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, 2001
[ ] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 11-2655906
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1375 Akron Street, Copiague, New York 11726
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(Address of principal executive offices) (Zip Code)
631-789-2600
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(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
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(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
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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 8, 2002, there were outstanding
41,949,909 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 of shares
held by non-affiliates of the registrant as of March 8, 2002 was $10,450,000.
DOCUMENTS INCORPORATED BY REFERENCE
None
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,"
"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 with, and to maintain,
superior technological capability (see "--Products Under Development"), 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 its 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 develop its manufacturing
capability and develop sales and marketing capabilities or enter into
manufacturing and/or marketing and sales arrangements with third parties (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).
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.
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 as a result 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.
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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 and
distributing vaccines. 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, neurodegenerative diseases, coronary
artery diseases and cancer.
Due to the Company's present limited finances, the Company has deferred
its development efforts for its products, although development of the
therapeutic neurocompounds is progressing with the Company's collaborative
partners, the Company is continuing to sell its TpP diagnostic kit through its
distributors and the Company is continuing contract research work with its
Antigen-Free Technology.
ABS' 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 (heparin).
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 the major protein component 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 for certain corporate
partners.
o Therapeutic Neurocompounds (ABS-103 and ABS-205). These are chemical
compounds which have been identified for the treatment of epilepsy,
migraine and mania and neurodegenerative diseases.
o Vaccines. The Company has entered into separate Agreements with
entities in Russia granting certain exclusive marketing rights to the
Company for smallpox and anthrax vaccines for humans, and certain
biological products related to animals, including livestock vaccines.
On June 29, 2001, the Company and its wholly-owned subsidiary, Stellar Bio
Systems, Inc. ("Stellar"), completed the sale of Stellar's in vitro
immunoflourescent antibody slide format assay business and Stellar's mouse serum
business (collectively, the "Stellar Business") to PanBio InDx Inc. ("PanBio
InDx"), a wholly owned subsidiary of PanBio Limited, an Australian company. The
Company received a purchase price of $1.2 million in cash at closing and the
right to receive up to a total of $540,000, payable quarterly over the next
three years, based on revenues of a portion of Stellar's business sold. Through
December 31, 2001, the Company recorded $32,000 under this earn-out right.
Assets sold in the transaction included rights to specified products, rights
under certain contracts and leases, inventory, accounts receivable and
intellectual property related to the Stellar Business, rights to the name
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"Stellar", certain computer hardware and software and other tangible assets and
goodwill. PanBio InDx assumed certain liabilities of the Stellar Business,
including accounts payable. The Company recorded a loss on the sale of $288,000,
which included the write-off of $705,000 of unamortized goodwill related to the
Company's purchase of Stellar in 1998.
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.
There can be no assurance that the Company's products developed or in
development will prove to be commercially viable, that any of the products that
have not already received clearance 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 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. If it does not
enter in such arrangements, ABS will need additional financing to continue to
develop, and to commercialize products. There can be no assurance of the terms
on which such financing could be available, if it is available at all.
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 highly
focused immune response that results in the proliferation of a large number of
antibody secreting cells producing monoclonal antibodies specific to the foreign
entity. The Company holds several United States and foreign 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 neurodegenerative diseases.
CURRENT PRODUCTS
Cardiovascular Products
Medical Background
Using its antigen-free mouse colony, the Company has developed and
patented two antibodies, 45J and MH1. The 45J antibody reacts specifically with
a portion of the fibrinogen molecule (the precursor protein molecule of fibrin)
and MH1 reacts specifically with fibrin (the protein produced by the conversion
of fibrinogen by thrombin in the formation of a blood clot). These antibodies
are used in two of the Company's products, the TpP and FiF tests. These tests
assist doctors in diagnosing cardiovascular risk, and the onset of the formation
of a blood clot (thrombosis).
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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 cement the platelets into an
insoluble mass which has the mechanical strength to withstand the
pressure of blood in the circulation.
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 (heart attack) 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; 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 chest pain from some less serious
condition.
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.
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
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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 subsequent 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.
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 Comparison of ELISA for Soluble Fibrin Polymer (TpP) and D-Dimer in
Patients with Renal Failure or Malignancy (Not in Remission) and Not
Having Evidence of Active Thromboembolism. Arkel, Ku, and Carr, ISTH
2001
o TpP Plasma Levels as a New Marker of Thrombophilia in Patients
With Cardioembolic Stroke. Delucca, et al., Italian Congress
on Stroke, Naples, 2000
o Decreased TpP Levels Linked to Preeclampsia. Clinical Lab Letter,
April 15, 2000, Vol 21, No 7
Page 5
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 submitted a 510(k) to the
FDA for marketing approval of the rapid assay format TpP test. The Company has
withdrawn this 510(k) in response to questions raised by the FDA that additional
data be generated to support the marketing application. While 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 is at this time not
proceeding with this format due to the funding required.
In March 2001, the Company entered into a Research and Non-exclusive
License Agreement with Biosite Diagnostics, Incorporated. Under this agreement
Biosite will validate the TpP marker and potentially use it with their rapid
quantitative testing platform. At this time Bringham and Women's Hospital in
Boston, Massachusetts is completing the data analysis on 2,000 plus patient
samples for MI, angina and unstable angina. Upon completion of the validation
study, Biosite may decide to develop TpP on its platform which would produce
license fee payments, purchases of antibodies from ABS and later royalties from
the sale of product. ABS does not have any performance obligations under this
agreement. In order to market the product, the licensee will be required to file
for the appropriate governmental clearances.
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 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 sold 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.
Page 6
Epilepsy; Migraine; Mania. ABS has developed a series of anticonvulsant
compounds which have improved properties compared to valproate, a significant
drug that 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 with lower sedative action and
terratogenicity (birth defects) side effects commonly associated with other
anticonvulsants, including valproate.
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 developed a proprietary enatioselective production procedure that allows the
production of the specific desired enantiomer. ABS 103R has been selectively
produced. The value of selectively producing R-103 lies in its superior safety
and efficacy profile. The Company has patented the use of ABS-103 as a treatment
for epilepsy, migraine and mania 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. In November 2001, ABS reacquired the license rights
from Abbott Laboratories and the agreement was terminated.
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. See "--Research and Development
Agreements -Global Scientific Network."
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
polyscialylation of a protein known as neural cell adhesion molecule by
neutoblastema cells in vitro. Polyscialylation of neural cell adhesion molecule
is involved in memory, neurodevelopment and other neuroplastic events. ABS-205
also has been shown to enhance polyscialylation of neural cell adhesion molecule
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 and additional applications relating to this technology are pending. 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. The Company has filed
United States patent applications, one of which has been allowed, and foreign
applications relating to this series of compounds.
PRODUCTS UNDER DEVELOPMENT
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 what is believed to be 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.
Page 7
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 human
serum, 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 adverse 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 has unsuccessfully been
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 has also investigated 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."
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, cytotoxins) 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".
The Company has deferred any further development of these projects until
such time that ABS obtains additional financing or collaborative partners.
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, 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."
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
Page 8
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 in 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; and the Chinese Academy of Medical Sciences, Beijing,
China.
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 is a party to 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 a
1998 agreement with the NIH (epilepsy branch) 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 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 its 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
also 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 12 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
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 using distributors. 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.
Page 9
During fiscal year 2001, the Company had one customer that accounted for
28% of its $860,000 of product sales. The Company does not believe that the loss
of this customer 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
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.
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.
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.
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
to 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. 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 Company continues to seek arrangements with
large pharmaceutical companies to market its products. In 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 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
Page 10
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. The Company does
not have any further obligations and could terminate the agreement.
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.
The Company does not have any further obligations and could terminate the
agreement.
In January 2000, ABS entered into a license agreement with Abbott granting
Abbott exclusive worldwide rights to the Company's ABS-103 compound, related
technology and patent rights. 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
depending upon successfully reaching development milestones, generally by
indication. In conjunction with entering into the license, Abbott made an
additional $1,500,000 equity investment in ABS. In November 2001, ABS
reacquired, from Abbott Laboratories, the license rights for ABS' neurological
compound ABS-103 and the license agreement was terminated. The Company is
seeking partners to license ABS-103 and put the compound into human clinical
trials.
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, will be available on terms acceptable or favorable to the Company.
VACCINES
ABS has entered into an agreement effective on November 30, 2001 with the
All-Russian Research Institute of Veterinary Virology and Microbiology
(Veterinary Institute) that grants ABS rights for at least 10 years to act as
the Veterinary Institute's exclusive distributor outside of Russia for certain
biological products related to animals, including livestock vaccines (livestock
biological products). The Veterinary Institute, which owns the rights to and
manufactures certain livestock biological products, is owned and operated by the
Russian Academy of Agricultural Sciences, an organization established by the
Russian government.
Under its agreement with the Veterinary Institute, ABS plans to market the
livestock biological products by making them available to pharmaceutical
companies, government agencies and regulatory authorities outside of Russia for
testing and evaluation. The terms of the sale of and specifications related to
livestock biological products will be negotiated from time to time with the
Veterinary Institute. The ability of the Company to sell livestock biological
products, including vaccines, is subject to the results of testing and
evaluation and the approval of government agencies and regulatory authorities in
the relevant country or jurisdiction. ABS further plans that any sales of
livestock biological products will be made through one or more sub-distributors
that may arrange any necessary testing and evaluation. To date, ABS has not
signed any agreements with a sub-distributor. ABS cannot predict if or when it
will receive any revenues from sales of livestock biological products. ABS is
responsible for its own expenses and costs in connection with the Veterinary
Institute agreement.
ABS also entered into agreements called Protocols of Understanding and
Mutual Support with a department of the Ministry of Health on December 13, 2001
and with the Ministry of Health at the Federation level on December 27, 2001,
Page 11
which Protocols obligate the Ministry to provide the following assistance to
ABS: (1) facilitate the establishment of contracts with one or more
manufacturers in Russia of certain human vaccines that would give ABS the right
to market such vaccines outside of Russia; (2) facilitate the ability of ABS to
obtain the licenses and permits that are necessary in Russia to acquire and
export such human vaccines; and (3) monitor the manufacturing and testing of
vaccine production to ensure compliance with the good manufacturing practices
that are adopted in compliance with applicable Russian regulations.
Anthrax and Smallpox Vaccines
ABS has entered into a ten-year agreement, dated January 14, 2002, as
amended March 11, 2002, with a Russian Association (Association) which
represents over thirty manufacturers, enterprises, and scientific research
institutes located in the Russian Federation. The Association has the exclusive
right to sell and distribute an injectable anthrax vaccine and an oral smallpox
vaccine produced by Russian manufacturers. Under the agreement between ABS and
the Association, ABS has been granted the exclusive right to act as a
distributor for these vaccines in the United States, Canada, Mexico, countries
of Central and South America and China. The anthrax vaccine is presently being
marketed outside of the ABS' territory by the Association.
The agreement between ABS and the Association also grants ABS the first
priority right to purchase a broad range of other immunobiological preparations,
including other human vaccines (biological products). The volumes, terms of
delivery, price and specifications related to the biological products are to be
negotiated separately with the Association. Under the agreement, ABS plans to
make certain biological products available to pharmaceutical companies,
government agencies and regulatory authorities for testing and evaluation.
Smallpox Vaccine
ABS has also entered into a separate ten-year agreement, dated January 15,
2002, with a Russian Federation manufacturer which grants ABS the right to act
as the manufacturer's exclusive worldwide distributor (with the right to assign
sub-distributors and agents) for a smallpox vaccine for human use outside of the
Commonwealth of Independent States (the Russian Federation and eleven other
independent countries formerly part of the Soviet Union). This manufacturer has
been operating for over 100 years, and was a supplier of smallpox vaccine used
by the World Health Organization during the global eradication of smallpox in
the 1970s.
ABS plans to market the smallpox vaccine by first making it available for
testing and evaluation by pharmaceutical companies, the U.S. Food and Drug
Administration and other government agencies and regulatory authorities outside
of the Commonwealth of Independent States. The terms of the sale of and
specifications related to the smallpox vaccine are to be negotiated with the
manufacturer.
With respect to both agreements, ABS plans to market the vaccines through
one or more sub-distributors, or to form collaborative agreements with
pharmaceutical companies that may arrange necessary testing and evaluation. The
ability of the Company, and any of its sub-distributors or collaboratives, to
sell the vaccines is subject to the results of testing and evaluation and the
approval of government agencies and regulatory authorities in the relevant
country or jurisdiction. ABS' exclusivity under these agreements is contingent
upon meeting certain obligations, including ABS' effort to obtain necessary
regulatory approvals for use in humans, and for the import and distribution of
the vaccines. ABS has not yet signed any agreements with a sub-distributor or
pharmaceutical companies. ABS cannot predict if or when it will receive any
revenues from sales of the vaccines. Each party is responsible for its own
expenses and costs in connection with the agreements.
There can be no assurances that these vaccines will meet the testing and
evaluation requirements by various government agencies, the ability of vaccine
manufacturing facilities in Russia to meet all quality and manufacturing
practices required for distribution or the Company's ability to consummate
necessary agreements with sub-distributors and to make sales of the vaccines.
Page 12
COMPETITION
The biotechnology industry is characterized by rapid technological
advances, evolving industry standards and technological obsolescence. ABS has
numerous competitors, most of whom have greater financial and other resources
than the Company. It is likely that others will 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. 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
competitor 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. 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.
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
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 Nos.
6,187,593 and 6,294,173, 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 22 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
Page 13
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. Sixteen patents protect
this technology on behalf of the Company in 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 No. 6,184,401 issued on February 6, 2001 relates to this
technology and will expire on June 22, 2019. Two United States patent
application and 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, including United States Patent No. 6,268,396
issued July 31, 2001 that expires on June 22, 2019. Twenty-two foreign
applications are pending relating to this technology. Technology for the
enantioselective synthesis of valproic acid analogues is also exclusively
licensed to the Company. One United States and 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. The Company
received United States Patent No. 6,300,373 on October 9, 2001, which will
expire on October 9, 2018 for Antiproliferative and Neurotrophic Molecules
relating to ABS-205.
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. Two of these applications have issued into United
States Patent No. 6,184,401 issued February 6, 2001, which will expire in 2019,
and No. 6,268,396, issued July 31, 2001, which will expire in 2019, relating to
the use of ABS-103 for the treatment of migraine. 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 Nos.
5,672,746, issued September 30, 1997, and No. 6,794,624, issued August 14,
2001). 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).
Page 14
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.
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.
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 Food
and Drug Administration ("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 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.
Page 15
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.
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.
Medical devices may be exported before receiving 510(k) clearance or PMA
approval under certain conditions. 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.
Regulation of In Vivo Products. Any products intended for human in vivo
use, including vaccines, are 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 clinical testing 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 general 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.
Page 16
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 other collaborative 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 approved. ABS' compliance with good
manufacturing practice ("GMP"), 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 product recalls,
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 the
facilities used to produce its TpP diagnostic test (and monoclonal antibodies)
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 operate a 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 had 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. The
Company entered into a manufacturing agreement with the purchaser of Stellar to
continue manufacturing the TpP kits for the Company in the same facility as
previously.
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 manufacturer's
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 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 and FiF
Page 17
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 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 by those with whom the member is employed or consults
might limit the ability of the scientific advisors to continue their
relationship with ABS.
Members are paid $1,000 per meeting attended, plus expenses. Members of
the Scientific Advisory Committee have been granted ten year options to purchase
between 5,000 and 25,000 shares of Class A Common Stock from the Company. As of
December 31, 2001, there were outstanding options to purchase an aggregate of
406,205 shares of Class A Common Stock held by members of the Scientific
Advisory Committee, at exercise prices ranging from $.28 per share to $7.75 per
share. The 2001 cash payments to the advisors for informal meetings and other
consultations as a group were approximately $29,000. 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 and/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 8, 2002 are:
Giancarlo Agnelli, M.D., is Professor of Internal Medicine at the
Division of Internal and Cardiovascular Medicine, Department of Internal
Medicine, University of Perugia, Italy. Prof. Agnelli is Associated Member
of the Hamilton Civic Hospital Research Centre at McMaster University,
Hamilton, Canada. He served as a member of the Fifth and Sixth Conference
Page 18
on Antithrombotic Therapy of the American College of Chest Physicians.
Professor Agnelli is Editor-in-Chief of the journal Vessels and Associate
Editor of the journal Haemostasis. He serves as a reviewer of many journals
including the New England Journal of Medicine, Lancet, Circulation, Blood,
Cardiovascular Research and Journal of the American College of Cardiology.
Prof. Agnelli is author of more than 200 publications in peer reviewed
journals.
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.
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.
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, 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.
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. Dr. Morozov is editor-in-chief of Psychiatry and
Psychopharmacology and also editor-in-chief of Media Medica publishing house.
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 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 was 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
Page 19
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 Adviser 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 four 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
As of March 8, 2002, ABS had ten full time employees and one part-time
employee. Of the full-time employees, two are research and development
personnel, including one Ph.D., and the balance are executive and administrative
personnel.
None of ABS' employees is represented by a labor organization. ABS
believes its relationship with its employees is satisfactory.
Item 2. Properties
ABS leases 6,000 square feet of office space in New York under a lease
expiring July 2002 (with an annual base rent of $42,000). The Company intends to
renew this lease. ABS also has a License Agreement with the University of
Maryland covering 1,400 square feet of space in Maryland expiring May 31, 2002
(at an annual fee of $35,000). The Company intends to renew this Agreement.
Page 20
Item 3. Legal Proceedings
The Company is party to an action commenced by Norman Kaminsky,
derivatively on behalf of the Company, against Alfred J. Roach, Chairman of the
Board of Directors of the Company, various other unaffiliated purchasers of
Common Stock sold by the Company in an October 1998 private placement, M.H.
Meyerson & Co., Inc., an alleged financial advisor to the Company ("Meyerson"),
certain alleged employees, officers and directors of Meyerson, and the Company,
as nominal defendant. The action was brought in the Supreme Court of the State
of New York, Nassau County and apparently filed in October 2001 although only
received by the Company in January 2002. The action is brought as a purported
derivative action so a recovery, if any is awarded, less fess and costs would
presumably inure to the benefit of the Company,. The action alleges that the
Company sold stock to the defendants, including Mr. Roach, for inadequate
consideration resulting in an alleged breach of a fiduciary duty of loyalty and
a duty of care by Mr. Roach, Meyerson and the alleged employees, officers and
directors of Meyerson, a breach of contract by Meyerson and unjust enrichment by
all defendants. The action seeks damages in an unspecified amount against Mr.
Roach, Meyerson and the alleged employees, officers and directors of Meyerson,
the disgorgement of all realized monies, profits and gains allegedly obtained
by, and creation of a constructive trust against, all defendants, and interest,
costs and disbursements.
On January 17, 2002, the Company commenced an action against Richard
Oppenheim in the Supreme Court of the State of New York, Suffolk County, seeking
a declaration from the court that, among other things, Mr. Oppenheim had, under
the terms of a December 14, 2000 agreement, released any right to assert a claim
which is the subject of a January 3, 2002 letter received by the Company from
Mr. Oppenheim's counsel. The December 14, 2000 agreement was entered into to
settle a claim by Mr. Oppenheim that he was entitled to a finder's fee
commission as a result of a third party investment made in the Company. The
January 3, 2002 letter from Mr. Oppenheim's counsel threatened litigation unless
the Company paid a finder's fee commission as a result of an alleged investment
made in August 2001 by the third party investor who had made an investment that
was covered by the December 14, 2000 agreement.
On January 22, 2002, Mr. Oppenheim commenced an action against the Company
in the United States District Court for the District of New Jersey alleging that
the Company owed him a finder's fee commission as a result of the August 2001
investment made by the third party investor discussed above. Among other things,
Mr. Oppenheim seeks compensatory damages in the amount of $200,000 and interest,
costs and disbursements.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 21
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 quoted on the
Nasdaq National Market under the trading symbol "MABXA" through December 6,
1999, on the Nasdaq Smallcap Market from December 6, 1999 through January 6,
2000 under the trading symbol "MABAC," from January 7, 2000 through July 10,
2000 on the OTC Bulletin Board under the symbol "MABA" and from July 11, 2000
through November 26, 2001 on the Nasdaq SmallCap Market under the symbol
"MABA". On November 26, 2001, the Nasdaq Stock Market halted trading in the
Company's Common Stock. The Company voluntarily delisted its Common Stock from
the Nasdaq Stock Market on January 8, 2002. Since January 9, 2002, the Company's
Common Stock has been quoted on the Pink Sheets for unsolicited customer orders
only under the symbol "MABA". The following table sets forth the high and low
closing bid prices for the Company's Common Stock for the period from January 1,
2000 through November 23, 2001, as reported by the appropriate market, without
retail mark-ups, mark-downs or commissions.
Fiscal Years High Low
------------------------------------------ -------------------- -------------
2001
First Quarter $ 1.13 $ .39
Second Quarter .86 .50
Third Quarter .61 .35
Fourth Quarter (through November 23, 2001) .47 .27
2000
First Quarter $ 6.41 $ .38
Second Quarter 2.66 1.22
Third Quarter 2.84 1.50
Fourth Quarter 1.69 .53
There were approximately 637 holders of record of Common Stock as of March
8, 2002 (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.
For the Year Ended December 31,
2001 2000 1999 1998 1997
--------------- ---------------- --------------- --------------- ---------------
Operating Results
Revenues:
Sales $860,000 $1,629,000 $1,361,000 $1,197,000 $150,000
Royalties/License $37,000 $502,000 - - -
Collaborative Agreements $36,000 $157,000 $82,000 - $9,000
Net Loss ($4,290,000) ($3,775,000) ($5,351,000) ($7,548,000) ($7,147,000)
Net Loss Attributable to Common
Stockholders ($5,181,000) ($6,225,000) ($5,351,000) ($7,548,000) ($7,147,000)
Net Loss Per Share
Basic and Diluted ($.12) ($.14) ($.14) ($.29) ($.35)
Weighted Average Shares 44,286,000 43,475,000 39,266,000 25,740,000 20,223,000
Page 22
As of December 31,
Balance Sheet 2001 2000 1999 1998 1997
- ------------- --------------- ---------------- --------------- ---------------- ----------------
Working Capital (Deficit) $384,000 $1,377,000 ($1,436,000) $2,947,000 $4,761,000
Total Assets $3,191,000 $5,086,000 $3,938,000 $6,514,000 $9,388,000
Long-Term Debt $57,000 $78,000 $33,000 $56,000 $8,000
Total Liabilities $712,000 $646,000 $2,360,000 $918,000 $2,705,000
Accumulated Deficit ($73,720,000) ($68,539,000) ($62,314,000) ($56,963,000) ($49,415,000)
ABS has not paid any cash dividends on its Common Stock since its
inception.
Selected Quarterly Data
Summarized unaudited quarterly financial data for the year ended December
31, 2001 and 2000 was as follows:
For the Quarter Ended
------------------------------------------------------------------
Mar. 31, 2001 June 30, 2001 Sept. 30, 2001 Dec. 31, 2001
---------------- ---------------- --------------- ----------------
Revenues:
Sales $ 488,000 $ 363,000 $ 6,000 $ 3,000
Royalties/License 1,000 1,000 1,000 34,000
Collaborative Agreements 34,000 - - 2,000
---------------- ---------------- --------------- ----------------
Total Revenues 523,000 364,000 7,000 39,000
Gross profit on sales 296,000 242,000 5,000 3,000
Loss from operations (901,000) (914,000) (1,004,000) (1,124,000)
Net Loss (893,000) (1,214,000) (1,020,000) (1,163,000)
Non-cash preferred stock
dividend - - (891,000) -
Net loss attributable to
common stockholders ($893,000) ($1,214,000) ($1,911,000) ($1,163,000)
Basic and diluted net loss
per share ($.02) ($.03) ($.04) ($.03)
For the Quarter Ended
------------------------------------------------------------------
Mar. 31, 2000 June 30, 2000 Sept. 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 on sales 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)
Non-cash preferred stock
dividend (2,450,000) - - -
Net loss attributable to
common stockholders ($2,948,000) ($1,034,000) ($997,000) ($1,246,000)
Basic and diluted net loss
per share ($.07) ($.02) ($.02) ($.03)
Page 23
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 significant revenues from the sale of
these products. Due to the Company's present limited finances, the Company has
deferred its development efforts for its products, although development of its
therapeutic neurocompounds is progressing with the Company's collaborative
partners, the Company is continuing to sell its TpP diagnostic kit through its
distributors and the Company is continuing contract research work with its
Antigen-Free Technology.
On June 29, 2001, ABS completed the sale of the assets of its wholly
owned subsidiary, Stellar Bio Systems, Inc. ("Stellar") for a $1.2 million
upfront cash payment at closing plus up to a total of $540,000 payable quarterly
over the next three years, based on revenues of a portion of Stellar's business
sold. Under the terms of the sale, the buyer of Stellar is to continue contract
manufacturing of ABS' Thrombus Precursor Protein (TpP(TM)) ELISA diagnostic test
kit for the Company. The Company recorded a loss on the sale of $288,000, which
included the write-off of $705,000 of unamortized goodwill related to the
Company's purchase of Stellar in 1998. Any future receipts (which aggregated
$32,000 through December 31, 2001) will be recorded as revenue. The Company had
acquired Stellar, a manufacturer and distributor of in vitro diagnostic products
and research reagents, in 1998 for $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 based upon Stellar's sales levels over a three year
period. The contingent payments aggregated $320,000, which were paid in an
aggregate of 378,896 shares of the Class A Common Stock (valued at their market
value when earned). (See Note 5 and 6 to the Consolidated Financial Statements.)
On November 9, 2001, the Company and Abbott Laboratories ("Abbott")
discontinued the exclusive worldwide license the Company had granted Abbott on
January 27, 2000 for the Company's ABS-103 neurocompound. In consideration for
the license, Abbott had paid ABS an initial non-refundable license fee of
$500,000 and had agreed to pay milestone payments depending upon successfully
reaching development milestones plus customary royalties on commercial sales. No
milestone payments were made. In addition, Abbott purchased 2,782,931 shares of
Class A Common Stock for $1.5 million. (See Note 9 to the Consolidated Financial
Statements.) In connection with the termination of the license, Abbott returned
all rights under the license agreement, with no further monetary obligations by
either party. ABS is free to license this compound to other companies and has
begun contacting appropriate partners.
On August 28, 2001, ABS entered into a financing transaction with
Biotechnology Value Fund ("BVF"), in which the Company sold 3,333 shares of
Series B Convertible Preferred Stock and warrants to purchase 3,333,000 shares
of Class A Common Stock to BVF for an aggregate purchase price of $2,050,000.
Previously, on February 3, 2000, ABS sold 6,000 and 1,000 shares of Series A
Preferred Stock and warrants to purchase 6,000,000 and 1,000,000 shares of Class
A Common Stock to BVF and the Company's Chairman, Alfred J. Roach, for $3.0
million and $500,000, respectively. (See Note 9 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 in 1990, (ii) the exercise of the Class A and Class B Warrants issued
in the initial public offering, (iii) private placements of Convertible
Debentures, Series A and Series B Convertible Preferred Stock and Class A Common
Stock, (iv) the exercise of stock options and warrants, (v) capital
Page 24
contributions to ABS by its CEO and Chairman of the Board, (vi) initial license
fee payments and fees from collaborative contract services, (vii) the sale of
Stellar's business and (viii) the income on funds invested in bank deposits,
United States Treasury bills and notes and other high grade liquid investments.
As of December 31, 2001, ABS, had working capital of $384,000,
compared to $1,377,000 at December 31, 2000. The Company had cash and cash
equivalents of $672,000 at December 31, 2001 and $150,000 at March 8, 2002,
compared to $1,194,000 at December 31, 2000. In January 2002, the Company
implemented a cash conservation program, whereby most employees and all officers
deferred a portion of their salaries and certain consultants have deferred their
compensation. As a result of the Company's continuing to incur cash expenses in
excess of cash receipts, the Company requires the receipt of additional
licensing fees or additional financing during the next few months. The
uncertainties involved in the receipt of additional licensing fees or receipt of
additional financing, many of which are outside the control of the Company raise
substantial doubt as to the Company's ability to continue as a going concern.
Therefore, 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 continue its research and product development in the
neurobiology and monoclonal antibody programs and in the development and
commercialization of TpP, including FDA approval process relating to additional
510(k) filings, the Company will need to incur substantial expenditures. (Also
see Contractual Obligations on page 26.)
To address its need for additional working capital, ABS is actively
seeking to license certain of its products, particularly its TpP, ABS-103
neurobiology compound and the anthrax and smallpox vaccines. If it is successful
in licensing some of its products, the licensees might provide additional
funding or perform additional testing necessary to obtain regulatory approvals
or provide clinical, manufacturing and marketing expertise which could lead to
revenue for the Company. The Company is also continuing its efforts on
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 is seeking financing from institutional
investors and/or financing agents. However, in the current economic environment,
financing has become more difficult to obtain, and there is no assurance 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, 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 2001, the Company's cash and cash equivalents
decreased by $522,000 to $672,000, primarily due to cash used in operating
activities ($3,314,000), partially offset by cash provided by financing
activities ($1,864,000) and cash provided by investing activities ($928,000).
Operating activities used $3,314,000 of cash in 2001. While the Company reported
a loss of $4,290,000 for the year, $864,000 of expenses were non-cash charges,
reducing the cash loss to $3,426,000. Changes in operating assets and
liabilities provided cash of $112,000, principally due to an increase in
accounts payable and accrued expenses ($219,000), decreases in other current
assets ($62,000) and other assets ($16,000) offset, in part, by increases
in accounts receivable ($112,000) and inventory levels ($73,000). Cash
provided from investing activities was derived from the sale of the Stellar
business ($1,232,000) and the sale of fixed assets ($6,000) offset, in part, by
payments for patent costs ($303,000) and the purchase of equipment ($7,000).
Financing activities provided $1,864,000 as a result of the cash
proceeds from the sale of Series B Convertible Preferred Stock and warrants to
BVF discussed above ($2,050,000) and the exercise of stock options ($19,000),
partially offset by payments under capital lease obligations and of notes
payable ($205,000). The private placement to BVF included warrants issued by the
Company as part of the total consideration of $2,050,000. The warrants had
non-cash fair value, determined by using an option-pricing model, of $891,000,
which is treated, for financial reporting purposes, as a non-cash preferred
stock dividend.
Page 25
At December 31, 2001, ABS had net operating loss carryforwards of
approximately $67,000,000 for income tax purposes. The net operating loss
carryforwards will expire in varying amounts through 2021. In addition, ABS has
approximately $1,300,000 of available research and development tax credits to
offset future taxes. These credits expire through 2021. In accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," ABS has recorded a valuation allowance of $68,300,00 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, 2001, $4,900,000 of net operating losses is no
longer subject to this limitation.
Contractual Obligations
Our contractual obligations are as follows:
Due by Period
-----------------------------------------------------
Total 2002 2003 2004 2005
----- ---- ---- ---- ----
(in thousands)
Capitalized Leases (1) $ 85.2 $ 28.5 $ 28.5 $ 24.1 $ 4.1
Operating Leases $ 35.6 $ - 0 - $ - 0 - $ - 0 - $ - 0 -
Preferred Stock Liquidation
Preference (2) $ 5,500.0
- ----------------
(1) Includes interest component.
(2) Payable as a preference on the Company's Series A and Series B
Convertible Preferred Stock if and when the Company were to liquidate.
Of this amount, Series A Preferred Stock having a liquidation preference
of $500,000 is held by Alfred J. Roach, Chairman of the Board of the
Company, who acquired the shares as an inducement to, and on the same
term as, BVF which acquired the remaining Series A Convertible Preferred
Stock (having a liquidation preference of $3,500,000) and all shares of
Series B Convertible Preferred Stock (having a liquidation preference of
$2,000,000). The shares were sold by the Company to BVF and Mr. Roach at
their liquidation preferences. On January 15, 2002, BVF converted 500
shares of Series A Preferred Stock into 500,000 shares of Class A
Common Stock.
Except for one year obligations under research and development agreements
(which are subject to renewal by mutual agreement) and the operating leases and
preferences payable to the holders of Series A and Series B Convertible
Preferred Stock reflected in the foregoing table, we have no off-balance sheet
contractual obligations. The Company has not purchased or entered into interest
rate swaps or future, forward, option or other instruments designed to hedge
against changes in interest rates, the price of commodities or the value of
foreign currencies. ABS does not believe it has any material exposure to market
rights associated with changes in interest rates, commodity prices or foreign
currencies.
Results of Operations
ABS has not generated significant revenues from the sale of any
products. Revenues from inception through December 31, 2001 of $7,313,000 are
attributable to nonrefundable initial license fees and collaborative research
Page 26
agreements, sales of the Company's TpP and FiF and, from April 1998 through its
sale on June 29, 2001, sales of Stellar products. As a result of ABS'
substantial start-up expenses and minimal revenues, ABS had an accumulated
deficit of $73,720,000 as of December 31, 2001.
ABS initiated its marketing efforts for TpP and FiF in the microtiter
plate format in November 1997. TpP kits have been marketed through European,
Middle East, Asian and United States distributors as well as direct sales to
specialty laboratories and research hospitals. ABS expects that its efforts in
2002 will be directed toward entering into license agreements for its ABS-103
neurobiology compound, TpP, and the anthrax and smallpox vaccines, adding new
distributors and specialty labs for TpP and expanding contract services for its
Antigen Free Technology. In March 2001, ABS entered into an agreement with
Biosite Diagnostics to validate the TpP marker and potentially use it with their
rapid quantitative testing platform. At this time Bringham and Women's Hospital
in Boston, Massachusetts is completing the data analysis on 2,000 plus patient
samples for MI, angina and unstable angina. Upon completion of the validation
study, Biosite may decide to develop TpP on its platform which could produce
license fee payments, purchases of antibodies from ABS and later royalties from
the sale of product. ABS does not have any performance obligations under this
agreement. In order to market the product, the licensee will be required to file
for the appropriate governmental clearances. ABS has a sufficient quantity of
antibodies to initially supply this potential licensee.
Comparison of Years Ended December 31, 2001 and 2000
ABS' net loss for the year ended December 31, 2001 was $4,290,000
compared to $3,775,000 for the year ended December 31, 2000. The increase in the
loss was primarily the result of lower revenues of $1,355,000, the loss on the
sale of the Stellar business and reduced investment income, partially offset by
reduced research and development and selling, general and administrative
expenses.
Sales during 2001 of $860,000 represented a decreased of $769,000
from 2000. The decrease was primarily due to the sale of Stellar on June 29,
2001. Sales of Stellar included in the Company's results were $816,000 in 2001
compared to $1,579,000 in 2000. Royalties and license fees decreased $465,000
due primarily to the absence in the 2001 period of a $500,000 license fee that
the Company received in the 2000 period. Collaborative agreements revenue
decreased by $121,000 due to a decrease in research contracts.
Cost of sales decreased $303,000 during 2001 from 2000 resulting
primarily from the decreased sales. Cost of sales as a percentage of sales
decreased from 38% during 2000 compared to 37% during 2001.
Research and development expenses decreased $339,000 from $1,326,000
in 2000 to $987,000 in 2001 as the Company reduced personnel costs, costs
associated with TpP development program and consultant costs offset, in part, by
an increase in costs to expand its neurobiology research program.
Selling, general and administrative expenses decreased $666,000 from
$4,241,000 in 2000 to $3,575,000 in 2001 as a result of the inclusion of these
costs of Stellar for six months in 2001 compared to twelve months in 2000,
reduced personnel costs, a decrease in investor relations costs and reduced
amortization of warrant values, partially offset by an increase in professional
service costs associated with the sale of the Stellar business and financing
activities.
Interest expense increased by $8,000 from $19,000 in 2000 to $27,000
in 2001, resulting primarily from higher average balances of notes payable and
capital lease obligations outstanding during the course of 2001.
Investment income decreased $116,000, from $140,000 in 2000 to
$24,000 in 2001, as a result of lower average cash balances.
Loss on sale of business of $288,000 relates to the sale of the
Stellar business as described in Note 5 of the Consolidated Financial
Statements.
Page 27
Equity in loss of joint venture of $62,000 relates to the preparation
and market launch of the Traditional Chinese Medicine product line of American
Healing Technologies, Inc., a joint venture in which the Company had a 50%
interest. See Note 10 of the Notes to Consolidated Financial Statements. In
February 2002, the Company converted its 50% ownership interest into a
convertible note. Therefore ABS will not record any equity in the earnings of
AHT subsequent to February 2002.
The non-cash preferred stock dividend of $891,000 in fiscal 2001
(which increased the loss attributable to common stockholders, but not the
Company's net loss) relates to the fair value of warrants issued in connection
with the August 2001 private placement to BVF discussed above, determined by
using an option-pricing model. See Note 9 of the Notes to Consolidated Financial
Statements for a more detailed description of this transaction.
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 research
and development and selling, general and administrative expenses and increased
investment income.
Sales during 2000 of $1,629,000 increased $268,000, or 20%, over
1999. Sales of Stellar products increased 20% and sales of TpP remained flat.
Royalties and license fees increased $502,000 due primarily to the license fee
received in connection with the Abbott agreement. Collaborative agreement
revenues increased by $75,000 due to an increase in research contracts.
Cost of sales increased $19,000 during 2000 over 1999 resulting from
the increase in sales. Cost of sales as a percentage of sales decreased from 44%
in 1999 to 38% in 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 the cost saving
program implemented during 1999, as well as cost savings from the consolidation
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
during 1999 that continued throughout fiscal 2000 and a decrease in travel and
meeting costs offset, in part, by increased professional service costs relating
to the Abbott license agreement and other contracts.
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 the warrants issued in connection with a private placement with BVF and Mr.
Roach, determined by using an option-pricing model. See Note 9 of the Notes to
Consolidated Financial Statements for a more detailed description of this
transaction.
Critical Accounting Policies And Judgmental Matters
Accounting policies whose application may have a significant effect on the
reported results of operations and financial position of ABS, and that can
require judgments by management that can affect their application, include SFAS
No. 5 - Accounting for Contingencies, and SFAS No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS No. 5 requires management judgments regarding the probability and estimated
amount of possible future contingent liabilities, including legal matters (see
Note 13 - Commitments and Contingent Liabilities). SFAS No. 121 requires
Page 28
judgments regarding future operating or disposition plans for marginally
performing assets and estimates of expected realizable values for capitalized
patent costs. The application of both of these policies can affect the amount
and timing of charges to operating results.
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 changes in interest rates, commodity prices or
foreign currencies.
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.
Page 29
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are:
Name Position
Alfred J. Roach Chairman of the Board, Chief Executive Officer and
Director
Josef C. Schoell President, Chief Operating Officer, Chief
Financial Officer and Director
James H. McLinden Senior Vice President and Chief Scientific Officer
Timothy J. Roach Treasurer, Secretary and Director
Ellena M. Byrne Director
Joseph M. Danis Director
Joseph C. Hogan Director
Alfred J. Roach, 86, has been Chairman of the Board of Directors of the
Company since its organization in September 1983. From September 1983 until
November 1998 and since January 2001 Mr. Roach has also served as the Company's
Chief Executive Officer. Mr. Roach has served as Chairman of the Board and/or
President of TII Industries, Inc. ("TII"), a corporation engaged in
manufacturing and marketing telecommunications products, and its predecessor
since its founding in 1964. Mr. Roach devotes a majority of his time to the
business of the Company.
Josef C. Schoell, 51, has been President and Chief Operating Officer and a
member of the Board of Directors of the Company since January 2001. He has also
served as the Company's Chief Financial Officer since July 1995. From July 1995
until January 2001 he served as Vice President-Finance of the Company. Mr.
Schoell joined the Company in 1992 as Controller. From 1988 until joining ABS,
Mr. Schoell was an independent consultant providing financial accounting and
computer services. From 1978 until 1988, Mr. Schoell served in various financial
and accounting positions with JP Stevens. Mr. Schoell is a graduate of New York
University Stern School of Business, is a Certified Public Accountant in New
York State and a member of the New York State Society of Certified Public
Accountants, American Institute of Certified Public Accountants and Financial
Executives International.
James H. McLinden, Ph.D., 52, has been Senior Vice President and Chief
Scientific Officer of the Company since January 2001. From November 1991 until
January 2001, he served as Vice President, Molecular Biology of the Company and,
from January 1987 to November 1991, as Director of Molecular Biology of the
Company.
Timothy J. Roach, 54, has been Treasurer, Secretary and a Director of the
Company since September 1983. He has also been affiliated with TII since 1974,
serving as its President since July 1980, Chief Operating Officer since May
1987, Vice Chairman of the Board since October 1993, Chief Executive Officer
since January 1995 and a director since January 1978. Mr. Roach devotes such
time as is necessary to the business of the Company to discharge his duties as
Treasurer, Secretary and a director. Timothy J. Roach is the son of Alfred J.
Roach.
Ellena M. Byrne, 51, has been a Director of the Company since March 1995
and was Executive Vice President from March 1995 through September 2001. From
January 1986 until December 1991, Ms. Byrne served as Vice
President-Administration of the Company and, from December 1991 until March
1995, Ms. Byrne served in various capacities with the Company, including
Director of Operations for Europe and Asia.
Joseph M. Danis, 56, has been a Director of, and a business development
consultant to, the Company since January 2001. Mr. Danis has been President of
Danis Associates since April 1996, a consulting firm he founded that focuses on
technology transfers, structuring ventures and all phases of due diligence for
pharmaceutical and biotechnology companies. From January 1996 to March 1996, Mr.
Danis served as Executive Director of Cultor Food Science, Inc. From 1986 to
Page 30
January 1996, he served in various capacities with Pfizer, Inc., including
Director of Technical Service and Licensing and Director, Acquisitions and
Licensing.
Joseph C. Hogan, Ph.D., 79, has been a Director of the Company since
December 1983. Dr. Hogan served as Dean of the College of Engineering of
the University of Notre Dame from 1967 until 1981, following which he
performed various services for the University of Notre Dame until 1985,
where he remains Dean Emeritus. From 1985 until his retirement in 1987, Dr.
Hogan was Director of Engineering Research and Resource Development at
Georgia Institute of Technology ("Georgia Tech"). Dr. Hogan is a director
of TII.
Directors serve until the next Annual Meeting of the Stockholders of the
Company following their election and until their respective successors are
elected and qualified.
Each executive officer is scheduled to hold office until the Annual
Meeting of Directors which is scheduled to be held after each Annual Meeting of
Stockholders. Any executive officer may be removed by the Board of Directors at
any time either with or without cause.
There are no understandings between any director or executive officer and
any other person pursuant to which any director or executive officer was elected
as such. Ms. Byrne was party to a consultant agreement with the Company, which
was terminated subsequent to year end, effective January 31, 2002.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act requires the Company's
executive officers and directors, and persons who beneficially own more than 10%
of the Company's Common Stock, to file initial reports of ownership, and reports
of changes of ownership, of the Company's equity securities with the Securities
and Exchange Commission and furnish copies of those reports to the Company.
Based solely on a review of copies of the reports furnished to the Company, or
written representation that no reports were required, the Company believes that
all reports required to be filed by such persons with respect to the Company's
year ended December 31, 2001 were timely filed.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company during
2001, 2000 and 1999 of the Company's chief executive officer and the only other
executive officer of the Company whose annual cash compensation for 2001
exceeded $100,000:
Annual Compensation Long-Term
--------------------------- Compensation All Other
Name and Principal Position Year Salary ($) Bonus ($) Options Compensation
- ------------------------------ ------ ------------ ----------- -------------- ---------------
Alfred J. Roach,
Chairman of the Board (1) 2001 250,000 ---- 1,075,000 ----
2000 250,000 ---- 100,000 ----
1999 250,000 (3) ---- 300,000 ----
Josef C. Schoell, President, 2001 194,000 ---- 500,000 ----
Chief Operating Officer 2000 120,000 ---- 50,000 ----
and Chief Financial 1999 120,000 (4) ---- 200,000 ----
Officer (2)
- --------------------------
(1) Mr. Roach has also served as the Company's Chief Executive
Officer in 2001.
(2) Mr. Schoell was appointed President and Chief Operating Officer of the
Company in January 2001. Prior thereto, he served as Vice
President-Finance and Chief Financial Officer.
(3) Includes $115,000 that was deferred during 1999 at the
election of Mr. Roach.
(4) Includes $10,000 that was deferred during 1999 at the election of Mr.
Schoell.
Page 31
Options Granted in Last Fiscal Year
The following table contains information concerning options to purchase
shares of the Company's capital stock granted by the Company during the year
ended December 31, 2001 to the executive officers named in the Summary
Compensation Table. No stock appreciation rights have been granted by the
Company.
Potential Realizable
Value At Assumed
Percent of Annual Rates of Stock
Number of Total Price Appreciation for
Shares Options Term (5)
Underlying Granted to Exercise ------------------------
Options Employees in Price Expiration
Name Granted Fiscal Year Per Share Date 5% 10%
- ------------------- ------------- -------------- ---------- ----------- ---------- -----------
Alfred J. Roach 350,000 (1) 12% $ .65 (3) 04/05/2006 $ 62,854 $ 138,891
725,000 (1) 25% .70 (4) 05/15/2011 319,164 808,824
Josef C. Schoell 300,000 (2) 10% .69 (4) 01/11/2011 129,804 328,948
50,000 (1) 2% .59 (4) 04/05/2011 18,552 47,015
150,000 (1) 5% .70 (4) 05/15/2011 66,034 167,343
- ---------------
(1) Exercisable as to 50% of the number of shares of Class A Common Stock
underlying the option during each six months commencing six months after
the date of grant, on a cumulative basis.
(2) Exercisable as to 25% of the number shares of Class A Common Stock
underlying the option during each six months commencing six months after
the date of grant, on a cumulative basis.
(3) The exercise price of the options granted was 110% of the market value
of the Class A Common Stock on the date of grant.
(4) The exercise price of the options granted was 100% of the market value
of the Class A Common Stock on the date of grant
(5) These are hypothetical values using assumed 5% and 10% compound growth
rates prescribed by Securities and Exchange Commission rules and are not
intended to forecast possible future appreciation, if any, in the market
price of the Company's Class A Common Stock.
Option Exercises In Last Fiscal Year And Year-End Values
No options to purchase shares of the Company's capital stock were
exercised during 2001 by the executive officers named in the Summary
Compensation Table. The following table contains information concerning the
number of shares of Class A Common Stock underlying unexercised options held at
December 31, 2001 by the executive officers named in the Summary Compensation
Table.
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Options at Fiscal
Year-End (#) Year-End ($)
(Exercisable / (Exercisable /
Name Unexercisable) Unexercisable) (1)
- --------------------- ----------------------- --------------------------
Alfred J. Roach 1,262,500 / 612,500 $7,500 / $ -
Josef C. Schoell 492,500 / 287,500 $3,500 / $ -
- ---------------
(1) Represents the closing price of the Company's Class A Common Stock on
the Nasdaq SmallCap Market on November 23, 2001 ($.35), the last full
day of trading in the Company's Class A Common Stock in 2001, less the
exercise price of each option.
Page 32
Employment Agreements
The Company does not have any employment agreements.
Remuneration of Directors
Each non-employee director receives a fee of $1,000 for each meeting of
the Board of Directors attended by that director in person and not
telephonically. Each director serving on the Audit Committee receives a fee of
$600 for each meeting of the committee attended by that director in person and
not telephonically. All directors are reimbursed for travel expenses incurred in
attending Board and committee meetings.
The Company's 1993 Non-Employee Director Stock Option Plan, as amended
March 21, 2001 (which amendment was approved by stockholders at the Company's
2001 Annual Meeting of Stockholders), provides for the automatic grant of an
option to purchase 25,000 shares of the Company's Class A Common Stock to each
non-employee director holding office immediately after each annual meeting of
stockholders. The exercise price for each option is equal to the fair market
value of the Company's Class A Common Stock on the date of grant. All options
have a term of ten years and are immediately exercisable.
Danis Associates, of which Joseph M. Danis is President and principal,
rendered consulting services during 2001 in connection with the licensing of a
product, for which it received fees of $56,000.
In October 2001, Ellena M. Byrne became a consultant to, instead of an
employee of, the Company. Consulting fees paid to Ms. Byrne in 2001 were
$9,000. The consultant agreement was terminated effective January 31, 2002.
Item 12. Security Holdings of Certain Stockholders and Management
The following table sets forth information at March 8, 2002 with respect
to the beneficial ownership of the Company's Class A Common Stock and Class B
Common Stock by (i) each person known by the Company to beneficially own more
than 5% of the outstanding shares of Class A Common Stock or Class B Common
Stock, (ii) each director of the Company, (iii) each current executive officer
named in the Summary Compensation Table in Item 11 of this Report and (iv) all
executive officers and directors of the Company as a group. Each share of Class
A Common Stock is entitled to one vote per share while each share of Class B
Common Stock is entitled to ten votes per share. The Company understands that,
except as noted below, each beneficial owner has sole voting and investment
power with respect to all shares attributable to such owner.
Class A Common Stock (1) Class B Common Stock
--------------------------------- ----------------------------
Percent No. of Percent
Beneficial Owners No. of Shares of Class Shares of Class
- ----------------------------------- ------------------- ---------- ------------- -----------
Directors and Officers:
Alfred J. Roach 10,934,750 (2) 22.6% 3,000,000 100%
Josef C. Schoell 628,000 (3)(4) 1.5% --- 0
Timothy J. Roach 925,000 (3) 2.2% --- 0
Ellena M. Byrne 319,250 (3)(5) * --- 0
Joseph M. Danis 38,750 (3) * --- 0
Joseph C. Hogan 95,000 (3) * --- 0
All executive officers and 13,315,750 (6) 26.3% 3,000,000 100%
directors as a group (7 persons,
including the foregoing)
Other 5% Owners:
BVF Partners, L.P. 18,166,000 (7) 30.2% --- 0
Abbott Laboratories 2,782,931 (8) 6.6% --- 0
- ---------------
(1) Asterisk indicates less than one percent. Shares of Class A Common
Stock subject to issuance upon conversion of Class B Common Stock or of
Page 33
Series A and Series B Preferred Stock into Class A Common Stock and upon
exercise of options and warrants that were exercisable on, or become
exercisable within 60 days after, March 8, 2002 are considered owned by
the holder thereof and outstanding for purposes of computing the
percentage of outstanding Class A Common Stock that would be owned by
such person, but (except for the computation of beneficial ownership by
all executive officers and directors as a group) are not considered
outstanding for purposes of computing the percentage of outstanding
Class A Commons Stock owned by any other person.
(2) The address of Mr. Roach is c/o American Biogenetic Sciences, Inc., 1375
Akron Street, Copiague, NY 11726. Beneficial ownership of Class A Common
Stock includes 3,000,000 shares of Class A Common Stock issuable upon
conversion of the same number of shares of Class B Common Stock on a
share for share basis, 1,000,000 shares of Class A Common Stock issuable
upon conversion of 1,000 shares of Series A Preferred Stock, 1,000,000
shares of Class A Common Stock subject to outstanding warrants and
1,512,500 shares of Class A Common Stock subject to outstanding options.
(3) Includes shares of Class A Common Stock subject to options as follows:
for Josef C. Schoell, 555,000; for Timothy J. Roach, 915,000; for
Ellena Byrne, 210,000; for Joseph M. Danis, 38,750; and for Joseph
C. Hogan, 75,000.
(4) Includes 200 shares owned by his wife and 2,000 shares owned by his
daughters. The inclusion of these amounts should not be construed as an
admission that Mr. Schoell is the beneficial owner of these shares.
(5) Includes 7,500 shares owned, and 21,250 shares subject to options held,
by her husband. The inclusion of these amounts should not be construed
as an admission that Ms. Byrne is the beneficial owner of these shares.
(6) Includes 3,000,000 shares of Class A Common Stock issuable upon
conversion of the same number of shares of Class B Common Stock,
1,000,000 shares of Class A Common Stock issuable upon conversion of
1,000 shares of Series A Preferred Stock, 1,000,000 shares of Class A
Common Stock subject to outstanding warrants, and 3,687,500 shares of
Class A Common Stock subject to outstanding options.
(7) Beneficial ownership of Class A Common Stock consists of 8,833,000
shares issuable upon conversion of 8,833 shares of Series A and B
Convertible Preferred Stock and 9,333,000 shares of Class A Common Stock
subject to outstanding warrants. These securities are held by certain
investment partnerships for which BVF Partners, L.P. serves as the
general partner and BVF, Inc. (of which Mark Lampert is sole owner) acts
as investment adviser, sharing the power to vote and dispose the shares
with such investment partnerships. The address of BVF Partners, L.P. is
227 West Monroe Street, Suite 4800, Chicago, IL 60606.
(8) The address of Abbott Laboratories is 100 Abbott Park Road, Abbott
Park, IL 60064.
Item 13. Certain Relationships and Related Transactions
None
Page 34
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-9
Notes to Consolidated Financial Statements F-10 - F-26
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.
(b) Exhibits
Exhibit Description
No.
- ---------------------------------------------------------------------------
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.
Page 35
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 reference to Exhibit 4 to ABS' Registration
Statement on Form S-3, file number 333-36116, filed with the
Commission on May 2, 2000.
4.5(a) Securities Purchase Agreement, dated as of August 23, 2001, by
and among ABS, Biotechnology Value Fund, L.P., Biotechnology
Value Fund II, L.P. Investment 10, L.L.C. and BVF Investments,
L.L.C. Incorporated herein by reference to Exhibit 4.1 to
ABS' Current Report on Form 8-K filed on September 18, 2001,
File No. 0-19041.
4.5(b) Registration Rights Agreement, dated as of August 28, 2001, by
and among ABS, Alfred J. Roach, Biotechnology Value Fund,
L.P., Biotechnology Value Fund II, L.P. Investment 10, L.L.C.
and BVF Investments, L.L.C. Incorporated herein by reference
to Exhibit 4.3 to ABS' Current Report on Form 8-K filed on
September 18, 2001, File No. 0-19041.
4.5(c) Security Agreement, dated August 28, 2001, by and among ABS,
Biotechnology Value Fund, L.P., Biotechnology Value Fund II,
L.P. Investment 10, L.L.C. and BVF Investments, L.L.C.
Incorporated herein by reference to Exhibit 4.7 to ABS'
Current Report on Form 8-K filed on September 18, 2001, File
No. 0-19041.
10.1+ Memorandum of Understanding dated January 4, 2001 terminating
Employment Agreement between ABS and Mr. John S. North.
Incorporated herein by reference to Exhibit 10.1(c) to ABS'
Form 10-K for the fiscal year ended December 31, 2000, File
No. 0-19041.
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 as amended.
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 on January 24, 1992, File No. 0- 19041.
Page 36
10.4 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 (date of earliest event reported), File No. 0-19041.
10.5 Asset Purchase Agreement, dated June 29, 2001, by and among
Stellar Bio Systems, Inc., ABS, PanBio InDx Inc., and PanBio
Limited. Incorporated herein by reference to Exhibit 2.1 to
ABS' Current Report on Form 8-K filed on July 13, 2001, File
No. 0-19041.
10.6 Exclusive Distributor Agreement effective as of November 30, 2001
between ABS and the All - Russian Research Institute of Veterinary
Virology and Microbiology. Incorporated herein by reference to
Exhibit 10.1 to ABS' Current Report on Form 8-K filed on January 9,
2002, File No. 0-19041.
10.7 Protocol of Mutual Understanding and Support dated December 13, 2001
between the Ministry of Health of the Russian Federation (the
Department) and ABS. Incorporated herein by reference to Exhibit 10.2
to ABS' Current Report on Form 8-K filed on January 9, 2002, File No.
0-19041.
10.8 Protocol of Mutual Understanding and Support dated December 13, 2001
between the Ministry of Health of the Russian Federation and ABS.
Incorporated herein by reference to Exhibit 10.3 to ABS' Current
Report on Form 8-K filed on January 9, 2002, File No. 0-19041.
10.9(a) Agreement on Joint Actions, dated January 14, 2002, between ABS and
the Association. Incorporated herein by reference to Exhibit 10.1 to
ABS' Current Report on Form 8-K filed on January 23, 2002, File No.
0-19041.
10.9(b)* Amendment No. 1 dated March 11, 2002 to the Agreement on Joint
Actions dated January 14, 2002, between ABS and the Association
10.10 Exclusive Distributor Agreement, dated January 15, 2002, between ABS
and the Manufacturer. Incorporated herein by reference to Exhibit
10.2 to ABS' Current Report on Form 8-K filed on January 23, 2002,
File No. 0-19041.
21* List of Subsidiaries.
23* Consent of Independent Public Accountants.
99* Letter dated March 26, 2002 from the Company to the Securities and
Exchange Commission regarding the audit of the Company's financial
statements as at and for the year ended December 31, 2001 by Arthur
Andersen LLP
* 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.
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2001.
Page 37
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 26, 2002 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 26, 2002 /s/ Alfred J. Roach
- --------------------- ------------------------------------
(Date) Alfred J. Roach, Chairman of the
Board of Directors and Chief Executive
Officer
March 26, 2002 /s/ Josef C. Schoell
- --------------------- ------------------------------------
(Date) Josef C. Schoell, President, Chief
Operating Officer,
Chief Financial Officer and Director
March 26, 2002 /s/ Timothy J. Roach
- --------------------- ------------------------------------
(Date) Timothy J. Roach, Secretary,
Treasurer and Director
March 26, 2002 /s/ Ellena M. Byrne
- --------------------- ------------------------------------
(Date) Ellena M. Byrne, Director
March 26, 2002 /s/ Joseph C. Hogan
- --------------------- ------------------------------------
(Date) Joseph C. Hogan, Director
March 26, 2002 /s/ Joseph M. Danis
- --------------------- ------------------------------------
(Date) Joseph M. Danis, Director
Page 38
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-9
Notes to Consolidated Financial Statements F-10 - F-26
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
Page 39
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, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001 and for the period from
inception (September 1, 1983) to December 31, 2001. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 and for the period from inception to December
31, 2001 in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial statements for the year ended
December 31, 2001 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.
/s/ Arthur Andersen LLP
Melville, New York
February 22, 2002
F-2
Page 40
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED BALANCE SHEETS
December 31,
2001 2000
------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 672,000 $ 1,194,000
Accounts receivable 25,000 146,000
Inventories 330,000 531,000
Other current assets 12,000 74,000
------------- --------------
Total current assets 1,039,000 1,945,000
------------- --------------
Fixed assets, net 95,000 477,000
Patent costs, net of accumulated amortization of $750,000 and
$633,000, respectively 1,975,000 1,967,000
Intangible assets, net - 599,000
Other assets 82,000 98,000
------------- --------------
$ 3,191,000 $ 5,086,000
============= ==============
Liabilities And Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 639,000 $ 368,000
Current portion of capital lease obligation 16,000 16,000
Current portion of notes payable - 184,000
------------- --------------
Total current liabilities 655,000 568,000
------------- --------------
Long Term Liabilities:
Notes payable, less current portion - 7,000
Capital lease obligation, less current portion 57,000 71,000
------------- --------------
Total liabilities 712,000 646,000
------------- --------------
Commitments (Notes 1, 9, 12 and 13)
Stockholders' Equity:
Series A & B convertible preferred stock, par value $.001 per share;
10,000,000 shares authorized; 10,333 and 7,000 shares issued and
outstanding, respectively (liquidation preference of $5,500,000) - -
Class A common stock, par value $.001 per share; 150,000,000 shares
authorized; 41,425,909 and 41,027,255 shares issued and outstanding,
respectively 41,000 41,000
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 76,224,000 72,935,000
Deficit accumulated during the development stage (73,720,000) (68,539,000)
Deferred stock compensation (69,000) -
------------- --------------
Total stockholders' equity 2,479,000 4,440,000
------------- --------------
$ 3,191,000 $ 5,086,000
============= ==============
The accompanying notes are an integral part of
these consolidated balance sheets.
F-3
Page 41
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period From
Inception
Year Ended December 31, (September 1, 1983)
---------------------------------------------------- Through December
2001 2000 1999 31, 2001
--------------- -------------- --------------- -------------------
Revenues:
Sales $ 860,000 $ 1,629,000 $ 1,361,000 $ 5,197,000
Royalties / license fees 37,000 502,000 - 1,539,000
Collaborative agreements 36,000 157,000 82,000 577,000
--------------- ------------- -------------- ----------------
933,000 2,288,000 1,443,000 7,313,000
Costs and Expenses:
Cost of sales 314,000 617,000 598,000 2,026,000
Research and development 987,000 1,326,000 1,725,000 32,844,000
Selling, general and administrative 3,575,000 4,241,000 4,488,000 41,397,000
Facility consolidation cost - - - 252,000
--------------- ------------- -------------- ----------------
Loss from operations (3,943,000) (3,896,000) (5,368,000) (69,206,000)
--------------- ------------- -------------- ----------------
Other Income (Expense):
Interest expense (27,000) (19,000) (16,000) (4,418,000)
Net gain on sale of fixed assets 6,000 - 4,000 17,000
Net loss on sale of business (288,000) - - (288,000)
Investment income, net 24,000 140,000 29,000 4,718,000
Equity in loss of joint venture (62,000) - - (62,000)
--------------- ------------- -------------- ----------------
Loss before extraordinary charge (4,290,000) (3,775,000) (5,351,000) (69,239,000)
Extraordinary charge for early retirement - - - (1,140,000)
of debentures, net
--------------- ------------- -------------- ----------------
Net loss $ (4,290,000) $ (3,775,000) $ (5,351,000) $ (70,379,000)
Non-cash preferred stock dividend (891,000) (2,450,000) - (3,341,000)
--------------- ------------- -------------- ----------------
Net loss attributable to common $ (5,181,000) $ (6,225,000) $ (5,351,000) $ (73,720,000)
stockholders
=============== ============= ============== ================
Per Share Information (Note 2):
Basic and Diluted net loss per share $ (.12) $ (.14) $ (.14)
=============== ============= ==============
Common shares used in computing per share
amounts:
Basic and Diluted 44,286,000 43,475,000 39,266,000
=============== ============= ==============
The accompanying notes are an integral part of these consolidated statements.
F-4
Page 42
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
From Inception
Year Ended December 31, (September 1,
------------------------------------------------ 1983) Through
2001 2000 1999 December 31, 2001
------------- ---------------- ------------- -----------------
Cash Flows From Operating Activities:
Net loss $ (4,290,000) $ (3,775,000) $ (5,351,000) $ (70,379,000)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 310,000 328,000 318,000 3,678,000
Net gain on sale of fixed assets (6,000) - (4,000) (17,000)
Net loss on sale of business 288,000 - - 288,000
Net (gain) on sale of marketable securities - - - (217,000)
Other noncash expenses accrued primarily for stocks,
options and warrants 111,000 325,000 502,000 2,980,000
Amortization of debt discount included in interest
expense - - - 2,160,000
Extraordinary loss on repurchase of debt - - - 1,140,000
Write-off of patent costs 99,000 - - 192,000
Equity in loss of joint venture 62,000 - - 62,000
Changes in operating assets and liabilities,
net of effect of sale of business:
(Increase) decrease in accounts receivable (112,000) 65,000 (34,000) (150,000)
(Increase) decrease in inventories (73,000) (20,000) 34,000 (446,000)
(Increase) decrease in other current assets 62,000 2,000 (36,000) (12,000)
(Increase) decrease in other assets 16,000 (22,000) 7,000 74,000
Increase (decrease) in accounts payable and accrued
expenses 219,000 (1,064,000) 840,000 971,000
Increase in interest payable to stockholder - 8,000 - 120,000
------------- ---------------- ------------- -----------------
Net cash used in operating activities (3,314,000) (4,153,000) (3,724,000) (59,556,000)
------------- ---------------- ------------- -----------------
Cash Flows From Investing Activities:
Capital expenditures (7,000) (32,000) (13,000) (2,095,000)
Proceeds from sale of fixed assets 6,000 - 4,000 28,000
Payments for patent costs and other assets (303,000) (203,000) (539,000) (2,973,000)
Proceeds from sale of business 1,232,000 - - 1,232,000
Business acquisition, net of stock issued and cash
acquired - - - (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 928,000 (235,000) (548,000) (3,710,000)
------------- ---------------- ------------- -----------------
Cash Flows From Financing Activities:
Payments to debentureholders - - - (2,246,000)
Proceeds from issuance of common stock, net 19,000 2,735,000 660,000 42,898,000
Proceeds from issuance of Series A convertible
preferred stock - 3,000,000 - 3,000,000
Proceeds from issuance of Series B convertible
preferred stock 2,050,000 - - 2,050,000
Proceeds from issuance of 5% convertible debentures, net - - - 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 (205,000) (36,000) (44,000) (355,000)
Redemption of 8% convertible debentures - - - (500,000)
Repurchase of 5% convertible debentures - - - (3,852,000)
Capital contributions from chairman - - - 1,000,000
Increase in loans payable to stockholder / affiliates 130,000 81,000 702,000 3,582,000
Repayment of loans payable to stockholder / affiliates
(remainder contributed to capital by the stockholder) (130,000) (291,000) - (1,721,000)
------------- ---------------- ------------- -----------------
Net cash provided by (used in) financing\
activities 1,864,000 5,489,000 1,318,000 63,938,000
------------- ---------------- ------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents (522,000) 1,101,000 (2,954,000) 672,000
Cash and Cash Equivalents at Beginning of Period 1,194,000 93,000 3,047,000 -
------------- ---------------- ------------- -----------------
Cash and Cash Equivalents at End of Period $ 672,000 $ 1,194,000 $ 93,000 $ 672,000
------------- ---------------- ------------- -----------------
Supplemental Disclosure of Non-cash Activities:
Capital expenditure made under capital lease obligation - $ 87,000 - $ 107,000
------------- ---------------- ------------- -----------------
Convertible debentures converted into 0, 0, 0 and
10,470,583 shares of Common Stock, respectively - - - $ 14,658,000
------------- ---------------- ------------- -----------------
Fair value of warrants or stock options issued $ 1,014,000 $ 2,792,000 - $ 4,394,000
------------- ---------------- ------------- -----------------
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
Page 43
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Per Class A Class B
Share Common Stock Common Stock
Amount Shares Dollars Shares Dollars
-------- ------------- -------------- -------------- ---------------
BALANCE, AT INCEPTION, (SEPTEMBER 1, 1983) $ $ - - $ -
Sale of common stock to Chairman for cash .33 78,000 - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1983 78,000 - - -
------------- -------------- -------------- ---------------
Sale of common stock to Chairman for cash .33 193,500 - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1984 271,500 - - -
------------- -------------- -------------- ---------------
Sale of common stock to Chairman for cash .33 276,700 1,000 - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1985 548,200 1,000 - -
--------------------------------------------------------------
Sale of common stock to Chairman for cash .33 404,820 - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1986 953,020 1,000 - -
------------- -------------- -------------- ---------------
Sale of common stock to Chairman for cash .33 48,048 - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1987 1,001,068 1,000 - -
------------- -------------- -------------- ---------------
Exchange of common stock for Class B stock (1,001,068) (1,000) 1,001,068 1,000
Sale of Class B stock to Chairman for cash .33 - - 1,998,932 2,000
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1988 - - 3,000,000 3,000
------------- -------------- -------------- ---------------
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1989 - - 3,000,000 3,000
------------- -------------- -------------- ---------------
Conversion of loans payable to stockholder into
additional paid-in capital - - - -
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 - -
Conversion of Class B stock into
Class A stock 668,500 1,000 (668,500) (1,000)
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1990 4,118,500 $4,000 2,331,500 $2,000
------------- -------------- -------------- ---------------
(Continued)
F-6
Page 44
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Per Class A Class B
Share Common Stock Common Stock
Amount Shares Dollars Shares Dollars
-------- ------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1990 $ 4,118,500 $4,000 2,331,500 $2,000
Exercise of Class A Warrants (net of $203,000
in underwriting expenses) for cash 3.00 3,449,955 3,000 - -
Exercise of Class B Warrants for cash 4.50 79,071 - - -
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 - -
Fair value of warrants issued - - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1991 8,915,276 9,000 1,481,500 1,000
------------- -------------- -------------- ---------------
Exercise of Class B Warrants (net of $701,000
in underwriting expenses) for cash 4.50 3,370,884 3,000 - -
Conversion of Class B stock
into Class A stock 106,000 - (106,000) -
Exercise of stock options 2.49 348,300 1,000 - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1992 12,740,460 13,000 1,375,500 1,000
------------- -------------- -------------- ---------------
Sale of common stock to Medeva PLC. 7.50 200,000 - - -
Exercise of stock options 2.00 32,700 - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1993 12,973,160 13,000 1,375,500 1,000
------------- -------------- -------------- ---------------
Exercise of stock options 2.16 91,250 - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1994 13,064,410 13,000 1,375,500 1,000
------------- -------------- -------------- ---------------
Conversion of 8% convertible debentures into
Class A Common Stock 1.85 354,204 - - -
Exercise of stock options 1.82 12,750 - - -
Fair value of warrants/options issued - - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1995 13,431,364 $13,000 1,375,500 $1,000
------------- -------------- -------------- ---------------
(Continued)
F-7
Page 45
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Per Class A Class B
Share Common Stock Common Stock
Amount Shares Dollars Shares Dollars
-------- ------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1995 13,431,364 $13,000 1,375,500 $1,000
Conversion of 8% convertible debentures into
Class A Common Stock 2.74 2,269,755 $2,000 - -
Exercise of stock options 2.53 569,875 1,000 - -
Fair value of warrants /options issued - - - -
Discount on 7% convertible debentures - - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1996 16,270,994 16,000 1,375,500 1,000
------------- -------------- -------------- ---------------
Conversion of 7% and 8% convertible debentures into
Class A Common Stock 2.93 2,995,006 3,000 - -
Sale of Class B Common Stock to Chairman for cash 2.23 - - 3 50,000 1,000
Exercise of stock options 2.00 27,500 - - -
Fair value of warrants issued - - - -
Class A Common Stock issued 3.12 48,117 - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1997 19,341,617 19,000 1,725,500 2,000
------------- -------------- -------------- ---------------
Conversion of 5%, 7% and 8% convertible debentures
into Class A Common Stock .32 4,851,618 5,000 - -
Sale of Class B Common Stock to Chairman for cash .37 - - 1,274,500 1,000
Exercise of stock options 1.75 4,000 - - -
Fair value of warrants issued - - - -
Class A Common Stock issued 1.06 163,915 - - -
Class A Common Stock issued for Stellar 1.76 398,406 1,000 - -
Class A Common Stock issued for Private Placement .25 10,800,000 11,000 - -
Discount on 5% convertible debentures - - - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1998 35,559,556 36,000 3,000,000 3,000
------------- -------------- -------------- ---------------
Sale of Class A Common Stock to Chairman for cash 1.13 440,000 - - -
Exercise of stock options .61 5,250 - - -
Fair value of warrants issued - - - -
Class A Common Stock issued .50 913,704 1,000 - -
Net (loss) for the period - - - -
------------- -------------- -------------- ---------------
BALANCE, DECEMBER 31, 1999 36,918,510 $37,000 3,000,000 $3,000
------------- -------------- -------------- ---------------
(Continued)
F-8
Page 46
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Per Class A Class B
Share Common Stock Common Stock
Amount Shares Dollars Shares Dollars
------- ---------- ------------ ----------- ----------
BALANCE, DECEMBER 31, 1999 $ 36,918,510 $37,000 3,000,000 $3,000
Sale of Series A Convertible Preferred Stock
(7,000 shares) - - - -
Warrants issued with the Convertible Preferred
Stock - - - -
Non-cash preferred stock dividend - - - -
Exercise of stock options and warrants .97 1,278,675 1,000 - -
Fair value of warrants issued - - - -
Class A Common Stock issued .55 2,830,070 3,000 - -
Net (loss) for the period - - - -
---------- ------------ ----------- -----------
BALANCE, DECEMBER 31, 2000 41,027,255 41,000 3,000,000 3,000
---------- ------------ ----------- -----------
Sale of Series B Convertible Preferred Stock (3,333
shares) - - - -
Warrants issued with the Convertible Preferred
Stock - - - -
Non-cash preferred stock dividend - - - -
Exercise of stock options and warrants .25 75,000 - - -
Fair value of stock options issued to consultants - - - -
Amortization of deferred stock compensation - - - -
Class A Common Stock issued .64 323,654 - - -
Net (loss) for the period - - - -
---------- ------------ ----------- -----------
BALANCE, DECEMBER 31, 2001 41,425,909 $41,000 3,000,000 $3,000
---------- ------------ ----------- -----------
(Continued)
F-9
Page 47
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Additional During the
Paid-in Development
Capital Stage Total
------------ -------------- -------------
BALANCE, AT INCEPTION, (SEPTEMBER 1, 1983) $ - $ - $ -
Sale of common stock to Chairman for cash 26,000 - 26,000
Net (loss) for the period - (25,000) (25,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1983 26,000 (25,000) 1,000
------------ -------------- -------------
Sale of common stock to Chairman for cash 65,000 - 65,000
Net (loss) for the period - (242,000) (242,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1984 91,000 (267,000) (176,000)
------------ -------------- -------------
Sale of common stock to Chairman for cash 92,000 - 93,000
Net (loss) for the period - (305,000) (305,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1985 183,000 (572,000) (388,000)
------------ -------------- -------------
Sale of common stock to Chairman for cash 134,000 - 134,000
Net (loss) for the period - (433,000) (433,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1986 317,000 (1,005,000) (687,000)
------------ -------------- -------------
Sale of common stock to Chairman for cash 16,000 - 16,000
Net (loss) for the period - (730,000) (730,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1987 333,000 (1,735,000) (1,401,000)
------------ -------------- -------------
Exchange of common stock for Class B stock - - -
Sale of Class B stock to Chairman for cash 664,000 - 666,000
Net (loss) for the period - (1,031,000) (1,031,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1988 997,000 (2,766,000) (1,766,000)
------------ -------------- -------------
Net (loss) for the period - (1,522,000) (1,522,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1989 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) 5,699,000 - 5,702,000
Conversion of Class B stock into
Class A stock - - -
Net (loss) for the period - (2,100,000) (2,100,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1990 $8,177,000 ($6,388,000) $1,795,000
------------ -------------- -------------
(Continued)
The accompanying notes are an integral part of these consolidated statements.
F-6
Page 48
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Additional During the
Paid-in Development
Capital Stage Total
------------ -------------- -------------
BALANCE, DECEMBER 31, 1990 $8,177,000 ($6,388,000) $1,795,000
Exercise of Class A Warrants (net of $203,000
in underwriting expenses) for cash 10,143,000 - 10,146,000
Exercise of Class B Warrants for cash 356,000 - 356,000
Conversion of Class B stock
into Class A stock - - -
Exercise of stock options 835,000 - 836,000
Fair value of warrants issued 900,000 - 900,000
Net (loss) for the period - (4,605,000) (4,605,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1991 20,411,000 (10,993,000) 9,428,000
------------ -------------- -------------
Exercise of Class B Warrants (net of $701,000
in underwriting expenses) for cash 14,465,000 - 14,468,000
Conversion of Class B stock
into Class A stock - - -
Exercise of stock options 865,000 - 866,000
Net (loss) for the period - (4,016,000) (4,016,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1992 35,741,000 (15,009,000) 20,746,000
------------ -------------- -------------
Sale of common stock to Medeva PLC. 1,500,000 - 1,500,000
Exercise of stock options 65,000 - 65,000
Net (loss) for the period - (6,521,000) (6,521,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1993 37,306,000 (21,530,000) 15,790,000
------------ -------------- -------------
Exercise of stock options 197,000 - 197,000
Net (loss) for the period - (7,431,000) (7,431,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1994 37,503,000 (28,961,000) 8,556,000
------------ -------------- -------------
Conversion of 8% convertible debentures into
Class A Common Stock 571,000 - 571,000
Exercise of stock options 23,000 - 23,000
Fair value of warrants/options issued 602,000 - 602,000
Net (loss) for the period - (5,607,000) (5,607,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1995 $38,699,000 ($34,568,000) $4,145,000
------------ -------------- -------------
(Continued)
The accompanying notes are an integral part of these consolidated statements.
F-7
Page 49
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Additional During the
Paid-in Development
Capital Stage Total
------------ -------------- -------------
BALANCE, DECEMBER 31, 1995 $38,699,000 ($34,568,000) $4,145,000
Conversion of 8% convertible debentures into
Class A Common Stock 5,483,000 - 5,485,000
Exercise of stock options 1,438,000 - 1,439,000
Fair value of 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 47,793,000 (42,268,000) 5,542,000
------------ -------------- -------------
Conversion of 7% and 8% convertible debentures into
Class A Common Stock 7,152,000 - 7,155,000
Sale of Class B Common Stock to Chairman for cash 778,000 - 779,000
Exercise of stock options 55,000 - 55,000
Fair value of warrants issued 149,000 - 149,000
Class A Common Stock issued 150,000 - 150,000
Net (loss) for the period - (7,147,000) (7,147,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1997 56,077,000 (49,415,000) 6,683,000
------------ -------------- -------------
Conversion of 5%, 7% and 8% convertible debentures
into Class A Common Stock 1,442,000 - 1,447,000
Sale of Class B Common Stock to Chairman for cash 465,000 - 466,000
Exercise of stock options 7,000 - 7,000
Fair value of warrants issued 205,000 - 205,000
Class A Common Stock issued 174,000 - 174,000
Class A Common Stock issued for Stellar 699,000 - 700,000
Class A Common Stock issued for Private Placement 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 62,520,000 (56,963,000) 5,596,000
------------ -------------- -------------
Sale of Class A Common Stock to Chairman for cash 495,000 - 495,000
Exercise of stock options 3,000 - 3,000
Fair value of warrants issued 376,000 - 376,000
Class A Common Stock issued 458,000 - 459,000
Net (loss) for the period - (5,351,000) (5,351,000)
------------ -------------- -------------
BALANCE, DECEMBER 31, 1999 $63,852,000 ($62,314,000) $ 1,578,000
------------ -------------- -------------
(Continued)
The accompanying notes are an integral part of these consolidated statements.
F-8
Page 50
AMERICAN BIOGENETIC SCIENCES, INC AND SUBSIDIARIES
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Additional During the Deferred
Paid-in Development Stock
Capital Stage Compensation Total
------------- -------------- ------------- ------------
BALANCE, DECEMBER 31, 1999 $63,852,000 ($62,314,000) $ - $ 1,578,000
Sale of Series A Convertible Preferred Stock - 3,500,000
(7,000 shares) 3,500,000 -
Warrants issued with the Convertible Preferred
Stock 2,450,000 - - 2,450,000
Non-cash preferred stock dividend - (2,450,000) - (2,450,000)
Exercise of stock options and warrants 1,234,000 - - 1,235,000
Fair value of warrants issued 342,000 - - 342,000
Class A Common Stock issued 1,557,000 - - 1,560,000
Net (loss) for the period - (3,775,000) - (3,775,000)
------------- -------------- ------------- ------------
BALANCE, DECEMBER 31, 2000 72,935,000 (68,539,000) - 4,440,000
------------- -------------- ------------- ------------
Sale of Series B Convertible Preferred Stock - 1,188,000
(3,333 shares) 1,188,000 -
Warrants issued with the Convertible Preferred
Stock 862,000 - - 862,000
Non-cash preferred stock dividend 891,000 (891,000) - -
Exercise of stock options and warrants 19,000 - - 19,000
Fair value of stock options issued to consultants 123,000 - (123,000) -
Amortization of deferred stock compensation - - 54,000 54,000
Class A Common Stock issued 206,000 - - 206,000
Net (loss) for the period - (4,290,000) - (4,290,000)
------------- -------------- ------------- ------------
BALANCE, DECEMBER 31, 2001 $ 76,224,000 $ (73,720,000) $69,000) $2,479,000
------------- -------------- ------------- ------------
The accompanying notes are an integral part of these consolidated statements.
F-9
Page 51
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 12). 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 its ABS-205 neurobiology compound and MH1 monoclonal
antibody and the Food and Drug Administration approval process relating to
510(K) applications for multiple formats of 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, 2001, ABS, had working capital of $384,000, compared to
$1,377,000 at December 31, 2000. The Company had cash and cash equivalents of
$672,000 at December 31, 2001 and $150,000 at March 8, 2002, compared to
$1,194,000 at December 31, 2000. In January 2002, the Company implemented a cash
conservation program, whereby most employees and all officers deferred a portion
of their salaries and certain consultants have deferred their compensation. As a
result of the Company's continuing to incur cash expenses in excess of cash
receipts, the Company requires the receipt of additional licensing fees or
additional financing during the next few months. The uncertainties involved in
the receipt of additional licensing fees or receipt of additional financing,
many of which are outside the control of the Company raise substantial doubt as
to the Company's ability to continue as a going concern. Therefore, 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 continue its research and product development in the
neurobiology and monoclonal antibody programs and in the development and
commercialization of TpP, including FDA approval process relating to additional
510(k) filings, the Company will need to incur substantial expenditures. To
address its need for additional working capital, ABS is actively seeking to
license certain of its products, particularly its TpP, ABS-103 neurobiology
compound and the anthrax and smallpox vaccines. If it is successful in licensing
some of its products, the licensees might provide additional funding or perform
additional testing necessary to obtain regulatory approvals or provide clinical,
manufacturing and marketing expertise which could lead to revenue for the
Company. The Company is also continuing its efforts on 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.
F-10
Page 52
In addition the Company is seeking financing from institutional investors
and/or financing agents. However, in the current economic environment, financing
has become more difficult to obtain, and there is no assurance 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, 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, 2001 and December 31, 2000, the Company had one
customer whose balance exceeded 10% of the accounts receivable balance. The one
customer accounted for 54% and 50% of the accounts receivable balance, as of
December 21, 2001, and December 31, 2000, respectively.
During fiscal year 2001, one customer accounted for 28% of the Company'
sales and a second customer accounted for 22% of the Company's sales. 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% and a third customer accounted for 11% of the Company's
sales.
Inventories
Inventories are 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 recorded a $99,000
write-off of capitalized patent costs as of December 31, 2001. In August 2001,
the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The Company believes the impact of adoption of SFAS No. 144 will not be
material.
F-11
Page 53
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 were being amortized over a
10-year period prior to the sale of the Stellar business as described in Note 5.
Fair Value of Financial Instruments
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, 2001 and
December 31, 2000, respectively.
Revenue Recognition
Revenue on product sales is recognized at the time the products are
shipped, the customer accepts delivery and when collectability 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 9).
The Company complies with the provisions of Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," which addresses when an entity should measure the fair value of its
equity instruments that it grants to nonemployees in connection with an
arrangement for goods or services.
F-12
Page 54
Net Loss Per Common Share
The Company follows the provisions of SFAS No. 128, "Earnings Per Share,"
which requires the presentation of both Basic EPS and Diluted EPS on the face of
the consolidated statements of operations. Basic net income / loss per common
share ("Basic EPS") is computed by dividing net income/loss by the weighted
average number of common shares outstanding. Diluted net income per common share
("Diluted EPS") is computed by dividing net income by the weighted average
number of common shares and dilutive potential common shares then outstanding.
Diluted EPS for 2001, 2000 and 1999 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,
2001 2000 1999
---------------- ---------------- ----------------
Stock Options 6,665,332 5,179,619 5,905,252
Conversion of Preferred Series A & B Stock 10,333,000 7,000,000 -
Warrants 11,490,814 8,187,814 1,039,295
---------------- ---------------- ----------------
Total Shares 28,489,146 20,367,433 6,944,547
================ ================ ================
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
The Company follows the provisions of SFAS No. 130 "Reporting
Comprehensive Income," which establishes rules for the reporting of
comprehensive income (loss) and its components. For the fiscal years ended 2001,
2000 and 1999, 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
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" 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 does 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 are 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
F-13
Page 55
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.
Recently Issued Accounting Pronouncements
In June 2001 the Financial Accounting Standards Board issued SFAS No. 141
and SFAS No. 142, "Business Combinations" and "Goodwill and Other Intangible
Assets", respectively. SFAS 141 addresses financial accounting and reporting for
business combinations, requiring the use of the purchase method of accounting.
SFAS 142 addresses accounting and reporting for acquired goodwill. It eliminates
the previous requirement to amortize goodwill and establishes new requirements
with respect to the recognition and valuation of goodwill. The Company believes
the adoption of SFAS No. 142 will not have any impact.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company believes the impact
of adoption of SFAS No. 144 will not be material.
3. Inventories
Inventories consist of the following:
December 31,
2001 2000
----------------- ---------------
Raw Materials $274,000 $328,000
Work in Progress - 132,000
Finished Goods 56,000 71,000
----------------- ---------------
$330,000 $531,000
================= ===============
4. Fixed Assets
Fixed assets consists of the following:
December 31,
2001 2000
----------------- ---------------
Laboratory equipment $ 1,263,000 $ 1,301,000
Office equipment and furniture 492,000 523,000
Leasehold improvements 212,000 514,000
Equipment under capital lease 81,000 87,000
----------------- ---------------
2,048,000 2,435,000
Accumulated depreciation and
amortization (1,953,000) (1,958,000)
----------------- ---------------
$ 95,000 $ 477,000
================= ===============
Depreciation and amortization of fixed assets was $70,000, $118,000 and
$122,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
5. Sale of Business
On June 29, 2001, the Company and its wholly-owned subsidiary, Stellar Bio
Systems, Inc. ("Stellar"), completed the sale of Stellar's in vitro
immunoflourescent antibody slide format assay business and Stellar's mouse serum
business (collectively, the "Stellar Business") to PanBio InDx Inc. ("PanBio
InDx"), a wholly owned subsidiary of PanBio Limited, an Australian company. The
Company received a purchase price of $1.2 million cash paid at closing and the
F-14
Page 56
right to receive up to an additional total of $540,000, payable quarterly over
three years, based on revenues of a portion of the Stellar Business sold. Assets
sold in the transaction included rights to specified products, rights under
certain contracts and leases, inventory, accounts receivable and intellectual
property related to the Stellar Business, rights to the name "Stellar," certain
computer hardware and software and other tangible assets and goodwill. PanBio
InDx assumed certain liabilities of the Stellar Business, including accounts
payable. The Company recorded a loss on the sale of $288,000, which included the
write-off of $705,000 of unamortized goodwill related to the Company's purchase
of Stellar in 1998. Any future quarterly receipts will be recorded as revenue
under the caption "Royalties / license fees". Through December 31, 2001, the
Company recorded $32,000 for the two quarterly payments due between June 30,
2001 and December 31, 2001.
In connection with the sale of the assets, the Company entered into a
Manufacture and Supply Agreement with PanBio InDx and PanBio Limited, pursuant
to which PanBio InDx is to manufacture the Company's thrombus precursor protein
diagnostic test kit for annual periods that may be terminated on notice given at
least 45 days prior to the end of the term.
The following unaudited pro forma summary presents information as if the
Stellar Business had been sold as of January 1, 1999. The pro forma amounts
include certain adjustments, primarily the elimination of Stellar results of
operations and deferred payments based on a portion of Stellar revenue. Pro
forma information does not necessarily reflect the actual results that would
have occurred nor is it necessarily indicative of future results of operations
of the Company:
Pro Forma Consolidated Statements of Operations:
Twelve Months Ended
December 31, 2001 December 31, 2000 December 31, 1999
-----------------------------------------------------------------
Total Revenue $ 165,000 $ 838,000 $ 235,000
------------------ ------------------ --------------------
Costs and expenses:
Cost of sales 8,000 12,000 39,000
Research and development 923,000 1,194,000 1,613,000
Selling, general and administrative 3,387,000 3,565,000 3,732,000
Other Income (Expense), net: (54,000) 184,000 81,000
------------------ ------------------ --------------------
Net loss (4,207,000) (3,749,000) (5,068,000)
Non-cash preferred stock dividend (891,000) (2,450,000) -
------------------ ------------------ --------------------
Net loss attributable to common
stockholders ($5,098,000) ($6,199,000) ($5,068,000)
================== ================== ====================
Net Loss Per Common Share
Basic and Diluted net loss per share ($.12) ($.14) ($.13)
Basic and Diluted 44,286,000 43,475,000 39,266,000
6. Acquisition
The Company had acquired Stellar, a manufacturer and distributor of in
vitro diagnostic products and research reagents, on April 23, 1998. 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 up to $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). On April 14, 2001, the Company
made the third and final contingent payment of $150,000 in Class A Common Stock
(236,967 shares). The acquisition was accounted for by the purchase method.
Results of operations of Stellar were included in the Company's consolidated
financial statements since the date of acquisition. The excess of
F-15
Page 57
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 was being amortized over a 10-year
period. Accumulated amortization of intangible assets was approximately $192,000
as of December 31, 2000. This business was sold in 2001 as described in Note 5.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
December 31,
2001 2000
--------------------------
Accounts Payable $387,000 $220,000
Professional Fees 203,000 77,000
Payroll and Related Expenses 49,000 71,000
--------------------------
$639,000 $368,000
==========================
8. Notes Payable
Notes payable at December 31, 2000 primarily represents the remaining
balance of an obligation arising from services rendered.
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, 2001 are as follows:
2002 $ 28,500
2003 28,500
2004 24,100
2005 4,100
-----------
Total minimum lease payments 85,200
Less amounts representing interest (12,200)
-----------
Present value of net minimum capital lease payments $ 73,000
===========
9. 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 are automatically converted in the event of
sale or, with certain exceptions, transfer.
F-16
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Private Placements
On January 27, 2000, the Company entered into an Exclusive License
Agreement with Abbott Laboratories ("Abbott") 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 gave 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 had 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. In November 2001, the Company reacquired, from Abbott, the
license rights for the ABS-103 neurological compound and the Exclusive License
Agreement was terminated.
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 "Series A Preferred Stock")
and related Series A 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. As a result, on February 3, 2000, the
Company entered into a Securities Purchase Agreement with BVF and Mr. Roach
relating to the sale by the Company to them of 6,000 and 1,000 shares of Series
A Preferred Stock, respectively, and Series A Warrants to purchase 6,000,000 and
1,000,000 shares of Class A Common Stock, respectively, and BVF loaned
$3,000,000 to the Company. On March 3, 2000, after receiving stockholder consent
to the proposed sale, BVF's loan and $500,000 of the Company's indebtedness to
Mr. Roach were cancelled in exchange for the Company's issuance of such Series A
Preferred Stock and Series A Warrants.
Preferred stock dividend related to warrants of $2,450,000 represents the
non-cash 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.
Under the terms of a Registration Agreement the Company has filed a Form
S-3 Registration Statement covering Class A Common Stock issuable upon
conversion of the Series A Preferred Stock and the exercise of the Series A
Warrants, which was declared effective in June 2000. On January 15, 2002, BVF
converted 500 shares of Series A Preferred Stock into 500,000 shares of Class
A Common Stock.
On August 28, 2001, BVF and certain of its affiliates (collectively,
"BVF") made an additional $2,050,000 investment in the Company pursuant to a
Securities Purchase Agreement dated as of August 23, 2001. In exchange for BVF's
F-17
Page 59
investment, ABS issued BVF 3,333 shares of newly designated Series B Convertible
Preferred Stock at a price of $600 per share and five year Series B Warrants to
purchase 3,333,000 shares of Common Stock at an exercise price of $1.00 per
share. The proceeds have been allocated based on the relative fair values of the
Series B Convertible Preferred Stock and the Series B Warrants. Additionally,
the Company agreed to amend certain terms of the previously issued Series A
Convertible Preferred Stock and related Series A Warrants to conform them to the
Series B Preferred Stock and Series B Warrants and issued a Revenue
Participation Note. The fair value of this amendment to the Series A Warrants
was estimated using an option-pricing model and is reflected as a non-cash
preferred stock dividend for the year ended December 31, 2001.
In connection with the transactions under the Securities Purchase
Agreement, the Company entered into various related agreements dated August 28,
2001 with BVF. As a condition of increasing its aggregate investment in the
Company to $5 million, BVF required the Company to issue to it a Revenue
Participation Note, under which the Company agreed to pay BVF 25% of any
royalties the Company actually receives under the January 2000 Exclusive License
Agreement with Abbott Laboratories, up to a maximum of $25 million in payments
under the Revenue Participation Note. The Company was given the right, each time
payment is made under the Revenue Participation Note, to redeem a percentage of
the Series A Preferred Stock and Series B Preferred Stock and the related Series
A Warrants and Series B Warrants which equals the percentage of the $25 million
ceiling which the payments the Company made under the Revenue Participation Note
constitute. The Company also granted BVF a security interest in the percentage
of the royalty payments to which it is entitled under the Revenue Participation
Note in order to secure the obligations. As a result of the discontinuance of
the Abbott Exclusive License Agreement, announced on November 9, 2001, the
Revenue Participation Note and related security agreement have no further
effect.
The Company also granted BVF certain demand and piggyback registration
rights with respect to the Series B Preferred Stock and Series B Warrants, and
amended the terms of the registration rights previously granted to the Series A
Preferred Stock and Series A Warrants in March 2000 to conform to the terms
applicable to the Series B.
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
Series A Preferred Stock initially will be convertible into 1,000 shares of
Class A Common Stock, at a conversion price of $.50 per share of Class A Common
Stock, and each share of Series B Preferred Stock initially will be convertible
into 1,000 shares of Class A Common Stock, at a conversion price of $.60 per
share of Class A Common Stock.
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. Remaining options outstanding on December 31, 2001 are fully vested.
F-18
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Changes in outstanding options under the 1986 Plan, expressed in number of
shares, are as follows:
For the Years Ended
------------------------------------------------------------------------------------
December 31, 2001 December 31, 2000 December 31, 1999
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Shares Avg. Shares Avg. Shares Avg.
Under Option Under Option Under Option
Option Price Option Price Option Price
----------- ---------- ---------- ----------- ----------- -----------
Options outstanding, beginning of year 2,183,000 $4.50 2,476,250 $4.20 2,790,500 $4.11
Exercised -- -- (147,250) $1.87 -- --
Cancelled (10,000) $2.50 (11,000) $2.32 (272,250) $3.65
Expired (1,110,500) $4.80 (135,000) $1.93 (42,000) $2.00
----------- ----------- ------------
Options outstanding, end of year 1,062,500 $4.21 2,183,000 $4.50 2,476,250 $4.20
=========== =========== ============
Options exercisable, end of year 1,062,500 $4.21 2,183,000 $4.50 2,453,250 $4.21
=========== =========== ============
Options available for grant, end of
year -- -- --
=========== =========== ============
The Company's 1993 Non-Employee Director Stock Option Plan, as amended
(the "1993 Plan"), provides for the grant of stock options to purchase up to an
aggregate of 500,000 shares of Class A Common Stock to outside directors of the
Company. Options to purchase 25,000 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 at any time during a period of ten
years 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, 2001 December 31, 2000 December 31, 1999
------------------------ ------------------------- ------------------------
Weighted Weighted Weighted
Shares Avg. Shares Avg. Shares Avg.
Under Option Under Option Under Option
Option Price Option Price Option Price
---------- ---------- ----------- ---------- --------- -----------
Options outstanding, beginning of year 147,500 $2.39 140,000 $2.63 120,000 $3.27
Granted 85,000 $.63 30,000 $1.53 40,000 $1.09
Exercised -- -- (15,000) $1.88 -- --
Cancelled (77,500) $2.36 (7,500) $4.58 -- --
Expired -- -- -- -- (20,000) $3.38
---------- ----------- ---------
Options outstanding, end of year 155,000 $1.44 147,500 $2.39 140,000 $2.63
========== =========== =========
Options exercisable, end of year 155,000 $1.44 97,500 $2.94 57,500 $3.76
========== =========== =========
Options available for grant, end of
year 317,500 325,000 347,500
========== =========== =========
The Company's 1996 Stock Option Plan, as amended (the "1996 Plan"), which
replaced the 1986 plan, provides for the grant until 2006 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 granted for exercise periods 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 any
class of voting stock of the Company may 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.
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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, 2001 December 31, 2000 December 31, 1999
------------------------ -------------------------- ------------------------
Weighted Weighted Weighted
Shares Avg. Shares Avg. Shares Avg.
Under Option Under Option Under Option
Option Price Option Price Option Price
---------- ---------- ------------ ---------- --------- -----------
Options outstanding, beginning of year 2,849,119 $1.00 3,289,002 $1.05 1,487,750 $1.99
Granted 345,000 $.59 792,500 $.47 2,255,000 $.70
Exercised (75,000) $.25 (1,062,594) $.77 (5,250) $.61
Cancelled (338,787) $.69 (169,789) $.92 (448,498) $2.40
---------- ------------ ---------
Options outstanding, end of year 2,780,332 $1.01 2,849,119 $1.00 3,289,002 $1.05
========== ============ =========
Options exercisable, end of year 2,374,707 $1.07 1,991,744 $1.17 1,250,382 $1.75
========== ============ =========
Options available for grant, end of
year 76,824 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 until 2010 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 granted for exercise periods 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 any
class of voting stock of the Company may 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.
Changes in outstanding options and options available for grant under the
2000 Plan, expressed in number of shares, are as follows:
For the Years Ended
----------------------------------------------------------------
December 31, 2001 December 31, 2000
------------------------------ ------------------------------
Weighted Weighted
Avg. Avg.
Shares Under Option Shares Under Option
Option Price Option Price
--------------- ----------- --------------- -----------
Options outstanding, beginning of year -- -- -- --
Granted 2,757,500 $.68 -- --
Exercised -- -- -- --
Cancelled (90,000) $.65 -- --
--------------- ---------------
Options outstanding, end of year 2,667,500 $.68 -- --
=============== ===============
Options exercisable, end of year 1,246,250 $.68 -- --
=============== ===============
Options available for grant, end of year 322,500 3,000,000
=============== ===============
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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 options granted to employees or directors under the stock
option plans. Had compensation cost for such options granted under the Company's
stock option plans been determined based on the fair value at the grant date for
options granted in 2001, 2000 and 1999 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:
2001 2000 1999
--------------------------------------------------------------- ----------------- ----------------- -----------------
Net loss attributable to common stockholders - as reported ($5,181,000) ($6,225,000) ($5,351,000)
Net loss attributable to common stockholders - pro forma ($6,026,000) ($6,881,000) ($6,130,000)
Basic and diluted loss per share - as reported ($.12) ($.14) ($.14)
Basic and diluted loss per share - pro forma ($.14) ($.16) ($.16)
--------------------------------------------------------------- ----------------- ----------------- -----------------
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 2001, 2000 and 1999: dividend yield of 0%;
expected volatility of 123% in 2001, 170 in 2000 and 106% in 1999; risk-free
interest rate of range 4.4% to 6.8% and expected lives of seven years.
The weighted average fair value of options granted under all four option
plans were $.61, $.49, and $.59 in 2001, 2000 and 1999, respectively. The
following table sets forth additional SFAS No. 123 disclosure information as to
options outstanding under all three plans at December 31, 2001:
Weighted Weighted Average
Shares Exercisable Exercise Average Remaining
Outstanding Shares Price Range Exercise Price Contractual Life
- -------------------------------------------------------------------------
1,281,250 1,110,625 $.28 - $.41 $.34 6.7
3,182,500 1,578,750 $.51 - $.70 $.66 8.7
651,332 626,332 $1.00 - $1.50 $1.07 5.8
336,250 308,750 $1.52 - $2.25 $1.79 4.7
319,250 319,250 $2.38 - $3.50 $3.42 5.0
828,750 828,750 $3.66 - $5.50 $4.77 1.3
65,000 65,000 $5.75 - $7.75 $6.27 1.6
1,000 1,000 $10.00 $10.00 .2
- -----------------------
6,665,332 4,838,457
Other Options Granted
The Company entered into a consulting agreement, which expired in 1996,
with an unaffiliated third party to assist in the strategic planning and
implementation of the Company's licensing, collaborative and co-marketing plans.
Pursuant to the agreement, the Company granted an option to purchase 50,000
shares of Class A Common Stock until 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 were exercisable for five years from
the date of grant. During 2000, the consultant exercised an option to purchase
50,000 shares of Class A Common Stock at $2.25 and the other option expired.
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The Company has granted an investor relations consultant a warrant to
purchase 50,000 shares of Class A Common Stock until 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 non-cash 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 until January 19, 2004 at
$1.00 per share pursuant to an agreement dated January 20, 1999. The warrant
would have been exercised in increments of 50,000 share amounts if certain
milestones were met during the period ending June 30, 2000. The consultant
earned options to purchase 250,000 shares under this agreement and the balance
of 50,000 shares was cancelled. The fair value of these warrants as determined
using an option-pricing model was $264,000 which was recorded as a non-cash
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.
The Company has granted an investor relations consultant a warrant to
purchase up to 300,000 shares of Class A Common Stock until 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, which was extended to March
14, 2002. As of December 31, 2001, 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 non-cash 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.
The Company granted stock options to purchase 212,500 shares of Class A
Common Stock to consultants during 2001. The fair value of these options as
determined using an option-pricing model was $123,000, which was recorded as
deferred stock compensation within the statement of stockholders' equity. The
Company recorded a $54,000 non-cash charge during 2001 for amortization of this
deferred compensation. The following assumptions were used for this fair value
computation: dividend yield of 0%, volatility of $123%, risk-free rates from
6.0% to 6.8% and expected lives of 5 years.
10. Joint Venture
In October 2000, American Healing Technologies, Inc. ("AHT"), a (Delaware)
corporation, was founded as a joint venture by the Company and other non
affiliated third parties. AHT is a distributor and marketer of authentic
classical Chinese herbal formulas and new healing technologies. The Company
accounts for its investment in AHT under the equity method of accounting. The
Company's carrying value of the investment is equal to the Company's cumulative
investment less its fifty percent share of the cumulative net loss of AHT. AHT's
fiscal year is the same as the Company's fiscal year. As of December 31, 2001,
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the net investment in AHT was $66,000, which is included in Other assets. In
February 2002, the Company converted its investment into a convertible note of
$131,000.
11. Federal Income Taxes:
At December 31, 2001, the Company had net operating loss carryforwards of
approximately $67,000,000 for income tax purposes. The net operating loss
carryforwards will expire in varying amounts through 2021. In addition, the
Company has approximately $1,300,000 of available research and development tax
credits to offset future taxes. These credits expire through 2021. In accordance
with SFAS No. 109 "Accounting for Income Taxes," the Company has recorded a
valuation allowance of $68,300,000 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, 2001, $4,900,000 of net operating losses is no
longer subject to this limitation.
12. Various Agreements
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 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, 2001 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.
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Employment Agreements
As of December 31, 2001, the Company does not have any employment
agreements.
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 $29,000, $37,000 and $65,000 for the
years ended December 31, 2001, 2000 and 1999, 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.
License Agreements
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:
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 $75,000 in 2001, $82,000 in 2000 and $18,000 in 1999 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 for a
period of the life of the patent or a minimum of 10 years. The Company expensed
$130,000 in 2001, $72,000 in 2000 and $75,000 in 1999 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
F-24
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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,
for which Abbott paid the Company an initial non-refundable license fee of
$500,000. The Company also entered into a Registration Rights Agreement with
Abbott. (See Note 9 for details regarding this agreement.) In November 2001, the
Company reacquired from Abbott the license rights and the Exclusive License
Agreement was terminated without cost to the Company.
13. Commitments and Contingencies
Leases
ABS leases 6,000 square feet of office space in New York under a lease
expiring July 2002 (with an annual base rent of $42,000). The Company intends to
renew this lease. ABS also has a License Agreement with the University of
Maryland covering 1,400 square feet of space in Maryland expiring May 31, 2002
(at an annual fee of $35,000). The Company intends to renew this Agreement.
Litigation
The Company is party to an action commenced by Norman Kaminsky,
derivatively on behalf of the Company, against Alfred J. Roach, Chairman of the
Board of Directors of the Company, various other unaffiliated purchasers of
Common Stock sold by the Company in an October 1998 private placement, M.H.
Meyerson & Co., Inc., an alleged financial advisor to the Company ("Meyerson"),
certain alleged employees, officers and directors of Meyerson, and the Company,
as nominal defendant. The action was brought in the Supreme Court of the State
of New York, Nassau County and apparently filed in October 2001 although only
received by the Company in January 2002. The action is brought as a purported
derivative action so a recovery, if any is awarded, less fees and costs would
presumably inure to the benefit of the Company. The action alleges that the
Company sold stock to the defendants, including Mr. Roach, for inadequate
consideration resulting in an alleged breach of a fiduciary duty of loyalty and
a duty of care by Mr. Roach, Meyerson and the alleged employees, officers and
directors of Meyerson, a breach of contract by Meyerson and unjust enrichment by
all defendants. The action seeks damages in an unspecified amount against Mr.
Roach, Meyerson and the alleged employees, officers and directors of Meyerson,
the disgorgement of all realized monies, profits and gains allegedly obtained
by, and creation of a constructive trust against, all defendants, and interest,
costs and disbursements.
On January 17, 2002, the Company commenced an action against Richard
Oppenheim in the Supreme Court of the State of New York, Suffolk County, seeking
a declaration from the court that, among other things, Mr. Oppenheim had, under
the terms of a December 14, 2000 agreement, released any right to assert a claim
which is the subject of a January 3, 2002 letter received by the Company from
Mr. Oppenheim's counsel. The December 14, 2000 agreement was entered into to
settle a claim by Mr. Oppenheim that he was entitled to a finder's fee
commission as a result of a third party investment made in the Company. The
January 3, 2002 letter from Mr. Oppenheim's counsel threatened litigation unless
the Company paid a finder's fee commission as a result of an alleged investment
made in August 2001 by the third party investor who had made an investment that
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was covered by the December 14, 2000 agreement. On January 22, 2002, Mr.
Oppenheim commenced an action against the Company in the United States District
Court for the District of New Jersey alleging that the Company owed him a
finder's fee commission as a result of the August 2001 investment made by the
third party investor discussed above. Among other things, Mr. Oppenheim seeks
compensatory damages in the amount of $200,000 and interest, costs and
disbursements.
In addition, from time to time the Company is a party to certain claims
and legal proceedings in the ordinary course of business, none of which, in
management's opinion, would have a material adverse effect on the Company's
financial position or results of operations.
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