10-K405 1 b38784abe10-k405.txt AMERICAN BIOGENETICS SCIENCES INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 0-19041 AMERICAN BIOGENETIC SCIENCES, INC. ---------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2655906 --------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1375 AKRON STREET, COPIAGUE NEW 11726 -------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 631-789-2600 ------------ (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: CLASS A COMMON STOCK -------------------- (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of the close of business on March 16, 2001, there were outstanding 41,102,255 shares of the registrant's Class A Common Stock and 3,000,000 shares of its Class B Common Stock. The approximate aggregate market value (based upon the closing price on the Nasdaq SmallCap Market) of shares held by non-affiliates of the registrant as of March 16, 2001 was $22,742,000. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement relating to its 2001 Annual Meeting of Stockholders are incorporated by reference into Part III of this report. 2 CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HABOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Report contains forward-looking statements. The words "believe," "expect," "anticipate," "estimate," "may," "will," "plan," "intend," "could," "estimate," "is being," "goal" and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters identify forward-looking statements. Such forward-looking statements are subject to a number of known and unknown risks and uncertainties that, in addition to general economic and business conditions (both in the United States and in the overseas markets where the Company intends to distribute products), could cause the Company's anticipated results, performance and achievements to differ materially from those described or implied in the forward-looking statements. Examples of these risks and uncertainties include, without limitation, the Company's ability to complete products under development and to maintain superior technological capability, foresee changes and identify, develop and commercialize innovative and competitive products (see "-- Products Under Development"), obtain widespread acceptance of its products by the medical community, including the reliability, safety and effectiveness of such products (see "-- Marketing and Sales"), meet competition (see "-- Competition"), comply with various governmental regulations related to the Company's products and obtain government clearance to market its products (see "-- Government Regulation"), successfully expand its manufacturing capability (see "-- Manufacturing"), attract and retain technologically qualified personnel (see "-- Personnel"), and generate cash flows and obtain collaborative or other arrangements with pharmaceutical companies or obtain other financing to support its product development testing and marketing operations and growth (see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Report). In addition to the foregoing, the Company's actual future results could differ materially from those projected in the forward-looking statements as a result of the risk factors set forth in the Company's various filings with the Securities and Exchange Commission and of changes in general economic conditions, changes in interest rates and changes in the assumptions used in making such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. 3 PART I ITEM 1. BUSINESS SUMMARY American Biogenetic Sciences, Inc. ("ABS" or the "Company") is a development stage company engaged in researching, developing and marketing cardiovascular and neurobiology products for commercial development. The Company commenced selling its products during the last quarter of 1997, although it has not yet derived any significant revenues from the sale of these products. The Company's products are designed for in vitro and in vivo diagnostic procedures and therapeutic drugs. In vitro diagnostic procedures are those in which blood, urine or other bodily fluid or tissue is extracted from the body and diagnostic tests are performed in a test tube or other laboratory equipment. In vivo diagnostic procedures are those in which proteins or compounds are injected directly into the body or bloodstream to assess abnormal reactions or conditions. The Company's therapeutic products have been identified for the treatment of epilepsy, migraine and mania and neurodegenerative diseases. At the present time ABS' principal products or activities are: o THROMBUS PRECURSOR PROTEIN DIAGNOSTIC TEST (TPP(TM)). This is an in vitro diagnostic test used to assess the risk of blood clots in the veins or arteries. This test is also used to monitor the performance of anti-clotting therapy or drugs used in the prevention of blood clots. o FUNCTIONAL INTACT FIBRINOGEN DIAGNOSTIC TEST (FIF(R)). This is an in vitro diagnostic test which measures the levels of fibrinogen in blood. Fibrinogen is a protein used in the blood-clotting process. o ANTIGEN-FREE TECHNOLOGY. This enabling technology is designed for the production of highly specific monoclonal antibodies used in diagnostics and therapeutics for a variety of diseases. The Company is currently performing contract research and antibody manufacturing for certain corporate partners. o THERAPEUTIC NEUROCOMPOUNDS. These are chemical compounds which have been identified for the treatment of epilepsy, migraine and mania and neurodegenerative diseases. One of these compounds, ABS-103 has been licensed to Abbott Laboratories. o IN VITRO DIAGNOSTIC PRODUCTS FOR INFECTIOUS AND AUTO-IMMUNE DISEASE. These can determine the status of such diseases as human herpes and lupus. 1 4 o MOUSE SERUM. This is a blood component that lacks blood cells which is used in diagnostic tests by major in vitro diagnostic product manufacturers for a variety of purposes. ABS was incorporated in Delaware in September 1983. The Company's principal executive offices are located at 1375 Akron Street, Copiague, New York 11726 and its telephone number is 631-789-2600. CORE TECHNOLOGIES THE ANTIGEN-FREE MOUSE COLONY - MONOCLONAL ANTIBODIES One of the Company's core technologies is a patented antigen-free mouse colony which allows the generation of highly specific monoclonal antibodies that are difficult to obtain from conventional systems. The Company utilizes this technology to supply antibodies for its in vitro and in vivo diagnostic products. The proprietary antigen-free mouse colony is maintained in a germ-free environment and fed a chemically defined and ultrafiltered diet. When the antigen-free mice are challenged with a foreign entity, there is a large immune response that eventually results in the proliferation of a large number of antibody secreting cells with a spectrum of specificities to the foreign entity. The Company holds several United States patents covering the antigen-free mouse colony and methods of producing antibodies relating to it. See "-- Intellectual Property." THERAPEUTIC NEUROCOMPOUNDS The Company has developed a series of neurocompounds for possible treatment of epilepsy, migraine, mania and neurodegeneration diseases. CURRENT PRODUCTS MEDICAL BACKGROUND FOR CARDIOVASCULAR PRODUCTS Using its antigen-free mouse colony, the Company developed and patented two antibodies, 45J and MH1. These antibodies react specifically with both fibrinogen (a blood protein) and fibrin (a component of blood clots). These antibodies are used in two of ABS' main products, the FiF and TpP tests. These tests assist doctors in diagnosing blood clots lodged in the legs and the lungs, known as thrombosis. Blood clots that form in the bloodstream consist of two major parts: o a cellular component made up of platelets; and o a meshwork of fibrin fibers that cements the platelets into an insoluble mass which has the mechanical strength to withstand the pressure of blood in the circulation. 2 5 The fibrin component is insoluble and is derived from fibrinogen, a blood protein that is manufactured in the liver. When thrombin, an enzyme produced in response to injury of a blood vessel, is present in blood, it converts soluble fibrinogen into fibrin at the site of vascular injury. Similarly, the generation of plasmin plays the major role in fragmentation of the fibrin meshwork, a process known as fibrinolysis. Like thrombin, plasmin does not ordinarily circulate in plasma but is derived from the circulating protein plasminogen when the fibrinolytic system is activated. In addition to causing fragmentation of fibrin, plasmin also attacks fibrinogen and institutes changes in its structure that prevent its polymerization to fibrin. In extreme cases, this process, called fibrinogenolysis, can lead to bleeding caused by lack of clottable fibrinogen. Fragmentation of fibrin leads to the production of soluble fibrin degradation products that circulate in plasma and are generally elevated in patients following a thrombotic event. Since all these products are proteins, it is possible to produce antibodies that can react specifically with individual fibrin degradation products. Electrophoretic techniques have identified soluble fibrin polymers in the plasma of patients with different clinical conditions, including myocardial infarction and deep vein thrombosis. Laboratory tests have also reported elevated soluble fibrin levels in other clinical intravascular fibrin formation conditions, including disseminated intravascular coagulation and patients undergoing surgical procedures who are experiencing thrombotic complications. Thrombosis itself can be fatal. It is also associated with a number of other medical conditions, such as heart attack, stroke, and complications from pregnancy. Some of the most hazardous sites for blood clot formation include the coronary arteries where a blood clot can lead to myocardial infarction (heart attack); the arteries leading to the brain, where a blood clot can cause stroke; and the veins of the legs which can lead to a pulmonary embolism. There are approximately 12 million surgical procedures performed each year in the United States alone which put patients at risk of forming a blood clot. Approximately 10 million people in the United States go to emergency rooms each year due to chest pain. However, as many as 80% of these individuals are not suffering heart attacks and may have from some less serious conditions. An early warning test that establishes those patients that are not having a heart attack will eliminate expensive diagnostic procedures and unnecessary hospital admissions. Furthermore, the early identification of those patients who are forming life threatening blood clots or suffering from a heart attack would permit earlier use of clot dissolving drugs or anticoagulants. Current biochemical tests for acute myocardial infarction measure cardiac muscle proteins which leak out as a result of dying heart muscle. This release of cardiac specific proteins only occurs 4-6 hours after the onset of clinical symptoms. There is a strong clinical need for an earlier warning of myocardial infarction. The detection of blood clot formation early in the clinical event should facilitate proper identification and treatment of myocardial infarction patients with life saving, clot dissolving drugs. 3 6 Several epidemiological studies have revealed a significant causal relationship between high fibrinogen levels and coronary artery disease. It is widely accepted that events leading to coronary artery disease are caused as much by biochemical processes in the coagulation (blood-clotting) system as by the metabolism of cholesterol. The most important landmark trial to show a causal relationship between high fibrinogen and coronary artery disease is the Framingham epidemiology study (1985) conducted at the Institute for Prevention of Cardiovascular Disease at the Deaconess Hospital, Harvard Medical School. That study concluded that elevated levels of fibrinogen "exceeded that of all risk factors except elevated systolic blood pressure." Other studies indicate that individuals with elevated levels of fibrinogen are predisposed to thrombosis. On the other hand, diminished levels may result in hemorrhage. Thus, reagents that can be used to measure fibrinogen can play a vital role in determining the appropriate level of thrombolytic therapy, as well as determine an individual's risk of coronary artery disease. THROMBUS PRECURSOR PROTEIN ASSAY (TPP) The Company's Thrombus Precursor Protein Assay (TpP) is an in vitro diagnostic enzyme test using the Company's patented monoclonal antibodies MH1 and 45J to measure soluble fibrin polymers in blood to indicate active blood clot formation (thrombosis) in individuals with possible myocardial infarction and other clinical conditions precipitated by clot formation. TpP provides a means to measure intravascular coagulation (fibrin formation) in post-operative patients to determine the risk of deep vein thrombosis and its clinical sequelae, pulmonary embolism. It has also been demonstrated that thrombosis precursor protein levels are significantly lower in patients who are undergoing invasive surgical procedures and have been adequately anticoagulated. TpP relies on the measurement of soluble fibrin polymers which are produced and circulate freely when a clot starts to form, even before the onset of clinical symptoms, and is elevated when the patient first begins to experience chest pain. TpP is also expected to offer physicians a screening tool to monitor patients post-operatively for blood clot formation and to effect therapeutic intervention if required and monitor their response to anticoagulant therapy. A study using TpP to monitor patients post-operatively was conducted at Johns Hopkins School of Medicine and a second at the University of Perugia, Italy in 1997. These studies showed that thrombosis precursor protein was elevated post operatively. The Company has patented: o the TpP test kit itself; o the antibodies used to recognize the presence of thrombosis precursor protein in blood; and o the use of TpP to measure intravascular fibrin polymer formation in patients with symptoms indicating a blood clotting event. 4 7 See "Intellectual Property." In October 1996, ABS received 510(k) clearance from the FDA to market TpP to aid in the risk assessment of blood clot formation and the monitoring of anticoagulant therapy. See "-- Government Regulation." The Company began to market TpP in late 1997 through independent distributors. ABS has put additional effort into clinical evaluation of TpP with the goal to characterize the most promising applications and demonstrate the advantages of TpP over competitor products. The following publications and abstracts have been presented and/or published: o Decreased TpP Levels Linked to Preeclampsia. Clinical Lab Letter, April 15, 2000, Vol 21, No 7. o Lepirudin Blunts Endotoxin-Induced Coagulation Activation. T. Pernerstorfer, et al. Blood, 1 March 2000, Vol 95, No 5 o The Use of Thrombus Precursor Protein, D-dimer, Prothrombin Fragment 1.2, and Thrombin Antithrombin in the Exclusion of Proximal Deep Vein Thrombosis and Pulmonary Embolism. S. LaCapra, et al. Blood Coagulation and Fibrinolysis 2000, Vol 11, No 4 In addition, ABS has developed a hand-held, disposable, rapid assay device which measures TpP levels in plasma. The prototype of a hand-held device for obtaining semi-quantitative test results (i.e. qualitative test results derived from numerical data) has been produced and the Company has recently submitted a 510(k) to the FDA for marketing approval of the rapid assay format TpP test. The Company believes that the more user-friendly and rapid point-of-care format will greatly enhance the market opportunity for the TpP test. The Company intends to seek outside sources for the manufacture of its point-of-care device and corporate partners to market this product. FUNCTIONAL INTACT FIBRINOGEN ASSAY (FIF) The Company's Functional Intact Fibrinogen Assay (FiF) is an in vitro diagnostic tool using the Company's patented monoclonal antibody, 45J, to provide a direct and accurate quantitative measurement of the amount of fibrinogen present in plasma. FiF has received FDA approval for use. See "-- Intellectual Property." Traditional clotting tests are an indirect measure of fibrinogen, estimated by the amount of time that passes before a clot is formed, which can be influenced by the presence of degradation products of fibrin/fibrinogen. FiF, on the other hand, is a direct measure of fibrinogen that is not adversely influenced by these products. In May 1996, a research group of the Framingham Heart Study reported that FiF is an accurate method of detecting elevated fibrinogen levels, a risk factor for cardiovascular disease. Furthermore, the findings demonstrated that the fibrinogen levels measured by FiF were 5 8 correlated with the prevalence of cardiovascular disease both by itself and when adjusted for age, weight, smoking and diabetes. In October 2000, an article published in the journal Circulation: Journal of the American Heart Association (2000;102:1634-1638) reported results that found the FiF test demonstrated a stronger association with cardiovascular disease than did the Clauss method (the current standard in fibrinogen testing). A total of 2,632 patients were evaluated in the Framingham Offspring Study - a continuation of the Framingham Heart Study. The study utilized the FiF test and demonstrated that the FiF test may be more adaptable for measuring fibrinogen levels in large populations, as reported in this publication. The Company has been marketing FiF in a manual format kit since late 1997 and continues to seek corporate partners to include FiF on automated diagnostic testing equipment. THERAPEUTIC NEUROCOMPOUNDS The Company has developed a series of neurocompounds for possible treatment of epilepsy, migraine, mania and neurodegenerative diseases. Epilepsy; Migraine; Mania. ABS is developing a series of anticonvulsant compounds which have improved properties compared to valproate, a significant drug which is currently used for the treatment of epilepsy, migraine and mania. In pre-clinical trials in Germany, one of these compounds, ABS-103, has been shown to control seizure activity without any of the sedative action or side effects commonly associated with other anticonvulsants. Scientists have recently discovered that many drugs exist as two forms, enantiomers, which are mirror images of each other and where one of the enantiomers is responsible for the therapeutic effects and the other enantiomer may be inactive or cause unwanted side effects. R-103 is the preferred chemical entity for commercial development. The Company has isolated the R- enantiomer (R-103) of ABS-103. ABS scientists were able to isolate the R (right) enantiomer from the S (left) to produce R-103. The value of isolating R-103 lies in its superior safety and efficacy profile. The Company has patented the use of ABS-103 as an anticonvulsant in the U.S. and in Europe and additional applications relating to this technology are pending. See "-- Intellectual Property." In January 2000, ABS entered into a license agreement with Abbott Laboratories ("Abbott") granting Abbott exclusive worldwide rights to ABS-103 for certain applications. See "-- Marketing and Sales." Neurodegenerative Diseases. The Company, in collaboration with the University College Dublin, University of Hanover, Germany, University of Notre Dame, United States and fellow researchers within the Global Scientific Network(R), has identified certain chemical compounds for the potential treatment of neurodegenerative diseases, designated as the ABS 200 series. See "-- Research and Development Agreements -- Global Scientific Network." 6 9 The ABS 200 series of compounds are putative neuroprotectants designed to treat and halt the progression of neurodegenerative diseases. The compounds have been evaluated in cells where they exhibit nerve growth factor-like activity. The ABS 200 series of compounds can penetrate the blood-brain barrier, unlike nerve growth factor, which requires specific development of a delivery system. One of the ABS 200 Series compounds, ABS-205, has been shown to induce the expression of a protein known as neural cell adhesion molecule in vitro. Neural cell adhesion molecule is involved in memory, neurodevelopment and other neuroplastic events. ABS-205 also has been shown to enhance neural cell adhesion molecule function in the rat hippocampus and cortex, areas known to be involved in memory formation. Moreover, ABS-205 protects against chemical induced memory loss (amnesia) in animals. The Company has patented this technology in the United States. See "-- Intellectual Property." The Company has also developed the ABS 300 series of compounds relating to small molecules which may be useful for enhancing memory. It has filed two United States patent applications and four foreign applications relating to this series of compounds. IN VITRO DIAGNOSTIC PRODUCTS FOR INFECTIOUS AND AUTO-IMMUNE DISEASE The Company also owns a series of in vitro diagnostic products for infectious and auto-immune disease. These products are manufactured and distributed by the Company's wholly owned subsidiary, Stellar Bio Systems, Inc. ("Stellar"). Stellar manufactures in vitro immunodiagnostic assays utilizing an immunofluorescent antibody assay format. These assays determine the presence of various infectious diseases and autoimmune conditions including: o human herpes simplex virus 1; o human parvovirus B-19; o human herpes simplex virus 2; o measles virus; o Epstein-Barr virus; o rubella virus; o cytomegalovirus; o adenovirus; o varicella zoster virus; o mumps virus; o respiratory syncytial virus; o antinuclear bodies Hep-2; o human herpes virus 6; o anti-nuclear bodies KB; o human herpes virus 7; o anti-mitochondrial bodies; and o anti-native DNA bodies.
MOUSE SERUM; RESEARCH REAGENTS Stellar also is the largest domestic provider of high quality mouse serum. Stellar's mouse serum is used as an assay component by in vitro diagnostic assay manufacturers. Stellar additionally provides contract services for the development, process scale up, manufacture and purification of research reagents such as monoclonal and polyclonal antibodies. Research reagents are individual components of diagnostic products, such as antibodies, calibrators and serum used in the biotechnology industry. PRODUCTS UNDER DEVELOPMENT 7 10 MH1 MH1 as an Imaging Agent. ABS has labeled an antibody fragment of its MH1 antibody that contains the binding site for fibrin with a radioisotope for use as an in vivo imaging agent to show the size and location of blood clots. Images have been generated in pre-clinical animal studies and clinical human studies with the resolution required for commercial use. The product is intended to permit the rapid imaging of blood clots in the lungs, a condition known as pulmonary embolism, and the detection of blood clots in the legs (deep vein thrombosis). The primary protein component of a thrombus is fibrin, and an antibody that can differentiate fibrin from its plasma precursor, fibrinogen, can be used when, appropriately labeled with a radioisotope, to image the site and extent of an occlusion and to carry thrombolytic reagents to the site. Traditional methods for detecting a thrombus in the circulatory system have consisted of angiography, venography, duplex doppler and monitoring radio labeled blood clot components, derived from a human donor, injected into the circulatory system and then absorbed by the clot. These procedures are costly, often may lack sensitivity and some can pose potential risks to the patient. The large quantity of dye required in angiography and venography may cause kidney problems and may irritate the walls of blood vessels. Also, in angiography a catheter is used for delivery of the dye into the arterial system which adds further to the risk of the patient. In contrast, only a minimum quantity of ABS' radio labeled MH1 need be used, and since the antibody is not derived from man, there is no risk of human blood-borne disease. However, whenever a foreign substance is introduced into the human body, there is the risk of an immune reaction and cases of reactions to mouse-derived antibody have been reported. In January 1995, ABS completed Phase I testing of MH1 in imaging blood clots for pulmonary embolism and deep vein thrombosis. The final Phase I report was submitted to the FDA in October 1995. The Company has compiled all necessary information regarding the Phase I/II clinical trials for MH1 imaging that were subsequently conducted and submitted a final report to the FDA in 1998. Clinical trial results demonstrated that MH1 is effective and safe as an imaging agent for pulmonary embolism and deep vein thrombosis. ABS is seeking corporate partners to fund, collaborate, license and to conduct full Phase II and Phase III trials and market the product. MH1 as a Delivery Vehicle for Thrombolytic Therapy. The Company is seeking to develop a product using MH1 as a delivery-vehicle for known thrombolytics (drugs that dissolve blood clots). Tests by the Company have demonstrated the ability to link MH1 to a known thrombolytic agent to form a potent, fibrin specific, therapeutic agent which, in animals, has demonstrated superior clot dissolving properties. In March 1998, ABS obtained a United States patent for this application. See "-- Intellectual Property." MH1 as an Antithrombotic. The Company is also investigating the utility of MH1 as an antithrombotic agent (to prevent clot formation) for the interference and/or inhibition of excess fibrin deposition in surgical procedures such as angioplasty. In January 1996, ABS obtained a United States patent for this application. See "-- Intellectual Property." 8 11 MH1 as a Delivery Vehicle for Anticancer Therapy. The Company is seeking to develop a product using MH1 as a delivery-vehicle for known anti-cancer drugs (example, cytotoxine) to tumors or cancers that contain aggregated fibrin. In February 1999 and 2001, the Company obtained two United States Patents covering the composition and method, respectively, for this therapy. See "-- Intellectual Property". NEUROBIOLOGY PROGRAM The goal of this longer term program is to develop fine chemical compounds for use in the treatment of epilepsy, migraine and mania and to treat and halt the progression of neurodegenerative diseases such as Alzheimer's, Parkinson's, neuropathy, trauma and stroke. Most of the applications developed to date have been developed in conjunction with scientists in the Company's Global Scientific Network. See "-- Research and Development Agreements Global Scientific Network." There can be no assurance that the Company's products in development will prove to be commercially viable, that any of the products will receive regulatory clearance or clearance for particular indications, or that ABS will successfully market any products or achieve significant revenues or profitable operations. The Company is seeking to enter into additional collaborative, licensing, distribution, and/or co-marketing arrangements with third parties to expedite the commercialization of its products. However, there can be no assurance that ABS will be able to enter into any such additional arrangements or, if it does, that any such arrangements will be on terms that will be favorable to ABS. RESEARCH AND DEVELOPMENT AGREEMENTS GLOBAL SCIENTIFIC NETWORK The Company formed its Global Scientific Network to promote and facilitate collaborative research leading to product development. The network is comprised of certain of the members of the Company's Scientific Advisory Committee and additional scientists from various disciplines. See "-- Scientific Advisory Committee." The network is a joint effort to expedite the research, development and commercialization of ABS' diagnostic and therapeutic products. Though the network does not hold meetings, communication among its participants is facilitated through the Company. The network offers the Company's management an opportunity to review and evaluate new technologies. In addition, it offers a network of scientific leaders who can offer advice and direction. To facilitate the identification and screening of new technologies, the Company has scientific coordinators in St. Petersburg, Russia; and Beijing, China. These activities are coordinated from the Company's office in Dublin, Ireland. The Company is currently collaborating with leading medical and scientific institutions worldwide including University College Dublin, Ireland; University of Hanover, Germany; Chinese Academy of Medical Sciences, Beijing, China. 9 12 Through its Global Scientific Network, ABS has entered into various agreements which generally grant the Company an exclusive license to the results of the research, as discussed below. AGREEMENTS FOR NEUROSCIENCE PROGRAMS ABS has entered into various agreements with universities and/or individual scientists who are part of the Global Scientific Network. These agreements generally grant the Company an exclusive license to the results of the research for use in various neuroscience applications, which may include compounds and antibodies. In general, the agreements are for a term equal to the duration of any patents that may be granted, with a minimum term of 10 years. In exchange for a license, ABS is obligated to pay certain research expenses and the costs of filing and processing patent applications in the United States and any other countries that ABS may select. Pursuant to these agreements, ABS is also required to pay the inventors or the university a royalty, typically 5% of net product sales. The Company is seeking to commercialize the products under development by entering into collaborative arrangements, licensing agreements and/or through research and development partners. ABS has also entered into development agreements with the National Institutes of Health (NIH) for some of its neurobiology products, including an agreement with the NIH (epilepsy branch) in 1998 to evaluate ABS-103 and R-103. These evaluations have been completed and have demonstrated anticonvulsant activity with little or no toxicity. In addition, results of an evaluation under a Phase I Small Business Innovation Research (SBIR) grant from the NIH, have demonstrated that ABS-205 can enhance learning and memory in pre-clinical models. There can be no assurance that the Company's neurobiology products will prove to be commercially viable, or that ABS will successfully market the products or achieve significant revenues or profitable operations or enter into any arrangements with third parties for development of the neurobiology products, or if it does, that any such arrangements will be on terms that will be favorable to ABS. OTHER RESEARCH AND DEVELOPMENT AGREEMENTS As part of its development stage activities, ABS, in the ordinary course of business, enters into various agreements that provide for the expenditure by the Company of funds for research and development activities. These agreements typically provide for the payment of royalties (typically 2% to 8% of net sales) by ABS if any products are successfully developed and marketed as a result of the work being performed under the agreement. Reference is made to Note 10 of the Notes to Consolidated Financial Statements for a discussion of various arrangements which the Company has entered into for collaborative research and development projects (including arrangements for the use of space and services) and technology license arrangements for the development and prospective manufacturing and sale of products being developed. MARKETING AND SALES 10 13 MARKETS The Company's commercial sales of its in vitro test kits are directed to hospitals, laboratories, clinical laboratories and physicians in large group medical practices. The Company believes that sales to hospitals and clinical laboratories will be dependent upon physician general acceptance of use of direct fibrinogen level measurement as part of routine and special blood analyses. MARKETING AND SALES During fiscal year 2000, the Company had one customer account for 44% of the Company's sales and a second customer accounted for 17% of the Company's sales. The Company does not believe that the loss of any one of these customers would have a material adverse effect on the consolidated operations of the Company. Sales of ABS' proposed products on a commercial basis will be substantially dependent on widespread acceptance by the medical community. The use of any products that the Company may develop for diagnosis and therapy will require educating the medical community as to their reliability, safety and effectiveness. The Company, and any pharmaceutical company with which it may collaborate, may use several approaches to obtain general acceptance in the medical community of the Company's proposed products. Such promotional approaches may include: publicizing existing studies; offering the products to current practitioners and researchers who are leaders in their fields for their use and publication of their findings; conducting comparative studies with competitive products and methodologies and publishing the results of the studies; and sponsoring professional symposia and seminars. The Company markets its TpP diagnostic kit through distributors. This approach requires the Company to pay the expenses of developing promotional literature and aids, hiring technical support personnel and performing studies to support clinical use of the product. The independent distributors that ABS uses also market similar products produced by others. ABS intends to rely on collaborative arrangements with pharmaceutical firms to conduct and fund the major portion of the human clinical trials that are necessary to obtain regulatory approval for any in vivo products it may develop. The Company also intends to rely on these firms to market and sell the products exclusively, especially during the first few years of the collaboration. While arrangements may vary, the Company intends to require payments of a royalty based on sales of the product, with an amount to be paid "up front" upon entering into the arrangement. The personnel and financial resources of the Company are not sufficient to permit the Company to alone gain the acceptance of the medical community for ABS' proposed in vivo pharmaceutical products or vaccines. Accordingly, the Company may be required to collaborate with one or more pharmaceutical companies, which will provide the necessary financing and expertise, in order to obtain medical community's acceptance. Such arrangements are likely to entail, among other things, the sharing of revenue or profits with such companies. The Company continues to seek arrangements with large pharmaceutical companies to market its products. In 11 14 the event ABS is unable to enter into arrangements or if the arrangements into which it enters are not successful, the Company will likely seek to market such products through distributors. This would require ABS to develop a marketing program to support sales. In January 1992, the Company entered into an agreement with Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi") of Japan granting Yamanouchi the exclusive right to manufacture, use and sell in Japan and Taiwan diagnostic test kits which utilize 45J. The Company received an initial payment of $900,000 (net of Japanese taxes). The license agreement requires Yamanouchi to purchase its 45J requirements from ABS. The agreement is for a period of fifteen years, provided that if any of the Company's patent rights for 45J have not yet expired at the end of that period, the agreement will continue until such expiration. The Company has filed a patent application in Japan relating to 45J. To date, Yamanouchi has not made any sales of the diagnostic tests covered by this agreement. The Company does not have any further obligations and could terminate the agreement. In October 1995, ABS entered into a license and collaboration agreement with F. Hoffmann-La Roche, Ltd. ("Hoffmann-La Roche") for the co-development and marketing of the Company's TpP test for the detection of active blood clot formation (thrombosis). The agreement grants Hoffmann-La Roche a worldwide license to market the TpP test in a latex based particle agglutination format, but does not obligate Hoffmann-La Roche to do so. Under the agreement, the Company received a $60,000 non-refundable development payment to adapt the TpP test in the latex based particle agglutination format to Hoffmann-La Roche's automated diagnostic systems. The Company may also receive milestone payments upon achievement of certain commercialization goals. The TpP test is to be manufactured by the Company for use on Hoffmann-La Roche's instruments. Prior to marketing the test, Hoffmann-La Roche must obtain 510(k) clearance. See "-- Government Regulation." ABS is to receive a percentage of Hoffmann-La Roche's net selling price for the Company's manufacturing of the TpP test plus a 5% royalty on net sales made by Hoffmann-La Roche. Under the agreement, the TpP test is also to be sold by ABS and Hoffmann-La Roche to other diagnostic companies using similar particle agglutination technology. On these sales, gross profit is to be shared equally between the Company and Hoffmann-La Roche. To date, ABS has not received any milestone or royalty payments. In December 1995, ABS entered into a license agreement with Abbott for the marketing of the Company's TpP assay. The license agreement grants Abbott a worldwide license to market the TpP test for Abbott's immunoassay formats, but does not obligate Abbott to do so. The Company received a $100,000 non-refundable up-front payment and is to receive milestone payments upon achievement of certain development and commercialization goals. The Company is to receive a 5% royalty on net sales made by Abbott. In addition, the reagent for the TpP test is to be manufactured by the Company for use by Abbott. Prior to marketing the test, Abbott must obtain 510(k) clearance. See "-- Government Regulation." To date, ABS has not received any milestone or royalty payments. In January 2000, ABS entered into a license agreement with Abbott granting Abbott exclusive worldwide rights to its ABS-103 compound, related technology and patent rights. The license gives Abbott the exclusive rights to develop and market the compound which presently is 12 15 in the pre-clinical stage. Abbott will complete development of the product and conduct appropriate clinical trials to test for safety and effectiveness. In consideration for the license and in addition to customary royalties on net sales, Abbott paid the Company a non-refundable up-front license fee of $500,000 and agreed to pay additional milestone payments aggregating up to $17 million depending upon successfully reaching development milestones, generally by indication. There can be no assurance that these milestones will be achieved. In conjunction with entering into the license, Abbott made an additional $1,500,000 equity investment in ABS. There can be no assurance that any future marketing arrangements will be entered into or, that if entered into, they will be on terms similar to those discussed above or on terms that will be favorable to the Company. If no arrangements are entered into, ABS will require substantial alternative financing in order to market its products. There can be no assurance that any such financing arrangements will be available to the Company or, if available to, it will be available on terms acceptable or favorable to the Company. There can be no assurance that any of the Company's products will be accepted in the medical community, and ABS is unable to estimate whether it will be able, and if so the length of time it would take, to gain such acceptance. COMPETITION The biotechnology industry is characterized by rapid technological advances, evolving industry standards and technological obsolescence. ABS has numerous competitors, none of whom is believed to be dominant, and it is likely that others may enter the field. Competitors may develop products which may render ABS' products obsolete or which have advantages over ABS' products, such as greater accuracy and precision or greater acceptance by the medical community. ABS' inability to meet and surpass its competitors' technological advances could have a material adverse effect on the Company's business, financial condition and results of operations. Competing products may also get through the regulatory approval process sooner than ABS' products, enabling those competitors to market their products earlier than ABS. Usually, the first person to market a product has a significant marketplace advantage. In addition, other products now in use, presently undergoing the regulatory approval process, or under development by others, may perform functions similar to ABS' existing products or those which it has under development. INTELLECTUAL PROPERTY Patents. ABS' policy is to seek patent protection for its proposed products, whether resulting from its own research and development activities or from development and licensing arrangements into which the Company enters. ABS has been issued United States Patents, Nos. 4,870,023 which will expire in 2006, covering a recombinant occlusion body and 5,041,379, which will expire 2008, covering a recombinant heliothis virus; United States Patent No. 5,294,548, relating to the Hepatitis A vaccine, filed jointly with the University of Iowa, which will expire 2011. In addition, ABS has been issued United States Patent, Nos. 5,091,512 and 5,120,834, each of which will expire in 13 16 2009, covering monoclonal antibodies specific for fibrinogen and monoclonal antibodies specific for fibrin, respectively. ABS has also been issued United States Patent No. 5,223,410, which will expire in 2010, covering the use of its antigen-free mouse colony to generate monoclonal antibodies. ABS has also been issued United States Patent No. 5,721,122 which expires in 2015, covering a method of obtaining primed lymphocytes collected from immunized antigen-free mice. ABS has further been issued United States Patent No. 5,453,359, which will expire in 2012, covering an immunoassay for soluble fibrin using the Company's proprietary fibrin-specific monoclonal antibody as a method of detecting a thrombotic event, such as myocardial infarction. ABS has also been issued United States Patent No. 5,487,892, which will expire in 2014, covering use of the Company's proprietary fibrin-specific monoclonal antibody as an antithrombotic agent. ABS has further been issued United States Patent No. 5,723,126, which will expire in 2015, covering the use of the Company's propriety fibrin-specific monoclonal antibody in conjunction with a thrombolytic reagent for the treatment of thrombosis. ABS has been issued United States Patent No. 5,837,540, which will expire in 2016, covering a method of producing fibrin-specific antibody. ABS has also been issued United States Patent No. 5,843,690, which will expire in 2015, covering a method and an assay kit for the in vitro detection of the presence or amount of soluble fibrin polymers in a sample from a subject. ABS has also been issued United States Patent No. 5,871,737, which will expire in 2008, covering a fibrin-specific monoclonal antibody conjugated with a cytotoxic reagent. ABS has been issued United States Patent No. 6,080,384, which will expire in 2017, covering methods for radionuclide-labeling of biomolecules and kits utilizing the same. ABS has also been issued United States Patent No. 6,187,593, which will expire in 2008, covering a method for treatment for fibrin encapsulated tumor using MH1 conjugated with a cytotoxic reagent. Additional patent applications are pending covering alternative embodiments of the Company's proprietary fibrin-specific monoclonal antibody, as well as improved methods of raising fibrin specific monoclonal antibodies and of using the soluble fibrin immunoassay. ABS has twenty-two counterpart applications (including designated countries under patent treaties) covering monoclonal antibodies specific for fibrinogen, monoclonal antibodies specific for fibrin, methods for use of the Company's proprietary fibrin-specific monoclonal antibody in a soluble fibrin assay, and as an antithrombotic agent, and the use of the antigen-free mouse colony to generate monoclonal antibodies. ABS presently has issued three patents in Australia covering monoclonal antibodies specific for fibrinogen, monoclonal antibodies specific for fibrin, methods for localizing a blood clot in a patient, an immunoassay for determining fibrin levels in a patient's blood, and use of the antigen-free mouse colony to generate monoclonal antibodies. The Company has exclusive worldwide rights in technology relating to certain methods and compositions for treating epilepsy. ABS has the exclusive license for United States Patent No. 5,786,380, which will expire in 2015, covering a method of reducing seizure activity in an individual by administering an anti-epileptic composition that contains ABS-103. Six patents protect this technology on behalf of the Company which include patents in the United States and Europe. The European Patent has been activated in 16 European countries. ABS has filed additional patent applications in the United States and other foreign jurisdictions to further protect this technology. Exclusive worldwide rights have also been obtained by the Company for technologies relating to certain fluorinated anti-convulsant compounds. United States Patent 14 17 No. 6,184,401 issued on February 6, 2001 relating to this technology and will expire on June 22, 2019. Another United States patent application and six foreign applications are pending relating to these technologies. The Company also has exclusive rights relating to the use of ABS-103 to treat migraine and affective illness. One United States and 22 foreign applications are pending relating to this technology. The Company has received a Notice of Allowance from the United States Patent and Trademark Office indicating that the United States application is in proper form for allowance. Technology for the enantioselective synthesis of valproic acid analogues is also exclusively licensed to the Company. One United States and two foreign applications are pending relating to this technology. The Company also has exclusive worldwide rights in technology related to certain novel neurotrophic methods and compositions. United States Patent No. 5,672,746 was issued September 30, 1997. A reissue application for this patent has been allowed. Foreign applications to protect this technology worldwide are pending. Ono Pharmaceutical, Ltd., ("Ono"), has filed third party observations in the patent applications relating to the neurotrophic compounds in the Japan and Australian patent offices, as well as the European Patent Office. These applications remain pending and the Company is continuing their prosecution. ABS has filed a reissue application of its United States Patent No. 5,672,746 to provide the United States Patent and Trademark Office an opportunity to examine this patent in light of the issues raised by Ono. The Company has received a Notice of Allowance from the United States Patent and Trademark Office indicating that the patent will be reissued. On November 30, 1998, the United States Patent and Trademark office declared an interference between an application of Ono and one of the Company's applications related to its 5,672,746 patent to determine the priority of invention of commonly claimed subject matter. The Company resolved the interference in the United States Patent and Trademark Office. The Company received a judgment that permits it to pursue patent protection relating to the use of ABS-205 as a therapeutic with claims which were previously allowed prior to the interference. ABS is the worldwide exclusive licensee of United States Patent No. 5,492,812, issued to Trinity College (Dublin, Ireland), which will expire in 2013, covering a method for diagnosing Alzheimer's disease, and a corresponding pending European patent application. There can be no assurance that any of the claims in pending or future applications will issue as patents, that any issued patents will provide ABS with significant competitive advantages, or that challenges will not be instituted against the validity or enforceability of any patent issued to ABS or, if instituted, that such challenges will not be successful. The cost of litigation to uphold the validity of patents and prevent infringement can be substantial. Furthermore, there can be no assurance that others have not independently developed or will not independently develop similar technologies or will not develop distinctively patentable technology duplicating the Company's technology or that they will not design around the patentable aspects of the Company's technology. While obtaining patents is deemed important by ABS, patents are not considered essential to the success of its business. However, if patents do not issue from present or future patent applications, ABS may be subject to greater competition. Moreover, unpatented technology could be independently developed by others who would then be free to use the technology in competition with unpatented technology of ABS. 15 18 Exclusive Licenses. The Company has exclusive worldwide rights in technology relating to certain methods and compositions for treating epilepsy, migraine and affective disorder. ABS has the exclusive license for United States Patent No. 5,786,380, which will expire in 2015, covering a method of reducing seizure activity in an individual by administering an anti-epileptic compound that contains ABS-103. Patents protect this technology on behalf of the Company in the United States and the European Patent Office. The European Patent has been activated in 16 European countries. ABS has filed additional patent applications in the United States and other foreign jurisdictions to further protect this technology. The Company has also received a Notice of Allowance from the United States Patent and Trademark Office indicating that a patent application relating to the use of ABS-103 for the treatment of migraine is allowable. Technology relating to the enatioselective synthesis of valproic acid analogues such as ABS-103 is also exclusively licensed to the Company. The Company also has exclusive worldwide rights in technology related to certain novel neurotrophic methods and compositions (United States Patent No. 5,672,746, issued September 30, 1997). Foreign applications to protect this technology worldwide are pending. ABS is the worldwide exclusive licensee of a United States patent covering a method for diagnosing Alzheimer's disease (United States Patent No. 5,492,812, issued to Trinity College (Dublin, Ireland), expiring in 2013) and a corresponding pending European patent application. Trade Secrets. With respect to certain aspects of its technology, ABS currently relies upon, and intends to continue to rely upon, trade secrets, unpatented proprietary know-how and continuing technological innovation to protect its potential commercial position. Relationships between ABS and its scientific consultants and collaborators may provide access to the Company's know-how, although, ABS has generally entered into confidentiality agreements with the parties involved. Similarly, ABS' employees and consultants have entered into agreements with the Company which require that they forebear from disclosing confidential information of ABS and that they assign to the Company all rights in any inventions made while in ABS' engagement relating to Company activities. However, members of the Company's Scientific Advisory Committee may be employed by or have consulting agreements with third parties, the businesses of which may conflict with or compete with ABS, and any inventions discovered by such individuals as part of their agreement with third parties will not become the property of ABS. There can be no assurance that trade secrets will be developed and maintained, that secrecy obligations will be honored, or that others will not independently develop similar or superior technology. To the extent that consultants, employees, collaborators or other third parties apply technological information independently developed by them or by others to Company projects, disputes may arise as to the ownership of such information which may not be resolved in favor of ABS. See "-- Scientific Advisory Committee." Trademarks. ABS owns trademarks registered with the United States Patent and Trademark Office for the names FiF(R), Global Scientific Network(R) and Cadkit(R). Federally registered trademarks have a perpetual life, as long as they are renewed on a timely basis, subject to the rights of third parties to seek cancellation of the marks. ABS has filed other trademark applications, including TpP(TM), and may claim common law trade name rights as to other potential products. It anticipates filing additional trademark applications in the future. ABS does not believe that any of its trademarks (or applied for trademarks) is material to its business. 16 19 GOVERNMENT REGULATION ABS' present and proposed activities are subject to government regulation in the United States and most other countries in which the Company may choose to market its proposed products or conduct product development, research or manufacturing. ABS has not determined those countries, other than the United States, where it will seek regulatory approvals to market its proposed products. The following is a discussion of the processes required in order to obtain FDA approval for marketing a product, which are different for the three types of products being developed by ABS: monoclonal antibodies for in vitro use, monoclonal antibodies for in vivo use and drugs to treat neurological diseases. Regulation of In Vitro Products. Some in vitro diagnostic products are regulated as medical devices and can be approved by the Food and Drug Administration (FDA) under a process known as a "510(k)." This procedure is available if the proposed product is "substantially equivalent" to another product that was in commercial distribution in the United States before May 28, 1976 or is lawfully marketed under a 510(k) approval (a "predicate device"). When a 510(k) review is used, a sponsor is required to submit a pre-market notification to the FDA. ABS cannot proceed with commercial sales of such products for diagnostic use in the United States until it receives 510(k) clearance from the FDA. In the event that the FDA requests additional information for the pre-market notification, this could result in multiple cycles of submissions, each potentially involving additional review periods until 510(k) clearance is granted or the FDA determines that the device is not substantially equivalent. In cases where ABS' product is determined by the FDA not to be "substantially equivalent" to a predicate device, a pre-market approval application ("PMA") will be required to be submitted and approved before commercial distribution is permitted. There can be no assurance that any present or future in vitro test ABS develops will be determined to be substantially equivalent by the FDA or receive PMA approval by the FDA in a timely manner or at all. A PMA may be required for some or all the Company's future proposed in vitro products. The FDA sometimes requires supporting clinical data for a 510(k) and invariably requires clinical data for a PMA. ABS expects that it will submit clinical data in at least some of its anticipated 510(k) notices. The clinical data must be gathered in accordance with FDA's regulations. Medical devices may be exported before receiving 510(k) clearance or PMA approval under certain conditions. Once cleared for marketing in the United States, a diagnostic device must comply with certain regulatory requirements, such as good manufacturing practices (also known as the Quality System Regulation), medical device reporting, and restrictions on advertising and promotion. Failure to comply with these rules can lead to FDA enforcement actions. The European Union also has developed a structure for the regulation of in vitro diagnostic devices. ABS believes that there are no material regulatory impediments to the sale of its in vitro diagnostic tests presently under development in North Africa and the Middle East. 17 20 Regulation of In Vivo Products. Any products intended for in vivo use, including vaccines, will be subject to regulation by the FDA. The products produced, depending on their characteristics, may be classified as "biologics" or products regulated under the Public Health Service Act (the "PHS Act") and the Federal Food, Drug, and Cosmetic Act (the "FDCA") or may be classified as non-biologic drugs regulated only under the FDCA. Development of a pharmaceutical product for use in humans under either statute is a multistep process. First, laboratory animal testing establishes probable safety and parameters of use of the experimental product for testing in humans and suggests potential effectiveness with respect to a given disease. Once the general investigative plan and protocols for specific human studies are developed, an investigational new drug ("IND") application is submitted to the FDA. FDA clearance of the IND is required before the study can begin. Normally, the initial phase of clinical testing (Phase I) is conducted to evaluate the pharmacological actions and side effects of the experimental product in humans, i.e. the safety of the drug. A demonstration of therapeutic benefit is not required in order to complete such trials successfully. If acceptable product safety is demonstrated, then Phase II trials may be initiated. Phase II trials are designed to evaluate the effectiveness of the product in the treatment of a given disease, and often involve well-controlled, closely monitored studies in a relatively small number of patients. Routes, dosages and schedules of administration may also be studied. If Phase II trials are successfully completed, Phase III trials may be commenced. Phase III trials are expanded, controlled trials which are intended to gather additional information about safety and effectiveness in order to evaluate the overall risk/benefit relationship of the product and provide the evidence of safety and effectiveness necessary for product approval. Although this is the standard drug testing pattern, different approaches are often used, such as combining Phases I and II. It is not possible to estimate the time within which Phase I, II and III studies will be completed with respect to a given product, although the time period to complete all the testing can exceed five years. Following the successful completion of clinical trials, the clinical evidence that has been accumulated is submitted to the FDA as part of a marketing application. Approval of the application is necessary before a company may market the product. The approval process can be very lengthy and depends upon the FDA's review of the application and the time required to provide satisfactory answers or additional clinical data when requested. For any given product, there is no assurance that an application will be approved in a timely manner, or at all. Failure to obtain such approvals would prevent ABS from commercializing its products and would have a material adverse effect on the Company's business. The process of seeking and obtaining FDA approval for a new product generally requires substantial funding. ABS anticipates that in most instances where it develops a product, the Company will seek to enter into a joint venture or similar arrangement with an established chemical or pharmaceutical company that will help conduct the required preclinical studies and clinical trials and bear a substantial portion of the expense of obtaining FDA approval. Good Manufacturing Practices. The FDA also has extensive regulations concerning good manufacturing practices applicable to both biologic and non-biologic drug products once they are 18 21 approved. ABS' compliance with good manufacturing practice, and its ability to assure the potency, purity and quality of the drugs and biologics manufactured, must be documented in the applications submitted for the products, and manufacturing facilities will be subject to pre-approval and other inspections by the FDA and other government agencies. Failure to comply with the good manufacturing practice regulations, or to comply with other applicable legal requirements, can lead to seizure of violative products, injunctive actions, other enforcement actions, and potential criminal and civil liability on the part of a Company and of the officers and employees of a Company. In addition to complying with FDA regulations, ABS and the facilities used by it are also required to comply with federal and state environmental, occupational health and other applicable regulations. ABS believes that its facilities comply with such regulations. MANUFACTURING While ABS has produced a limited quantity of monoclonal antibodies for testing and evaluation of its in vitro products, there can be no assurances that ABS will be able to either finance or meet FDA regulations for good manufacturing practices required in order to convert and operate its facility for commercial production of such products. ABS does not intend to establish its own manufacturing operations for its in vivo products unless and until, in the opinion of management of ABS, the size and scope of its business and its financial resources so warrant. It is the Company's intention to enter into manufacturing agreements, joint ventures or license agreements for the manufacture of monoclonal antibodies. Each joint venture partner or contract manufacturer participating in the process of manufacturing the Company's monoclonal antibody must comply with FDA regulations and provide documentation to support that part of the manufacturing process in which it is involved. ABS has contracted with several different GMP manufacturers for the production of antibodies. Starting in February 2000, the Company has manufactured and assembled TpP kits in house at the Stellar facility in Columbia, Maryland. The Stellar facility presently complies with GMP regulations and has received International Standards Organization ("ISO") 9001 series certification. There is no assurance that the Company will be able to enter into arrangements for the manufacture of sufficient quantities of the Company's in vivo monoclonal antibody necessary to obtain full FDA clearance, that the FDA will accept the Company's manufacturing arrangements, or find the facilities in GMP compliance, or that commercial manufacturing arrangements can be obtained on acceptable terms. PRODUCT LIABILITY The testing, marketing, manufacture and sale of pharmaceutical products entails a risk of product and other liability claims by consumers and others. ABS' monoclonal antibodies are generated from an antigen free mouse colony and there have been clinical reports of instances of the human immune system negatively reacting to mouse derived antibodies. Product and other liability claims may be asserted by 19 22 physicians, laboratories, hospitals or patients relying upon the results of ABS' diagnostic tests (MH1 imaging). Product liability claims may be asserted by physicians, laboratories, hospitals or patients relying upon the results of the Company's diagnostic tests (TpP, FiF and Stellar products). Claims may also be asserted against ABS by end users of the Company's products, including persons who may be treated with any in vivo diagnostic or therapeutics. Certain distributors of pharmaceutical products require minimum product liability insurance coverage as a condition precedent to purchasing or accepting products for distribution. Failure to satisfy these insurance requirements could impede the ability of ABS to achieve broad distribution of its proposed products, which would have a material adverse effect upon the business and financial condition of ABS. ABS has obtained product liability insurance covering its TpP and FiF products. Although ABS will attempt to obtain product liability insurance prior to the marketing of any of its other proposed products, there is no assurance that ABS will be able to obtain such insurance. Also, there can be no assurance that any insurance obtained (including its existing policies) can be maintained or that such insurance can be acquired or maintained at a reasonable cost or will be sufficient to cover all possible liabilities. In the event of a successful suit against ABS, lack or insufficiency of insurance coverage could have a material adverse effect on ABS. SCIENTIFIC ADVISORY COMMITTEE ABS has a Scientific Advisory Committee comprised of scientists and physicians active in the fields of microbiology, immunology and molecular biology and in cardiovascular disease, hepatic disease and drug development. These scientists serve as advisors to the Company. Members of the Scientific Advisory Committee are selected by the Company's management and generally make themselves available on an informal basis for consultations with ABS. Members of the Scientific Advisory Committee review the feasibility of the Company's proposed research and development programs review the progress of programs undertaken and assist in establishing both the scientific goals of ABS and the priorities of its product development. Members of the Scientific Advisory Committee may be employed by or have consulting agreements with third parties, the business of which may conflict or compete with ABS. Any inventions discovered by such individuals as part of their agreements with third parties will not become the property of ABS. These individuals are not required to devote any, and are expected to devote only a small portion, of their time to ABS, and are not expected to actively participate in the development of the Company's technology. It is possible regulations or policies now in effect or adopted in the future might limit the ability of the scientific advisors to continue their relationship with ABS. Members of the Scientific Advisory Committee were used on an informal basis for consultations in 2000. Members are paid $1,000 per meeting attended, plus expenses. Members of the Scientific Advisory Committee have been granted ten year options to purchase from 5,000 to 25,000 shares of Class A Common Stock from the Company. As of December 31, 2000, there were outstanding options for an aggregate of 416,250 shares held by members of the Scientific Advisory Committee, at exercise prices ranging from $.28 per share to $7.75 per share. The 2000 cash payments to the advisors for informal meetings and other consultations as a group 20 23 were approximately $37,000. Certain members of the Committee are associated with institutions with which ABS has undertaken or may in the future undertake collaborative research efforts. Arrangements with these institutions may result in a member of the Scientific Advisory Committee receiving royalties or other compensation from that institution or from ABS if such member works as a scientist in the collaborative effort. The members of the Scientific Advisory Committee have no general fiduciary duties to ABS, have entered into limited confidentiality agreements and may, in their discretion, engage in activities which are competitive with those engaged in by the Company. The members of the Committee as of March 16, 2001 are: Giancarlo Agnelli, M.D., is Professor of Internal Medicine at the University of Perugia, Italy, where he received his medical education. Prior to appointment to his present post he was a research fellow and clinical fellow in the Department of Pathology and Department of Medicine at McMaster University, Hamilton, Ontario, Canada. He continues as an associate member of the Hamilton Civic Hospital Research Center at McMaster University. He is co-chairman of the Sub-Committee on Control of Anti-coagulation of the Scientific and Standardization Committee of the International Society on Thrombosis and Hemostasis. He has presented lectures at more than 200 international and national meetings and is the author or co-author of more than 200 scientific articles. Denian Ba, M.D., Ph.D., is presently Academician, The Chinese Academy of Engineering; President of the Chinese Academy of Medical Sciences & Peking Union Medical College; Chairman, Chinese Society of Immunology; Vice Chairman, Chinese Medical Association. Dr. Ba was engaged in research on Cancer Immunology as Associate Chief, Chief, Department of Immunology at the Institute of Cancer Research in Harbin Medical University, and Deputy Director, Director at the Institute of Cancer Research in Harbin Medical University. Dr. Ba received his M.D. from the Department of Medicine of Harbin Medical University and received his Ph.D. from the School of Medicine of Hokkaido University, Japan. Konrad T. Beyreuther, Ph.D., is presently professor of Molecular Biology and Head of Laboratory for Molecular Neuropathology at the Center of Molecular Biology, University of Heidelberg, Federal Republic of Germany. His primary research deals with genetics and molecular biology of Alzheimer's disease and related dementia disorders. He earned his doctorate at the Max-Plank Institute for Biochemistry Munich, University of Munich, Germany. Gustav Victor Rudolf Born, M.D., D. Phil., F.R.S., is presently Research Director of The William Harvey Research Institute at St. Bartholomew's Hospital Medical College, London, England, and Emeritus Professor of Pharmacology in the University of London. Among Professor Born's distinctions, appointments and activities are: Fellowship and Royal Medal of the Royal Society; Foundation President of the British Society for Thrombosis and Haemostasis; Corresponding Member of the Belgian Royal Academy of Medicine; Professor of the Foundation de France, Paris; Robert Pfleger, Paul Morawitz and Alexander-von- Humbolst Prizes; Honorary Life Member of the New York Academy of Sciences; Medical Advisor of the Heineman Medical Research Center, Charlotte, North Carolina; Honorary Doctorates from eight universities, including Brown and Loyola; Gold Medal for Medicine, Jung Foundation. 21 24 Jeffrey Ginsberg, M.D., is a hematologist with research training in clinical and laboratory aspects of thrombosis. His current research interests include the clinical development of novel antithrombotic agents, the diagnosis and management of thrombosis during pregnancy, the prevention and treatment of the post- phlebitic syndrome, the investigation of the clinical complications of antiphospholipid antibodies, and the diagnosis of venous thrombosis and pulmonary embolism. He is currently the principal investigator of a number of clinical trials relative to thrombosis. He is the Director of the Thromboembolism Unit at Chedoke-McMaster Hospitals and a Career Investigator of the Heart and Stroke Foundation of Ontario. Lawrence Grossman, Ph.D., is University Distinguished Service Professor of Biochemistry at the Johns Hopkins University School of Hygiene and Public Health, Baltimore, Maryland. He is consultant to Applied DNA Systems, Inc. He earned a Ph.D. degree from the University of Southern California, and subsequently trained and worked thereafter at Johns Hopkins University and Brandeis University. His areas of expertise are in DNA repair, molecular basis of mutagenesis and molecular biology in general. Thomas W. Meade, CBE, DM, FRCP, FRS, is presently Director of the Medical Research Council Epidemiology and Medical Care Unit, Wolfson Institute of Preventive Medicine, St. Bartholomew's and the Royal London Hospital School of Medicine and Dentistry, London, England. Additional appointments include: Professor of Epidemiology at the University of London, Hon. Consultant in Epidemiology, North West London Hospitals NHS Trust, Hon. Consultant in Epidemiology, St. Bartholomew's and Royal London Hospitals NHS Trust. He is: Doctor of Medicine, Fellow of the Royal College of Physicians and Fellow of the Royal Society. Daniel M. Michaelson, Ph.D., is presently Professor of Neurobiology, Department of Neurobiochemistry, Tel Aviv University, Tel Aviv, Israel. He earned a Ph.D. in Biophysics from the University of California, Berkeley. Among Professor Michaelson's distinctions, appointments and activities are: Membership of the International Society of Neurochemistry, International Society for Developmental Neuroscience, International Brain Research Organization, the New York Academy of Sciences, Israel Society of Neurosciences, Israel Biochemical Society and the Israel Society for Pharmacology and Physiology. He is a member of the Scientific Advisory Board of the Alzheimer Foundation, and a board member of Ramot University Authority for Applied Research and Industrial Development Ltd. Peter Victorovich Morozov, M.D., Ph.D., is Professor of Psychiatry at the Russian State Medical University, Moscow. He has served as the Secretary of the International Section of the National Scientific Society of Psychiatrists and is currently secretary of the Russian Section of French-Russian Society of Psychiatrists. Dr. Morozov's primary area of research is psychopharmacology, problems of classification and diagnosis, post-traumatic stress disorders. Dr. Morozov graduated from Pirogov II Medical School and received his doctorate from the Institute of Psychiatry AMS USSR. Heinz Nau, Ph.D., is presently Professor and Chairman, Department of Food Toxicology at the School of Veterinary Medicine in Hannover, Germany. He obtained his Ph.D. degree in Chemistry from the University Innsbruck, Austria. He then did post-doctoral work at 22 25 Massachusetts Institute of Technology, Cambridge, Massachusetts, and was a Professor at the Institute of Toxicology and Embryopharmacology in Berlin, Germany. Dr. Nau holds an Honorary Doctorate from the University of Uppsala, Sweden, and is currently President of the European Teratology Society, and a Member of the Scientific Committee of Food at the European Commission in Brussels, Belgium, as well as a member of the International Federation of Teratological Societies. He has published over 350 scientific papers and is an editor of several books. He won the Warkany Award of the American Teratology Society (1996) and the year 2000 prize for Development of Alternatives to Experimental Animal Testing. Rem V. Petrov, M.D., is currently Vice-President of Russian Academy of Sciences, Moscow, Russia and chief of the Immunology Department of the Institute of Bioorganic Chemistry of the Academy. His main scientific interests are in the fields of Immunogenetics (genetical control of Immune response, interactions of syngeneic and nonsyngeneic cells) and Immunobiotechnology (artificial immunogens and vaccines, immunopharmacology-myelopeptides and other natural immunomodulators). Craig M. Pratt, M.D., is currently a Professor of Medicine and Director, Clinical Cardiology Research, Section of Cardiology, Department of Internal Medicine, Baylor College of Medicine, Houston, Texas. Dr. Pratt is currently Director of the Coronary Care Unit and Non-invasive Laboratories at The Methodist Hospital. Nationally, Dr. Pratt is a consultant to the Cardiovascular and Renal Drugs Advisory Board to the Food and Drug Administration. John H. Proctor, Ph.D., Fellow and formerly Secretary General of the World Academy of Art and Science from 1986-1997, Life Fellow and Past President of the Washington Academy of Sciences in Washington, D.C., a full member of the Russian Academy of Sciences and a corresponding member of the Spanish Royal Academy of Sciences. He has facilitated national and international technology transfer, organizational development and productivity improvement projects for over thirty years. Dr. Proctor has written three books and has published eighty technical papers. Ciaran M. Regan, Ph.D., D.Sc. is presently Associate Professor of Pharmacology at University College, Dublin, Ireland. Dr. Regan received his B.Sc. and Ph.D. from University College, Dublin. He is a past Postdoctoral Fellow, Department of Biochemistry, University of Nijmegen, The Netherlands and past Scientific Officer of Medical Research Council, Institute of Neurology, London. Dr. Regan has numerous publications. Jacob Szmuszkovicz, Ph.D., is a Professor of Chemistry at the University of Notre Dame, South Bend, Indiana. He earned a doctorate in Chemistry from the Hebrew University, Jerusalem. He served as a Member of Staff at the Weizmann Institute before joining the Upjohn Company where he held the position of a Distinguished Scientist in the CNS (Central Nervous System) Unit from 1954 to 1985. Dr. Szmuszkovicz is co-inventor on over 100 patents. He has served as a Member of the Executive Committee of the Organic Division of the American Chemical Society. PERSONNEL 23 26 As of March 16, 2001, ABS had 29 full time employees and 4 part-time employees. Of the full-time employees, 6 are research and development personnel, including 3 Ph.D.s, 9 are manufacturing personnel, and the rest are executive and administrative personnel. ABS' Executive Vice President is party to an employment agreement with the Company ending September 30, 2001. This officer also is party to an agreement with ABS to keep corporate information with regard to the business of the Company confidential during and subsequent to employment with ABS. None of ABS' employees is represented by a labor organization. ABS believes its relationship with its employees is satisfactory. The Company has standardized procedures for recruiting, interviewing and reference checking prospective personnel. ITEM 2. PROPERTIES ABS leases 6,000 square feet of office space in Copiague, New York under a lease expiring July 2001 (with an annual base rent of $41,000), which it intends to renew, and office space in Dublin, Ireland under a short-term arrangement. ABS' subsidiary, Stellar, has a lease covering 16,000 square feet in Columbia, Maryland, with an annual base rent of $184,000 and a term ending March 31, 2006. ABS has terminated its lease with Boston University and has consolidated its research and development activities at Stellar's facility. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 24 27 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Company's Class A Common Stock (the "Common Stock") was traded on the Nasdaq National Market under the trading symbol "MABXA" until December 6, 1999 and on the Nasdaq Smallcap Market from December 6, 1999 to January 6, 2000 under the trading symbol "MABAC." Between January 6, 2000 and July 10, 2000, the Common Stock has traded on the OTC Bulletin Board under the symbol "MABA." Since July 11, 2000, the Common Stock has traded on the Nasdaq SmallCap Market under the symbol "MABA". The following table sets forth the high and low closing bid prices for the Company's Common Stock for the periods indicated, as reported by the appropriate market, without retail mark-ups, mark-downs or commissions.
Fiscal Years High Low ------------ ----- ----- 2000 First Quarter $6.41 $ .38 Second Quarter 2.66 1.22 Third Quarter 2.84 1.50 Fourth Quarter 1.69 .53 1999 First Quarter $1.44 $ .84 Second Quarter 1.22 .94 Third Quarter 1.16 .25 Fourth Quarter .66 .28
There were approximately 623 holders of record of Common Stock as of March 16, 2001 (exclusive of stockholders whose shares are held in street name by brokers, depositories and other institutional firms). ABS has not paid any cash dividends on its Common Stock since its inception and does not anticipate paying dividends for the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA. The following selected financial data for the periods indicated have been derived from the consolidated financial statements of the Company audited by Arthur Andersen LLP, independent public accountants. This information should be read in conjunction with the related financial statements and notes thereto and management's discussion and analysis of financial conditions and results of operations included elsewhere in this report. 25 28
For the Year Ended December 31, -------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ------------ ------------ ------------ ------------ Operating Results Revenues: Sales $1,629,000 $1,361,000 $1,197,000 $ 150,000 -- Royalties/License $ 502,000 -- -- -- -- Collaborative Agreements $ 157,000 $ 82,000 -- $ 9,000 $ 54,000 Net Loss ($3,775,000) ($5,351,000) ($7,548,000) ($7,147,000) ($7,700,000) Net Loss attributable to common ($6,225,000) ($5,351,000) ($7,548,000) ($7,147,000) ($7,700,000) stockholder Net Loss Per Share Basic and Diluted ($.14) ($.14) ($.29) ($.35) ($.45) Weighted Average Shares 43,475,000 39,266,000 25,740,000 20,223,000 17,209,000
As of December 31, -------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ------------ ------------ ------------ ------------ Working Capital (Deficit) $1,377,000 ($1,436,000) $2,947,000 $4,761,000 $13,697,000 Total Assets $5,086,000 $3,938,000 $6,514,000 $9,388,000 $16,473,000 Long-Term Debt $78,000 $33,000 $56,000 $8,000 $10,319,000 Total Liabilities $646,000 $2,360,000 $918,000 $2,705,000 $10,931,000 Accumulated Deficit ($68,539,000) ($62,314,000) ($56,963,000) ($49,415,000) ($42,268,000)
ABS has not paid any cash dividends on its Common Stock since its inception. 26 29 SELECTED QUARTERLY DATA Summarized unaudited quarterly financial data for the year ended December 31, 2000 and 1999 was as follows:
For the Quarter Ended --------------------------------------------------------- Mar 31, 2000 Jun 30, 2000 Sep 30, 2000 Dec 31, 2000 ------------ ------------ ------------ ------------ Revenues: Sales 383,000 461,000 367,000 418,000 Royalties/License 500,000 -- -- 2,000 Collaborative Agreements 76,000 15,000 51,000 15,000 ---------- ---------- ---------- ---------- Total Revenues 959,000 476,000 418,000 435,000 Gross profit 227,000 329,000 208,000 248,000 Loss from operations (517,000) (1,083,000) (1,030,000) (1,266,000) Net Loss (498,000) (1,034,000) (997,000) (1,246,000) Preferred stock dividend related to warrants (2,450,000) -- -- Net loss attributable to common stockholders (2,948,000) (1,034,000) (997,000) (1,246,000) Basic and diluted net loss per share (0.07) (0.02) (0.02) (0.03)
For the Quarter Ended --------------------------------------------------------- Mar 31, 1999 Jun 30, 1999 Sep 30, 1999 Dec 31, 1999 ------------ ------------ ------------ ------------ Revenues: Sales 292,000 343,000 353,000 373,000 Royalties/License -- -- -- -- Collaborative Agreements 40,000 39,000 3,000 -- ---------- ---------- ---------- ---------- Total Revenues 332,000 382,000 356,000 373,000 Gross profit 174,000 196,000 199,000 194,000 Loss from operations (1,490,000) (1,554,000) (1,140,000) (1,184,000) Net Loss (1,471,000) (1,550,000) (1,141,000) (1,189,000) Basic and diluted net loss per share (0.04) (0.04) (0.03) (0.03)
27 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis provides information which ABS' management believes is relevant to an assessment and understanding of the Company's results of operations and financial condition. This discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere herein. OVERVIEW ABS is a development stage company incorporated in September 1983. To date, ABS has launched two commercial products (TpP, ABS' Thrombus Precursor Protein diagnostic test, and FiF, ABS' Functional Intact Fibrinogen diagnostic test), although it has not yet derived any significant revenues from the sale of these products. On April 23, 1998, the Company acquired Stellar Bio Systems, Inc. ("Stellar"), a manufacturer and distributor of in vitro diagnostic products and research reagents. Reagents are individual components of diagnostic products, such as antibodies, calibrators and serum used in the biotechnology industry. The purchase price was $120,000 in cash and $700,000 in Class A Common Stock at the market value on the acquisition date (398,406 shares), plus future contingent payments of $650,000 in Class A Common Stock to be paid over three years based upon future sales levels of Stellar, with the Class A Common Stock to be valued at its market value on the respective acquisition agreement anniversary dates. On April 23, 1999, the Company made the first contingent payment of $150,000 in Class A Common Stock (131,118 shares). On April 24, 2000, the Company made the second contingent payment of $20,000 in Class A Common Stock (10,811 shares). (see Note 5 to the Consolidated Financial Statements) On January 27, 2000, ABS granted to Abbott an exclusive worldwide license to its ABS-103 neurocompound. In consideration for the license, Abbott paid ABS an initial non-refundable license fee of $500,000 and agreed to pay up to $17 million of milestone payments depending upon successfully reaching development milestones plus customary royalties on commercial sales. In addition, Abbott purchased 2,782,931 shares of Class A Common Stock for $1.5 million. (See Note 8 to the Consolidated Financial Statements.) On February 3, 2000, ABS entered into a Stock Purchase Agreement with Biotechnology Value Fund and the Company's chairman Mr. Roach relating to the issuance of Series A Convertible Preferred Stock plus warrants for a total of $3.5 million. (See Note 8 to the Consolidated Financial Statements.) LIQUIDITY AND CAPITAL RESOURCES The Company has funded its research and development activities to date principally from (i) the sale of Common Stock issued in an initial public offering, (ii) the exercise of the Class A and Class B Warrants issued in the initial public offering, (iii) private placements of Convertible Debentures, Convertible Preferred Series A Stock and Class A Common Stock, (iv) the exercise of stock options and warrants, (v) capital contributions to ABS by it's CEO and Chairman of the Board, (vi) initial license fee payments and fees from collaborative contract services and (vii) the income on 28 31 funds invested in bank deposits, United States Treasury bills and notes and other high grade liquid investments. ABS expects to continue to incur substantial expenditures in research and product development in the neurobiology and monoclonal antibody programs and in the development and commercialization of a rapid assay format for TpP, as well as in the FDA approval process relating to additional 510(k) filings for TpP and Stellar's products. As of December 31, 2000, ABS, had working capital of $1,377,000, compared to a negative working capital of $1,436,000 at December 31, 1999. Additionally, the Company had cash and cash equivalents of $1,194,000 at December 31, 2000. As of March 16, 2001 the Company's cash and cash equivalents had decreased to approximately $506,000. As a result of the Company's continuing to incur cash expenses in excess of cash receipts, the Company will require the receipt of additional licensing fees and milestone payments, additional financing or the disposition of assets. If this does not occur, the Company will be required to carry out a significant cash conservation program to carry it beyond the next few months. Due to the uncertainties involved in the receipt of milestone payments and additional licensing fees or receipt of additional financing, many of which are outside the control of the Company, the Company's independent public accountants have qualified their audit opinion with regard to the Company's ability to continue as a going concern. In order to address the need for additional capital, ABS is actively seeking to license certain of its products and is aggressively working on those matters within its control with respect to achievement of contractual milestones for milestone payments. The Company's current products which it is aggressively seeking to license include TpP, MH1, and the ABS-205 neurobiology compound. If it is successful in licensing some of these products, the licensees might provide additional funding or might perform additional testing necessary to obtain regulatory approvals or provide clinical, manufacturing and marketing expertise which will indirectly lead to revenue for the Company. The Company is also discussing collaborations and contract services involving its patented Antigen-Free technology. The Company cannot guaranty that it will be successful in generating funding from these sources. In addition the Company has entered into preliminary discussions with a number of potential investors and private placement agents concerning additional financing. However, in the current economic environment, financing has become more difficult to obtain, including within the biotechnology industry, and there is no guaranty that the Company will be able to obtain additional financing on reasonable terms, or that it will be able to obtain financing at all. The Company's failure to raise sufficient additional funds, either through licensing, milestone payments or co-marketing activities or additional financing, will have a material adverse effect on its financial condition and ability to continue as a going concern. During fiscal year 2000, the Company's cash and cash equivalents increased by $1,101,000 to $1,194,000, primarily from financing activities ($5,489,000) offset by cash used in operating activities ($4,153,000) and cash used in investing activities ($235,000). Net cash of $4,153,000 was used to fund the Company's cash loss from operations of $3,122,000 (net of non cash expenses of $328,000 for depreciation and amortization and $325,000 incurred in 29 32 connection with the issuance of stock and warrants). Net cash of $1,031,000 was used by changes in operating assets and liabilities, primarily as a result of a decrease in accounts payable and accrued expenses ($1,064,000), an increase in inventory ($20,000) an increase in other assets ($22,000) partially offset by a decrease in accounts receivable ($65,000), a decrease in other current assets ($2,000) and an increase in interest payable to stockholder ($8,000). Cash used in investing activities was for capitalized patent costs ($203,000) and the purchase of equipment ($32,000). Financing activities provided $5,489,000 as a result of the cash proceeds from the sale of Series A Convertible Preferred Stock ($3,000,000), the sale of Class A Common Stock to Abbott ($1,500,000), the exercise of stock options and warrants ($1,235,000), additional loans from the Company's Chairman ($81,000) partially offset by the repayment of loans to the Company's Chairman of $291,000 ($500,000 of the loan payable to the Chairman was converted into Series A Convertible Preferred Stock) and payments of other notes payable ($36,000). The Company entered into a capital lease obligation of $87,000 for the acquisition of new computers, network and software which is disclosed as Supplemental Non-cash Activities. The warrants issued of $2,792,000 represents the noncash fair value of the warrants issued to BVF and Mr. Roach in the private placement of Preferred Stock ($2,450,000) and warrants issued to an investor relations consultant ($342,000), both determined by using an option-pricing model. At December 31, 2000, ABS had net operating loss carryforwards of approximately $63,000,000 for income tax purposes. The net operating loss carryforwards will expire in varying amounts through 2020. In addition, ABS has approximately $1,300,000 of available research and development tax credits to offset future taxes. These credits expire through 2020. In accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," ABS has recorded a valuation allowance of $64,300,000 to fully reserve for the deferred tax benefit attributable to its net operating loss and tax credit carryforwards due to the uncertainty as to their ultimate realizability. In accordance with certain provisions of the Tax Reform Act of 1986, a change in ownership of a corporation of greater than 50 percentage points within a three-year period places an annual limitation on the corporation's ability to utilize its existing net operating loss carryforwards, investment tax and research and development credit carryforwards (collectively "tax attributes"). Such a change in ownership was deemed to have occurred in connection with ABS' 1990 initial public offering at which time ABS' tax attributes amounted to approximately $4.9 million. The annual limitation of the utilization of such tax attributes is approximately $560,000. To the extent the annual limitation is not utilized, it may be carried forward for utilization in future years. At December 31, 2000, $4,900,000 million of net operating losses is no longer subject to this limitation. RESULTS OF OPERATIONS ABS has not generated any significant revenues from the sale of any products. Revenues from inception through December 31, 2000 of $6,380,000 are attributable to nonrefundable initial license fees and collaborative research agreements, sales of TpP and FiF and, since April 1998, sales of Stellar products. As a result of ABS' substantial start-up expenses and minimal revenues, ABS had an accumulated deficit of $68,539,000 as of December 31, 2000. ABS' 30 33 research and development expenses are anticipated to be substantial for the foreseeable future and ABS expects to continue to incur significant operating losses. ABS initiated its marketing efforts for TpP and FiF in the microtiter plate format in November 1997. TpP kits have been marketed through European, Japanese and United States distributors as well as direct sales to specialty laboratories and research hospitals. ABS' efforts in 2001 will be directed toward entering into license agreements for TpP, FiF, MH1 and ABS-205, adding new distributors and specialty labs for TpP, launching the rapid assay format (POC) of TpP upon approval of the 510K filed with the FDA and continue clinical studies with TpP to expand into other clinical indications. ABS' efforts will also be directed to expanding Stellar's revenue based by adding new distributors and increasing the sales force. ABS has licenses for TpP with Abbott and Roche in the automated instrument format and a license for 45J with Yamanouchi. ABS does not have any performance obligations under these agreements. In order to market the product the licensees will be required to file for the appropriate governmental clearances. ABS has a sufficient quantity of antibodies to initially supply these licensees. Management believes that the POC format will increase the commercial potential of the TpP test and encourage the licensees to complete the commercialization process under these agreements. COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999 ABS' net loss for the year ended December 31, 2000 was $3,775,000 compared to $5,351,000 for the year ended December 31, 1999. The decrease in the loss was primarily the result of the license fee of $500,000 received under the Abbott license agreement, increased product sales by Stellar, reduced R&D and SG&A expenses and increased investment income. Sales during fiscal year 2000 of $1,629,000 increased $268,000 or 20% over the fiscal year 1999. Sales of Stellar products increased 20% and sales of TpP remained flat. Royalties and license fees increased $502,000 due to the license fee received in connection with the Abbott agreement and $2,000 of royalties received from the Trevigen agreement. Collaborative agreements increased by $75,000 due to an increase in research contracts. Cost of sales increased $19,000 during 2000 compared to 1999 resulting from increases in sales. Cost of sales as a percentage of sales decreased 6% from 44% during 1999 compared to 38% during 2000. The decrease was due to increased volume and manufacturing efficiencies at the Stellar facility on both Stellar products and in-house production of TpP kits. Research and development expenses decreased $399,000 from $1,725,000 in 1999 to $1,326,000 in 2000 primarily from the full year of cost saving program implemented in 1999 as well as cost savings from the consolidations of operations at Stellar. Selling, general and administrative expenses decreased $247,000 from $4,488,000 in 1999 to $4,241,000 in 2000, as a result of reduced personnel costs and other general costs associated with the cost saving program implemented in 1999 and continued throughout fiscal 2000, a decrease in travel and meeting costs, offset in part, by increased professional service costs relating to the Abbott license agreement and other contracts. 31 34 Interest expense increased by $3,000 from $16,000 in 1999 to $19,000 in 2000, resulting primarily from the loans payable to the Company's Chairman. Investment income increased $111,000, from $29,000 in fiscal year 1999 to $140,000 in fiscal year 2000, as a result of higher average cash balances. The preferred stock dividend of $2,450,000 relates to the fair value of warrants issued in connection with a private placement represents the noncash fair value of the warrants issued to BVF and Mr. Roach, determined by using an option-pricing model, in the private placement. See Note 8 of the Notes to Consolidated Financial Statements on Page F-15 of this Form 10K for a more detailed description of this transaction. COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 ABS' net loss for the year ended December 31, 1999 was $5,351,000 compared to $7,548,000 for the year ended December 31, 1998. The decrease was primarily the result of the absence of an extraordinary charge for the early retirement of debentures ($1,140,000), a $598,000 decrease in interest expense, a $436,000 decrease in research and development expense and a $246,000 increase in revenues. The Company completed its consolidation of facilities in Maryland which resulted in savings in R&D expenses. Sales during 1999 of $1,361,000 include sales of Stellar products for a full year and sales of TpP. Sales of TpP declined in 1999 due to a slow market acceptance of the current test format. Stellar product sales increased over 1998 due to a full years' operation. Collaborative agreement revenue of $82,000 reflects the earned portion of an NIH National Institute on Aging grant and contract services. The Company obtained a grant of $135,000 from the NIH for additional studies of the Company's ABS-205 therapeutic neurocompound. These studies have been completed and the final report filed at the end of 1999. Cost of sales increased by $133,000 during 1999 compared to 1998 due primarily to increased sales. Cost of sales as a percentage of sales was 43.9% in 1999 and 38.8% in 1998. The percentage increase was due to increased payroll costs and higher fixed TpP costs being absorbed by a lower sales volume. Research and development costs decreased $436,000 from $2,161,000 in 1998 to $1,725,000 in 1999 primarily due to the consolidation of R&D facilities in Columbia, Maryland. This was partially offset by the inclusion of Stellar's costs for the full year of 1999 compared to eight months in 1998, increases in Stellar's post-acquisition research and development costs relating to FDA 510(k) filings, and continued TpP rapid assay POC development and clinical costs. Selling, general and administrative expenses increased by $56,000 from $4,432,000 in 1998 to $4,488,000 in 1999, primarily as a result of the inclusion of Stellar's selling and general expenses for the full year of 1999 compared to eight months in 1998, increased cost of investor 32 35 relations, and the noncash value of warrants issued for services. This was offset in part by a reduction in other consulting costs. Interest expense was $598,000 lower in 1999 than in 1998, resulting from the repurchase of convertible debentures in the fourth quarter of fiscal 1998. Interest income, net, was $290,000 lower in 1999 than in 1998 due to lower average cash balances. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's available cash is invested in highly liquid investments (primarily United States Treasury Bills) which have a maturity, at the time of purchase, of less than three months. ABS does not have operations subject to risks of foreign currency fluctuations, nor does it use derivative financial instruments in its operations. ABS does not have exposure to market risks associated with changes in interest rates because it has no variable interest rate debt outstanding. ABS does not believe it has any other material exposure to market risks associated with interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The response to this item is submitted in a separate section of this report, starting on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 33 36 PART III The information called for by Part III (Items 10, 11, 12 and 13 of Form 10-K) is incorporated herein by reference to such information which will be contained in ABS' Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 with respect to ABS' 2001 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. (a) 1. and 2. Financial Statements and Financial Statement Schedules The following consolidated financial statements of ABS are annexed hereto immediately following the signature page of this Report.
Page ------------ Index to Consolidated Financial Statements F-1 Report of Independent Public Accountants F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Cash Flows F-5 Consolidated Statements of Stockholders' Equity F-6 - F-8 Notes to Consolidated Financial Statements F-9 - F-28
Information required by schedules called for under Regulation S-X is either not applicable or the information required therein is included in the consolidated financial statements or notes thereto. 34 37 (b) Exhibits
Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation of ABS, as filed with the Secretary of State of Delaware on July 30, 1996 and amended through March 3, 2000. Incorporated herein by reference to Exhibit 3.1 to ABS' Form 10-K for the fiscal year ended December 31, 1999, File No. 0-19041. 3.2 Amended and Restated By-Laws of ABS. Incorporated herein by reference to Exhibit 4.02 to ABS' Registration Statement on Form S-8, File No. 333-09473. 4.1 Form of Purchase and Investment Agreement executed by ABS and several investors on October 27, 1998. Incorporated herein by reference to Exhibit 99 to ABS' Registration Statement on Form S-3, file number 333-69735, filed with the Commission on December 24, 1998. 4.2 Form of Warrant issued to several individuals under ABS' Financial Advisory Agreement with M.H. Meyerson & Co., Inc., dated as of August 13, 1998 and schedule of holders thereof. Incorporated herein by reference to Exhibit 4.1(e) to ABS' Form 10-K for the fiscal year ended December 31, 1998, File No. 0-19041. 4.3(a) Stock Purchase Agreement, dated as of January 27, 2000, between ABS and Abbott Laboratories. Incorporated herein by reference to Exhibit 99.1 to ABS' Current Report on Form 8-K dated January 27, 2000 (date of earliest event reported), File No. 0-19041. 4.3(b) Registration Rights Agreement, dated as of January 27, 2000, between ABS and Abbott Laboratories. Incorporated herein by reference to Exhibit 4.1 to ABS' Current Report on Form 8-K dated January 27, 2000 (date of earliest event reported), File No. 0-19041. 4.4(a) Securities Purchase Agreement, dated as of February 3, 2000, among ABS and Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., Investment 10 L.L.C. and Alfred J. Roach. Incorporated herein by reference to Exhibit 4.4(a) to ABS' Form 10-K for the fiscal year ended December 31, 1999, File No. 0-19041. 4.4(b) Registration Agreement, dated as of March 3, 2000, among ABS and Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., Investment 10 L.L.C. and Alfred J. Roach. Incorporated herein by reference to Exhibit 4.4(b) to ABS' Form 10-K, for the fiscal year ended December 31, 1999, File No. 0-19041. 4.4(c) Form of Warrant issued to Redington, Inc. (one of three Warrants substantially
35 38
Exhibit No. Description ----------- ----------- identical except for the date and price information. Incorporated herein by reference to Exhibit 4 to ABS' Registration Statement on Form S-3, file number 333-36116, filed with the Commission on May 2, 2000. 10.1(a)+ Employment Agreement dated October 1, 1996 between ABS and Ellena M. Byrne. Incorporated herein by reference to Exhibit 10.1(b) to ABS' Form 10-K/A, dated April 30, 1997, File No. 0-19041. 10.1(b)+ Employment Agreement dated November 2, 1998 between ABS and Mr. John S. North. Incorporated herein by reference to Exhibit 10.1(b) to ABS' Form 10-K for the fiscal year ended December 31, 1998, File No. 0-19041. 10.1(c)+* Memorandum of Understanding dated January 4, 2001 between ABS and Mr. John S.North. 10.2(a)+ ABS' Stock Option Plan, as amended. Incorporated herein by reference to Exhibit 28.1 to ABS' Registration Statement on Form S-8, File No. 33-51240. 10.2(b)+ ABS' 1993 Non-Employee Director Stock Option Plan. Incorporated herein by reference to Exhibit 99.01 to ABS' Registration Statement on Form S-8, File No. 33-65416. 10.2(c)+ ABS' 1996 Stock Option Plan, as amended. Incorporated herein by reference to Exhibit 10.2(c) to Form 10-K for the fiscal year ended December 31, 1999, File No. 0-19041. 10.2(d)+ ABS' 2000 Stock Option Plan. Incorporated herein by reference to Exhibit 99.01 to ABS' Registration Statement on Form S-8, File No. 33-45644. 10.3 Exclusive License Agreement dated January 24, 1992 between ABS and Yamanouchi Pharmaceutical Co., Ltd. Incorporated herein by reference to Exhibit 10.29 to ABS' Current Report on Form 8-K dated January 24, 1992, File No. 0-19041. 10.4 Warrant dated October 25, 1995 issued to Swartz Investments, Inc. Incorporated herein by reference to Exhibit 10.13 to ABS' Current Report on Form 8-K dated October 12, 1995, File No. 0-19041. 10.5 Exclusive License Agreement, dated as of January 27, 2000, between ABS and Abbott Laboratories. Incorporated herein by reference to Exhibit 10.1 to ABS' Current Report on Form 8-K dated January 27, 2000, File No. 0-19041. 21 List of Subsidiaries. Incorporated herein by reference to Exhibit 21 to ABS' Form 10-K for the fiscal year ended December 31, 1998, File No. 0-19041. 23* Consent of Independent Public Accountants.
36 39 *Filed herewith. All other exhibits are incorporated by reference to the document following the description thereof. +Management contract or compensatory plan. (b) Reports on Form 8-K. None 37 40 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. March 28, 2001 AMERICAN BIOGENETIC SCIENCES, INC. --------------------------- (Date) (Registrant) By: /s/ Josef C. Schoell ----------------------------------- Josef C. Schoell President, Chief Operating Officer, Chief Financial Officer (Principal Financial and Accounting Officer) 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. March 28, 2001 /s/ Alfred J. Roach ----------------------- -------------------------------------- (Date) Alfred J. Roach, Chairman of the Board of Directors and Chief Executive Officer March 28, 2001 /s/ Josef C. Schoell ----------------------- -------------------------------------- (Date) Josef C. Schoell, President, Chief Operating Officer, Chief Financial Officer and Director March 28, 2001 /s/ Timothy J. Roach ----------------------- -------------------------------------- (Date) Timothy J. Roach, Secretary, Treasurer and Director March 28, 2001 /s/ Ellena M. Byrne ----------------------- -------------------------------------- (Date) Ellena M. Byrne, Executive Vice President and Director March 28, 2001 /s/ Joseph C. Hogan ----------------------- -------------------------------------- (Date) Joseph C. Hogan, Director March 28, 2001 /s/ Joseph M. Danis ----------------------- -------------------------------------- (Date) Joseph M. Danis, Director March 28, 2001 /s/ Glenna M. Crooks ----------------------- -------------------------------------- (Date) Glenna M. Crooks, Director
41 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Cash Flows F-5 Consolidated Statements of Stockholders' Equity F-6 - F-8 Notes to Consolidated Financial Statements F-9 - F-28
Information required by schedules called for under Regulation S-X is either not applicable or the information required therein is included in the consolidated financial statements or notes thereto. F-1 42 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To American Biogenetic Sciences, Inc.: We have audited the accompanying consolidated balance sheets of American Biogenetic Sciences, Inc. (a Delaware corporation in the development stage) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000 and for the period from inception (September 1, 1983) to December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Biogenetic Sciences, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 and for the period from inception to December 31, 2000 in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements for the year ended December 31, 2000 have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses since inception and anticipates that it will continue to incur significant losses in the foreseeable future. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Melville, New York March 23, 2001 F-2 43 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------------- 2000 1999 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,194,000 $ 93,000 Accounts receivable 146,000 211,000 Inventories 531,000 511,000 Other current assets 74,000 76,000 ------------ ------------ Total current assets 1,945,000 891,000 ------------ ------------ Fixed assets, net 477,000 476,000 Patent costs, net of accumulated amortization of $633,000 and $502,000, respectively 1,967,000 1,895,000 Intangible assets, net 599,000 657,000 Other assets 98,000 19,000 ------------ ------------ $ 5,086,000 $ 3,938,000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 368,000 $ 1,581,000 Current portion of capital lease obligation 16,000 - Current portion of notes payable 184,000 746,000 ------------ ------------ Total current liabilities 568,000 2,327,000 ------------ ------------ Long Term Liabilities: Notes payable, less current portion 7,000 33,000 Capital lease obligation 71,000 - ------------ ------------ Total liabilities 646,000 2,360,000 ------------ ------------ Commitments and Contingencies (Notes 1, 5, 8, 10 and 11) STOCKHOLDERS' EQUITY: Series A convertible preferred stock, par value $.001 per share 10,000,000 shares authorized; 7,000 and 0 shares issued and outstanding, respectively (liquidation preference of $3,500,000) - - Class A common stock, par value $.001 per share; 100,000,000 shares authorized; 41,027,255 and 36,918,510 shares issued and outstanding, respectively 41,000 37,000 Class B common stock, par value $.001 per share; 3,000,000 shares authorized; 3,000,000 shares issued and outstanding 3,000 3,000 Additional paid-in capital 72,935,000 63,852,000 Deficit accumulated during the development stage (68,539,000) (62,314,000) ------------ ------------ Total stockholders' equity 4,440,000 1,578,000 ------------ ------------ $ 5,086,000 $ 3,938,000 ------------ ------------
The accompanying notes are an integral part of these consolidated balance sheets. F-3 44 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period From Inception (September 1, Year Ended December 31, 1983) Through ---------------------------------------------------- December 31, 2000 1999 1998 2000 ----------- ----------- ------------ -------------- REVENUES: Sales $ 1,629,000 $ 1,361,000 $ 1,197,000 $ 4,337,000 Royalties / license fees 502,000 - - 1,502,000 Collaborative agreements 157,000 82,000 - 541,000 ----------- ----------- ------------ -------------- 2,288,000 1,443,000 1,197,000 6,380,000 COSTS AND EXPENSES: Cost of sales 617,000 598,000 465,000 1,712,000 Research and development 1,326,000 1,725,000 2,161,000 31,857,000 Selling, general and administrative 4,241,000 4,488,000 4,432,000 37,822,000 Facility consolidation cost - - 252,000 252,000 ----------- ----------- ------------ -------------- Loss from operations (3,896,000) (5,368,000) (6,113,000) (65,263,000) ----------- ----------- ------------ -------------- OTHER INCOME (EXPENSE): Interest expense (19,000) (16,000) (614,000) (4,391,000) Net gain on sale of fixed assets - 4,000 - 11,000 Investment income, net 140,000 29,000 319,000 4,694,000 ----------- ----------- ------------ -------------- Loss before extraordinary charge (3,775,000) (5,351,000) (6,408,000) (64,949,000) Extraordinary charge for early retirement of debentures, net - - (1,140,000) (1,140,000) ----------- ----------- ------------ -------------- NET LOSS $(3,775,000) $(5,351,000) $(7,548,000) $(66,089,000) Preferred stock dividend related to warrants (2,450,000) - - (2,450,000) ----------- ----------- ------------ -------------- Net loss attributable to common stockholders $(6,225,000) $(5,351,000) $(7,548,000) $(68,539,000) =========== =========== ============ ============== PER SHARE INFORMATION (NOTE 2): Basic and Diluted net loss per share $(0.14) $(0.14) $(0.29) =========== =========== ============ Common shares used in computing per share amounts: Basic and Diluted 43,475,000 39,266,000 25,740,000 =========== =========== ============
The accompanying notes are an integral part of these consolidated statements. F-4 45 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period From Inception (September 1, Year Ended December 31, 1983) Through ---------------------------------------------------- December 31, 2000 1999 1998 2000 ----------- ----------- ------------ -------------- Cash Flows From Operating Activities: Net income (loss) $(3,775,000) $(5,351,000) $ (7,548,000) $(66,089,000) Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation and amortization 328,000 318,000 497,000 3,368,000 Net (gain) loss on sale of fixed assets - (4,000) - (11,000) Net (gain) loss on sale of marketable securities - - - (217,000) Other noncash expenses accrued primarily for stocks and warrants 325,000 502,000 306,000 2,869,000 Amortization of debt discount included in interest expense - - 317,000 2,160,000 Extraordinary loss on repurchase of debt - - 1,140,000 1,140,000 Write-off of patent costs - - - 93,000 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 65,000 (34,000) (69,000) (38,000) (Increase) decrease in inventories (20,000) 34,000 (91,000) (373,000) (Increase) decrease in other current assets 2,000 (36,000) 1,000 (74,000) (Increase) decrease in other assets (22,000) 7,000 1,000 58,000 Increase (decrease) in accounts payable and accrued expenses (1,064,000) 840,000 265,000 752,000 Increase in interest payable to stockholder 8,000 - - 120,000 ----------- ----------- ------------ -------------- Net cash used in operating activities (4,153,000) (3,724,000) (5,181,000) (56,242,000) ----------- ----------- ------------ -------------- Cash Flows From Investing Activities: Capital expenditures (32,000) (13,000) (41,000) (2,088,000) Proceeds from sale of fixed assets - 4,000 - 22,000 Payments for patent costs and other assets (203,000) (539,000) (229,000) (2,670,000) Business acquisition, net of stock issued and cash acquired - - (119,000) (119,000) Proceeds from maturity and sale of marketable securities - - - 67,549,000 Purchases of marketable securities - - - (67,332,000) ----------- ----------- ------------ -------------- Net cash provided by (used in) investing activities (235,000) (548,000) (389,000) (4,638,000) ----------- ---------- ------------ -------------- Cash Flows From Financing Activities: Payments to debentureholders - - (1,000,000) (2,246,000) Proceeds from issuance of common stock, net 2,735,000 660,000 3,182,000 42,879,000 Proceeds from issuance of Series A convertible preferred stock 3,000,000 - - 3,000,000 Proceeds from issuance of 5% convertible debentures, net - - 3,727,000 3,727,000 Proceeds from issuance of 7% convertible debentures, net - - - 8,565,000 Proceeds from issuance of 8% convertible debentures, net - - - 7,790,000 Principal payments under capital lease obligation and notes payable (36,000) (44,000) (61,000) (150,000) Redemption of 8% convertible debentures - - (500,000) (500,000) Repurchase of 5% convertible debentures - - (3,852,000) (3,852,000) Capital contributions from chairman - - - 1,000,000 Increase in loans payable to stockholder / affiliates 81,000 702,000 - 3,452,000 Repayment of loans payable to stockholder / affiliates (remainder contributed to capital by the stockholder) (291,000) - - (1,591,000) ----------- ---------- ------------ -------------- Net cash provided by (used in) financing activities 5,489,000 1,318,000 1,496,000 62,074,000 ----------- ---------- ------------ -------------- Net Increase (Decrease) in Cash and Cash Equivalents 1,101,000 (2,954,000) (4,074,000) 1,194,000 Cash and Cash Equivalents at Beginning of Period 93,000 3,047,000 7,121,000 0 ----------- ---------- ------------ -------------- Cash and Cash Equivalents at End of Period $ 1,194,000 $ 93,000 $ 3,047,000 $ 1,194,000 =========== =========== ============ ============== Supplemental Disclosure of Non-cash Activities: Capital expenditure made under capital lease obligation $ 87,000 - - $107,000 =========== =========== ============ ============== Convertible debentures converted into 0, 0, 4,851,618, and 10,470,583 shares of Common Stock, respectively - - $ 1,447,000 $ 14,658,000 =========== =========== ============ ============== Warrants issued $ 2,792,000 - $ 63,000 $ 3,380,000 ----------- ---------- ------------ -------------- Conversion of stockholder loan to preferred stock or paid-in capital $ 500,000 - - $ 1,981,000 ----------- ---------- ------------ --------------
The accompanying notes are an integral part of these consolidated statements. F-5 46 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit Accumulated Per Class A Common Stock Class B Common Stock Additional During the Share --------------------- -------------------- Paid-in Development Amount Shares Dollars Shares Dollars Capital Stage Total -------- ----------- --------- --------- -------- ------------ ------------ ---------- BALANCE, AT INCEPTION, (SEPTEMBER 1, 1983) $ - - $ - 0 $ - $ - $ - $ - Sale of common stock to chairman for cash .33 78,000 - - - 26,000 - 26,000 Net (loss) for the period - - - - - (25,000) (25,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1983 78,000 - - - 26,000 (25,000) 1,000 ----------- ------- --------- -------- --------- ------------ ---------- Sale of common stock to chairman for cash .33 193,500 - - - 65,000 - 65,000 Net (loss) for the period - - - - - (242,000) (242,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1984 271,500 - - - 91,000 (267,000) (176,000) ----------- ------- --------- -------- --------- ------------ ---------- Sale of common stock to chairman for cash .33 276,700 1,000 - - 92,000 - 93,000 Net (loss) for the period - - - - (305,000) (305,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1985 548,200 1,000 - - 183,000 (572,000) (388,000) ----------- ------- --------- -------- --------- ------------ ---------- Sale of common stock to chairman for cash .33 404,820 - - - 134,000 - 134,000 Net (loss) for the period - - - - - (433,000) (433,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1986 953,020 1,000 - - 317,000 (1,005,000) (687,000) ----------- ------- --------- -------- --------- ------------ ---------- Sale of common stock to chairman for cash .33 48,048 - - - 16,000 - 16,000 Net (loss) for the period - - - - - (730,000) (730,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1987 1,001,068 1,000 - - 333,000 (1,735,000) (1,401,000) ----------- ------- --------- -------- --------- ------------ ---------- Exchange of common stock for Class B stock (1,001,068) (1,000) 1,001,068 1,000 - - 0 Sale of Class B stock to chairman for cash .33 - - 1,998,932 2,000 664,000 - 666,000 Net (loss) for the period - - - - - (1,031,000) (1,031,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1988 - - 3,000,000 3,000 997,000 (2,766,000) (1,766,000) ----------- ------- --------- -------- --------- ------------ ---------- Net (loss) for the period - - - - - (1,522,000) (1,522,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1989 - - 3,000,000 3,000 997,000 (4,288,000) (3,288,000) ----------- ------- --------- -------- --------- ------------ ---------- Conversion of loans payable to stockholder into additional paid-in capital - - - - 1,481,000 - 1,481,000 Sale of 1,150,000 Units to public consisting of 3,450,000 shares of Class A common stock and warrants (net of $1,198,000 underwriting expenses) 2.00 3,450,000 3,000 - - 5,699,000 - 5,702,000 Conversion of Class B stock into Class A stock 668,500 1,000 (668,500) (1,000) - - 0 Net (loss) for the period - - - - - (2,100,000) (2,100,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1990 4,118,500 $ 4,000 2,331,500 $ 2,000 $8,177,000 $ (6,388,000) $1,795,000 ----------- ------- --------- -------- --------- ------------ ----------
F-6 47 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit Accumulated Per Class A Common Stock Class B Common Stock Additional During the Share --------------------- -------------------- Paid-in Development Amount Shares Dollars Shares Dollars Capital Stage Total -------- ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1990 $ 4,118,500 $4,000 2,331,500 $ 2,000 $ 8,177,000 $ (6,388,000) $ 1,795,000 Exercise of Class A Warrants (net of $203,000 in underwriting expenses) for cash 3.00 3,449,955 3,000 - - 10,143,000 - 10,146,000 Exercise of Class B Warrants for cash 4.50 79,071 - - - 356,000 - 356,000 Conversion of Class B stock into Class A stock 850,000 1,000 (850,000) (1,000) - - - Exercise of stock options 2.00 417,750 1,000 - - 835,000 - 836,000 Fair Value for warrants issued - - 900,000 - 900,000 Net (loss) for the period - - - (4,605,000) (4,605,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1991 8,915,276 9,000 1,481,500 1,000 20,411,000 (10,993,000) 9,428,000 ----------- ---------- --------- -------- ------------ ------------ ----------- Exercise of Class B Warrants (net of $701,000 in underwriting expenses) for cash 4.50 3,370,88 3,000 - - 14,465,000 - 14,468,000 Conversion of Class B stock into Class A stock 106,000 - (106,000) - - - - Exercise of stock options 2.49 348,300 1,000 - - 865,000 - 866,000 Net (loss) for the period - - - - - (4,016,000) (4,016,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1992 12,740,460 13,000 1,375,500 1,000 35,741,000 (15,009,000) 20,746,000 ----------- ---------- --------- -------- ------------ ------------ ----------- Sale of common stock to Medeva PLC. 7.50 200,000 - - - 1,500,000 - 1,500,000 Exercise of stock options 2.00 32,700 - - - 65,000 - 65,000 Net (loss) for the period - - - - - (6,521,000) (6,521,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1993 12,973,160 13,000 1,375,500 1,000 37,306,000 (21,530,000) 15,790,000 ----------- ---------- --------- -------- ------------ ------------ ----------- Exercise of stock options 2.16 91,250 - - - 197,000 - 197,000 Net (loss) for the period - - - - (7,431,000) (7,431,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1994 13,064,410 13,000 1,375,500 1,000 37,503,000 (28,961,000) 8,556,000 ----------- ---------- --------- -------- ------------ ------------ ----------- Conversion of 8% convertible debentures into Class A Common Stock 1.85 354,204 - - - 571,000 - 571,000 Exercise of stock options 1.82 12,750 - - - 23,000 - 23,000 Fair Value for warrants/options issued - - - - 602,000 - 602,000 Net (loss) for the period - - - - - (5,607,000) (5,607,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1995 13,431,364 $13,000 1,375,500 $ 1,000 $ 38,699,000 $(34,568,000) $ 4,145,000 ----------- ---------- --------- -------- ------------ ------------ -----------
F-7 48 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit Accumulated Per Class A Common Stock Class B Common Stock Additional During the Share --------------------- --------------------- Paid-in Development Amount Shares Dollars Shares Dollars Capital Stage Total -------- ----------- ---------- ---------- -------- ------------ ------------ ----------- Conversion of 8% convertible debentures into Class A Common Stock 2.74 2,269,755 $ 2,000 - $ - $ 5,483,000 $ - $ 5,485,000 Exercise of stock options 2.53 569,875 1,000 - - 1,438,000 - 1,439,000 Fair Value for warrants/options issued - - - - 330,000 - 330,000 Discount on 7% convertible debentures - - - - 1,843,000 - 1,843,000 Net (loss) for the period - - - - - (7,700,000) (7,700,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1996 16,270,994 16,000 1,375,500 1,000 47,793,000 (42,268,000) 5,542,000 ----------- ---------- ---------- -------- ------------ ------------ ----------- Conversion of 7% and 8% convertible debentures into Class A Common Stock 2.93 2,995,006 3,000 - - 7,152,000 - 7,155,000 Sale of Class B Common Stock to Chairman for cash 2.23 - - 350,000 1,000 778,000 - 779,000 Exercise of stock options 2.00 27,500 - - - 55,000 - 55,000 Fair Value for warrants issued - - - - 149,000 - 149,000 Class A Common Stock issued 3.12 48,117 - - - 150,000 - 150,000 Net (loss) for the period - - - - - (7,147,000) (7,147,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1997 19,341,617 19,000 1,725,500 2,000 56,077,00 (49,415,000 6,683,000 ----------- ---------- ---------- -------- ------------ ------------ ----------- Conversion of 5%, 7% and 8% convertible debentures into Class A Common Stock 0.32 4,851,618 5,000 - - 1,442,000 - 1,447,000 Sale of Class B Common Stock to Chairman for cash 0.37 - - 1,274,500 1,000 465,000 - 466,000 Exercise of stock options 1.75 4,000 - - - 7,000 - 7,000 Fair Value for warrants issued - - - - 205,000 - 205,000 Class A Common Stock issued 1.06 163,915 - - - 174,000 - 174,000 Class A Common Stock issued for Stellar 1.76 398,406 1,000 699,000 - 700,000 Class A Common Stock issued for Private Placement 0.25 10,800,000 11,000 - - 2,689,000 - 2,700,000 Discount on 5% convertible debentures - - - - 762,000 - 762,000 Net (loss) for the period - - - - - (7,548,000) (7,548,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1998 35,559,556 36,000 3,000,000 3,000 62,520,000 (56,963,000) 5,596,000 ----------- ---------- ---------- -------- ------------ ------------ ----------- Sale of Class A Common Stock to Chairman for cash 1.13 440,000 - - - 495,000 - 495,000 Exercise of stock options 0.61 5,250 - - - 3,000 - 3,000 Fair Value for warrants issued - - - - 376,000 - 376,000 Class A Common Stock issued 0.50 913,704 1,000 - - 458,000 - 459,000 Net (loss) for the period - - - - - (5,351,000) (5,351,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1999 36,918,510 37,000 3,000,000 3,000 63,852,000 (62,314,000) 1,578,000 ----------- ---------- ---------- -------- ------------ ------------ ----------- Sale of Series A Convertible Preferred Stock (7,000 shares) - - - - 3,500,000 - 3,500,000 Warrants issued with the Convertible Preferred Stock - - - - 2,450,000 - 2,450,000 Preferred stock dividend related to warrants - - - - - (2,450,000) (2,450,000) Exercise of stock options and warrants 0.97 1,278,675 1,000 - - 1,234,000 - 1,235,000 Fair Value for warrants issued - - - - 342,000 - 342,000 Class A Common Stock issued 0.55 2,830,070 3,000 - - 1,557,000 - 1,560,000 Net (loss) for the period - - - - - (3,775,000) (3,775,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 2000 41,027,255 $41,000 3,000,000 $ 3,000 $ 72,935,000 $(68,539,000) $ 4,440,000 ----------- ---------- ---------- -------- ------------ ------------ -----------
The accompanying notes are an integral part of these consolidated statements. F-8 49 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND DEVELOPMENT STAGE RISKS: American Biogenetic Sciences, Inc. (together with its subsidiaries (Note 2), the "Company" or "ABS") was incorporated in Delaware on September 1, 1983. The Company was formed to engage in the research, development and production of bio-pharmaceutical products. As a development stage company, the Company has not materially commenced its principal operations. Most of its efforts have been devoted to research and development, acquiring equipment, recruiting and training personnel, and financial planning. The Company's research efforts have been focused on the development of products to diagnose, prevent and treat diseases in humans. The Company has had limited product sales to date and has had limited revenues from collaborative and licensing agreements (Note 10). Since its inception, the Company has been dependent upon the receipt of capital investment or other financing to fund its continuing research and commercialization activities. The Company expects to incur substantial expenditures in research and product development of ABS205 and MH1 and the Food and Drug Administration approval process relating to 510(K) applications for its TpP and other diagnostic tests. Currently product development plans of the Company include entering into additional collaborative, licensing and co-marketing arrangements with pharmaceutical and or biotechnology companies to provide additional funding and clinical expertise to perform tests necessary to obtain regulatory approvals, provide manufacturing expertise and market the Company's products. Without such collaborative, licensing or co-marketing arrangements, additional sources of funding will be required to finance the Company. In addition to the normal risks associated with a business engaged in research and development of new products, there can be no assurance that the Company's research and development will be successfully completed, that any products developed will obtain the necessary U.S. regulatory approvals (principally from the FDA), that any approved product will be a commercial success, that adequate product liability insurance can be obtained or that sufficient capital will be available when required to permit the Company to realize its plans. In addition, the Company operates in an environment of rapid changes in technology and in an industry, which has many competitors who have far more resources available to them than does the Company. Further, the Company is dependent upon the services of several key employees and advisors. As of December 31, 2000, ABS, had working capital of $1,377,000, compared to a negative working capital of $1,436,000 at December 31, 1999. Additionally, the Company had cash and cash equivalents of $1,194,000 at December 31, 2000. As of March 16, 2001 the Company's cash and cash equivalents had decreased to approximately $506,000. As a result of the Company's continuing to incur cash expenses in excess of cash receipts, the Company will require the receipt of additional licensing fees and milestone payments, additional financing or the disposition of assets. If this does not occur, the Company will be required to carry out a significant cash conservation program to carry it beyond the next few months. Due to the uncertainties involved in the receipt of milestone payments and additional licensing fees F-9 50 or receipt of additional financing, many of which are outside the control of the Company, the Company's independent public accountants have qualified their audit opinion with regard to the Company's ability to continue as a going concern. In order to address the need for additional capital, ABS is actively seeking to license certain of its products and is aggressively working on those matters within its control with respect to achievement of contractual milestones for milestone payments. The Company's current products which it is aggressively seeking to license include TpP, MH1, and the ABS-205 neurobiology compound. If it is successful in licensing some of these products, the licensees might provide additional funding or might perform additional testing necessary to obtain regulatory approvals or provide clinical, manufacturing and marketing expertise which will indirectly lead to revenue for the Company. The Company is also discussing collaborations and contract services involving its patented Antigen-Free technology. The Company cannot guaranty that it will be successful in generating funding from these sources. In addition the Company has entered into preliminary discussions with a number of potential investors and private placement agents concerning additional financing. However, in the current economic environment, financing has become more difficult to obtain, including within the biotechnology industry, and there is no guaranty that the Company will be able to obtain additional financing on reasonable terms, or that it will be able to obtain financing at all. The Company's failure to raise sufficient additional funds, either through licensing, milestone payments or co-marketing activities or additional financing, will have a material adverse effect on its financial condition and ability to continue as a going concern. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION During 1989, the Company formed a subsidiary, American Biogenetic Sciences (Ireland), Ltd., which is 99% owned by the Company and, to fulfill legal requirements, 1% owned by an officer of the Company. On April 23, 1998, the Company acquired all of the capital stock of Stellar Bio Systems, Inc. ("Stellar") (Note 5). The financial statements reflect the accounts of the Company and these subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. CASH EQUIVALENTS Cash equivalents include highly liquid investments, which have an original maturity of less than three months from date of purchase. CONCENTRATION OF CREDIT RISK As of December 31, 2000, the Company had one customer whose balances exceeded 10% of the accounts receivable balance. This customer accounted for 50% of the accounts receivable balance. As of December 31, 1999, the Company had two customers whose balances exceeded 10% of the accounts receivable balance. These customers accounted for 35% and 24% of the accounts receivable balance, respectively. F-10 51 During fiscal year 2000, one customer accounted for 44% of the Company's sales, and a second customer accounted for 17% of the Company's sales. During fiscal year 1999, one customer accounted for 30% of the Company's sales, another customer accounted for 20% while a third customer accounted for 11% of the Company's sales. During fiscal year 1998, one customer accounted for 34% of the Company's sales, another customer accounted for 17% while a third customer accounted for 10% of the Company's sales. INVENTORY Inventory is valued at the lower of cost (first-in, first-out) or market. LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ABS periodically reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the fair value of the asset measured by the future net cash flows (on an undiscounted basis) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the underlying fair value of the assets. ABS has performed a review of its long-lived assets and has determined that no impairment of the respective carrying values has occurred as of December 31, 2000. FIXED ASSETS Fixed assets are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is generally provided for by the straight-line method over the estimated useful lives of the assets. Laboratory equipment, office equipment and furniture are depreciated over five years. Leasehold improvements are amortized over the life of the lease, usually five years. PATENT COSTS Costs of certain patent applications are capitalized. Upon issuance of a patent, such costs are charged to operations utilizing the straight-line method over the lesser of the estimated useful life or 17 years. Costs of unsuccessful patent applications or discontinued projects are charged to expense. INTANGIBLE ASSETS Intangible assets include goodwill and intellectual know-how relating to the acquisition of Stellar. Intangible assets are being amortized over a 10-year period. FAIR VALUE OF FINANCIAL INSTRUMENTS F-11 52 The Company accounts for the fair value of its financial instruments in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The carrying value of all financial instruments reflected in the accompanying balance sheets approximated fair value at December 31, 2000 and December 31, 1999, respectively. REVENUE RECOGNITION Revenue on product sales is recognized at the time the products are shipped, the customer accepts delivery and when collectibility is reasonably assured. Revenue from royalties and license fees are recognized when earned, provided that no significant performance obligations remain. RESEARCH AND DEVELOPMENT INCOME AND EXPENSES Revenues from collaborative agreements are recognized as the Company performs research activities under the terms of each agreement, provided that no further performance obligations remain. Research and development costs are charged to expense in the year incurred. STOCK-BASED COMPENSATION The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 encourages entities to adopt a fair value based method of accounting for stock compensation plans. However, SFAS No. 123 also permits the Company to continue to measure compensation costs under pre-existing accounting pronouncements. If the fair value based method of accounting is not adopted, SFAS No. 123 requires pro forma disclosures of net loss and net loss per common share in the notes to consolidated financial statements. The Company has elected to provide the necessary pro forma disclosures (Note 8). NET LOSS PER COMMON SHARE The Company follows the provisions of SFAS No. 128, "Earnings Per Share." Basic net loss per common share ("Basic EPS") is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the weighted average number of common shares and dilutive potential common shares then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the consolidated statements of operations. The impact of the adoption of this statement was not material to all previously reported EPS amounts. Diluted EPS for 2000, 1999 and 1998 is the same as Basic EPS because the inclusion of stock options, warrants and convertible debentures then outstanding would be anti-dilutive. For the purposes of the calculation of both basic and diluted EPS, Class A and Class B Common Stock have been treated as one class. The following equity instruments were not included in the diluted net loss per share calculation as their effect would be anti-dilutive:
December 31, ------------------------------------------------------ 2000 1999 1998 ------------ ----------- ----------- Stock Options 5,179,619 5,905,252 4,398,250
F-12 53 Conversion of Preferred Series A Stock 7,000,000 -- -- Warrants 8,187,814 1,039,295 709,445 ------------ ----------- ----------- 20,367,433 6,944,547 5,107,695 ============ =========== ===========
INCOME TAXES The Company recognizes deferred tax assets and liabilities for the estimated future tax effects of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. 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. COMPREHENSIVE INCOME In fiscal 1999 the Company adopted SFAS No. 130 "Reporting Comprehensive Income," which establishes new rules for the reporting of comprehensive income (loss) and its components. The adoption of this statement had no impact on the Company's net income (loss) or shareholders' equity. For the fiscal years ended 2000, 1999 and 1998, the Company's operations did not give rise to items includable in comprehensive income (loss) which were not already included in net income (loss). Therefore, the Company's comprehensive income is the same as its net income (loss) for all periods presented. DERIVATIVE INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years beginning after June 15, 2000 and will not require retroactive restatement of prior period financial statements. This statement requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet measured at fair value. Derivative instruments will be recognized as gains or losses in the period of change. If certain conditions are met where the derivative instrument has been designated as a fair value hedge, the hedge items may also be marked to market through earnings, thus creating an offset. If the derivative is designed and qualifies as a cash flow hedge, the changes in fair value of the derivative instrument may be recorded in comprehensive income. The Company does not presently make use of derivative instruments. The adoption of SFAS No. 133 on January 1, 2001 was not material. F-13 54 3. INVENTORIES INVENTORIES CONSIST OF THE FOLLOWING:
December 31, ------------------------------ 2000 1999 ----------- ---------- Raw Materials $328,000 $334,000 Work in Progress 132,000 71,000 Finished Goods 71,000 106,000 ----------- ---------- $531,000 $511,000 =========== -=========
4. FIXED ASSETS FIXED ASSETS CONSISTS OF THE FOLLOWING:
December 31, ------------------------------ 2000 1999 ----------- ----------- Laboratory equipment $1,301,000 $1,279,000 Office equipment and furniture 523,000 523,000 Leasehold improvements 514,000 514,000 Equipment under capital lease 87,000 - ----------- ----------- 2,435,000 2,316,000 Accumulated depreciation and amortization (1,958,000) (1,840,000) ----------- ----------- $477,000 $ 476,000 =========== ===========
Depreciation and amortization of fixed assets was $118,000, $122,000 and $237,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 5. ACQUISITION On April 23, 1998, the Company acquired Stellar Bio Systems, Inc. ("Stellar"), a manufacturer and distributor of in vitro diagnostic products and research reagents. Reagents are individual components of diagnostic products, such as antibodies, calibrators and serum used in the biotechnology industry. The purchase price was $120,000 in cash and $700,000 in Class A Common Stock at the market value on the acquisition date (398,406 shares), plus future contingent payments of $650,000 in Class A Common Stock to be paid over three years based upon future sales levels of Stellar, with the Class A Common Stock to be valued at its market value on the acquisition agreement anniversary dates. On April 23, 1999, the Company made the first contingent payment of $150,000 in Class A Common Stock (131,118 shares). On April 24, 2000, the Company made the second contingent payment of $20,000 in Class A Common Stock (10,811 shares). The Acquisition was accounted for by the purchase method. Results of operations of Stellar have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the aggregate purchase price over the fair value of net assets acquired of $791,000 has been allocated to intangible assets (intellectual know-how of $100,000 and goodwill of $691,000) and is being amortized over a 10-year period. Any additional future payments required under the contingent earnout provisions of the purchase agreement will be accounted for as additional goodwill and will be amortized over the remaining life of the goodwill. Accumulated amortization of F-14 55 intangible assets was approximately $192,000, $114,000 and $41,000 as of December 31, 2000, 1999 and 1998, respectively. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
December 31, --------------------------------- 2000 1999 ----------- ------------ Accounts Payable $220,000 $1,117,000 Professional Fees 77,000 98,000 Payroll and Related Expenses 71,000 366,000 ----------- ------------ $368,000 $1,581,000 =========== ============
7. LONG TERM DEBT: On May 20, 1998, the Company completed a private placement to three accredited investors of an aggregate of $4,000,000 of 5% Convertible Debentures due May 20, 2001, and three series of Warrants to purchase up to an aggregate of 261,288 shares of the Company's Class A Common Stock. Interest on the Debentures was payable only on maturity, conversion, redemption or when other payment was made on the Debentures in cash or, if registered for resale under the Securities Act of 1933, as amended, in shares of the Company's Class A Common Stock valued at the applicable Debenture conversion price. These debentures were repurchased on November 11, 1998 (see below). The Company also issued to the investors warrants in series entitling the investors to purchase, at an exercise price of $1.9141 per share, an aggregate of 261,228 shares of the Company's Class A Common Stock at any time to and including May 19, 2002. These warrants were cancelled on November 11, 1998 (see below). In conjunction with the private placement, the Company incurred both cash and noncash issuance costs totaling $525,000. These issuance costs were amortized on a straight-line basis, which is not materially different than the effective interest rate method, as a component of interest expense through November 11, 1998. Upon conversion of the Debentures, the related unamortized deferred financing costs were charged to paid-in capital. The fair value of the warrants as determined using an option-pricing model of $252,000, was recorded as additional paid-in capital and included in the $525,000 total issuance costs related to these Debentures. In addition, the Company recorded additional paid-in capital and debt discount of $762,000 to reflect the intrinsic value of the maximum market price conversion discount (16%) related to these Debentures. The debt discount was amortized and charged to interest expense from May 20, 1998 through November 11, 1998. The unamortized issuance costs and debt discount were included in the extraordinary charge for early extinguishment discussed below. On November 11, 1998, the Company repurchased the then outstanding Debentures for a total of $3,852,000 (principal amount of $3,248,000 plus accrued interest of $79,000 and a $525,000 premium). As a result of the repurchase the Company has recorded a one-time extraordinary charge to earnings of $1,140,000 which represents the loss on early extinguishment. F-15 56 For each of the aforementioned debt instruments and warrants, the fair value of each was estimated on the date of the agreement using an option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 135% in 1998; risk-free interest rate of range 5.7% to 6.5% and expected lives of 2 to 5 years dependent on the life of the instrument. NOTES PAYABLE Notes payable at December 31, 2000 primarily represents the remaining balance of an obligation arising from services rendered. Notes payable at December 31, 1999 primarily represents demand notes payable to the Company's Chairman. CAPITAL LEASE OBLIGATION During fiscal 2000, the Company entered into lease obligations of $87,000 for the acquisition of computer equipment, which contains a bargain purchase option. As a result, the present value of the remaining future minimum lease payments, with imputed interest rates ranging from approximately 11.7% to 14.6%, are recorded as a capitalized lease asset and related capitalized lease obligation. Future minimum payments at December 31, 2000 are as follows: 2001 $ 24,000 2002 28,500 2003 28,500 2004 24,100 2005 4,100 -------- Total minimum lease payments 109,200 Less amounts representing interest (22,200) -------- Present value of net minimum capital lease payments $ 87,000 ======== 8. STOCKHOLDERS' EQUITY: DESCRIPTION OF CLASS A AND CLASS B COMMON STOCK Holders of Class A Common Stock and Class B Common Stock have equal rights to receive dividends, equal rights upon liquidation, vote as one class on all matters requiring stockholder approval, have no preemptive rights, are not redeemable and do not have cumulative voting rights; however, holders of Class A Common Stock have one vote for each share held while holders of the Class B Common Stock have ten votes for each share held on all matters to be voted on by the stockholders. All Class B Common Stock is owned by the Chairman of the Board and may be converted into Class A Common Stock on a share-for-share basis at the option of the holder and generally is automatically converted in the event of sale or, with certain exceptions, transfer. PRIVATE PLACEMENT On October 27, 1998, the Company entered into an agreement to issue an aggregate of 10,800,000 shares of its Class A Common Stock to a group of accredited investors at a price of $.25 per share, a price above the market price of the Company's Class A Common Stock at the time. Of such shares, 4,000,000 shares were purchased by Alfred J. Roach, the Company's Chairman of the F-16 57 Board of Directors and Chief Executive Officer, for an aggregate price of $1,000,000. The Company has registered the shares issued in the private placement under the Securities Act of 1933, as amended. The proceeds from this private placement were used to repurchase the 5% Convertible Debentures (see Note 7). On January 27, 2000, the Company entered into an Exclusive License Agreement with Abbott Laboratories under which the Company granted to Abbott an exclusive worldwide license to its ABS-103 compound, related technology and patent rights. The Exclusive License Agreement gives Abbott the exclusive right to develop and market the compound, which presently is in the pre-clinical stage. In consideration for the license grant and in addition to customary royalties on sales, Abbott paid the Company an initial non-refundable license fee of $500,000 and agreed to pay additional milestone payments aggregating up to $17 million depending upon successfully reaching development milestones, generally by indication. The Company has no obligation to provide any additional services under this agreement. In connection with the entering into of the Exclusive License Agreement, the Company and Abbott also entered into a Stock Purchase Agreement dated January 27, 2000 pursuant to which Abbott purchased 2,782,931 shares (the "Abbott Shares") of the Company's Class A Common Stock for $1,500,000. The Company also entered into a Registration Rights Agreement with Abbott pursuant to which, among other things, the Company agreed to register the Abbott Shares under the Securities Act of 1933, as amended upon Abbott's request at any time after the first anniversary of the sale and to include the Abbott Shares in any other registration of the Company's securities under the Securities Act after that date. All expenses of registration of the Abbott Shares, other than underwriting discounts, selling commissions and fees and disbursements of counsel for Abbott, are to be borne by the Company. PREFERRED STOCK On December 31, 1999 the Company and Biotechnology Value Fund, L.P. ("BVF") signed a letter agreement, subject to negotiation of definitive agreements, authorization of preferred stock and certain other matters, for BVF to invest between $2 and $3 million for the purchase of between 4,000 and 6,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") and related Warrants. When the Company and BVF began negotiating the definitive agreements for the sale transaction in January 2000, in order to induce BVF to purchase the full $3 million, at the suggestion of BVF, the Company's Chairman Mr. Roach agreed that rather than demand repayment of his demand notes, he would convert $500,000 of the approximately $776,000 plus accrued interest owed to him into an additional investment in the Company on terms identical to the terms previously negotiated with BVF and that the balance of the amount owed him (approximately $276,000 of principal) could be repaid at the rate of $100,000 of principal and interest per month until repaid in full. Accordingly, $500,000 of the amount owed Mr. Roach was converted into 1,000 shares of Preferred Stock and 1,000,000 Warrants. The Company entered into a Securities Purchase Agreement dated as of February 3, 2000 with BVF and Mr. Roach relating to the issuance of the 7,000 shares of Preferred Stock and Warrants for 7,000,000 shares of Class A Common Stock. On February 7, 2000, BVF loaned $3,000,000 to the Company, equaling the purchase price for 6,000 shares of Preferred Stock and F-17 58 6,000,000 Warrants. On March 3, 2000, after receiving stockholder consent to the proposed sale, the Company repaid BVF's loan and $500,000 of the Company's indebtedness to Mr. Roach by issuing 6,000 shares of Preferred Stock and 6,000,000 Warrants to BVF and 1,000 shares of Preferred Stock and 1,000,000 Warrants to Mr. Roach. Preferred stock dividend related to warrants of $2,450,000 represents the noncash fair value of the warrants issued to BVF and Mr. Roach, determined by using an option-pricing model, in the private placement. The following assumptions were used for this fair value computation: dividend yield of 0%, volatility of 106%, risk-free interest rate of 5.01% and expected lives of 5 years. The Shares of Preferred Stock: (i) have the right to participate with dividends declared on the Common Stock, if, as and when declared, on an as-converted basis; (ii) contain customary anti-dilution adjustments for mechanical adjustments in the event of stock splits and similar transactions; (iii) contain restrictions on subsequent issuances of other preferred stock ranking equal to or superior to the Preferred Stock without the consent of the holders of a majority of such Preferred Stock; (iv) have a liquidation preference equal to the original issue price of the Preferred Stock, plus any accrued and unpaid dividends; (v) will not be entitled to vote except as a separate class when its rights are affected; and (vi) will be convertible at any time after the original issue date at the option of the holder. Each share of Preferred Stock initially will be convertible into 1,000 shares of Class A Common Stock, or a conversion price of $.50 per share of Class A Common Stock. Under the terms of the Registration Agreement the Company has filed a Form S-3 Registration Statement covering Class A Common Stock issuable upon conversion of the Preferred Stock and the exercise of the warrants, which went effective June 2000. STOCK OPTION PLANS The Company's 1986 Stock Option Plan (the "1986 Plan") provided for the grant of incentive stock options and/or non-qualified options until July 1997 to purchase up to an aggregate of 4,450,000 shares of Class A Common Stock. Options were granted at exercise prices not less than the fair market value at the date of grant and for a term not to exceed ten years from the date of grant; except that an incentive stock option granted under the 1986 Plan to a stockholder owning more than 10% of the outstanding Common Stock of the Company could not have a term which exceeded five years nor have an exercise price of less than 110% of the fair market value of the Class A Common Stock on the date of the grant. The outstanding options have a vesting period ranging two years to four years ratably from the date of grant. Changes in outstanding options and options available for grant under the 1986 Plan, expressed in number of shares, are as follows: F-18 59
For the Years Ended ------------------------------------------------------------------- December 31, 2000 December 31, 1999 ---------------------------- ------------------------------- Shares Weighted Avg. Shares Weighted Avg. Under Option Under Option Option Price Option Price -------- ------------- ----------- ------------- Options outstanding, beginning of year 2,476,250 $4.20 2,790,500 $4.11 Exercised (147,250) $1.87 -- -- Cancelled (11,000) $2.32 (272,250) $3.65 Expired (135,000) $1.93 (42,000) $2.00 Options outstanding, end of year 2,183,000 $4.50 2,476,250 $4.20 Options exercisable, end of year 2,183,000 $4.50 2,453,250 $4.21 Options available for grant, end of year -- --
F-19 60 The Company's 1993 Non-Employee Director Stock Option Plan (the "1993 Plan") provides for the issuance of stock options for up to 500,000 shares of Class A Common Stock to outside directors of the Company. Options to purchase 10,000 shares of Class A Common Stock are automatically granted immediately following each Annual Meeting of the Company to each outside director elected at the Annual Meeting. The option exercise price is 100% of the fair market value of the Class A Common Stock on the date of grant and the option may be exercised during a period of five years from the date of grant at the rate of 25% each year on a cumulative basis, commencing one year from the date of grant. Changes in outstanding options and options available for grant under the 1993 Plan, expressed in number of shares, are as follows:
For the Years Ended ------------------------------------------------------------------- December 31, 2000 December 31, 1999 ---------------------------- ------------------------------- Shares Weighted Avg. Shares Weighted Avg. Under Option Under Option Option Price Option Price -------- ------------- ----------- ------------- Options outstanding, beginning of year 140,000 $2.63 120,000 $3.27 Granted 30,000 $1.53 40,000 $1.09 Exercised (15,000) $1.88 -- -- Cancelled (7,500) $4.58 -- -- Expired -- -- (20,000) $3.38 Options outstanding, end of year 147,500 $2.39 140,000 $2.63 Options exercisable, end of year 97,500 $2.94 57,500 $3.76 Options available for grant, end of year 325,000 347,500
F-20 61 The Company's 1996 Stock Option Plan, as amended (the "1996 Plan"), which replaced the 1986 plan, provides for the grant of incentive stock options and/or non-qualified options to employees, officers and consultants of the Company to purchase up to an aggregate of 4,000,000 shares of Class A Common Stock. Options may be granted at exercise prices not less than the fair market value at the date of grant and may be exercisable for a period not to exceed ten years from the date of grant; except that the term of an incentive stock option granted under the 1996 Plan to a stockholder owning more than 10% of the outstanding Common Stock of the Company must not exceed five years nor have an exercise price of less than 110% of the fair market value of the Class A Common Stock on the date of the grant. The majority of options outstanding are exercisable 25% each year on a cumulative basis, commencing one year from the date of grant. Changes in outstanding options and options available for grant under the 1996 Plan, expressed in number of shares, are as follows:
For the Years Ended ------------------------------------------------------- December 31, 2000 December 31, 1999 ------------------------- ------------------------- Shares Weighted Avg. Shares Weighted Avg. Under Option Under Option Option Price Option Price --------- ------------- --------- ------------- Options outstanding, beginning of year 3,289,002 $1.05 1,487,750 $1.99 Granted 792,500 $0.47 2,255,000 $0.70 Exercised (1,062,594) $0.77 (5,250) $.061 Cancelled (169,789) $0.92 (448,498) $2.40 Options outstanding, end of year 2,849,119 $1.00 3,289,002 $1.05 Options exercisable, end of year 1,991,744 $1.17 1,250,382 $1.75 Options available for grant, end of year 83,037 705,748
The Company's 2000 Stock Option Plan, (the "2000 Plan"), which is in addition to the 1996 plan, provides for the grant of incentive stock options and/or non-qualified options to employees, officers and consultants of the Company to purchase up to an aggregate of 3,000,000 shares of Class A Common Stock. Options may be granted at exercise prices not less than the fair market value at the date of grant and may be exercisable for a period not to exceed ten years from the date of grant; except that the term of an incentive stock option granted under the 2000 Plan to a stockholder owning more than 10% of the outstanding Common Stock of the Company must not exceed five years nor have an exercise price of less than 110% of the fair market value of the Class A Common F-21 62 Stock on the date of the grant. There were no options granted under this plan in fiscal year 2000. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for options granted in 2000, 1999 and 1998 in accordance with the provisions of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below:
2000 1999 1998 ----------- ----------- ----------- Net loss -- as reported ($6,225,000) ($5,351,000) ($7,548,000) Net loss -- pro forma ($6,881,000) ($6,130,000) ($8,243,000) Basic and diluted loss per share -- as reported ($.14) ($.14) ($.29) Basic and diluted loss per share -- pro forma ($.16) ($.16) ($.32) ----------- ----------- -----------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998: dividend yield of 0%; expected volatility of 170% in 2000, 106% in 1999 and 135% in 1998; risk-free interest rate of range 4.4% to 6.8% and expected lives of seven years. The weighted average fair value of all three option plans for options granted were $.49, $.59 and $.50 in 2000, 1999 and 1998, respectively. The following table sets forth additional SFAS No. 123 disclosure information as to options outstanding for all three plans at December 31, 2000:
Weighted Average Shares Exercisable Exercise Weighted Average Remaining Outstanding Shares Price Range Exercise Price Contractual Life ----------- ----------- ---------------- ---------------- ---------------- 1,433,750 809,375 $0.25 $0.38 $0.30 8.7 196,125 116,125 $0.40 $0.66 $0.53 5.9 807,994 694,244 $1.00 $1.50 $1.05 7.1 442,550 370,050 $1.52 $2.25 $1.83 4.9 361,450 355,950 $2.38 $3.50 $3.37 6.0 1,864,250 1,853,000 $3.66 $5.50 $4.90 1.4 72,500 72,500 $5.75 $7.75 $6.32 2.9 1,000 1,000 $10.00 $10.00 1.2 --------- --------- 5,179,619 4,272,244
F-22 63 OTHER OPTIONS GRANTED The Company entered into a consulting agreement with an unaffiliated third party to assist in the strategic planning and implementation of the Company's licensing, collaborative and co-marketing plans, which expired February 29, 1996. Pursuant to the agreement, the Company granted an option to purchase 50,000 shares of Class A Common Stock on or before February 28, 2000 at $2.25 per share. The Company also granted performance options to purchase 50,000 shares of Class A Common Stock at $2.25 for licensing or collaborative agreements entered into which met certain criteria. These options are exercisable for five years from the date of grant. During 2000, the consultant exercised their option to purchase 50,000 shares of Class A Common Stock at $2.25 and the balance of 50,000 shares expired. The Company has granted an investor relations consultant a warrant to purchase 50,000 shares of Class A Common Stock on or before November 14, 2000 at $3.50 per share pursuant to an agreement dated November 27, 1995. This warrant expired on November 14, 2000. The Company entered into an agreement with an unaffiliated third party dated October 6, 1995 to assist with the marketing of the Company's products and intellectual property, which agreement has expired. Pursuant to this agreement, the Company granted performance options to purchase 25,000 shares of Class A Common Stock and issued 5,000 shares for services rendered under the agreement. Options were granted for 12,500 shares at $3.00 per share and 12,500 shares at $5.50 per share. These options are exercisable for five years from the date of grant. These options expired on February 28, 2001. The Company entered into an agreement with an unaffiliated third party to render financial consulting advice, dated August 13, 1998 and amended on October 1, 1998. Pursuant to this agreement, the Company granted performance options to purchase up to 400,000 shares of Class A Common Stock. Options were granted for 150,000 shares at $.75 per share, 150,000 shares at $1.00 per share and 100,000 shares at $1.50 per share. The options are exercisable for four years from the agreement date. The fair value of these options as determined using an option-pricing model was $124,000, which is being recorded as a noncash charge over the vesting/service period of the options. The following assumptions were used for this fair value computation: dividend yield of 0%, volatility of 135%, risk-free interest rate of 4.26% and expected lives of 4 years. The charge was $81,000 in 1999 and $43,000 in 1998. The Company has granted an investor relations consultant a warrant to purchase up to 300,000 shares of Class A Common Stock on or before January 19, 2004 at $1.00 per share pursuant to an agreement dated January 20, 1999. The warrant may be exercised in increments of 50,000 share amounts only if certain milestones are met during the period ending June 30, 2000. The consultant has earned 250,000 shares under this agreement and the balance of 50,000 shares were cancelled. The fair value of these warrants as determined using an option-pricing model was $264,000 which was recorded as a noncash charge over the one year service period (fiscal year 1999). The following assumptions were used for this fair value computation: dividend yield of 0%, volatility of 149%, risk-free interest rate of 4.6% and expected lives of 4 years. F-23 64 The Company has granted an investor relations consultant a warrant to purchase up to 300,000 shares of Class A Common Stock on or before March 14, 2002 at $3.00 per share pursuant to an agreement dated March 15, 2000. The warrant may be exercised in increments of 50,000 share amounts only if certain milestones are met during the period ending September 14, 2001. As of December 31, 2000, the consultant has earned 50,000 shares. The fair value of these warrants as determined using an option-pricing model was $342,000 which was recorded as a noncash charge over the one year service period (March 2000 to February 2001). The following assumptions were used for this fair value computation: dividend yield of 0%, volatility of 105%, risk-free interest rate of 6.5% and expected lives of 2 years. 9. FEDERAL INCOME TAXES: At December 31, 2000, the Company had net operating loss carryforwards of approximately $63,000,000 for income tax purposes. The net operating loss carryforwards will expire in varying amounts through 2020. In addition, the Company has approximately $1,300,000 of available research and development tax credits to offset future taxes. These credits expire through 2020. In accordance with SFAS No. 109 "Accounting for Income Taxes," the Company has recorded a valuation allowance of $64,300,000 to fully reserve for the deferred tax benefit attributable to its net operating loss and tax credit carryforwards due to the uncertainty as to their ultimate realizability. In accordance with certain provisions of the Tax Reform Act of 1986, a change in ownership of a corporation of greater than 50 percentage points within a three-year period places an annual limitation on the corporation's ability to utilize its existing net operating loss carryforwards, investment tax and research and development credit carryforwards (collectively "tax attributes"). Such a change in ownership was deemed to have occurred in connection with the Company's 1990 initial public offering, at which time the Company's tax attributes amounted to approximately $4.9 million. The annual limitation of the utilization of such tax attributes is approximately $560,000. To the extent the annual limitation is not utilized, it may be carried forward for utilization in future years. At December 31, 2000, $4,900,000 of net operating losses is no longer subject to this limitation. 10. VARIOUS AGREEMENTS AGREEMENTS WITH BOSTON UNIVERSITY On December 1, 1996, the Company entered into a Sublease Agreement and, effective January 1, 1997, an Agreement for Services with Boston University. These two agreements provided for the Company's use of approximately 7,700 square feet of space for laboratories and for its antigen-free technology at a total annual payment of $275,000. The agreements had an initial term of three years. In connection with this lease agreement, the Company may, at its option, pay a portion of the annual lease obligation with Class A Common Stock plus a warrant to purchase shares of Class A Common Stock. The number of shares are computed using the average market price of the Company's Class A Common Stock during the ten days prior to issuance. The warrant shares F-24 65 are to be exercisable at a price equal to the closing price of the underlying Class A Common Stock on the date the warrant is issued and for a period of four years from the date of issuance. During 1997, the Company issued 48,117 shares of Class A Common Stock and warrants to purchase 48,117 shares of Class A Common Stock with the exercise price ranging from $2.13 to $4.75. During 1998, the Company issued 129,847 shares of Class A Common Stock and warrants to purchase 129,847 shares of Class A Common Stock with the exercise price ranging from $.63 to $2.19. During 1999, the Company issued 29,850 shares of Class A Common Stock and warrants to purchase 29,850 shares of Class A Common Stock with the exercise price of $1.28. The fair values of the warrants were calculated using an option-pricing model at the date of issue and recorded a charge to operations of $32,000 in 1999, $99,000 in 1998 and $93,000 in 1997. In the fourth quarter of 1998, the Company implemented a consolidation of its research and development facilities. In 1998, the Company recorded a $252,000 reserve for consolidating facilities which included severance costs, lease termination, and the write-down of leasehold improvements. The Boston facilities were closed in June 1999 and consolidated at the Stellar facilities in Columbia, Maryland. UNIVERSITY OF NOTRE DAME AGREEMENT On December 1, 1983, the Company entered into a lease agreement with the University of Notre Dame ("Notre Dame Agreement") which was amended and extended until November 30, 1993, at which time it was terminated. On December 1, 1993, the Company entered into a lease with Notre Dame ("Notre Dame Lease") for substantially the same premises occupied by the Company under the Notre Dame Agreement for a term ending August 31, 1995. Notre Dame extended the rental of a portion of the space through August 31, 1996. In February 1996, the Company entered into a lease in South Bend, Indiana for approximately 5,200 square feet with an annual base rent of $52,200. This lease commenced on April 1, 1996 for an initial five-year term with three one-year renewal options. In September 1996, the Company entered into a second lease for a three year term in South Bend, Indiana for approximately 3,000 square feet with an annual base rent of $30,400. In 1997, the Company moved its research and development activities from South Bend, Indiana to Boston, Massachusetts. The Company closed both facilities and has terminated both leases. Under the Notre Dame Agreement, the Company was required to pay Notre Dame for the direct and indirect payroll cost of substantially all of the Company's research and development personnel, purchases of laboratory supplies, items of equipment or other costs associated with the research projects. Notre Dame has granted the Company all rights, title and interest in and to any inventions, patents and patent applications for research projects funded by the Company. Inventors of any processes or technology which receive Company support have assigned his or her interest in the product, patent or patent applications to the Company. The Company did not incur costs under the Notre Dame Agreement during the three years ended December 31, 2000, and incurred $6,150,000 for the period from inception (September 1, 1983) through December 31, 1996. The Company has agreed to pay Notre Dame a royalty of 5% of the net income the Company achieves from sales of products resulting from Company-sponsored research activities at Notre Dame. Royalty payments shall continue for a ten-year period from the date of the first commercial sale of a product, regardless of the continuation of the Notre Dame Agreement. F-25 66 EMPLOYMENT AGREEMENTS The Executive Vice-President is a party to an employment agreement with the Company ending September 30, 2001. The aggregate annual minimum compensation under this agreement as of December 31, 2000 was approximately $90,000. This officer also is party to a confidentiality agreement with the Company requiring them to maintain certain information in confidence during and subsequent to the employment with the Company. SCIENTIFIC ADVISORY COMMITTEE AGREEMENTS The Company has entered into advisory board agreements with certain research scientists with respect to specific projects in which the Company has an interest. The payments to the advisors for informal meetings and other consultations as a group were approximately $37,000, $65,000 and $115,000 for the three years ended December 31, 2000, 1999 and 1998, respectively. Generally, members of the Company's Scientific Advisory Committee are employed by or have consulting agreements with third parties, the businesses of which may conflict or compete with the Company and any inventions discovered by such individuals will not become the property of the Company. As part of its development stage activities, the Company enters into various agreements that provide for the expenditure of funds for research and development activities and typically provide for the payment of royalties (between 2% to 8% of net sales) by the Company if any products are successfully developed and marketed as a result of the work being performed under the agreement. The following is a summary of significant agreements the Company has entered into: LICENSE AGREEMENTS On January 24, 1992, the Company entered into an exclusive, 15 year license agreement with Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"), a Japanese pharmaceutical company. Under this agreement, Yamanouchi may manufacture, use or market diagnostic assays that contain the Company's monoclonal antibody, 45-J, in Japan and Taiwan. Yamanouchi paid a non-refundable, initial sign-up payment to the Company of $900,000 (net of Japanese taxes). The agreement provides that Yamanouchi is to pay the Company a fixed percentage over the Company's manufacturing costs of the 45-J antibody supplied to Yamanouchi. On an ongoing basis, Yamanouchi is to pay the Company royalties at the rate of 10% of all net sales of diagnostic assays sold by Yamanouchi or its affiliates during each calendar year of the agreement term. Additionally, Yamanouchi is to pay the Company 50% of any initial fees, royalties or other consideration received with respect to any sublicense granted by Yamanouchi. To date, Yamanouchi has not made any sales. On December 10, 1992, the Company entered into an agreement (as amended) with University College Dublin, Ireland granting the Company an exclusive license for drugs/compounds to halt the onset and/or progression of neurodegenerative diseases, in general, and Alzheimer's disease, in particular. The agreement's term is the duration of any patents that may be granted to the university with a minimum of 10 years. Pursuant to the agreement, the Company is to pay the university a royalty of 5% of net income relating to product sales. The Company expensed $82,000 F-26 67 in 2000, $18,000 in 1999 and $5,000 in 1998 for certain research expenses, supplies and equipment under this agreement. On August 10, 1993, the Company entered into a five-year collaboration agreement with the Free University of Berlin to develop therapeutic compounds. The Company also acquired a series of anticonvulsant compounds. Pursuant to the agreement, the Company is to pay a royalty of 5% of the net product sales. The agreement lasts the life of the patent or a minimum of 10 years. The Company expensed $72,000 in 2000, $75,000 in 1999 and $103,000 in 1998 for research expenses and supplies under this agreement. In October 1995, ABS entered into a license and collaboration agreement with F. Hoffmann-La Roche, Ltd. ("Hoffmann-La Roche") for the co-development and marketing of the Company's TpP test for the detection of active thrombosis (blood clot formation). The agreement grants Hoffmann-La Roche a worldwide license to market the TpP test in a latex based particle agglutination format. Under the agreement, the Company received a $60,000 non-refundable development payment, to adapt the TpP test in the latex based particle agglutination format to Hoffmann-La Roche's automated diagnostic systems. The Company is also to receive milestone payments upon achievement of certain commercialization goals. The TpP test is to be manufactured by the Company for use on Hoffmann-La Roche's instruments. ABS is to receive a percentage of Hoffmann-La Roche's net selling price for the Company's manufacturing of the TpP test plus a 5% royalty on net sales made by Hoffmann-La Roche. Under the agreement, the TpP test is also to be sold by ABS and Hoffmann-La Roche to other diagnostic companies using similar particle agglutination technology. On these sales, gross profit is to be shared equally between the Company and Hoffmann-La Roche. To date, ABS has not received any milestone or royalty payments. In December 1995, ABS entered into a license agreement with Abbott Laboratories ("Abbott") for the marketing of the Company's TpP assay. The license agreement grants Abbott a worldwide license to market the TpP test for Abbott's immunoassay formats. The Company received a $100,000 non-refundable up-front payment and is to receive milestone payments upon achievement of certain development and commercialization goals. The Company is to receive a 5% royalty on net sales made by Abbott. In addition, the reagent for the TpP test is to be manufactured by the Company for use by Abbott. To date, ABS has not received any milestone or royalty payments. On January 27, 2000, the Company entered into an Exclusive License Agreement with Abbott under which the Company granted to Abbott an exclusive worldwide license to its ABS-103 compound, related technology and patent rights. The Company also entered into a Registration Rights Agreement with Abbott. (See Note 8 for details regarding this agreement.) F-27 68 11. COMMITMENTS AND CONTINGENCIES LEASES ABS leases 6,000 square feet of office space in New York under a lease expiring July 2001 (with an annual base rent of $41,000), which it intends to renew. ABS' subsidiary, Stellar, has a lease covering 16,000 square feet in Maryland, with an annual base rent of $184,000 and a term ending March 31, 2006. LITIGATION From time to time we are a party to certain claims and legal proceedings in the ordinary course of business, none of which, in our opinion, would have a material adverse effect on our financial position or results of operations. F-28 69 Commission File No. 0-19041 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 AMERICAN BIOGENETIC SCIENCES, INC. 70
Exhibit No. Description ----------- ----------- 3.1 Restated Certificate of Incorporation of ABS, as filed with the Secretary of State of Delaware on July 30, 1996 and amended through March 3, 2000. Incorporated herein by reference to Exhibit 3.1 to ABS' Form 10-K for the fiscal year ended December 31, 1999, File No. 0-19041. 3.2 Amended and Restated By-Laws of ABS. Incorporated herein by reference to Exhibit 4.02 to ABS' Registration Statement on Form S-8, File No. 333-09473. 4.1 Form of Purchase and Investment Agreement executed by ABS and several investors on October 27, 1998. Incorporated herein by reference to Exhibit 99 to ABS' Registration Statement on Form S-3, file number 333-69735, filed with the Commission on December 24, 1998. 4.2 Form of Warrant issued to several individuals under ABS' Financial Advisory Agreement with M.H. Meyerson & Co., Inc., dated as of August 13, 1998 and schedule of holders thereof. Incorporated herein by reference to Exhibit 4.1(e) to ABS' Form 10-K for the fiscal year ended December 31, 1998, File No. 0-19041. 4.3(a) Stock Purchase Agreement, dated as of January 27, 2000, between ABS and Abbott Laboratories. Incorporated herein by reference to Exhibit 99.1 to ABS' Current Report on Form 8-K dated January 27, 2000 (date of earliest event reported), File No. 0-19041. 4.3(b) Registration Rights Agreement, dated as of January 27, 2000, between ABS and Abbott Laboratories. Incorporated herein by reference to Exhibit 4.1 to ABS' Current Report on Form 8-K dated January 27, 2000 (date of earliest event reported), File No. 0-19041. 4.4(a) Securities Purchase Agreement, dated as of February 3, 2000, among ABS and Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., Investment 10 L.L.C. and Alfred J. Roach. Incorporated herein by reference to Exhibit 4.4(a) to ABS' Form 10-K for the fiscal year ended December 31, 1999, File No. 0-19041. 4.4(b) Registration Agreement, dated as of March 3, 2000, among ABS and Biotechnology Value Fund, L.P., Biotechnology Value Fund II, L.P., Investment 10 L.L.C. and Alfred J. Roach. Incorporated herein by reference to Exhibit 4.4(b) to ABS' Form 10-K, for the fiscal year ended December 31, 1999, File No. 0-19041. 4.4(c) Form of Warrant issued to Redington, Inc. (one of three Warrants substantially identical except for the date and price information. Incorporated herein by
71
Exhibit No. Description ----------- ----------- reference to Exhibit 4 to ABS' Registration Statement on Form S-3, file number 333-36116, filed with the Commission on May 2, 2000. 10.1(a)+ Employment Agreement dated October 1, 1996 between ABS and Ellena M. Byrne. Incorporated herein by reference to Exhibit 10.1(b) to ABS' Form 10-K/A, dated April 30, 1997, File No. 0-19041. 10.1(b)+ Employment Agreement dated November 2, 1998 between ABS and Mr. John S. North. Incorporated herein by reference to Exhibit 10.1(b) to ABS' Form 10-K for the fiscal year ended December 31, 1998, File No. 0-19041. 10.1(c)+* Memorandum of Understanding dated January 4, 2001 between ABS and Mr. John S. North. 10.2(a)+ ABS' Stock Option Plan, as amended. Incorporated herein by reference to Exhibit 28.1 to ABS' Registration Statement on Form S-8, File No. 33-51240. 10.2(b)+ ABS' 1993 Non-Employee Director Stock Option Plan. Incorporated herein by reference to Exhibit 99.01 to ABS' Registration Statement on Form S-8, File No. 33-65416. 10.2(c)+ ABS' 1996 Stock Option Plan, as amended. Incorporated herein by reference to Exhibit 10.2(c) to Form 10-K for the fiscal year ended December 31, 1999, File No. 0-19041. 10.2(d)+ ABS' 2000 Stock Option Plan. Incorporated herein by reference to Exhibit 99.01 to ABS' Registration Statement on Form S-8, File No. 33-45644. 10.3 Exclusive License Agreement dated January 24, 1992 between ABS and Yamanouchi Pharmaceutical Co., Ltd. Incorporated herein by reference to Exhibit 10.29 to ABS' Current Report on Form 8-K dated January 24, 1992, File No. 0- 19041. 10.4 Warrant dated October 25, 1995 issued to Swartz Investments, Inc. Incorporated herein by reference to Exhibit 10.13 to ABS' Current Report on Form 8-K dated October 12, 1995, File No. 0-19041. 10.5 Exclusive License Agreement, dated as of January 27, 2000, between ABS and Abbott Laboratories. Incorporated herein by reference to Exhibit 10.1 to ABS' Current Report on Form 8-K dated January 27, 2000, File No. 0-19041. 21 List of Subsidiaries. Incorporated herein by reference to Exhibit 21 to ABS' Form 10-K for the fiscal year ended December 31, 1998, File No. 0-19041. 23* Consent of Independent Public Accountants.
72 *Filed herewith. All other exhibits are incorporated by reference to the document following the description thereof. +Management contract or compensatory plan.