been determined as if the Company had accounted for its stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1998 and 1997, respectively: risk-free interest rate of 5.55% and 6.61%; dividend yield of 0% and 0%; volatility factors of the expected market price of the Company's common stock of .822 and .692; and a weighted-average expected life of the option of 3.2 and 4.9 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period and the expense for 1998 and 1997 are not necessarily indicative of the effects on reported net income (loss) for future years. The Company's pro forma information as of December 31, is as follows: F-16 44 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 8. STOCK OPTION PLAN (CONTINUED)
1998 1997 -------------- ------------- Pro forma net loss $ (2,358,342) $ (2,544,335) Pro forma basic and diluted net loss per share $ (0.44) $ (0.47)
Based on the Black-Scholes method, the fair value of the options granted as of December 31, is as follows:
1998 1997 ----------- ----------- Number of options issued at fair market value of stock 104,000 66,000 Weighted-average fair value of options $ 1.12 $ 2.48 Weighted-average exercise price of options $ 1.92 $ 3.94 Number of options issued in excess of fair -- 7,000 market value of stock Weighted average fair value of options -- $ 2.11 Weighted average exercise price of options -- $ 4.27
A summary of the Company's stock option activity, and related information for the year ended December 31, is as follows:
1998 1997 ------------------------ ------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE ------- ---------- ------- ----------- Outstanding, beginning of year 188,500 $ 4.64 135,500 $ 5.10 Granted 104,000 1.92 73,000 3.97 Expired, unexercised -- -- (20,000) 5.25 Exercised -- -- -- -- ------- ------- Outstanding, end of year 292,500 $ 3.68 188,500 $ 4.64 ======= ======= Exercisable at end of year 62,900 $ 4.80 23,875 $ 5.08 ======= =======
Exercise prices for options outstanding as of December 31, 1998 ranged from $1.75 to $5.50. The weighted-average remaining contractual life of those options is 8.75 years. F-17 45 Amarillo Biosciences, Inc. and Subsidiaries (companies in the development stage) Notes to Consolidated Financial Statements (continued) 9. EMPLOYEE BENEFIT PLAN The Company has a Simplified Employee Pension Plan (the Plan) which is a contributory plan that covers all employees of the Company. Contributions to the Plan are at the discretion of the Company. The plan expense for the years ended December 31, 1998 and 1997, and cumulative from June 25, 1984 (inception) through December 31, 1998 was $0, $49,131 and $200,857, respectively. 10. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. Significant components of the Company's deferred tax liabilities and assets are as follows at December 31:
1998 1997 ----------- ----------- Deferred tax liability: Prepaid expenses $ 14,287 $ 24,065 Deferred tax assets: Net operating loss and AMT carryforward 3,332,332 2,599,564 Accrued interest and note payable 256,683 235,061 Depreciation and amortization 159,410 116,520 Other 72,572 67,509 ----------- ----------- 3,820,997 3,018,654 Valuation allowance for deferred tax assets (3,806,710) (2,994,589) ----------- ----------- Total deferred tax assets, net of valuation allowance 14,287 24,065 ----------- ----------- Net deferred taxes $ -- $ -- =========== ===========
At December 31, 1998, the Company has net operating loss carryforwards of approximately $9,695,000 for federal income tax purposes expiring in 2006. The ability of the Company to utilize these carryforwards may be limited should changes in stockholder ownership occur in the future. At December 31, 1998, the Company had approximately $36,000 of alternative minimum tax credits which may be carried forward indefinitely. The difference between the reported income tax provision and the benefit normally expected by applying the statutory rate to the loss before income taxes results primarily from the inability of the Company to recognize its tax losses. F-18 46 11. CONTINGENCIES The Company is not a party to any litigation and is not aware of any pending litigation or unasserted claims or assessments as of December 31, 1998. 12. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has and expects to have transactions with related parties, including stockholders. In addition to the transactions disclosed elsewhere in these financial statements, such related party transactions included legal fees of approximately $74,000 and $88,000 paid to Morris, Moore, Moss and Douglass, P.C., a member of which is an officer and stockholder of the Company, in 1998 and 1997, respectively. The Company also employs various stockholders as researchers and consultants and pays fees based on contractual agreements. 13. SETTLEMENT OF LITIGATION Commencing in 1993, the Company was the plaintiff in litigation involving a patent infringement action in New Zealand. In May 1996, a settlement was reached whereby the Company: (1) amended its manufacturing and supply agreement with ISI to allow the sub-license of certain products previously exclusively licensed to ISI and purchased 312,500 shares of ISI common stock for $625,000, or $2 per share, representing the quoted market price of ISI stock at that time; and (2) received $550,000 cash from the defendant in the lawsuit, comprising $50,000 in exchange for a sub-license of the technology that was the subject of the lawsuit and $500,000 as a payment toward research and development costs incurred by the Company. As a result of restrictions on the sale by the Company of its ISI stock until August 1997, the Company discounted the ISI stock (quoted price $1.66 per share at December 31, 1996) to a carrying value of $471,500 at December 31, 1996 and during 1995 charged $150,000 to selling, general and administrative expenses and charged $3,500 to unrealized loss on marketable securities in 1996. During 1997, after a four for one reverse stock split, the Company sold 65,000 shares of ISI stock for $580,850 and realized a gain on the sale of $188,562. At December 31, 1998, the Company determined that its investment in ISI common stock had permanently declined in value and accordingly recognized a loss on the ISI stock of $74,590, representing the difference between the Company's cost basis in the ISI common stock and its quoted market price at December 31, 1998. F-19 47 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------------- --------------------------------------------------------------------------- 3.1* Restated Articles of Incorporation of the Company. 3.2* Articles of Amendment of Restated Articles of Incorporation of the Company. 3.3* Bylaws of the Company. 4.1* Specimen Common Stock Certificate. 4.2* Form of Underwriter's Warrant. 10.1* Agreement dated as of April 1, 1984 between University Patents, Inc. and the Company. 10.2* License Agreement dated as of March 22, 1988 between the Company and The Texas A&M University System. 10.3* License Agreement dated October 20, 1989 between the Company and ISI. 10.4* Manufacturing and Supply Agreement dated October 20, 1989 between the Company and ISI. 10.5* Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and HBL, as amended. 10.6* Amended and Restated Agreement dated as of November 24, 1992 between Mitsubishi and the Company. 10.7* Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL. 10.9* Employment Agreement dated as of March 4, 1994 between the Company and Dr. Joseph M. Cummins, as amended. 10.11* Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL. 10.12* Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and Fernz Corporation Limited. 10.13* Amendment of ACC/ISI License Agreement dated April 27, 1995 between the Company and ISI. 10.14* PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the Company. 10.15* License and Supply Agreement dated July 10, 1995 between Veldona Africa, Inc. ("VAF") and Innovative Therapeutics, Ltd. ("ITL"). 10.16* Pricing Amendment, dated December 5, 1995 between VAF and ITL. 10.18* Form of Consulting Agreement between the Company and the Underwriter. 10.19* Research Agreement dated March 25, 1996 between the Company and Ajinomoto Co., Inc. 10.20 1996 Employee Stock Option Plan, Amended and Restated as of September 12, 1998. 10.21 Outside Director and Advisor Stock Option Plan, Amended and Restated as of September 12, 1998.
48
EXHIBIT NUMBER DESCRIPTION - -------------- -------------------------------------------------------------------------------- 10.22* Form of Indemnification Agreement between the Company and officers and directors of the Company. 10.23* Indemnification Agreement between HBL and the Company. 10.24* Stock Purchase Agreement dated as of September 21, 1987 between Mesa Operating Limited Partnership and the Company. 10.26** License Agreement dated July 22, 1997, between Hoffmann-La Roche Inc., and the Company. 10.27** Distribution Agreement dated January 12, 1998, between Global Damon Pharmaceutical and the Company. 10.28** Distribution Agreement dated September 17, 1997, between HBL and the Company (TNF-A). 10.29** Distribution Agreement dated September 17, 1997, between HBL and the Company (IFN-G). 10.30 Amendment No. 1 dated September 28, 1998 to License Agreement of March 22, 1988, between The Texas A&M University System and the Company. 10.31 Employment Agreement dated as of November 29, 1998 between the Company and Kathleen L. Kelleher. 10.32 Employment Agreement dated as of September 14, 1998 between the Company and Dr. Philip C. Fox. 10.33 Employment Agreement dated as of September 14, 1998 between the Company and John Smith. 10.34 Engagement Agreement dated as of October 15, 1998 between Trust Company of the South and the Company. 21. Subsidiaries of the Company. The following sets forth the name and jurisdiction of incorporation of each subsidiary of the Company. All of such subsidiaries are wholly-owned by the Company.
NAME JURISDICTION OF INCORPORATION ----------------------------- ----------------------------- VANGUARD BIOSCIENCES, INC. TEXAS VELDONA USA, INC. TEXAS VELDONA AFRICA, INC. TEXAS VELDONA POLAND, INC. TEXAS ABI TAIWAN, INC. TEXAS AMARILLO CELL OF CANADA, INC. TEXAS 27. Financial Data Schedule
*The Exhibit is incorporated by reference to the exhibit of the same number to the Company's Registration Statement on Form SB-2 filed with and declared effective by the Commission (File No. 333-4413) on August 8, 1996. **The Exhibit is incorporated by reference to the Company's 1997 Annual Report on Form 10-KSB filed with the Commission on or before March 31, 1998. EX-10.20 2 1996 STOCK OPTION PLAN 1 EXHIBIT 10.20 AMARILLO BIOSCIENCES, INC. 1996 EMPLOYEE STOCK OPTION PLAN AMENDED AND RESTATED AS OF SEPTEMBER 12, 1998 ARTICLE I -- GENERAL 1.01. PURPOSES. The purposes of this 1996 Employee Stock Option Plan (the "Plan") are to: (1) closely associate the interests of the management of AMARILLO BIOSCIENCES, INC. ("ABI") and its Subsidiaries and Affiliates (collectively referred to as the "Company") with the shareholders by reinforcing the relationship between participants' rewards and shareholder gains; (2) provide management with an equity ownership in the Company commensurate with Company performance, as reflected in increased shareholder value; (3) maintain competitive compensation levels; and (4) provide an incentive to management for continuous employment with the Company. 1.02. ADMINISTRATION. (a) The Plan shall be administered by a committee of directors appointed by the Board of Directors of ABI (the "Committee"), as constituted from time to time. The Committee shall consist of at least two members of the Board. Notwithstanding anything in this Section 1.02 to the contrary, so long as any equity security of the Company is registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any successor statute, all authority to exercise discretion with respect to participation in the Plan by persons who are (i) "officers" within the meaning of the applicable Securities and Exchange Commission rules and regulations relating to Section 16 of the 1934 Act, or any successor statute, (ii) directors of the Company and/or (iii) beneficial owners of more than ten percent (10%) of any class of equity securities of the Company who are otherwise eligible to participate in the Plan, and the timing, pricing, amounts and other terms and conditions of awards granted under the Plan to such officers, directors and beneficial owners, shall be vested in the Committee, if all of the members of the Committee are disinterested persons within the meaning ascribed to such term in Rule 16b-3 promulgated under the 1934 Act, or within any successor definition or under any successor rule ("disinterested persons"). (b) The Committee shall have the authority, in its sole discretion and from time to time to: (i) designate the employees or classes of employees eligible to participate in the Plan; (ii) grant awards provided in the Plan in such form and amount, and subject to such vesting, as the Committee shall determine, provided that in no event shall the period for vesting be longer than that set forth in Section 2.04, below. -1- 2 (iii) impose such limitations, restrictions and conditions upon any such awards as the Committee shall deem appropriate; and (iv) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be in its sole discretion and shall be conclusive. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. (d) With respect to persons subject to Section 16 of the Securities Exchange act of 1934 (the "1934 Act"), transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successor under the 1934 Act. To the extent any provision of the Plan or action by the Board of Directors or the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board of Directors or the Committee, as applicable. (e) All usual and reasonable expenses of the Committee shall be paid by the Company, and no member shall receive compensation with respect to his services for the Committee except as may be authorized by the Board of Directors. The Board of Directors and the Committee may employ attorneys, consultants, accountants or other persons, and the Board of Directors, the Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Board of Directors or the Committee in good faith shall be final and binding upon all Employees who have received awards, and upon the Company and all other interested persons. No member of Board of Directors or the Committee shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan or awards made thereunder, and the Company shall indemnify and hold harmless each member of the Board of Directors or the Committee against all loss, cost, expenses or damages, occasioned by any act or omission to act in connection with any such action, determination or interpretation under or of the Plan, consistent with the Company's certificate of incorporation and bylaws. -2- 3 1.03. ELIGIBILITY FOR PARTICIPATION. Participants in the Plan shall be selected by the Committee from among the employees of the Company. In making this selection and in determining the form and amount of awards, the Committee shall consider any factors deemed relevant, including the individual's functions, responsibilities, value of services to the Company and past and potential contributions to the Company's profitability and sound growth. 1.04. TYPES OF AWARDS UNDER PLAN. Awards under the Plan will be in the form of Incentive Stock Options, as described in Article II; provided, however, that Limited Rights, as described in Article III, may be awarded with respect to Options concurrently or previously awarded. 1.05. AGGREGATE LIMITATION ON AWARDS. (a) Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of Common Stock of ABI ("Common Stock"). The maximum number of shares of Common Stock which may be issued under the Plan shall be three hundred ninety thousand (390,000) shares. The maximum number of shares of Common Stock with respect to which Incentive Stock Options may be granted in any one year to any employee shall not exceed one hundred fifty thousand (150,000). (b) In addition to shares of Common Stock actually issued pursuant to the exercise of Incentive Stock Options, there shall be deemed to have been issued a number of shares equal to the number of shares of Common Stock in respect of which Limited Rights (as described in Article III) shall have been exercised. (c) Any shares of Common Stock subject to an Incentive Stock Option which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan, but shares subject to an Incentive Stock Option which are not issued as a result of the exercise of Limited Rights shall not again be available for issuance under the Plan. 1.06. EFFECTIVE DATE AND TERM OF PLAN. (a) The Plan shall become effective on the date approved by the holders of a majority of the shares of Common Stock present in person or by proxy and entitled to vote at the 1996 Annual Meeting of Shareholders of ABI. (b) No awards shall be made under the Plan after the last day of the Company's 2001 fiscal year provided, however, that the Plan and all awards made under the Plan prior to such date shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards. -3- 4 ARTICLE II -- INCENTIVE STOCK OPTIONS 2.01. AWARD OF INCENTIVE STOCK OPTIONS. The Committee may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more "Incentive Stock Options," intended to qualify as such under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") ("Incentive Stock Options") to purchase for cash the number of shares of Common Stock allotted by the Committee. The date an Incentive Stock Option is granted shall mean the date selected by the Committee as of which the Committee allots a specific number of shares to a participant pursuant to the Plan. 2.02. INCENTIVE STOCK OPTION AGREEMENTS. The grant of an Incentive Stock Option shall be evidenced by a written Incentive Stock Option Agreement, executed by the Company and the holder of an Incentive Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Incentive Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 2.03. INCENTIVE STOCK OPTION PRICE. The Option Price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be 100% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted; provided, however, that with respect to any Optionee who owns stock possessing more than 10% of the total combined voting power of all classes of stock of ABI or of its parent or Subsidiary corporation (with such ownership determined in view of the attribution provisions of Section 424(d) of the Code), the Option Price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option shall be 110% of the Fair Market Value of a share of Common Stock on the date the Incentive Stock Option is granted. The Committee shall determine the date on which an option is granted, provided that such date is consistent with the Code and any applicable rules or regulations thereunder; in the absence of such determination, the date on which the Committee adopts a resolution granting an option shall be considered the date on which such option is granted, provided the Employee to whom the option is granted is promptly notified of the grant and a written option agreement is duly executed as of the date of the resolution. 2.04. TERM AND EXERCISE. Each Incentive Stock Option for employees who are not 10% owners is exercisable during a period of ten years from the date of grant thereof (the "Option Term"), subject to the Vesting Schedule for Employees who are not 10% Owners, set forth below. With respect to any Optionee who at the time the Option is granted owns stock possessing more than 10% of the total combined voting power of all classes of stock of ABI or of its parent or Subsidiary corporation (with such ownership determined pursuant to the attribution rules set forth in Section 424(d) of the Code), each Incentive Stock Option is exercisable during a period of five years from the date of grant -4- 5 thereof, subject to the Vesting Schedule for Employees who are 10% Owners, set forth below. No Incentive Stock Option shall be exercisable after the expiration of its Option Term. The Committee may also in its sole discretion accelerate the exerciseability or vesting of any option or installment thereof at any time. VESTING SCHEDULE FOR EMPLOYEES WHO ARE NOT 10% OWNERS. Options awarded shall be exercisable, subject to the other terms and conditions of the Plan, only upon the expiration of the designated number of years of active employment with the Company from date of award, as provided below: 20% of Options awarded - 1 year 40% of Options awarded - 2 years 60% of Options awarded - 3 years 80% of Options awarded - 4 years 100% of Options awarded - 5 years VESTING SCHEDULE FOR EMPLOYEES WHO ARE 10% OWNERS. 25% of Options awarded - 1 year 50% of Options awarded - 2 years 75% of Options awarded - 3 years 100% of Options awarded - 4 years Except as provided in Sections 2.06, 2.07 and 2.08 hereof, no Incentive Stock Option shall be exercised at any time unless the holder thereof is then a regular full-time employee of the Company or one of its subsidiaries. 2.05. MAXIMUM AMOUNT OF INCENTIVE STOCK OPTION GRANT. In no event shall the aggregate Fair Market Value of all Common Stock (determined at the time the option is granted) with respect to which Incentive Stock Options are exercisable for the first time by an individual during any calendar year (under all plans of the Company and its subsidiaries) exceed $100,000. 2.06. DEATH OF OPTIONEE. (a) Upon the death of the Optionee, any Incentive Stock Option exercisable on the date of death may be exercised by the Optionee's estate or by a person who acquires the right to exercise such Incentive Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both the remaining Option Term of the Incentive Stock Option and one year after the Optionee's death. -5- 6 (b) The provisions of this Section shall apply notwithstanding the fact that the Optionee's employment may have terminated prior to death, but only to the extent of any Incentive Stock Options exercisable on the date of death. 2.07. RETIREMENT OR DISABILITY. Upon the termination of the Optionee's employment by reason of permanent disability (as defined herein) or retirement (as determined by the Committee), the Optionee may, within 36 months from the date of such termination of employment, exercise any Incentive Stock Options to the extent such Incentive Stock Options were exercisable at the date of such termination of employment. Notwithstanding the foregoing, the tax treatment available pursuant to Section 422 of the Code upon the exercise of an Incentive Stock Option will not be available to an Optionee who exercises any Incentive Stock Options more than (i) 12 months after the date of termination of employment due to permanent disability or (ii) three months after the date of termination of employment due to retirement. For purposes hereof, "permanent disability" shall have the meaning set forth in Section 22(e)(3) of the Code or any successor provision thereto. 2.08. TERMINATION FOR OTHER REASONS. Except as provided in Sections 2.06 and 2.07 or except as otherwise determined by the Committee, all Incentive Stock Options shall terminate upon the termination of the Optionee's employment; provided, however, that if the Optionee's employment was involuntarily terminated (with or without cause), Optionee may exercise, during a 90-day period commencing with date of termination, all Options theretofore vested, or which vest during said 90-day period, under the Vesting Schedules set forth in Paragraph 2.04, above. At the end of the 90-day period, all rights of such Optionee under any then outstanding option or right shall terminate and shall be forfeited immediately as to any unexercised portion thereof. 2.09. MANNER OF PAYMENT. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the Option Price for such shares with cash or in shares of the Common Stock, valued at the Fair Market Value per Share on the date of exercise. -6- 7 2.10. ISSUANCE OF SHARES. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a shareholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder. 2.11. EFFECT OF EXERCISE. The exercise of any Stock Option shall cancel that number of related Limited Rights, if any, which is equal to the number of shares of Common Stock purchased pursuant to said Option. 2.12. RULE 16b-3 EXEMPTION. Options granted under the Plan shall comply with the applicable provisions of Rule 16b-3 promulgated under the 1934 Act, or any successor, and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the 1934 Act with respect to Plan transactions. ARTICLE III -- LIMITED RIGHTS 3.01. AWARD OF LIMITED RIGHTS. Concurrently with or subsequent to the award of any Incentive Stock Option, the Committee may, subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, award to the Optionee with respect to each Option, a related limited right permitting the Optionee, during a specified limited time period, to be paid the appreciation on the Common Stock in lieu of exercising the Option ("Limited Right"). 3.02. LIMITED RIGHTS AGREEMENT. Limited Rights granted under the Plan shall be evidenced by written agreements in such form as the Committee may from time to time determine. 3.03. EXERCISE PERIOD. Limited Rights shall (and must) be exercised immediately preceding or simultaneous with the date of a Change in Control of ABI (the "Exercise Period"), and all Limited Rights held by the Optionee shall be exercised during such Exercise Period, without regard to the Vesting Schedules set forth in Paragraph 2.04; provided, however, that if a Change in Control shall have occurred without notice or opportunity for exercise of Limited Rights, then the Limited Rights shall be exercised as soon as practicable after a determination has been made that a "Change in Control" has occurred, or has been deemed to have occurred. -7- 8 As used in the Plan, a "Change in Control" shall be deemed to have occurred if (a) individuals who were directors of ABI, immediately prior to a Control Transaction shall cease, within one year of such Control Transaction, to constitute a majority of the Board of Directors of ABI (or of the Board of Directors of any successor to ABI or to all or substantially all of its assets), or (b) any entity, person or Group other than ABI or a Subsidiary of ABI or Hayashibara Biochemical Laboratories, Inc. or an Affiliate thereof acquires shares of ABI in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially fifty-one percent (51%) or more of the outstanding shares. As used herein, "Control Transaction" shall be (i) any tender offer for or acquisition of capital stock of ABI, (ii) any merger, consolidation, or sale of all or substantially all of the assets of ABI which has been approved by the shareholders, (iii) any contested election of directors of ABI, or (iv) any combination of the foregoing; which results in a change in voting power sufficient to elect a majority of the Board of Directors of ABI. As used herein, "Group" shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities Exchange Act of 1934, as amended. 3.04. AMOUNT OF PAYMENT. The amount of payment to which an Optionee shall be entitled upon the exercise of each Limited Right shall be equal to 100% of the amount, if any, which is equal to the difference between the Fair Market Value per share of Common Stock covered by the related Option on the date the Option was granted and the Market Price of a share of such Common Stock. Market Price is defined to be the greater of (i) the highest price per share of the Company's Common Stock paid in connection with any Change in Control and (ii) the highest price per share of the Company's Common Stock paid pursuant to an unsolicited brokerage transaction during the 60-day period prior to the Change in Control. 3.05. FORM OF PAYMENT. Payment of the amount to which an Optionee is entitled upon the exercise of Limited Rights, as determined pursuant to Section 3.04, shall be made solely in cash. -8- 9 3.06. EFFECT OF EXERCISE. If Limited Rights are exercised, the Stock Options related to such Limited Rights cease to be exercisable to the extent of the number of shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of the Options related to such Limited Rights, the Limited Rights granted with respect thereto terminate to the extent of the number of shares as to which the related Options were exercised or terminated. 3.07. RETIREMENT OR DISABILITY. Upon termination of the Optionee's employment with the Company by reason of permanent disability or retirement (as each is determined by the Committee), the Optionee may, within 36 months from the date of termination, exercise any Limited Right to the extent such Limited Right is otherwise exercisable during such 36-month period. 3.08. DEATH OF OPTIONEE OR TERMINATION FOR OTHER REASONS. Except as provided in Section 3.07, or except as otherwise determined by the Committee, all Limited Rights granted under the Plan shall terminate upon the termination of the Optionee's employment with the Company, or upon the death of the Optionee. ARTICLE IV -- MISCELLANEOUS 4.01. GENERAL RESTRICTION. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of shares of Common Stock thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 4.02. NON-ASSIGNABILITY. No award under the Plan shall be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution. During the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative. -9- 10 4.03. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such participant. 4.04. NON-UNIFORM DETERMINATIONS. The Committee's determinations under the Plan (including without limitation determinations of the persons to receive awards, the form, amount and timing of such awards, the terms and provisions of such awards and the agreements evidencing same) need not be uniform and may be made by it selectively among persons who receive, or are eligible to receive, awards under the Plan, whether or not such persons are similarly situated. 4.05. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to him. 4.06. DEFINITIONS. In this Plan the following definitions (along with other definitions set forth elsewhere in the Plan) shall apply: (a) "Affiliate" means any person or entity which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with ABI. (b) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the date of grant, as reported in The Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean -10- 11 between the bid and asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Committee. (c) "Option" means Incentive Stock Option. (d) "Option Price" means the purchase price per share of Common Stock deliverable upon the exercise of an Incentive Stock Option. (e) "Subsidiary" means any corporation of which, at the time more than 50% of the shares entitled to vote generally in an election of directors are owned directly or indirectly by ABI or any Subsidiary thereof. 4.07. LEAVES OF ABSENCE. The Committee shall be entitled to make such rules, regulations and determinations as it deems appropriate under the Plan in respect of any leave of absence taken by the recipient of any award. Without limiting the generality of the foregoing, the Committee shall be entitled to determine (i) whether or not any such leave of absence shall constitute a termination of employment within the meaning of the Plan and (ii) the impact, if any, of any such leave of absence on awards under the Plan theretofore made to any recipient who takes such leave of absence. 4.08. NEWLY ELIGIBLE EMPLOYEES. The Committee shall be entitled to make such rules, regulations, determinations and awards as it deems appropriate in respect of any employee who becomes eligible to participate in the Plan or any portion thereof after the commencement of an award or incentive period. 4.09. ADJUSTMENTS. In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee shall appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretofore granted under the Plan, the amount and terms of any Limited Rights theretofore awarded under the Plan, and any and all other matters deemed appropriate by the Committee. -11- 12 4.10. AMENDMENT OF THE PLAN. (a) The Committee may, without further action by the shareholders and without receiving further consideration from the participants, amend this Plan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Committee may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without shareholder approval the Committee may not (i) increase the maximum number of shares of Common Stock which may be issued under the Plan (other than increases pursuant to Section 4.10), (ii) extend the period during which any award may be granted or exercised, or (iii) extend the term of the Plan. The termination or any modification or amendment of the Plan, except as provided in subsection (a), shall not without the consent of a participant, affect his or her rights under an award previously granted to him or her. 4.11. DISPOSITION OF OPTION SHARES; WITHHOLDING TAXES. Upon the disposition (within the meaning of Code Section 424(c)) of shares of Common Stock acquired pursuant to the exercise of an Incentive Stock Option prior to the expiration of the holding period requirements of Code Section 422(a)(1), the Optionee shall be required to give notice to the Company of such disposition and the Company shall have the right to require the Optionee to pay to the Company the amount of any taxes that are required by law to be withheld with respect to such disposition. -12- EX-10.21 3 OUTSIDE DIRECTOR & ADVISOR STOCK OPTION PLAN 1 EXHIBIT 10.21 AMARILLO BIOSCIENCES, INC. OUTSIDE DIRECTOR AND ADVISOR STOCK OPTION PLAN AMENDED AND RESTATED AS OF SEPTEMBER 12, 1998 ARTICLE I -- GENERAL 1.01. PURPOSES. The purposes of this Outside Director and Advisor Stock Option Plan (the "Plan") are to: (1) closely associate the interests of the Outside Directors and Scientific Advisors of AMARILLO BIOSCIENCES, INC. ("ABI") and its Subsidiaries and Affiliates (collectively referred to as the "Company") with the shareholders by reinforcing the relationship between participants' rewards and shareholder gains; (2) provide ABI's Outside Directors and Scientific Advisors with an equity ownership in the Company commensurate with Company performance, as reflected in increased shareholder value; and (3) provide an incentive to Outside Directors and Scientific Advisors for continuous association with the Company. The Plan is not an incentive stock option plan within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code"). 1.02. ADMINISTRATION OF THE PLAN. (a) The Plan shall be administered by a Committee of persons appointed by the Board of Directors of ABI (the "Committee"), as constituted from time to time. The Committee shall consist of at least two members of the Board. (b) The Committee shall have the authority, in its sole discretion and from time to time, to: (i) designate the Directors and Advisors eligible to participate in the Plan; (ii) grant awards provided in the Plan in such form and amount, and subject to such vesting, as the Committee shall determine, provided that in no event shall the period for vesting be longer than that set forth in Section 2.04, below. (iii) impose such limitations, restrictions and conditions upon any such awards as the Committee shall deem appropriate; and (iv) interpret the Plan, adopt, amend and rescind rules and regulations relating to the Plan, and make all other determinations and take all other action necessary or advisable for the implementation and administration of the Plan. -1- 2 (c) Decisions and determinations of the Committee on all matters relating to the Plan shall be conclusive. No member of the Committee shall be liable for any action taken or decision made in good faith relating to the Plan or any award thereunder. (d) With respect to persons subject to Section 16 of the 1934 Act, transactions under the Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successor under the 1934 Act. To the extent any provision of the Plan or action by the Board of Directors or the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Board of Directors or the Committee, as applicable. (e) All usual and reasonable expenses of the Committee shall be paid by the Company, and no member shall receive compensation with respect to his services for the Committee except as may be authorized by the Board of Directors. The Board of Directors and the Committee may employ attorneys, consultants, accountants or other persons, and the Board of Directors, the Committee, the Company and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Board of Directors or the Committee in good faith shall be final and binding upon all person who have received awards, and upon the Company and all other interested persons. No member of Board of Directors or the Committee shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan or awards made thereunder, and the Company shall indemnify and hold harmless each member of the Board of Directors or the Committee against all loss, cost, expenses or damages, occasioned by any act or omission to act in connection with any such action, determination or interpretation under or of the Plan, consistent with the Company's certificate of incorporation and bylaws. 1.03. AWARDS UNDER PLAN. Each award under the Plan will include both: (i) Stock Options, as described in Article II; and (ii) Limited Rights, as described in Article III. 1.04. AGGREGATE LIMITATION ON AWARDS. (a) Shares of stock which may be issued under the Plan shall be authorized and unissued or treasury shares of Common Stock of ABI ("Common Stock"). The maximum number of shares of Common Stock which may be issued under the Plan shall be two hundred ten thousand (210,000) shares. (b) In addition to shares of Common Stock actually issued pursuant to the exercise of Stock Options, there shall be deemed to have been issued a number of shares equal to the number of shares of Common Stock in respect of which Limited Rights (as described in Article III) shall have been exercised. -2- 3 (c) Any shares of Common Stock subject to a Stock Option which for any reason is terminated unexercised or expires shall again be available for issuance under the Plan, but shares subject to a Stock Option which are not issued as a result of the exercise of Limited Rights shall not again be available for issuance under the Plan. 1.05. EFFECTIVE DATE AND TERM OF PLAN. (a) The Plan shall become effective on the date approved by the holders of a majority of the shares of Common Stock present in person or by proxy and entitled to vote at the 1996 Annual Meeting of Shareholders of ABI. (b) No awards shall be made under the Plan after the last day of the Company's 2001 fiscal year provided, however, that the Plan and all awards made under the Plan prior to such date shall remain in effect until such awards have been satisfied or terminated in accordance with the Plan and the terms of such awards. ARTICLE II -- STOCK OPTIONS 2.01. AWARD OF STOCK OPTIONS. (a) The Committee may, from time to time and subject to the provisions of the Plan and such other terms and conditions as the Committee may prescribe, grant to any participant in the Plan one or more non-qualified stock options ("Options") to purchase for cash the number of shares of Common Stock allotted by the Committee. (b) Each Outside Director shall be automatically granted an Option to purchase ten thousand (10,000) shares on the date on which such person first becomes an Outside Director, whether through election by the shareholders of the Company or appointment by the Board to fill a vacancy. The foregoing notwithstanding, any Outside Director who has previously received an Option award as a Scientific Advisor under Section 2.01(c), below, shall be automatically awarded, in his capacity as an Outside Director, an option to purchase only five thousand (5,000) shares, instead of ten thousand (10,000) shares, although additional Options may be awarded by the Committee. (c) Each Scientific Advisor who is not also serving as an Outside Director shall be automatically granted an Option to purchase five thousand (5,000) shares on the date on which such person first becomes a Scientific Advisor. The foregoing notwithstanding, any Scientific Advisor who has previously received an Option award as an Outside Director shall not automatically be awarded any additional Options as a Scientific Advisor, although additional Options may be awarded by the Committee. (d) In the event any Option granted under the Plan would cause the number of shares subject to outstanding Options plus the number of shares previously purchased under Options to exceed the total number of shares available for issuance under the Plan, then the remaining Options shall be granted to persons qualifying for same, on a pro rata basis, and no further grants shall be -3- 4 made until such time, if any, as additional shares become available for grant under the Plan through action of the shareholders to increase the number of shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (e) Options may be granted only to Outside Directors and/or Scientific Advisors. (f) Options granted under the Plan shall comply with the applicable provisions of Rule 16b-3 promulgated under the 1934 Act, or any successor provisions thereto, and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the 1934 Act with respect to Plan transactions. 2.02. STOCK OPTION AGREEMENTS. The grant of a Stock Option shall be evidenced by a written Stock Option Agreement, executed by the Company and the holder of a Stock Option (the "Optionee"), stating the number of shares of Common Stock subject to the Stock Option evidenced thereby, and in such form as the Committee may from time to time determine. 2.03. STOCK OPTION PRICE. The Option Price per share of Common Stock deliverable upon the exercise of a Stock Option shall be 100% of the Fair Market Value of a share of Common Stock on the date the Stock Option is granted. 2.04. TERM AND EXERCISE. Each Stock Option may be exercised during a period of ten years from the date of grant thereof (the "Option Term"), subject to the vesting schedule set forth below. The Committee may also in its sole discretion accelerate the exerciseability or vesting of any option or installment thereof at any time. No Stock Option shall be exercisable after the expiration of its Option Term. VESTING SCHEDULE. Options awarded shall be exercisable, subject to the other terms and conditions of the Plan, only upon the expiration of the designated number of years of active association with the Company as an Outside Director or Scientific Advisor, from date of award, as provided below: 20% of Options awarded - 1 year 40% of Options awarded - 2 years 60% of Options awarded - 3 years 80% of Options awarded - 4 years 100% of Options awarded - 5 years -4- 5 2.05. MANNER OF PAYMENT. Each Stock Option Agreement shall set forth the procedure governing the exercise of the Stock Option granted thereunder, and shall provide that, upon such exercise in respect of any shares of Common Stock subject thereto, the Optionee shall pay to the Company, in full, the Option Price for such shares with cash or in shares of the Common Stock, valued at the Fair Market Value per Share on the date of exercise. 2.06. ISSUANCE OF SHARES. As soon as practicable after receipt of payment, the Company shall deliver to the Optionee a certificate or certificates for such shares of Common Stock. The Optionee shall become a shareholder of the Company with respect to Common Stock represented by share certificates so issued and as such shall be fully entitled to receive dividends, to vote and to exercise all other rights of a shareholder. 2.07. DEATH OF OPTIONEE. (a) Upon the death of the Optionee, any rights to the extent exercisable on the date of death may be exercised by the Optionee's estate, or by a person who acquires the right to exercise such Stock Option by bequest or inheritance or by reason of the death of the Optionee, provided that such exercise occurs within both the remaining effective term of the Stock Option and one year after the Optionee's death. (b) The provisions of this Section shall apply notwithstanding the fact that the Optionee's association may have terminated prior to death, but only to the extent of any rights exercisable on the date of death. 2.08. DISABILITY. Upon termination of the Optionee's association by reason of permanent disability (as defined herein), the Optionee may, within 36 months from the date of termination, exercise any Stock Options to the extent such Options are exercisable during such 36-month period. Notwithstanding the foregoing, the tax treatment available pursuant to Section 422 of the Code upon the exercise of an Incentive Stock Option will not be available to an Optionee who exercises any Incentive Stock Options more than (i) 12 months after the date of termination of employment due to permanent disability or (ii) three months after the date of termination of employment due to retirement. For purposes hereof, "permanent disability" shall have the meaning set forth in Section 22(e)(3) of the Code or any successor provision thereto. 2.09. TERMINATION FOR OTHER REASONS. Except as provided in Sections 2.07 and 2.08, or except as otherwise determined by the Committee, all Stock Options shall terminate upon the termination of the Optionee's association with the Company as an Outside Director or Scientific Advisor; provided, however, that if the -5- 6 Optionee's association was involuntarily terminated (with or without cause), Optionee may exercise, during a 90-day period commencing with date of termination, all Options theretofore vested, or which vest during said 90-day period, under the Vesting Schedule set forth in Paragraph 2.04, above. At the end of the 90-day period, all rights of such Optionee under any then outstanding option or right shall terminate and shall be forfeited immediately as to any unexercised portion thereof. 2.10. EFFECT OF EXERCISE. The exercise of any Stock Option shall cancel that number of related Limited Rights, if any, which is equal to the number of shares of Common Stock purchased pursuant to said Option. 2.11. RULE 16b-3 EXEMPTION. Options granted under the Plan shall comply with the applicable provisions of Rule 16b-3 promulgated under the 1934 Act, or any successor provisions thereto, and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the 1934 Act with respect to Plan transactions. ARTICLE III -- LIMITED RIGHTS 3.01. AWARD OF LIMITED RIGHTS. Concurrently with the award of each Stock Option, there shall automatically be awarded to the Optionee, with respect to each Option, a related limited right permitting the Optionee, during a specified limited time period, to be paid the appreciation on the Common Stock in lieu of exercising the Option ("Limited Right"). 3.02. LIMITED RIGHTS AGREEMENT. Limited Rights granted under the Plan shall be evidenced by written agreements in such form as the Committee may from time to time determine. 3.03. EXERCISE PERIOD. Limited Rights shall (and must) be exercised immediately preceding or simultaneous with the date of a Change in Control of ABI (the "Exercise Period"), and all Limited Rights held by the Optionee shall be exercised during such Exercise Period, without regard to the Vesting Schedule set forth in Paragraph 2.04; provided, however, that if a Change in Control shall have occurred without notice or opportunity for exercise of Limited Rights, then the Limited Rights shall be exercised as soon as practicable after a determination has been made that a "Change in Control" has occurred, or has been deemed to have occurred. -6- 7 As used in the Plan, a "Change in Control" shall be deemed to have occurred if (a) individuals who were directors of ABI immediately prior to a Control Transaction shall cease, within one year of such Control Transaction, to constitute a majority of the Board of Directors of ABI (or of the Board of Directors of any successor to ABI or to all or substantially all of its assets), or (b) any entity, person or Group other than ABI or a Subsidiary of ABI or Hayashibara Biochemical Laboratories, Inc. or an Affiliate thereof acquires shares of ABI in a transaction or series of transactions that result in such entity, person or Group directly or indirectly owning beneficially fifty-one percent (51%) or more of the outstanding shares. As used herein, "Control Transaction" shall be (i) any tender offer for or acquisition of capital stock of ABI, (ii) any merger, consolidation, or sale of all or substantially all of the assets of ABI which has been approved by the shareholders, (iii) any contested election of directors of ABI, or (iv) any combination of the foregoing; which results in a change in voting power sufficient to elect a majority of the Board of Directors of ABI. As used herein, "Group" shall mean persons who act in concert as described in Sections 13(d)(3) and/or 14(d)(2) of the 1934 Act, as amended. 3.04. AMOUNT OF PAYMENT. The amount of payment to which an Optionee shall be entitled upon the exercise of each Limited Right shall be equal to 100% of the amount, if any, which is equal to the difference between the Fair Market Value per share of Common Stock covered by the related Option on the date the Option was granted and the Market Price of a share of such Common Stock. Market Price is defined to be the greater of (i) the highest price per share of the Company's Common Stock paid in connection with any Change in Control and (ii) the highest price per share of the Company's Common Stock paid pursuant to an unsolicited brokerage transaction during the 60-day period prior to the Change in Control. 3.05. FORM OF PAYMENT. Payment of the amount to which an Optionee is entitled upon the exercise of Limited Rights, as determined pursuant to Section 3.04, shall be made solely in cash. -7- 8 3.06. EFFECT OF EXERCISE. If Limited Rights are exercised, the Stock Options related to such Limited Rights cease to be exercisable to the extent of the number of shares with respect to which the Limited Rights were exercised. Upon the exercise or termination of the Options related to such Limited Rights, the Limited Rights granted with respect thereto terminate to the extent of the number of shares as to which the related Options were exercised or terminated. 3.07. DISABILITY. Upon termination of the Optionee's association with the Company as either an Outside Director or Scientific Advisor by reason of permanent disability (as determined by the Committee), the Optionee may, within 36 months from the date of termination, exercise any Limited Right to the extent such Limited Right is otherwise exercisable during such 36-month period. 3.08. DEATH OF OPTIONEE OR TERMINATION FOR OTHER REASONS. Except as provided in Section 3.07, or except as otherwise determined by the Committee, all Limited Rights granted under the Plan shall terminate upon the termination of the Optionee's association with the Company as either an Outside Director or Scientific Advisor or upon the death of the Optionee. ARTICLE IV -- MISCELLANEOUS 4.01. GENERAL RESTRICTION. Each award under the Plan shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body, or (iii) an agreement by the grantee of an award with respect to the disposition of shares of Common Stock, is necessary or desirable as a condition of, or in connection with, the granting of such award or the issue or purchase of shares of Common Stock thereunder, such award may not be consummated in whole or in part unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 4.02. NON-ASSIGNABILITY. Unless otherwise provided in the agreement with the Optionee, Options shall not be assignable or transferable by the recipient thereof, except by will or by the laws of descent and distribution, and during the life of the recipient, such award shall be exercisable only by such person or by such person's guardian or legal representative. If provided in the agreement with the Optionee, Options and rights may be transferred by the holder to Permitted Transferees, provided that there cannot be any consideration for the transfer. "Permitted Transferee" means a member of a holder's immediate family, trusts for the benefit of such immediate family members, and partnerships in which -8- 9 the holder and such immediate family members are the only partners. An immediate family member shall include a holder's descendants, spouse, and spouses of descendants. 4.03. RIGHT TO TERMINATE ASSOCIATION. Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in association with the Company or affect any right which the Company or the shareholders of the Company may have to terminate the association of such participant. 4.04. RIGHTS AS A SHAREHOLDER. The recipient of any award under the Plan shall have no rights as a shareholder with respect thereto unless and until certificates for shares of Common Stock are issued to him. 4.05. DEFINITIONS. In this Plan the following definitions (along with other definitions elsewhere set forth in the Plan) shall apply: (a) "Affiliate" means any person or entity which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with ABI. (b) "Board" means the Board of Directors of ABI. (c) "Fair Market Value" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the date of grant, as reported in The Wall Street Journal or such other source as the Board deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the bid and asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in -9- 10 The Wall Street Journal or such other source as the Board deems reliable; or (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Committee. (d) "Option" or "Stock Option" means all or any Options granted under the Plan. (e) "Option Price" means the purchase price per share of Common Stock deliverable upon the exercise of a Stock Option. (f) "Outside Director" means a director of ABI, who is not an employee of the Company. (g) "Scientific Advisor" means a person named by the Board of Directors of ABI to serve on the Company's Board of Scientific Advisors. (h) "Shares" or "shares," unless otherwise specified, shall mean shares of Common Stock. (i) "Subsidiary" means any corporation of which, at the time, more than 50% of the shares entitled to vote generally in an election of directors are owned directly or indirectly by ABI or any Subsidiary thereof. 4.06. ADJUSTMENTS. In the event of any change in the outstanding Common Stock by reason of a stock dividend or distribution, recapitalization, merger, consolidation, split-up, combination, exchange of shares or the like, the Committee shall appropriately adjust the number of shares of Common Stock which may be issued under the Plan, the number of shares of Common Stock subject to Options theretofore granted under the Plan, the Option Price of Options theretofore granted under the Plan, the amount and terms of any Limited Rights theretofore awarded under the Plan, and any and all other matters deemed appropriate by the Committee. 4.07. AMENDMENT OF THE PLAN. (a) Subject to subsection (b), the Committee may, without further action by the shareholders and without receiving further consideration from the participants, amend this Plan or condition or modify awards under this Plan in response to changes in securities or other laws or rules, regulations or regulatory interpretations thereof applicable to this Plan or to comply with stock exchange rules or requirements. (b) The Committee may at any time and from time to time terminate or modify or amend the Plan in any respect, except that without shareholder approval the Committee may not -10- 11 extend the term of the Plan. ABI shall seek and obtain shareholder approval of any amendment to increase the number of shares of Common Stock which may be issued under the Plan or for any other amendment to the Plan to the extent that such increase or other amendment requires shareholder approval under the requirements of the stock exchange or market system under which shares of Common Stock of the Company are then listed or the Internal Revenue Code of 1986 or other laws then in effect and applicable to the Company and the Plan. The termination or any modification or amendment of the Plan, except as provided in subsection (a), shall not without the consent of a participant affect his rights under an award previously granted to him. -11- EX-10.30 4 AMENDMENT NO. 1 TO LICENSE AGREEMENT OF 3/22/88 1 EXHIBIT 10.30 AMENDMENT NO. 1 TO LICENSE AGREEMENT OF MARCH 22, 1988 BETWEEN AMARILLO BIOSCIENCES, INC. AND THE TEXAS A&M UNIVERSITY SYSTEM THIS AMENDMENT NO. 1 ("Amendment") is entered into as of this the ____ day of __________________, 1998, by and between AMARILLO BIOSCIENCES, INC. (formerly Amarillo Cell Culture Company, Incorporated), a Texas corporation having its principal office at 800 West 9th Avenue, Amarillo, Texas 79101 (hereinafter referred to as "ABI"); and THE TEXAS A&M UNIVERSITY SYSTEM, having its principal offices at College Station, Texas 77843 (hereinafter referred to as "TAMUS"). WHEREAS, TAMUS and ABI have heretofore entered into that certain License Agreement dated March 22, 1988 (hereinafter, the "License Agreement"); and further WHEREAS, the parties desire to amend the License Agreement with respect to the matters hereinafter set forth; THEREFORE, in consideration of these presents and for other good and valuable consideration the receipt and sufficiency of which are evidenced by the execution hereof, the parties hereby agree as follows: 1. All references in the License Agreement to "ACC" shall be deemed to be references to "ABI". 2. The first sentence of Article 3.2 is amended by deleting the words "or any licensee". 3. The following shall be inserted following the existing Article 3.2: "3.2-A. In the event ABI enters into a sublicense arrangement (as defined below), then in lieu of the royalty provided in Article 3.2 -1- 2 above, ABI shall pay to TAMUS an earned royalty of five percent (5%) of all amounts actually received by ABI or its AFFILIATES with respect to the sale by any sublicensee of ABI of LICENSED PRODUCTS in a country where PATENT RIGHTS exist. The earned royalty percentage shall be applied only once to the NET SELLING PRICE regardless of the possibility that manufacture, use, or sale of a LICENSED PRODUCT may be covered by more than one LICENSED PATENT. For purposes of this Article 3.2-A, "sublicense arrangement" shall mean an arrangement under which ABI and its AFFILIATES do not market LICENSED PRODUCT directly, or indirectly through an agent, but rather license rights to market LICENSED PRODUCT to an unaffiliated entity, which entity is responsible for obtaining regulatory approval in the subject market, and for promotion and pricing." 4. The following shall be added at the end of the existing Article 3.3: ", and the royalties payable under Article 3.2-A above shall be reduced to two and one-half percent (2.5%) of all amounts actually received by ABI or its AFFILIATES." 5. The following shall be added at the end of the existing Article 6.4: "; provided, however, that for the license year beginning April 1, 1998, and for all subsequent license years, the application of such credit shall never cause the royalty provided for under Article 3.4(b) to be reduced below $7,500.00 per year." 6. Except as herein amended, all terms and provisions of the License Agreement shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment has been executed by the undersigned as of the date first above written. AMARILLO BIOSCIENCES, INC. THE TEXAS A&M UNIVERSITY SYSTEM By: By: ----------------------- ---------------------------- Joseph M. Cummins, President -2- EX-10.31 5 EMPLOYMENT AGREEMENT - KATHLEEN L. KELLEHER 1 EXHIBIT 10.31 EMPLOYMENT CONTRACT This Employment Contract ("Contract") is entered into by and between AMARILLO BIOSCIENCES, INC., a Texas corporation ("Employer"), and KATHLEEN L. KELLEHER ("Employee"). ABI and its controlled subsidiaries shall be hereinafter collectively referred to as "ABI Companies". Employer hereby employs Employee, and Employee accepts employment, on the following terms and conditions. ARTICLE I TERM OF EMPLOYMENT 1.01. By this Contract, Employer employs Employee and Employee accepts employment with Employer and with such ABI Companies as Employer shall designate, for a period of one (1) year, commencing January 4, 1999; however, this Contract may be terminated earlier by Employer for cause, at its option, by giving written notice of termination to Employee, without prejudice to any other remedy to which Employer may be entitled either at law, in equity or under this Contract. "For cause," as used in this Section 1.01, shall mean and include any of the following events: (a) Misappropriation or embezzlement by Employee involving Employer or an ABI Company; (b) The conviction in any jurisdiction of Employee for any crime involving an ABI Company which constitutes a felony; (c) Employee's material violation of any of the material provisions of this Contract; provided, however, that Employer shall give written notice of Employee's -1- 2 violation of such provisions and Employee shall have a period of twenty (20) business days to cure such violation; or (d) Employee shall have become Disabled (as defined in Section 2.01, below), and said Disability shall have continued for a period of six (6) consecutive months, or a period of six (6) months in any twelve (12) month period. All determinations regarding the existence and continuation of a Disability shall be made as provided in Section 2.01, below. Termination of this Contract for cause shall be effective upon written notice thereof to Employee. Employee shall thereupon be entitled to compensation earned prior to the date of termination, computed pro rata up to and including the date of termination, shall be entitled to no further compensation, and will be relieved of all duties and obligations under this Contract as of the date of termination; provided, however, that the provisions of Articles VII, IX and X shall survive both the expiration of this Contract, or any earlier termination. 1.02. Employer may terminate this Contract at any time upon two (2) weeks prior written notice to Employee; however, in the event of such termination by Employer without cause, Employer shall continue to pay to Employee the monthly base salary set forth in Section 2.01, below, for a period of one (1) year from the date Employee receives notice of termination. Employee must seek alternative employment and show reasonable proof of this to Employer. Compensation earned by Employee during this period will be deducted from Employer's obligation under this Section 1.02. In the case of termination of the Contract by Employer, Employer can at the time of termination release Employee in writing -2- 3 from the non-competition provisions contained in Section 7.06, below. In such event, the salary continuation provided for in this Section shall terminate. In the event of termination of the Employment Contract by Employee, Employee shall restate to Employer in written and explicit form the applicability of the non-competition provisions contained in Section 7.06, below. The Employer shall thereupon have a period of three (3) weeks to discharge itself from the obligation of salary continuation payment as heretofore described in this Section 1.02 by releasing Employee in writing from the non-competition provisions of said Section 7.06. In such event, such compensation will terminate upon the date employment terminates. ARTICLE II COMPENSATION 2.01. As compensation for all services rendered under this Contract, Employee shall be paid by Employer a salary of TWELVE THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($12,500.00) per month, payable at least monthly during the term of this Contract. The amount paid is to be prorated for any partial employment period. In the event Employee becomes Disabled (as hereinafter defined), Employee shall continue to receive compensation from employer as follows (but only until the expiration of one (1) year from date of execution of this Contract): (i) during the first two (2) months following a determination of Disability, Employee shall receive compensation at the rate of one hundred percent (100%) of salary; -3- 4 (ii) during the third and fourth months following a determination of Disability, Employee shall receive compensation at the rate of seventy-five percent (75%) of salary; and (iii) during the fifth and sixth months following a determination of Disability, Employee shall receive compensation at the rate of fifty percent (50%) of salary; and (iv) after six (6) months following a determination of disability, Employee's compensation and all fringe benefits shall terminate, but this Contract shall remain in force, and Employee shall remain an employee of Employer, until Employer shall have given notice of termination as provided in Section 1.01, above. For purposes of determining the percentage of salary and the duration of payment thereof to which Employee is entitled following a determination of Disability, if Employee resumes full-time employment hereunder after such determination and thereafter becomes Disabled again, such succeeding period of Disability shall be deemed a continuation of the prior period of Disability unless a period of at least six continuous months of active full-time employment has elapsed since the conclusion of the prior period of Disability. Notwithstanding anything to the contrary contained in this Section 2.01: (i) any and all amounts payable to Employee hereunder during any period of Disability shall be reduced by any disability income insurance proceeds paid to Employee under any policies owned by and paid for by the Employer; and (ii) Employee shall be conclusively deemed to be Disabled for purposes of this Agreement during any period in which she receives disability insurance proceeds from an insurance carrier pursuant to clause (i). For all purposes of this Contract, "Disability" (including the adjective "Disabled") shall mean Employee's inability by reason of physical or mental incapacity to -4- 5 perform the customary duties of her employment for a period of thirty (30) consecutive days or a period of thirty (30) days in any consecutive three (3) month period. If any dispute arises as to the existence of Employee's Disability, such dispute shall be resolved by two licensed physicians, one selected by the Board of Directors of Employer (other than Employee) and one selected by Employee. If the two physicians so selected cannot agree as to whether or not Employee is Disabled, the two physicians so selected shall designate a third physician and the determination of two of the three physicians so selected as to whether or not Employee is Disabled shall be final and binding on the parties for all purposes. 2.02. Employer shall perform an annual performance review of Employee's performance for the purpose of determining whether Employee's salary and benefits should be adjusted. 2.03. Employee will be eligible for a bonus plan, said bonus plan to be submitted to and approved by the Board of Directors of Employer during the first six (6) months of 1999. ARTICLE III DUTIES OF EMPLOYEE 3.01. Employee is employed as Chief Operating Officer and Vice President of Business Development and shall work at 800 9th Street, Amarillo, the principal offices of Employer, and at such other place(s) in the City of Amarillo as Employer may direct. Employee shall be named to said positions as an officer of Employer by the Board of Directors of Employer, and shall perform the duties of Chief Operating Officer and Vice -5- 6 President of Business Development, as such duties may be further set forth by resolution of the Board of Directors of Employer. The expected duties are delineated in Appendix "A" to this Employment Contract; however, Employee understands and agrees that Employer shall have the right to modify such duties from time to time, consistent with the legitimate business needs of Employer. Employee shall devote her entire productive time, ability, attention and energies to the business of Employer during the term of this Contract and during such time, Employee shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether or not for compensation, without the prior consent of the Board of Directors of Employer. ARTICLE IV EMPLOYEE'S OBLIGATIONS AS TO INSURANCE 4.01. Employee agrees to submit to physical examination as may be required for the obtaining by Employer of insurance on Employee's life, and agrees to consent to the issuance of a policy or policies of insurance on her life, such policies to be owned by Employer, and naming Employer as beneficiary. Upon termination of Employee's employment for any reason, and if requested by Employee, Employer shall assign any such policy to Employee, so that Employee shall have the option of keeping the policy in force at Employee's expense. The foregoing notwithstanding, Employer shall be entitled to retain the accumulated cash value of any such policy. -6- 7 ARTICLE V EMPLOYEE BENEFITS 5.01. If Employer provides hospital, surgical, medical, dental, group life insurance, or other fringe benefits to its employees, or any of them, at any time during the term of this Contract, Employee shall be entitled to participate in such benefits, on terms and conditions at least as favorable as those accorded to other employees of Employer, subject to insurability. ARTICLE VI REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE 6.01. Employee is authorized to incur reasonable business expenses for promoting the business of Employer, including expenditures for entertainment and travel. Employer will reimburse Employee for all such expenses upon Employee's presentation of written expense vouchers, itemizing such expenditures. ARTICLE VII PROPERTY RIGHTS OF PARTIES 7.01. Employee will have access to and become familiar with, during the course of employment, various trade secrets, consisting of formulas, devices, secret inventions, processes, compilations of information, records, and specifications owned by ABI Companies and regularly used in the operation of ABI Companies. Employee shall not disclose any such trade secrets directly or indirectly nor use them in any way either during the term of this Contract or at any time thereafter except as required in the course of her employment. All files, records, documents, drawings, specifications, equipment and similar items relating to the business of ABI Companies, whether or not prepared by Employee, shall -7- 8 remain the exclusive property of ABI Companies and shall not be removed from the premises of Employer under any circumstances, except in pursuit of the trade and business of ABI Companies. 7.02. On the termination of employment or whenever requested by Employer, Employee shall immediately deliver to Employer all property in Employee's possession or under Employee's control belonging to ABI Companies, including but not limited to all accounting records, computer terminals and tapes, disks, or other data storage mechanisms, accounting machines, and all office furniture and fixtures, supplies and other personal property in the possession or under the control of Employee, in good condition, ordinary wear and tear excepted, and including without limitation all correspondence files, research data, and patent information or data, of every sort. 7.03. Employee does not claim any rights or interests in and to trade secrets, formulas, devices, inventions, processes, patents, applications, continuations, copyrights, trademarks, compilations of information, records, specifications, rights, interests and data of any other sort, affecting or pertaining directly or indirectly to the business of ABI Companies as now conducted, or to the patents, trade secrets, and other rights now owned by ABI Companies. 7.04. Employee agrees that she will promptly and fully inform and disclose to Employer all inventions, designs, improvements and discoveries that Employee may have during the term of this Contract that pertain or relate to the business of ABI Companies or to any experimental work carried on by ABI Companies, whether conceived by Employee -8- 9 alone or with others and whether or not conceived during regular working hours. All such inventions, designs, improvements and discoveries shall be the exclusive property of Employer. Employee shall assist ABI Companies in obtaining patents on all such inventions, designs, improvements and discoveries deemed patentable by ABI Companies, and shall execute all documents and do all things necessary to obtain such patents for Employer or ABI Companies. 7.05. It is contemplated that Employee in the course of her employment will be engaged in work involving various patents and secret processes owned by ABI Companies. All experiments, developments, formulas, patterns, devices, secret inventions and compilations of information, records, and specifications regarding such matters are trade secrets, which Employee shall not disclose directly or indirectly to anyone other than ABI Companies or their agents, or use in any way, either during the term of this Contract or at any time after the termination of this Contract, except as required in the course and scope of her employment. 7.06. During the term of this Contract, Employee shall not directly or indirectly either as an employee, employer, consultant, agent, principal, partner, stock holder, corporate officer, director, or in any other individual or representative capacity engage or participate in any business that is in competition in any manner whatsoever with the business of ABI Companies; provided, however, that Employee may without restriction invest in professionally managed mutual funds, where the investment decision regarding specific securities is made by the fund manager, and not by Employee; and Employee may purchase, -9- 10 own and sell stock or other securities of pharmaceutical companies, as long as Employee is not directly or indirectly through one or more intermediaries in control of or controlled by or under common control with any such company. Furthermore, upon the termination of this Contract, Employee expressly agrees not to engage or participate directly or indirectly in any business that is in competition with the business of ABI Companies, for a period of one (1) year; and further provided, that no business will be considered to be in competition with ABI Companies unless its business relates to the manufacture, sale, testing or development of products containing interferon alpha, interferon gamma, tumor necrosis factor alpha, lactosucrose, interleukin 18, or some other bioactive substance hereafter developed, or brought under development, by an ABI Company. Employer and Employee recognize and agree that ABI Companies may obtain or develop additional technologies from time to time, and if that is the case, Employer may expand the terms of this non-competition provision by giving written notice to Employee of the additional technologies that are to be protected. 7.07. In the event of a breach by Employee of any provisions of this Article VII, the parties hereto agree that Employer, in addition to any other remedies to which Employer may be entitled at law, shall be entitled to the remedy of specific performance, it being understood and agreed by the parties hereto that damages may be difficult to ascertain, and that an award of damages would in all probability not sufficiently compensate Employer for any breach by Employee of such provisions. ABI Companies are intended third-party beneficiaries of the provisions of this Article VII. -10- 11 ARTICLE VIII STOCK OPTIONS 8.01. Upon commencement of employment on January 4, 1999, Employee shall be awarded options to purchase one hundred thousand (100,000) shares of common stock of ABI pursuant to the Company's 1996 Employee Stock Option Plan, as amended and restated as of September 12, 1998 (the "Plan"). The option price per share under such options shall be one hundred percent (100%) of the Fair Market Value of Employer's common stock as of January 4, 1999, as defined and set forth in Section 4.06 of the Plan. A copy of said Plan is attached to this Employment Contract at Appendix "B", and is hereby incorporated by reference, as if fully herein set forth in its entirety. Reference is made to such Plan for a full explanation of the terms and conditions of the Plan, and options granted to Employee pursuant to this Section 8.01 shall be fully subject to all of the terms, conditions and provisions of the Plan. Options granted under this Section 8.01 to Employee shall also be subject to any future amendments of the Plan, made pursuant to Section 4.10 of the Plan. The options are "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986. The 100,000 options to be granted to Employee on January 4, 1999, pursuant to this Section 8.01 shall vest one-third (1/3) at January 3, 2000, one-third (1/3) at January 3, 2001, and one-third (1/3) at January 3, 2002. 8.02. The grant of options described in Section 8.01 above shall include the award of "Limited Rights" within the meaning of Article III of the Plan, relating to each -11- 12 option granted. Said Limited Rights shall be exercisable subject to all of the terms and conditions of the Plan. 8.03. Employee agrees to execute and deliver to Employer an appropriate incentive stock option agreement, as required by the Internal Revenue Code of 1986 and regulations promulgated thereunder, evidencing the grant of options provided for in this Article VIII. ARTICLE IX COMPULSORY ARBITRATION Employer and Employee desire to avoid and settle without litigation future disputes which may arise between them relative to this Contract. Accordingly, the parties agree to engage in good faith negotiations to resolve any such dispute. In the event they are unable to resolve any such dispute by negotiation, such dispute shall be submitted to arbitration to take place in Dallas County in the State of Texas in compliance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration award shall be final and binding upon the parties hereto and may be filed with and enforced by any court of competent jurisdiction. ARTICLE X ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL 10.01. This Contract supersedes all other agreements, either oral or in writing, between the parties to this Contract with respect to the employment of Employee by -12- 13 Employer, and this Contract contains the entire understanding of the parties and all of the covenants and agreements between the parties with respect to such employment. 10.02. This Contract may be amended only by an instrument signed in writing by both parties; and provided further, that no amendment may be executed on behalf of Employer, except pursuant to a resolution of the Board of Directors of Employer. 10.03. The following provisions shall survive the expiration of this Agreement: ARTICLES VII, VIII, IX and X. IN WITNESS WHEREOF, this Contract is executed by the undersigned as of this ____ day of _______________, 1998. EMPLOYEE: EMPLOYER: AMARILLO BIOSCIENCES, INC. By: - --------------------------- ------------------------------- KATHLEEN L. KELLEHER JOSEPH M. CUMMINS, President -13- EX-10.32 6 EMPLOYMENT AGREEMENT - PHILIP C. FOX 1 EXHIBIT 10.32 EMPLOYMENT CONTRACT This Employment Contract ("Contract") is entered into by and between AMARILLO BIOSCIENCES, INC., a Texas corporation ("Employer"), and DR. PHILIP C. FOX, 6509 Seven Locks Rd., Cabin John, Maryland ("Employee"). ABI and its controlled subsidiaries shall be hereinafter collectively referred to as "ABI Companies". Employer hereby employs Employee, and Employee accepts employment, on the following terms and conditions. ARTICLE I TERM OF EMPLOYMENT 1.01. By this Contract, Employer employs Employee and Employee accepts employment with Employer and with such ABI Companies as Employer shall designate for a period of two (2) years from January 1, 1999; however, this Contract may be terminated earlier by Employer for cause, at its option, by giving written notice of termination to Employee, without prejudice to any other remedy to which Employer may be entitled either at law, in equity or under this Contract. "For cause," as used in this Section 1.01, shall mean and include any of the following events: (a) Misappropriation or embezzlement by Employee involving Employer or an ABI Company; (b) The conviction in any jurisdiction of Employee for any crime involving an ABI Company which constitutes a felony; -1- 2 (c) Employee's material violation of any of the material provisions of this Contract; provided, however, that Employer shall give written notice of Employee's violation of such provisions and Employee shall have a period of twenty (20) business days to cure such violation; or (d) Employee shall have become Disabled (as defined in Section 2.01, below), and said Disability shall have continued for a period of six (6) consecutive months, or a period of six (6) months in any twelve (12) month period. All determinations regarding the existence and continuation of a Disability shall be made as provided in Section 2.01, below. Termination of this Contract for cause shall be effective upon written notice thereof to Employee. Employee shall thereupon be entitled to compensation earned prior to the date of termination, computed pro rata up to and including the date of termination, shall be entitled to no further compensation, and will be relieved of all duties and obligations under this Contract as of the date of termination; provided, however, that the provisions of Articles VII, VIII, IX, and X shall survive both the expiration of this Contract, or any earlier termination. 1.02. Employer may terminate this Contract at any time upon two (2) weeks prior written notice to Employee; however, in the event of such termination by Employer without cause, Employer shall continue to pay to Employee the monthly base salary set forth in Section 2.01, below, and all benefits provided herein shall continue, for a period of six (6) months from the date Employee receives notice of termination. In the event Employee -2- 3 obtains other employment, compensation earned by Employee during this period will be deducted from Employer's obligation under this Section 1.02. 1.03. Employee may terminate this Contract solely for cause at his option, by giving written notice of termination to Employer, without prejudice to any other remedy to which Employee may be entitled either at law, or equity or under this Contract. "For cause" as used in this Section 1.03 shall mean and include any of the following events: (a) Employer's material violation of any material provisions of this Contract; provided, however, that Employee shall give written notice of Employer's violation of such provisions and Employer shall have twenty (20) business days to cure any non-monetary violation and three (3) business days to cure any monetary violation; or (b) Bankruptcy, receivership or dissolution of the Employer. Termination of this Contract by the Employee for cause shall be effective, after the expiration of any cure period, upon written notice thereof to Employer. In the event of such termination by Employee for cause, Employer shall continue to pay Employee the monthly base salary as set forth in Section 2.01 through December 31, 2000. ARTICLE II COMPENSATION 2.01. As compensation for all services rendered under this Contract, Employee shall be paid by Employer a salary of Twelve Thousand Five Hundred and No/100 Dollars ($12,500.00) per month, payable at least monthly during the term of this Contract. The amount paid is to be prorated for any partial employment period. -3- 4 2.02. In the event Employee becomes Disabled (as hereinafter defined), Employee shall continue to receive compensation from employer as follows (but only until the expiration of this Contract): (i) during the first two (2) months following a determination of Disability, Employee shall receive compensation at the rate of one hundred percent (100%) of salary; (ii) during the third and fourth months following a determination of Disability, Employee shall receive compensation at the rate of seventy-five percent (75%) of salary; and (iii) during the fifth and sixth months following a determination of Disability, Employee shall receive compensation at the rate of fifty percent (50%) of salary; and (iv) after six (6) months following a determination of disability, Employee's compensation and all fringe benefits shall terminate, but this Contract shall remain in force, and Employee shall remain an employee of Employer, until Employer shall have given notice of termination as provided in Section 1.01, above. For purposes of determining the percentage of salary and the duration of payment thereof to which Employee is entitled following a determination of Disability, if Employee resumes full-time employment hereunder after such determination and thereafter becomes Disabled again, such succeeding period of Disability shall be deemed a continuation of the prior period of Disability unless a period of at least six continuous months of active full-time employment has elapsed since the conclusion of the prior period of Disability. Notwithstanding anything to the contrary contained in this Section 2.02: (i) During any period of Disability, if Employee receives more than his base monthly salary as provided in Section 2.01 from a combination of (a) disability income insurance proceeds paid -4- 5 to Employee under any policies owned by and paid for by the Employer and (b) compensation paid by Employer pursuant to this Section 2.02, then any such excess shall be promptly returned by Employee to Employer. For example, if Employee is disabled during the first year of this Agreement such that his compensation under Section 2.01 is $12,500.00 a month ($150,000.00 / 12) and such disability has continued for five (5) months such that Employee is receiving fifty percent (50%) of his salary being $6,250.00 a month, and if Employee receives $7,500.00 from disability income insurance proceeds paid under a policy owned by and paid for by the Employer, then the Employee shall return to Employer the sum of $1,250.00 being the excess of the amount Employee would otherwise receive, over the base monthly salary under Section 2.01 ($6,250.00 + $7,500.00 - $12,500.00); and (ii) Employee shall be conclusively deemed to be Disabled for purposes of this Agreement during any period in which he receives disability insurance proceeds from an insurance carrier pursuant to clause (i)(a). For all purposes of this Contract, "Disability" (including the adjective "Disabled") shall mean Employee's inability by reason of physical or mental incapacity to perform the customary duties of his employment for a period of thirty (30) consecutive days or a period of thirty (30) days in any consecutive three (3) month period. If any dispute arises as to the existence of Employee's Disability, such dispute shall be resolved by two licensed physicians, one selected by the Board of Directors of Employer (other than Employee) and one selected by Employee. If the two physicians so selected cannot agree as to whether or not Employee is Disabled, the two physicians so selected shall designate a third physician and the determination of two of the three physicians so selected as to whether or not Employee is Disabled shall be final and binding on the parties for all purposes. -5- 6 2.03. Employer shall perform an annual performance review of Employee's performance for the purpose of determining whether Employee's salary and benefits should be increased. ARTICLE III DUTIES OF EMPLOYEE 3.01. Employee is employed as Director of Research and Development. Employee shall perform the duties of Director of Research and Development, as such duties may be further set forth by resolution of the Board of Directors of Employer. The expected duties are delineated in Appendix "A" to this Employment Contract; however, Employee understands and agrees that Employer shall have the right to modify such duties from time to time, in consultation with Employee, consistent with the legitimate business needs of Employer. Employee shall devote his entire productive time, ability, attention and energies to the business of Employer during the term of this Contract and during such time, Employee shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether or not for compensation, without the prior consent of the Board of Directors of Employer. The Employer hereby acknowledges that the Board of Directors of Employer approves of the following services by Employee: (a) Continuation of Employee's current professional activities being (i) President of International Society for Oral Oncology; (ii) Member of Advisory Board Sjogren's Syndrome Foundation; (iii) Member of Editorial Boards of Oral Surgery, Oral Medicine and Oral Pathology and Special Care in Dentistry; and -6- 7 (b) Review manuscripts for various medical journals. (c) To honor previously accepted speaking engagements. 3.02. The principal location of the Employee's employment shall be Montgomery County, Maryland or the immediate vicinity. Employee shall not be required to relocate to Employer's offices in Amarillo, Texas or elsewhere. Until such time as Employer establishes a business office in Montgomery County, Maryland, Employee may perform his duties from his home in Montgomery County, Maryland. In the event Employee, for any reason, is unable to perform his duties from his home, Employer shall, within sixty (60) days notice from Employee to Employer of such inability, rent, purchase or otherwise obtain space in Montgomery County, Maryland sufficient for Employee to perform his duties. 3.03. The Employer will provide Employee, at Employer's expense, with all computer equipment, telecommunication lines, etc., required in Employer's opinion for Employee's performance of his duties. Ownership of such equipment will remain with the Employer. ARTICLE IV EMPLOYEE'S OBLIGATIONS AS TO INSURANCE 4.01. Employee agrees to submit to physical examination as may be required for the obtaining by Employer of insurance on Employee's life, and agrees to consent to the issuance of a policy or policies of insurance on his life, such policies to be owned by Employer, and naming Employer as beneficiary. Upon termination of Employee's employment for any reason, and if requested by Employee, Employer shall assign any such -7- 8 policy to Employee, so that Employee shall have the option of keeping the policy in force at Employee's expense. The foregoing notwithstanding, Employer shall be entitled to retain the accumulated cash value of any such policy. ARTICLE V EMPLOYEE BENEFITS 5.01. If Employer provides hospital, surgical, medical, dental, group life insurance, performance bonus, or other fringe benefits to its employees, or any of them, at any time during the term of this Contract, Employee shall be entitled to participate in such benefits, on terms and conditions at least as favorable as those accorded to other employees of Employer, subject to insurability. As of the date of execution of this Contract, Employer maintains for its employees $250,000.00 per employee, group accidental death, and $50,000 per employee, group term life. 5.02. Employee and his immediate family will participate in Employer's health care plan which the Employer shall put in place for Employee in Montgomery County, Maryland in the near future and which shall be with the Preferred Provider Network plan of Blue Cross Blue Shield or an equivalent insurer and plan. In the interim, Employee may obtain health insurance for himself and his immediate family and Employer will reimburse Employee for premiums on said health insurance upon Employee providing written documentation of such premium. 5.03. During the period of his employment, the Employee shall be entitled to four (4) weeks (twenty (20) business days) of vacation annually and shall receive full -8- 9 compensation and benefits during his vacation periods. Vacations shall be taken at such time or times as the Employee and Employer shall mutually agree. One (1) week unused vacation time may be carried forward each year. In addition to vacation time, Employee shall be entitled to such paid sick leave and holidays as are provided to other full-time employees of Employer. ARTICLE VI REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE 6.01. Employee is authorized to incur reasonable business expenses for promoting the business of Employer, including expenditures for entertainment and travel. Further, Employer shall pay for or reimburse to Employee: (i) Employee's dues to professional organizations and professional journals which are approximately $2,000.00 per year; and (ii) for his professional activities including attendance at meetings and conferences, including travel, registration, lodging and related expenses, and also including preparation of presentations and manuscripts which Employee estimates will cost approximately $7,000.00 per year. Employer will reimburse Employee for all such expenses upon Employee's presentation of written expense vouchers, itemizing such expenditures. -9- 10 ARTICLE VII PROPERTY RIGHTS OF PARTIES 7.01. Employee will have access to and become familiar with, during the course of employment, various trade secrets, consisting of formulas, devices, secret inventions, processes, compilations of information, records, and specifications owned by ABI Companies and regularly used in the operation of ABI Companies. Employee shall not disclose any such trade secrets directly or indirectly nor use them in any way either during the term of this Contract or at any time thereafter except as required in the course of his employment with ABI Companies; provided, however, that this Section 7.01 shall not restrict Employee in any manner with respect to any such information or property which is now or which hereafter through no improper act or failure to act on the part of Employee becomes generally known or available to the public without breach of this Contract. All files, records, documents, drawings, specifications, equipment and similar items relating to the business of ABI Companies, whether or not prepared by Employee, shall remain the exclusive property of ABI Companies and shall not be removed from the premises of Employer under any circumstances, except in pursuit of the trade and business of ABI Companies. 7.02. On the termination of employment or whenever requested by Employer, Employee shall immediately deliver to Employer all property in Employee's possession or under Employee's control belonging to ABI Companies, including but not limited to all accounting records, computer terminals and tapes, disks, or other data storage mechanisms, accounting machines, and all office furniture and fixtures, supplies and other personal -10- 11 property in the possession or under the control of Employee, in good condition, ordinary wear and tear excepted, and including without limitation all correspondence files, research data, and patent information or data, of every sort. 7.03. Employee does not claim any rights or interests in and to trade secrets, formulas, devices, inventions, processes, patents, applications, continuations, copyrights, trademarks, compilations of information, records, specifications, rights, interests and data of any other sort, affecting or pertaining directly or indirectly to the business of ABI Companies as now conducted, or to the patents, trade secrets, and other rights now owned by ABI Companies. 7.04. Employee agrees that he will promptly and fully inform and disclose to Employer all inventions, designs, improvements and discoveries that Employee may have during the term of this Contract that pertain or relate to the business of ABI Companies or to any experimental work carried on by ABI Companies, whether conceived by Employee alone or with others and whether or not conceived during regular working hours. All such inventions, designs, improvements and discoveries shall be the exclusive property of Employer. Employee shall assist ABI Companies in obtaining patents on all such inventions, designs, improvements and discoveries deemed patentable by ABI Companies, and shall execute all documents and do all things necessary to obtain such patents for Employer or ABI Companies. 7.05. It is contemplated that Employee in the course of his employment will be engaged in work involving various patents and secret processes owned by ABI Companies. -11- 12 All experiments, developments, formulas, patterns, devices, secret inventions and compilations of information, records, and specifications regarding such matters are trade secrets, which Employee shall not disclose directly or indirectly to anyone other than ABI Companies or their agents, or use in any way, either during the term of this Contract or at any time after the termination of this Contract, except as required in the course and scope of his employment with ABI. 7.06. During the term of this Contract, Employee shall not directly or indirectly either as an employee, employer, consultant, agent, principal, partner, stock holder, corporate officer, director, or in any other individual or representative capacity engage or participate in any business that is in competition in any manner whatsoever with the business of ABI Companies; provided, however, that Employee may without restriction purchase, own and sell stock or other securities of any company which is neither in the pharmaceutical business, nor engaged in the manufacture, sale, testing or development of products containing interferon alpha, interferon gamma, tumor necrosis factor alpha, lactosucrose, interleukin 18, or some other bioactive substance hereafter developed, or brought under development, by an ABI Company, and with which Employee has been actively involved in his employment with ABI; and further, Employee may without restriction invest in professionally managed mutual funds, where the investment decision regarding specific securities is made by the fund manager, and not by Employee; and Employee may purchase, own and sell stock or other securities of pharmaceutical companies, and companies engaged in the manufacture, sale, testing or development of products containing interferon alpha, interferon gamma, tumor -12- 13 necrosis factor alpha, lactosucrose, interleukin 18, or some other bioactive substance hereafter developed, or brought under development, by an ABI Company, and with which Employee had been actively involved in his employment with ABI, as long as Employee is not directly or indirectly through one or more intermediaries in control of or controlled by or under common control with any such company. Furthermore, upon the termination of this Contract, Employee expressly agrees not to engage or participate directly or indirectly in any business that is in competition with the business of ABI Companies, for a period of one (1) year; and further provided, that no business will be considered to be in competition with ABI Companies unless its business relates to the manufacture, sale, testing or development of products containing interferon alpha, interferon gamma, tumor necrosis factor alpha, lactosucrose, interleukin 18, or some other bioactive substance hereafter developed, or brought under development, by an ABI Company, and with which Employee had been actively involved in his employment with ABI. Employer and Employee recognize and agree that ABI Companies may obtain or develop additional technologies from time to time, and if that is the case, and if Employee was actively involved during his employment with such additional technologies, Employer may expand the terms of this non-competition provision by giving written notice to Employee of the additional technologies that are to be protected. Except as specifically limited herein, Employee may purchase, own and sell stock, securities and other investments. 7.07. In the event of a breach by Employee of any provisions of this Article VII, the parties hereto agree that Employer, in addition to any other remedies to which -13- 14 Employer may be entitled at law, shall be entitled to the remedy of specific performance, it being understood and agreed by the parties hereto that damages may be difficult to ascertain, and that an award of damages would in all probability not sufficiently compensate Employer for any breach by Employee of such provisions. ABI Companies are intended third-party beneficiaries of the provisions of this Article VII. ARTICLE VIII STOCK OPTIONS 8.01. Upon commencement of employment on January 1, 1999, Employee shall be awarded options to purchase one hundred thousand (100,000) shares of common stock of ABI pursuant to the Company's 1996 Employee Stock Option Plan, as amended and restated as of May 12, 1998 (the "Plan"). The option price per share under such options shall be one hundred percent (100%) of the Fair Market Value of Employer's common stock as of January 1, 1999, as defined and set forth in Section 4.06 of the Plan. A copy of said Plan is attached to this Employment Contract at Appendix "B", and is hereby incorporated by reference, as if fully herein set forth in its entirety. Reference is made to such Plan for a full explanation of the terms and conditions of the Plan, and options granted to Employee pursuant to this Section 8.01 shall be fully subject to all of the terms, conditions and provisions of the Plan. Options granted under this Section 8.01 to Employee shall also be subject to any future amendments of the Plan, made pursuant to Section 4.10 of the Plan. The options are "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986. It is understood and acknowledged that previously the Plan -14- 15 contained provisions for five-year vesting, and limited options that may be granted in any one year to any one employee to 50,000 options. The Committee administering the Plan has made the necessary amendments to the Plan, to allow vesting to occur over a three-year period, one-third (1/3) of the options to vest at December 31, 1999, one-third (1/3) at December 31, 2000, and one-third (1/3) at December 31, 2001; and to increase the limit on options granted to one employee in any one year to at least 100,000 options. Said amendments were made by the Committee effective September 12, 1999. The 100,000 options granted to Employee on January 1, 1999 pursuant to this Section 8.01 shall vest one-third (1/3) at December 31, 1999, one-third (1/3) at December 31, 2000, and one-third (1/3) at December 31, 2001. 8.02. The grant of options described in Section 8.01 above shall include the award of "Limited Rights" within the meaning of Article III of the Plan, relating to each option granted. Said Limited Rights shall be exercisable subject to all of the terms and conditions of the Plan. 8.03. Employee agrees to execute and deliver to Employer an appropriate incentive stock option agreement, as required by the Internal Revenue Code of 1986 and regulations promulgated thereunder, evidencing the grant of options provided for in this Article VIII. ARTICLE IX COMPULSORY ARBITRATION Employer and Employee desire to avoid and settle without litigation future disputes which may arise between them relative to this Contract. Accordingly, the parties -15- 16 agree to engage in good faith negotiations to resolve any such dispute. In the event they are unable to resolve any such dispute by negotiation, such dispute shall be submitted to arbitration to take place in Dallas County in the State of Texas in compliance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration award shall be final and binding upon the parties hereto and may be filed with and enforced by any court of competent jurisdiction. ARTICLE X ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL 10.01. This Contract supersedes all other agreements, either oral or in writing, between the parties to this Contract with respect to the employment of Employee by Employer, and this Contract contains the entire understanding of the parties and all of the covenants and agreements between the parties with respect to such employment. 10.02. This Contract may be amended only by an instrument signed in writing by both parties; and provided further, that no amendment may be executed on behalf of Employer, except pursuant to a resolution of the Board of Directors of Employer. 10.03. This Agreement shall be binding upon the Employer, its successors and assigns. This Agreement shall inure to the benefit of and be enforceable by the Employee and his personal or legal representatives, executors, administrators, successors, heirs and assigns. 10.04. The following provisions shall survive the expiration of this Agreement: ARTICLES VII, VIII, IX and X. -16- 17 IN WITNESS WHEREOF, this Contract is executed by the undersigned as of this ____ day of _______________, 1998. EMPLOYEE: EMPLOYER: AMARILLO BIOSCIENCES, INC. By: - --------------------------- --------------------------- PHILIP C. FOX JOSEPH M. CUMMINS, President -17- EX-10.33 7 EMPLOYMENT AGREEMENT - JOHN SMITH 1 EXHIBIT 10.33 EMPLOYMENT CONTRACT This Employment Contract ("Contract") is entered into by and between AMARILLO BIOSCIENCES, INC., a Texas corporation ("Employer"), and JOHN SMITH ("Employee"). ABI and its controlled subsidiaries shall be hereinafter collectively referred to as "ABI Companies". Employer hereby employs Employee, and Employee accepts employment, on the following terms and conditions. ARTICLE I TERM OF EMPLOYMENT 1.01. By this Contract, Employer employs Employee and Employee accepts employment with Employer and with such ABI Companies as Employer shall designate for a period of one (1) year from date of execution of this Contract; however, this Contract may be terminated earlier by Employer for cause, at its option, by giving written notice of termination to Employee, without prejudice to any other remedy to which Employer may be entitled either at law, in equity or under this Contract. "For cause," as used in this Section 1.01, shall mean and include any of the following events: (a) Misappropriation or embezzlement by Employee involving Employer or an ABI Company; (b) The conviction in any jurisdiction of Employee for any crime involving an ABI Company which constitutes a felony; -1- 2 (c) Employee's material violation of any of the material provisions of this Contract; provided, however, that Employer shall give written notice of Employee's violation of such provisions and Employee shall have a period of twenty (20) business days to cure such violation; or (d) Employee shall have become Disabled (as defined in Section 2.01, below), and said Disability shall have continued for a period of six (6) consecutive months, or a period of six (6) months in any twelve (12) month period. All determinations regarding the existence and continuation of a Disability shall be made as provided in Section 2.01, below. Termination of this Contract for cause shall be effective upon written notice thereof to Employee. Employee shall thereupon be entitled to compensation earned prior to the date of termination, computed pro rata up to and including the date of termination, shall be entitled to no further compensation, and will be relieved of all duties and obligations under this Contract as of the date of termination; provided, however, that the provisions of Articles VII, VIII, IX, and X shall survive both the expiration of this Contract, or any earlier termination. 1.02. Employer may terminate this Contract at any time upon two (2) weeks prior written notice to Employee; however, in the event of such termination by Employer without cause, Employer shall continue to pay to Employee the monthly base salary set forth in Section 2.01, below, for a period of one (1) year from the date Employee receives notice of termination. Employee must seek alternative employment and show reasonable proof of this to Employer. Compensation earned by Employee during this period will be deducted from Employer's obligation under this Section 1.02. In the case of termination of the Contract by Employer, Employer can at the time of termination -2- 3 release Employee in writing from the non-competition provisions contained in Section 7.06, below. In such event, the salary continuation provided for in this Section shall terminate. 1.03. Employee is not a U.S. citizen, but will apply for an immigration work visa so that he may lawfully reside in the United States during the term of this Contract. If Employee should be required to terminate his residence in the U. S. at any time during the term of this Contract due to inability to obtain or extend a work visa, or for any other reason relating to the immigration and naturalization laws of the United States, this Contract shall thereupon immediately terminate, Employee shall be entitled to compensation for any completed but uncompensated period of employment, and Employer and Employee shall thereafter have no obligation one to the other arising from this Contract, except that Articles VII, VIII, IX and X shall survive such termination. ARTICLE II COMPENSATION 2.01. As compensation for all services rendered under this Contract, Employee shall be paid by Employer a salary of Eight Thousand Three Hundred Thirty-Three and No/100 Dollars ($8,333.00) per month, payable at least monthly during the term of this Contract. The amount paid is to be prorated for any partial employment period. In the event Employee becomes Disabled (as hereinafter defined), Employee shall continue to receive compensation from employer as follows (but only until the expiration of one (1) year from date of execution of this Contract): (i) during the first two (2) months following a determination of Disability, Employee shall receive compensation at the rate of one hundred percent (100%) of salary; -3- 4 (ii) during the third and fourth months following a determination of Disability, Employee shall receive compensation at the rate of seventy-five percent (75%) of salary; and (iii) during the fifth and sixth months following a determination of Disability, Employee shall receive compensation at the rate of fifty percent (50%) of salary; and (iv) after six (6) months following a determination of disability, Employee's compensation and all fringe benefits shall terminate, but this Contract shall remain in force, and Employee shall remain an employee of Employer, until Employer shall have given notice of termination as provided in Section 1.01, above. For purposes of determining the percentage of salary and the duration of payment thereof to which Employee is entitled following a determination of Disability, if Employee resumes full-time employment hereunder after such determination and thereafter becomes Disabled again, such succeeding period of Disability shall be deemed a continuation of the prior period of Disability unless a period of at least six continuous months of active full-time employment has elapsed since the conclusion of the prior period of Disability. Notwithstanding anything to the contrary contained in this Section 2.01: (i) any and all amounts payable to Employee hereunder during any period of Disability shall be reduced by any disability income insurance proceeds paid to Employee under any policies owned by and paid for by the Employer; and (ii) Employee shall be conclusively deemed to be Disabled for purposes of this Agreement during any period in which he receives disability insurance proceeds from an insurance carrier pursuant to clause (i). For all purposes of this Contract, "Disability" (including the adjective "Disabled") shall mean Employee's inability by reason of physical or mental incapacity to perform the customary duties of his employment for a period of thirty (30) consecutive days or a period of thirty (30) days in any -4- 5 consecutive three (3) month period. If any dispute arises as to the existence of Employee's Disability, such dispute shall be resolved by two licensed physicians, one selected by the Board of Directors of Employer (other than Employee) and one selected by Employee. If the two physicians so selected cannot agree as to whether or not Employee is Disabled, the two physicians so selected shall designate a third physician and the determination of two of the three physicians so selected as to whether or not Employee is Disabled shall be final and binding on the parties for all purposes. 2.02. Employer shall pay the cost of moving Employee's household goods, including furniture, furnishings and personal effects, from Pomona, New York to Amarillo, Texas. ARTICLE III DUTIES OF EMPLOYEE 3.01. Employee is employed as Director of Marketing and shall work at 800 9th Street, Amarillo, the principal offices of Employer, and at such other place(s) in the City of Amarillo as Employer may direct. Employee shall perform the duties of Director of Marketing, as such duties may be further set forth by resolution of the Board of Directors of Employer. The expected duties are delineated in Appendix "A" to this Employment Contract; however, Employee understands and agrees that Employer shall have the right to modify such duties from time to time, consistent with the legitimate business needs of Employer. Employee shall devote his entire productive time, ability, attention and energies to the business of Employer during the term of this Contract and during such time, Employee shall not directly or indirectly render any services of a business, commercial or professional nature to any other person or organization, whether or not for compensation, without the prior consent of the Board of Directors of Employer. -5- 6 ARTICLE IV EMPLOYEE'S OBLIGATIONS AS TO INSURANCE 4.01. Employee agrees to submit to physical examination as may be required for the obtaining by Employer of insurance on Employee's life, and agrees to consent to the issuance of a policy or policies of insurance on his life, such policies to be owned by Employer, and naming Employer as beneficiary. Upon termination of Employee's employment for any reason, and if requested by Employee, Employer shall assign any such policy to Employee, so that Employee shall have the option of keeping the policy in force at Employee's expense. The foregoing notwithstanding, Employer shall be entitled to retain the accumulated cash value of any such policy. ARTICLE V EMPLOYEE BENEFITS 5.01. If Employer provides hospital, surgical, medical, dental, group life insurance, or other fringe benefits to its employees, or any of them, at any time during the term of this Contract, Employee shall be entitled to participate in such benefits, on terms and conditions at least as favorable as those accorded to other employees of Employer, subject to insurability; provided, however, that Employee shall be entitled to four (4) weeks (20 work days) paid vacation per year, irrespective of vacation benefits of other employees. A maximum of one (1) week unused vacation may be carried forward to the next year. -6- 7 ARTICLE VI REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE 6.01. Employee is authorized to incur reasonable business expenses for promoting the business of Employer, including expenditures for entertainment and travel. Employer will reimburse Employee for all such expenses upon Employee's presentation of written expense vouchers, itemizing such expenditures. ARTICLE VII PROPERTY RIGHTS OF PARTIES 7.01. Employee will have access to and become familiar with, during the course of employment, various trade secrets, consisting of formulas, devices, secret inventions, processes, compilations of information, records, and specifications owned by ABI Companies and regularly used in the operation of ABI Companies. Employee shall not disclose any such trade secrets directly or indirectly nor use them in any way either during the term of this Contract or at any time thereafter except as required in the course of his employment. All files, records, documents, drawings, specifications, equipment and similar items relating to the business of ABI Companies, whether or not prepared by Employee, shall remain the exclusive property of ABI Companies and shall not be removed from the premises of Employer under any circumstances, except in pursuit of the trade and business of ABI Companies. 7.02. On the termination of employment or whenever requested by Employer, Employee shall immediately deliver to Employer all property in Employee's possession or under Employee's control belonging to ABI Companies, including but not limited to all accounting records, -7- 8 computer terminals and tapes, disks, or other data storage mechanisms, accounting machines, and all office furniture and fixtures, supplies and other personal property in the possession or under the control of Employee, in good condition, ordinary wear and tear excepted, and including without limitation all correspondence files, research data, and patent information or data, of every sort. 7.03. Employee does not claim any rights or interests in and to trade secrets, formulas, devices, inventions, processes, patents, applications, continuations, copyrights, trademarks, compilations of information, records, specifications, rights, interests and data of any other sort, affecting or pertaining directly or indirectly to the business of ABI Companies as now conducted, or to the patents, trade secrets, and other rights now owned by ABI Companies. 7.04. Employee agrees that he will promptly and fully inform and disclose to Employer all inventions, designs, improvements and discoveries that Employee may have during the term of this Contract that pertain or relate to the business of ABI Companies or to any experimental work carried on by ABI Companies, whether conceived by Employee alone or with others and whether or not conceived during regular working hours. All such inventions, designs, improvements and discoveries shall be the exclusive property of Employer. Employee shall assist ABI Companies in obtaining patents on all such inventions, designs, improvements and discoveries deemed patentable by ABI Companies, and shall execute all documents and do all things necessary to obtain such patents for Employer or ABI Companies. 7.05. It is contemplated that Employee in the course of his employment will be engaged in work involving various patents and secret processes owned by ABI Companies. All experiments, developments, formulas, patterns, devices, secret inventions and compilations of -8- 9 information, records, and specifications regarding such matters are trade secrets, which Employee shall not disclose directly or indirectly to anyone other than ABI Companies or their agents, or use in any way, either during the term of this Contract or at any time after the termination of this Contract, except as required in the course and scope of his employment. 7.06. During the term of this Contract, Employee shall not directly or indirectly either as an employee, employer, consultant, agent, principal, partner, stock holder, corporate officer, director, or in any other individual or representative capacity engage or participate in any business that is in competition in any manner whatsoever with the business of ABI Companies; provided, however, that Employee may without restriction invest in professionally managed mutual funds, where the investment decision regarding specific securities is made by the fund manager, and not by Employee; and Employee may purchase, own and sell stock or other securities of pharmaceutical companies, as long as Employee is not directly or indirectly through one or more intermediaries in control of or controlled by or under common control with any such company. Furthermore, upon the termination of this Contract, Employee expressly agrees not to engage or participate directly or indirectly in any business that is in competition with the business of ABI Companies, for a period of one (1) year; and further provided, that no business will be considered to be in competition with ABI Companies unless its business relates to the manufacture, sale, testing or development of products containing interferon alpha, interferon gamma, tumor necrosis factor alpha, lactosucrose, interleukin 18, or some other bioactive substance hereafter developed, or brought under development, by an ABI Company. Employer and Employee recognize and agree that ABI Companies may obtain or develop additional technologies from time to time, and if that is the case, Employer may expand the terms of -9- 10 this non-competition provision by giving written notice to Employee of the additional technologies that are to be protected. 7.07. In the event of a breach by Employee of any provisions of this Article VII, the parties hereto agree that Employer, in addition to any other remedies to which Employer may be entitled at law, shall be entitled to the remedy of specific performance, it being understood and agreed by the parties hereto that damages may be difficult to ascertain, and that an award of damages would in all probability not sufficiently compensate Employer for any breach by Employee of such provisions. ABI Companies are intended third-party beneficiaries of the provisions of this Article VII. ARTICLE VIII STOCK OPTIONS 8.01. Upon commencement of employment, Employee shall be awarded options to purchase forty thousand (40,000) shares of common stock of ABI pursuant to the Company's 1996 Employee Stock Option Plan, as amended and restated as of May 13, 1997 (the "Plan"). A copy of said Plan is attached to this Employment Contract at Appendix "B", and is hereby incorporated by reference, as if fully herein set forth in its entirety. Reference is made to such Plan for a full explanation of the terms and conditions of the Plan, and options granted to Employee pursuant to this Section 8.01 shall be fully subject to all of the terms, conditions and provisions of the Plan. Options granted under this Section 8.01 to Employee shall also be subject to any future amendments of the Plan, made pursuant to Section 4.10 of the Plan. The options are "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986. -10- 11 8.02. The grant of options described in Section 8.01 above shall include the award of "Limited Rights" within the meaning of Article III of the Plan, relating to each option granted. Said Limited Rights shall be exercisable subject to all of the terms and conditions of the Plan. 8.03. Employee agrees to execute and deliver to Employer an appropriate incentive stock option agreement, as required by the Internal Revenue Code of 1986 and regulations promulgated thereunder, evidencing the grant of options provided for in this Article VIII. ARTICLE IX COMPULSORY ARBITRATION Employer and Employee desire to avoid and settle without litigation future disputes which may arise between them relative to this Contract. Accordingly, the parties agree to engage in good faith negotiations to resolve any such dispute. In the event they are unable to resolve any such dispute by negotiation, such dispute shall be submitted to arbitration to take place in Dallas County in the State of Texas in compliance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration award shall be final and binding upon the parties hereto and may be filed with and enforced by any court of competent jurisdiction. ARTICLE X ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL 10.01. This Contract supersedes all other agreements, either oral or in writing, between the parties to this Contract with respect to the employment of Employee by Employer, and this Contract contains the entire understanding of the parties and all of the covenants and agreements between the parties with respect to such employment. -11- 12 10.02. This Contract may be amended only by an instrument signed in writing by both parties; and provided further, that no amendment may be executed on behalf of Employer, except pursuant to a resolution of the Board of Directors of Employer. 10.03. The following provisions shall survive the expiration of this Agreement: ARTICLES VII, VIII, IX and X. IN WITNESS WHEREOF, this Contract is executed by the undersigned as of this 14th day of September, 1998. EMPLOYEE: EMPLOYER: AMARILLO BIOSCIENCES, INC. By: - ----------------------------- ---------------------------- JOHN SMITH JOSEPH M. CUMMINS, President -12- EX-10.34 8 ENGAGEMENT AGREEMENT DATED OCTOBER 15, 1998 1 EXHIBIT 10.34 [TRUST COMPANY OF THE SOUTH LETTERHEAD] October 13, 1998 Mr. Joseph M. Cummins, DVM, PhD President and Chief Executive Officer Amarillo Biosciences, Inc. 800 West Ninth Avenue Amarillo TX 79101-3206 Re: Engagement Dear Dr. Cummins: This letter is to confirm our understanding that Amarillo Biosciences, Inc. (the "Company") has engaged Trust Company of the South ("TCOS") to act as its Executive Advisor. TCOS's services in connection with this engagement will include assisting the Company, in (1) Preparation of a corporate profile suitable for use with brokers and investors (research, write, design, print and distribute). All content is subject to the Company's approval, (2) Designing and implementation of a plan for both the short and long term promotion of investor interest in the Company, (3) Interfacing with the investment community on behalf of the Company and publicly promoting investor interest in the Company, (4) Preparation of press releases, upon request, and introduction of the Company to appropriate financial writers and media persons, (5) Enlistment of additional market makers for the Company's stock, (6) Development of a list of key brokers that can be cultivated on behalf of the Company and its stock, and seek to enhance the interest of these brokers in the Company, (7) Assistance, when requested, in the preparation of presentations to broker and investor groups, (8) Development, with Company's officers of an ongoing in-house program for investor relations, (9) Coordination with management and other board members in the selection of additional outside board members, (10) Evaluation of the benefits of listing the Company's securities on the American Stock Exchange when and if appropriate, (11) Evaluation and recommendations regarding utilizing personal and corporate trust services provided by TCOS. The Company agrees to promptly reimburse TCOS for all expenses incurred by TCOS pursuant to this engagement. Such expenses shall include but not be limited to, transportation, lodging, mileage, meals, parking, tips, copying, printing, telephone, overnight delivery, computer research, postage, telecopy and other miscellaneous items. The Company shall have the right to pre-approve expense charges which would exceed $7,500.00 in one calendar month. The term of this Engagement will be for a period of five years from the effective date of this letter agreement provided, however, that the Company may terminate the Engagement prior to the expiration of said term by giving written notice of termination to TCOS at least ten days prior to any six months anniversary of this letter agreement. Notwithstanding the termination of this agreement, the expense reimbursement provisions contained herein, the indemnification and contribution provisions set forth on Schedule I attached hereto and incorporated herein, and the Non-Disclosure Agreement set forth on Schedule II and incorporated herein shall survive and will remain in full force and effect. 2 Mr. Joseph M. Cummins, DVM, PhD. Amarillo Biosciences, Inc. Engagement October 13, 1998 Page 2 As remuneration for the aforementioned services, the Company agrees to pay TCOS a fee of $6,000 per month. Additionally, TCOS is to receive a Warrant to purchase up to 112,000 shares of the Company's common stock at a price of $1.75 per share. If, at any time from the date hereof through September 29, 2003, the Company proposes to register its securities under the Securities Act of 1933 ("the Act") or any such securities of the Company held by its stockholders (in any such case, other than in connection with a merger, acquisition or pursuant to Form S-8 or successor form), it will give written notice of its intention to do so by registered mail ("Notice"), at least thirty (30 business days prior to the filing of each such registration statement), to the Warrant Holder. Upon the written request of the Warrant Holder, made within fifteen (15) business days after receipt of the Notice, that the Company include any of the Warrant Holder's shares of common stock of the Company in the proposed registration statement (such request to specify the number of shares to be so included), the Company shall use its best efforts to effect the registration under the Act of the securities which it has been so requested to register, at the Company's sole cost and expense and at no cost or expense to the Warrant Holder. Nothing herein contained shall prohibit the Company from granting so-called "piggyback" rights superior to or equal to the rights granted herein to any person or entity not affiliated with the Company. Notwithstanding the provisions of this paragraph, the Company shall have the right at any time after it shall have given Notice (irrespective of whether any written request for inclusion of such securities shall have already been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. The Warrant will be exercisable beginning on the effective date of this letter agreement and will expire if not exercised the later of: (i) five years from the effective date of this letter agreement, or (ii) eight years from the effective date of this letter agreement if the holder(s) of the Warrant has not been afforded the opportunity to register the underlying securities in a public offering of the Company's securities during the initial five year period. The expense of registration will be paid by the Company. In accordance with applicable securities laws, the Warrant will be transferable at the written instruction of TCOS. The Warrant and underlying common shares are subject to adjustment, proratably, in price and number in the case of certain transactions such as mergers, recapitalization, stock splits and stock dividends. The Warrant holder will have the right of co-sale. The Warrant holder will also have "cheap stock" dilution protection, so that such holder receives the right to additional shares and/or a lesser share price in the event shares are issued at a below market price. The Company and TCOS shall undertake to have a formal Warrant Agreement finalized on or before October 31, 1998 and both parties understand the aforementioned is only a brief summary of certain material provisions of the Warrant. In connection with TCOS's services, the Company will furnish or cause to be furnished to TCOS such information and data (hereinafter referred to as the "Information") relating to the Company and such access to the Company's officers, directors and employees and independent contractors, as TCOS reasonably deems necessary or as TCOS reasonably requests. The Company will be solely responsible for the contents of any and all written or oral communications provided. The Company represents and warrants that any such communications and all information including, but not limited to, financial information, will not contain any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstance under which such statements are or will be made. The Company recognizes and confirms that in TCOS's performance of its services hereunder, (a) TCOS may rely upon the accuracy and completeness of the information without independent verification and (b) TCOS does not assume responsibility for the accuracy or completeness thereof whether or not it makes an independent verification. TCOS shall provide the Company for its review, comment and 3 Mr. Joseph M. Cummins, DVM, PhD. Amarillo Biosciences, Inc. Engagement October 13, 1998 Page 3 approval copies of any tangible communications whether written or recorded on audio, video or film media, which TCOS may give to any person in providing services under this Engagement. TCOS shall provide such copies to the Company a minimum of three business days prior to TCOS's first proposed use of such materials. Any information obtained by TCOS pursuant to the Engagement shall be governed by a Non-Disclosure Agreement between TCOS and the Company in the form attached hereto as Schedule 11. TCOS shall retain the legal status of an independent contractor. In no event shall TCOS be or be deemed to be an employee or agent of the Company, or to qualify for benefits afforded such persons as Company employees. TCOS has no power to act for, represent or bind the Company. The Company hereby irrevocably agrees to provide the indemnification as set forth in Schedule I to TCOS and other parties specified therein. This letter agreement shall be governed by, and construed in accordance with, the laws of the State of South Carolina without regard to principles of conflict of laws. This letter agreement has been and is made solely for the benefit of the Company and TCOS and its agents, employees, officers, directors, stockholders and controlling persons and their respective successor and assigns and heirs, and no other person shall acquire or have any right under or by virtue of this letter agreement. Please confirm that the foregoing accurately reflects our understanding by signing, dating and returning to us the attached copy of this letter agreement, along with your check for $8,500 representing the initial monthly fee and an expense advance of $2,500, whereupon when accepted and approved by the TCOS's Trust Committee this will become a binding and effective agreement between us. Very truly yours, TRUST COMPANY OF THE SOUTH /s/ ANDY M. CRANE, SR. -------------------------- Andy M. Crane President & CEO Agreed and Accepted AMARILLO BIOSCIENCES, INC. By: /s/ JOSEPH M. CUMMINS ------------------------------------ Joseph M. Cummins, DVM, PhD. President & Chief Executive Officer Date: 15th October, 1998 --------------------------------- AMC:ctjk Enclosures 4 SCHEDULE I TO ENGAGEMENT LETTER DATED OCTOBER 13,1998 BETWEEN TRUST COMPANY OF THE SOUTH AND AMARILLO BIOSCIENCES, INC. a) The Company agrees to indemnify and hold TCOS, its affiliates and any affiliated entities of TCOS and their respective officers, directors, partners, employees, agents and controlling persons within the meaning of Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934 (TCOS and each such entity and person being hereinafter called an "Indemnified Person") harmless from and against any and all claims, liabilities, losses, damages, costs and expenses incurred (including fees and disbursements of counsel) by them which are (A) caused by, related to or arise out of (i) actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by the Company or (ii) actions taken or omitted to be taken (including any untrue statements omitted to be made) by an Indemnified Person with the Company's consent or in conformity with actions taken or omitted to be taken by the Company pursuant to the accompanying letter (B) otherwise related to or "arising out of TCOS's activities performed pursuant to the accompanying letter agreement (including, without limitation, its role as Executive Advisor and agent), the services contemplated by the accompanying letter agreement or TCOS's role in connection therewith. The Company will not, however, be responsible for any such claims, liabilities, losses, damages, costs or expenses pursuant to clause (B) of the preceding sentence which have been finally determined by a court of competent jurisdiction to have primarily and directly resulted from willful misconduct or negligence on the part of the Indemnified Person seeking indemnification hereunder. b) Notwithstanding anything expressed or implied herein to the contrary, the indemnity provided for herein shall cover the amount of any settlements entered into by an Indemnified Person in connection with any claim for which an Indemnified Person may be indemnified hereunder; provided, however, that an Indemnified Person shall not enter into any such settlement unless the Company has consented thereto (which consent shall not be unreasonably withheld). No settlement binding on an Indemnified Person may be made without the consent of such Indemnified Person (which consent shall not be unreasonably withheld). c) The Company and TCOS agree that if any indemnification sought by an Indemnified person pursuant to this paragraph is held by a court to be unavailable for any reason other than that specified in the second sentence of paragraph (a) above, then (whether or not TCOS is the Indemnified Person), in order to provide just and equitable contribution, the Company and TCOS shall contribute to the claims, liabilities, losses, damages, costs and expenses for which such indemnification is held unavailable in such proportion as is appropriate to reflect the relative benefits of the Company, on the one hand, and TCOS on the other hand, in connection with the services or services contemplated by the accompanying letter agreement, and also relative fault of the Company, on the one hand, and TCOS on the other hand, in connection with the services or services contemplated by the accompanying letter agreement, and also relative fault of the Company, on the one hand, and TCOS, on the other hand, subject to the limitation that in any 5 SCHEDULE I TO ENGAGEMENT LETTER DATES OCTOBER 13,1998 BETWEEN TRUST COMPANY OF THE SOUTH AND AMARILLO BIOSCIENCES, INC. PAGE TWO. event TCOS's aggregate contribution to all claims, liabilities, losses, damages, costs and expenses with respect to which contribution is available hereunder shall not exceed the amount of fees (but not expenses) actually received by TCOS pursuant to the accompanying letter agreement. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. You also agree that no Indemnified Person shall have any liability (whether direct or indirect in contract or tort or otherwise) to the Company for or in connection with the accompanying letter agreement, the services contemplated hereby or TCOS's role in connection therewith, except for any such liability for losses, claims, damages, liabilities or expenses incurred by the Company that are determined by final judgment or a court of competent jurisdiction to have resulted directly from willful misconduct or negligence of such Indemnified Person. The provisions in this is Schedule I shall remain operative and in full force and effect regardless of the termination or expiration of the Engagement pursuant to the accompanying letter agreement. 6 SCHEDULE II NON-DISCLOSURE AGREEMENT TO ENGAGEMENT LETTER DATED OCTOBER 13,1998 BETWEEN TRUST COMPANY OF THE SOUTH AND AMARILLO BIOSCIENCES, INC. RECITALS The parties are exploring areas of common business interest. In the course of these discussion, the parties have delivered or will deliver to each other certain information which the parties desire to remain confidential, including descriptive memoranda, appraisals, financial statements or summaries, correspondence records or other specific financial, technical, commercial or other information regarding their businesses and affairs, whether or not such material is specifically marked or designated as confidential (the "Confidential Information"). The parties desire to assure each other that all Confidential Information exchanged will be treated with utmost confidence and will not be used by either party to the detriment of the other. The party who receives Confidential Information in any instance is referred to as "Recipient" and the part who discloses Confidential Information is referred to as "Discloser". AGREEMENTS In consideration of the recitals and the mutual agreements which follow, the parties agree: 1. Any Confidential Information exchanged is provided only for the purposes of assisting each party in exploring their common interests. Recipient acknowledges that Confidential Information is proprietary and confidential and that Discloser would suffer great loss and irreparable harm if Recipient, its affiliates, agents or employees would improperly use the Confidential Information or disclose it to Discloser's customers, employees, competitors, potential competitors or other parties. Recipient agrees to use Confidential Information solely for the purpose of evaluating the parties' common interests and to prevent the use of Confidential Information for any commercial purpose. 2. Recipient acknowledges that the restrictions of this Agreement are reasonable and the consideration provided is sufficient to fully and adequately compensate Recipient for agreeing to these restrictions. Recipient shall not improperly use or disclose to others or permit the improper use or disclosure of any of the Confidential Information or any analysis, modifications or improvements derived from Confidential Information. Recipient shall protect Confidential Information by using the same degree of care, but no less than a reasonable degree of care, to prevent the unauthorized use, dissemination or publication of the Confidential Information as Recipient uses to protect its own confidential information of a like nature. 7 SCHEDULE II NON-DISCLOSURE AGREEMENT TO ENGAGEMENT LETTER DATED OCTOBER 13,1998 BETWEEN TRUST COMPANY OF THE SOUTH AND AMARILLO BIOSCIENCES, INC. PAGE TWO. 3. Recipient agrees upon written request of Discloser, to return all materials containing Confidential Information, including all existing copies, extracts, photographs and summaries thereof, within two business days of such request. 4. Nothing contained herein shall be construed as restricting or creating any liability for the disclosure, communication or use of the following types of information: (a) information which, at the time of disclosure hereunder, was published or know publicly or was otherwise in the public domain: (b) information which after disclosure hereunder, is published or becomes publicly know or otherwise in the public domain other than as a result of a breach of this Agreement, or (c) information which was disclosed to the recipient in good faith by a third part who was not, and is not, under any obligation of confidence or secrecy to the other party hereto at the time of such disclosure. 5. Recipient shall be responsible to Discloser for any breach of the provisions of this agreement by persons who are within Recipient's reasonable control. Recipient shall be entitled to an injunction or injunctions to prevent breaches of any provisions of this Agreement and may specifically enforce such provisions in any action instituted in any court having appropriate jurisdiction. Recipient agrees to indemnify and hold Discloser harmless from and against all loss, damage, cost or expense (including reasonable attorneys' fees) resulting from or arising out of any breach of this Agreement by Recipient. These specific remedies are in addition to any other remedy to which Discloser may be entitled at law or in equity. Nothing contained in this Agreement shall be deemed to prevent the disclosure of any Confidential Information if such disclosure is legally required, in the opinion of counsel to Recipient, to be made in a judicial, administrative or governmental proceeding to disclose any Confidential Information and to allow Discloser a reasonable time to oppose such process. 6. Recipient shall not be permitted to disregard its obligations under this Agreement by using Confidential Information to guide a search of publications or other publicly available materials or be selecting a series of items of knowledge from unconnected sources in the public domain and fitting them together through use of Confidential Information. 7. Without the other party's consent, neither party nor its principals, agents, employees or representatives, will disclose to any person the fact that discussions or negotiations are taking 8 SCHEDULE II NON-DISCLOSURE AGREEMENT TO ENGAGEMENT LETTER DATED OCTOBER 13, 1998 BETWEEN TRUST COMPANY OF THE SOUTH AND AMARILLO BIOSCIENCES, INC. PAGE THREE. place unless required by law; provided, however, each party will consult concerning the content of any such disclosure with the other prior to making the disclosure. 8. Neither party acquires any intellectual property rights under this Agreement except the limited right to use the Confidential Information for the purpose described in section 1. 9. Except for the terms of this Agreement, none of the parties shall be committed in any way with respect to the matters discussed by them, unless and until a definitive agreement with respect thereto is executed. 10. This Agreement is the parties' complete understanding with respect to the subject matter hereof and may only be amended in writing signed by both parties. The parties' respective obligations shall survive the execution of this Agreement. This Agreement may not be assigned in whole or in part. The provisions of this Agreement shall be governed by and construed in accordance with the laws of the State of South Carolina. EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,776,328 0 0 0 0 4,819,743 244,377 127,616 4,986,062 317,998 2,600,000 0 0 54,142 2,013,992 4,986,062 0 222,289 0 1,372,850 0 0 117,000 (2,332,801) 0 (2,332,801) 0 0 0 (2,332,801) (.43) (.43)
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