SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission File Number 0-19041
American Biogenetic Sciences, Inc.
(Exact name of registrant as specified in its charter)
Delaware 11-2655906
(State or other jurisdiction (I.R.S.Employer Identification No.)
of incorporation or organization)
1375 Akron Street 516-789-2600
Copiague, New York 11726 (Telephone number)
Address of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 12, 1998
Class A Common Stock, par value $.001 35,510,538
Class B Common Stock, par value $.001 3,000,000
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
Form 10-Q for the Quarter Ended September 30, 1998
INDEX
Part I - FINANCIAL INFORMATION
Item 1: Financial Statements: Page No.
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1998 and
September 30, 1997 and For the Period from Inception
(September 1, 1983) Through September 30, 1998 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and September 30, 1997
and For the Period from Inception (September 1, 1983)
Through September 30, 1998 5
Consolidated Statements of Stockholders' Equity -
For the Period from Inception (September 1, 1983)
Through September 30, 1998 6 - 8
Notes to Consolidated Financial Statements 9 - 15
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 16 - 20
Part II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 21 - 23
Signature 24
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
Assets 1998 1997
------------ ------------
(Unaudited)
Current Assets:
Cash and cash equivalents $5,695,000 $7,121,000
Accounts receivable 250,000 -
Inventory 496,000 296,000
Other current assets 47,000 41,000
------------ ------------
Total current assets 6,488,000 7,458,000
------------ ------------
Fixed assets, at cost, net of accumulated
depreciation and amortization of $1,705,000
and $1,481,000, respectively 640,000 511,000
Patent costs, net of accumulated
amortization of $365,000 and $292,000,
respectively 1,474,000 1,337,000
Debt issuance costs, net of accumulated
amortization of $613,000 and $520,000,
respectively 457,000 59,000
Intangible assets 582,000 -
Other assets 36,000 23,000
------------ ------------
$9,677,000 $9,388,000
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $683,000 $494,000
Current portion of capital lease obligation 3,000 3,000
------------ ------------
Total current liabilities 686,000 497,000
------------ ------------
Long Term Liabilities:
Notes Payable 127,000 -
5% convertible debentures, net of unamortized debt
discount of $508,000 3,409,000 -
7% convertible debentures - 1,350,000
8% convertible debentures 500,000 850,000
Long-term portion of capital lease obligation 6,000 8,000
------------ ------------
Total liabilities 4,728,000 2,705,000
------------ ------------
Stockholders' Equity:
Class A common stock, par value $.001 per
share; 50,000,000 shares authorized;
20,895,062 and 19,341,617 shares issued
and outstanding, respectively 21,000 19,000
Class B common stock, par value $.001 per share;
3,000,000 shares authorized; 1,775,500 and
1,725,500 shares issued and outstanding, respectively 2,000 2,000
Additional paid-in capital 58,913,000 56,077,000
Deficit accumulated during the
development stage (53,987,000) (49,415,000)
------------ ------------
Total stockholders' equity 4,949,000 6,683,000
------------ ------------
$9,677,000 $9,388,000
============ ============
See notes to unaudited consolidated financial statements
Page 3
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Period
From Inception
Three Months Ended Nine Months Ended (September 1,
-------------------------- ------------------------------ 1983) Through
September 30, September 30, September 30, September 30, September 30,
1998 1997 1998 1997 1998
------------ ------------ -------------- -------------- --------------
Revenues:
Sales $412,000 $ - $853,000 $ - $1,003,000
Royalties / license fees - - - - 1,000,000
Collaborative agreements - - - 9,000 302,000
------------ ------------ -------------- -------------- --------------
412,000 - 853,000 9,000 2,305,000
Expenses:
Cost of sales 173,000 - 315,000 - 347,000
Research and development 587,000 704,000 1,663,000 2,676,000 28,308,000
Selling, general and administrative 1,082,000 973,000 3,213,000 2,950,000 27,874,000
------------ ------------ -------------- -------------- --------------
Loss from operations (1,430,000) (1,677,000) (4,338,000) (5,617,000) (54,224,000)
------------ ------------ -------------- -------------- --------------
Other Income (Expense):
Interest expense (320,000) (65,000) (496,000) (878,000) (4,238,000)
Net gain on sale of fixed assets - 1,000 - 1,000 7,000
Net investment income 91,000 127,000 262,000 453,000 4,468,000
------------ ------------ -------------- -------------- --------------
Net loss ($1,659,000) ($1,614,000) ($4,572,000) ($6,041,000) ($53,987,000)
============ ============ ============== ============== ==============
Per Share Information (Note 3):
Net loss per common share:
Basic ($0.07) ($0.08) ($0.21) ($0.31)
============ ============ ============== ==============
Diluted ($0.07) ($0.08) ($0.21) ($0.31)
============ ============ ============== ==============
Common shares used in computing
per share amounts:
Basic 22,442,000 20,694,000 21,854,000 19,774,000
============ ============ ============== ==============
Diluted 22,442,000 20,694,000 21,854,000 19,774,000
============ ============ ============== ==============
See notes to unaudited consolidated financial statements
Page 4
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Period
From Inception
(September 1,
Nine Months Ended 1983)
-------------------------- Through
September 30, September 30, September 30,
1998 1997 1998
------------ ------------ --------------
Cash Flows From Operating Activities:
Net loss ($4,572,000) ($6,041,000) ($53,987,000)
Adjustments to reconcile net (loss) to net cash
provided or (used) in operating activities:
Depreciation and amortization 415,000 410,000 2,640,000
Net gain on sale of fixed assets - (1,000) (7,000)
Net gain on sale of marketable securities - - (217,000)
Other non-cash expenses accrued primarily for stocks and warrants 78,000 127,000 1,814,000
Amortization of debt discount included in interest expense 254,000 492,000 2,097,000
Write off of patent costs - - 93,000
(Increase) decrease in accounts receivable (142,000) - (142,000)
(Increase) decrease in inventory (42,000) (223,000) (338,000)
(Increase) decrease in other current assets (6,000) 494,000 (47,000)
(Increase) decrease in other assets (9,000) (2,000) 63,000
Increase (decrease) in accounts payable and accrued expenses 185,000 440,000 896,000
Increase in interest payable to stockholder - - 112,000
------------ ------------ --------------
Net cash provided by (used in) operating activities (3,839,000) (4,304,000) (47,023,000)
------------ ------------ --------------
Cash Flows From Investing Activities:
Capital expenditures (37,000) (198,000) (2,039,000)
Proceeds from sale of fixed assets - 2,000 18,000
Payments for patent costs and other assets (210,000) (360,000) (1,909,000)
Business acquisition, net of stock issued and cash acquired (119,000) - (119,000)
Proceeds from maturity and sale of marketable securities - 5,817,000 67,549,000
Purchases of marketable securities - (2,796,000) (67,332,000)
------------ ------------ --------------
Net cash provided by (used in) investing activities (366,000) 2,465,000 (3,832,000)
------------ ------------ --------------
Cash Flows From Financing Activities:
Payments to debentureholders (1,000,000) (1,154,000) (2,246,000)
Proceeds from issuance of common stock, net 98,000 399,000 36,400,000
Proceeds from issuance of 5% convertible debentures, net 3,727,000 - 3,727,000
Proceeds from issuance of 7% convertible debentures, net - - 8,565,000
Proceeds from issuance of 8% convertible debentures, net - - 7,790,000
Principal payments under capital lease obligation and notes payable (46,000) (2,000) (55,000)
Capital contributions from chairman - - 1,000,000
Increase in loans payable to stockholder / affiliates - - 2,669,000
Repayment of loans payable to stockholder and affiliates
(remainder contributed to capital by the stockholder) - - (1,300,000)
------------ ------------ --------------
Net cash provided by (used in) financing activities 2,779,000 (757,000) 56,550,000
------------ ------------ --------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,426,000) (2,596,000) 5,695,000
Cash and Cash Equivalents at Beginning of Period 7,121,000 10,760,000 -
------------ ------------ --------------
Cash and Cash Equivalents at End of Period $5,695,000 $8,164,000 $5,695,000
============ ============ ==============
Supplemental Disclosure of Noncash Activities:
Capital expenditures made under capital lease obligation - - $20,000
============ ============ ==============
Convertible Debentures converted into 1,036,142, 2,944,201,
and 6,655,107 shares of Common Stock, respectively $835,000 $8,252,000 $14,046,000
============ ============ ==============
Warrants issued to debentureholders and placement agent $252,000 - $777,000
============ ============ ==============
See notes to unaudited consolidated financial statements
Page 5
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Class A Class B
Per Common Stock Common Stock
Share --------------------------- ------------------------
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 - - -
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
Page 6
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 - -
Expense for 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 - - -
Expense for warrants/options issued - - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1995 13,431,364 $13,000 1,375,500 $1,000
------------ ------------- ----------- -----------
CONTINUED
Page 7
------------ ------------- ----------- -----------
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 - -
Expense for warrants/options issued - - - -
Discount on 7% convertible debentures - - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 30, 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 for cash 2.23 - - 350,000 1,000
Exercise of stock options 2.00 27,500 - - -
Expense for 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 0.84 1,036,142 1,000 - -
Sale of Class B Common Stock for cash 1.62 - - 50,000 -
Exercise of stock options 1.75 4,000 - - -
Expense for warrants issued - - - -
Class A Common Stock issued 1.11 114,897 - - -
Class A Common Stock issued for Stellar 1.76 398,406 1,000 - -
Discount on 5% convertible debentures - - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, SEPTEMBER 30, 1998 20,895,062 $21,000 1,775,500 $2,000
============ ============= =========== ===========
See notes to unaudited consolidated financial statements
Page 8
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(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 - 92,000
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
Page 6 (column continuation)
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
Expense for 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
Expense for 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
Page 7 (column continuation)
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
Expense for warrants/options issued 330,000 - 330,000
Discount on 7% convertible debentures 1,843,000 - 1,843,000
Net (loss) for the period - (7,700,000) (7,700,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1996 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 for cash 778,000 - 779,000
Exercise of stock options 55,000 - 55,000
Expense for 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 7% and 8% Convertible Debentures
into Class A Common Stock 834,000 - 835,000
Sale of Class B Common Stock for cash 81,000 - 81,000
Exercise of stock options 7,000 - 7,000
Expense for warrants issued 325,000 - 325,000
Class A Common Stock issued 128,000 - 128,000
Class A Common Stock issued for Stellar 699,000 - 700,000
Discount on 5% convertible debentures 762,000 - 762,000
Net (loss) for the period - (4,572,000) (4,572,000)
------------ ------------- -----------
BALANCE, SEPTEMBER 30, 1998 $58,913,000 ($53,987,000) $4,949,000
============ ============= ===========
See notes to unaudited consolidated financial statements
CONTINUED
Page 8 (column continuation)
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
(1) INTERIM FINANCIAL STATEMENTS
The interim unaudited consolidated financial statements presented herein
have been prepared in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to
Form 10-Q and Regulation S-X pertaining to interim financial statements.
Accordingly, they do not include all information and footnotes required
by generally accepted accounting principles for complete financial
statements. The interim financial statements presented herein reflect
all adjustments (consisting of normal recurring adjustments and
accruals) which, in the opinion of management, are necessary for a fair
presentation of financial position as of September 30, 1998 and results
of operations for the three and nine months ended September 30, 1998 and
September 30, 1997. The Company's financial statements should be read
in conjunction with the summary of significant accounting policies and
the notes to consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. The
results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the results for the full year.
(2) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No.133, "Accounting for
Derivative Instruments and Hedging Activities ". The Statement
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
SFAS No.133 is effective for fiscal years beginning after June 15, 1999.
A company may also implement the Statement as of the beginning of any
fiscal quarter after June 16, 1998. SFAS No.133 cannot be applied
retroactively. SFAS No.133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at the Company's election, before January 1,
1998).
While the Company operates in international markets, it does so
presently without the use of derivatives hedging instruments, and
therefore this new pronouncement is not applicable.
(3) NET LOSS PER SHARE
Basic net loss per common share ("Basic EPS") is computed by dividing
net loss by the weighted average number of common shares outstanding.
Diluted net loss per common share ("Diluted EPS") is computed by
dividing net loss by the weighted average number of common shares and,
if any, potential dilutive common shares. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the
consolidated statements of operations. Diluted EPS for 1997 and 1998 is
the same as Basic EPS because the inclusion of stock options and
convertible debentures outstanding would be antidilutive.
(4) STOCKHOLDERS' EQUITY
Stock Options - The following summarizes the stock option activity in
all stock option plans for the three months ended September 30, 1998.
Shares Price
Granted 162,500 $.61 - $1.00
Exercised 0 -
Cancelled 5,250 $1.52 - $5.50
Each option entitles the holder to purchase one share of Class A Common
Stock of the Company.
Other Shares and Warrants - In connection with a lease agreement for
certain facilities, the Company may, at its option, pay a portion of the
annual lease obligation with Class A Common Stock plus warrants. The
number of shares of Common Stock is to be computed using the average
market price of the Company's Class A Common Stock during the ten days
prior to issuance. The warrants are to be exercisable at a price equal
to the closing price of the underlying Class A Common Stock on the date
the warrant is issued and for a period of four years from the date of
issuance. The Company issued 54,293 shares of Class A Common Stock
during the quarter ended September 30, 1998, as well as a warrant to
purchase 54,293 shares of Class A Common Stock at an exercise price of
$.63 per share. The Company has recorded a noncash charge of $22,000
which represents the fair value of the warrant.
(5) LONG TERM LIABILITIES
On May 20, 1998, the Company completed a private placement to three
accredited investors (the "Investors") of an aggregate of $4,000,000 of
5% Convertible Debentures due May 20, 2001 (the "Debentures"), and three
series of Warrants to purchase up to an aggregate of 261,288 shares of
the Company's Class A Common Stock (the "Warrants"). The Debentures
became convertible to the extent of 25% of the principal amount thereof
commencing on September 17, 1998, with an additional 25% of the
principal amount of the Debentures becoming first convertible on each of
October 17, 1998, November 16, 1998 and December 16, 1998 (subject to
potential acceleration in certain instances) at a conversion price equal
to 87% (if converted before November 17, 1998), 86% (if converted
between November 17, 1998 and February 14, 1999), 85% (if converted
between February 15, 1999 and May 20, 1999) or 84% (if converted after
May 20, 1999), respectively, of the average of the closing bid prices of
the Company's Class A Common Stock for the five consecutive trading days
immediately preceding the date of conversion of the Debentures (the
"Variable Conversion Price"); provided, however, that in no event may
the conversion price be greater than $1.9375 per share, which was 125%
of such average price over the five consecutive trading days prior to
the consummation of the transaction (the "Fixed Conversion Price").
Interest on the Debentures is payable only on maturity, conversion,
redemption or when other payment is made on the Debentures in cash or,
if registered for resale under the Securities Act of 1933, as amended
(the "Securities Act"), in shares of the Company's Class A Common Stock
valued at the applicable Debenture conversion price. Any Debentures
outstanding on May 20, 2001 will be automatically converted into Class
A Common Stock of the Company as of that date. In addition, the Company
may require conversion of outstanding Debentures after May 20, 2000 if
the closing bid price of its Class A Common Stock on the trading day
immediately preceding its giving of notice of conversion to Debenture
holders is at least $3.0625. In the event the Company would be required
to issue more than 4,000,000 shares of its Class A Common Stock upon
conversion of all of the Debentures (the "Conversion Limit"), the
Company will have the option of: (i) issuing additional shares of Common
Stock if stockholder approval has been obtained or if stockholder
approval is not required in order to comply with applicable rules of the
market upon which its Class A Common Stock is traded or (ii) paying cash
to the holder in an amount equal to the principal amount of Debentures
being converted plus an amount equal to the number of shares of Class A
Common Stock that would be otherwise issuable upon conversion of the
Debentures multiplied by the difference between the highest sales price
of the Company's Common Stock on the date of conversion and the
applicable Debenture conversion price. In the event of a merger or
other business combination or corporate reorganization, as a result of
which the stockholders of the Company immediately prior thereto own in
the aggregate less than 50% of the voting power of the ultimate parent
resulting from such transaction, or the Company transfers all or
substantially all of its assets to another person, then the Debenture
holders may participate in such transaction as a class on the same basis
as if the Debentures had been converted. In the event a purchase,
tender or exchange offer is made and accepted by the holders of more
than 50% of the voting power of all outstanding shares of Common Stock
immediately prior thereto, the holders of the Debentures are entitled to
redeem any outstanding Debentures at a redemption price equal to 115% of
the then outstanding principal amount of the Debentures plus accrued
interest on the Debentures.
The Company also issued to the Investors the Warrants in series
entitling the Investors to purchase, at an exercise price of $1.9141 per
share, an aggregate of 65,307 shares of the Company's Class A Common
Stock at any time to and including May 19, 2002, 65,307 shares of the
Company's Common Stock (subject to pro rata reduction to the extent the
original principal amount of the Debentures issued to the Investors is
not outstanding on the day such Warrant is first exercised) at any time
between November 20, 1998 and November 19, 2002, and 130,614 shares of
the Company's Class A Common Stock (subject to pro rata reduction to the
extent the original principal amount of the Debentures issued to the
Investors is not outstanding on the day such Warrant is first exercised)
at any time between May 20, 1999 and May 19, 2003.
In conjunction with this offering, the Company incurred both cash and
noncash issuance costs totaling $525,000. These issuance costs are
being amortized as a component of interest expense over the term of the
Debentures. Upon conversion of the Debentures, the related unamortized
deferred financing costs are charged to paid-in capital. The estimated
noncash value of the Warrants; $252,000, has been recorded as additional
paid-in capital, while their cost is included in the $525,000 total
issuance costs related to these Debentures. In addition, the Company
recorded additional paid-in capital and debt discount of $762,000 to
reflect the dollar value of the maximum market price conversion discount
(16%) related to these Debentures. The debt discount is being amortized
and charged to interest expense from May 20, 1998 through May 20, 1999,
the period during which the Debentures become 100% convertible and the
maximum discount rate becomes applicable.
(6) ACQUISITION
On April 23, 1998, the Company acquired all of the capital stock of
Stellar Bio Systems, Inc., ("Stellar"), a manufacturer of
immunodiagnostic kits and reagents. The purchase price was $120,000 in
cash and $700,000 in Class A Common Stock (398,406 shares were issued)
plus future contingent payments of $650,000 in Class A Common Stock to
be paid over three years based upon future sales levels of Stellar with
the Class A Common Stock to be valued at its market value on the
anniversary dates. The acquisition was accounted for by the purchase
method. Stellar is not considered a significant subsidiary under the
Securities and Exchange Commission Regulations S-X. Results of
operations have been included in the Company's consolidated financial
statements since the date of acquisition. The excess of the aggregate
purchase price over the fair market value of net assets acquired of
$604,000 has been allocated to intangible assets and goodwill, and will
be amortized over a 10 year period. Any additional future payments
required under the contingent earnout provisions of the purchase
agreement will be accounted for as additional goodwill and will be
amortized over the remaining life of the goodwill.
(7) SUBSEQUENT EVENTS
On October 27, 1998, the Company agreed to issue an aggregate
of 10,800,000 shares of its Class A Common Stock to a group of
accredited investors at a price of $.25 per share, a price above the
market price of the Company's Class A Common Stock at the time. Of such
shares, 4,000,000 shares were purchased by Alfred J. Roach, the
Company's Chairman of the Board of Directors and Chief Executive
Officer, for an aggregate price of $1,000,000. The Company has agreed
to register the shares issued in the private placement under the
Securities Act of 1933, as amended (the "Securities Act"), within six
months after the issuance of the shares. The $2,700,000 proceeds
thereof, together with $1,152,000 of the Company's funds were used to
repurchase the remaining $3,248,000 outstanding principal amount plus
accrued interest and a 16% premium of the Company's 5% Convertible
Debentures and Warrants to purchase 261,228 shares of the Company's
Class A Common Stock, each of which had been issued in May 1998 as part
of a private placement of $4,000,000 of such debentures, of which
$752,000 has been converted into an aggregate of 4,000,000 shares of the
Company's Class A Common Stock. As a result, in the fourth quarter of
fiscal 1998, the Company will record a one time charge to earnings of
approximately $1,140,000 for the loss on the early extinguishment of the
5% Convertible Debentures.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The Company's results of operations include the results of operations of
Stellar Bio Systems, Inc. ("Stellar") from April 23, 1998, the date of
its acquisition by the Company.
Results of Operations
Three Months ended September 30, 1998
The Company's net loss of $1,659,000 for the third quarter ended
September 30, 1998 was $45,000 higher than the net loss of $1,614,000
for the third quarter ended September 30, 1997. The increase in the net
loss was primarily due to an increase in interest expense ($255,000), an
increase in selling, general and administrative expense ($109,000) and
a reduction in investment income ($36,000) offset, in large part, by the
gross profit ($239,000) of Stellar and of TpP, the Company's Thrombus
Precursor Protein diagnostic test and a reduction in research and
development expenses ($117,000).
Sales during the three months ended September 30, 1998 were $412,000,
consisting of sales of Stellar products for a full three months and
continued sales of TpP. Stellar was acquired in April 1998 and TpP
sales commenced in the fourth quarter of 1997. Accordingly, there were
no product sales by the Company in the comparable 1997 period.
Cost of sales for the three months ended September 30, 1998 was $173,000
or 42% of sales.
Research and development expenses decreased $117,000 from $704,000 to
$587,000, primarily as a result of reductions in research and
development personnel and consulting costs offset, in part, by increases
in the cost of TpP clinical studies and point of care (POC) development
costs and the inclusion of Stellar for the entire three months of 1998.
Selling, general and administrative expenses increased $109,000 from
$973,000 to $1,082,000, primarily as a result of the inclusion of
Stellar for the entire three months of 1998 and increased costs
associated with the marketing and promotional effort for TpP.
Interest expense increased by $255,000 from $65,000 in the 1997 period
to $320,000 in the 1998 period, resulting from an increase in the
amortized debt issuance and debenture discount cost component of
interest expense ($240,000 and $19,000 during the third quarters of
1998 and 1997, respectively). Upon conversion of the Company's
convertible debentures ($83,000 and $150,000 during the third quarters
of 1998 and 1997, respectively), the related unamortized debt issuance
costs ($9,000 and $4,000 during the third quarters of 1998 and 1997,
respectively) are charged to paid-in capital. As a result of the
November 1998 repurchase of the Company's 5% Convertible Debentures,
ongoing interest expense related to these debentures ceased. The
Company will record a one time charge to earnings of approximately
$1,140,000 in the fourth quarter of 1998, relating to the early
extinguishment of the 5% Convertible Debentures.
Investment income decreased $36,000 from $127,000 in the 1997 period to
$91,000 in the 1998 period as a result of lower average cash balances
offset, in part, by slightly higher interest rates on U.S. Government
obligations in which most of the Company s available cash is invested.
Nine Months Ended September 30, 1998
The Company s net loss decreased $1,469,000 during the nine months ended
September 30, 1998 from a loss of $6,041,000 during the 1997 period to
a loss of $4,572,000 in the 1998 period. The reduction in the net loss
is attributable to the reduced research and development expenses
($1,013,000), gross profit ($538,000 or 63%) on sales of Stellar
products and TpP kits and reduced interest expense ($382,000) offset,
in part, by increased selling, general and administrative expenses
($263,000) and reduced investment income ($191,000).
Sales during the nine months ended September 30, 1998 were $853,000,
consisting of sales of Stellar products since the date of acquisition of
Stellar in late April 1998 and sales of TpP, which commenced in the
fourth quarter of 1997. Accordingly, there were no product sales by the
Company in the comparable 1997 period. Revenues during the nine months
of 1997 ($9,000) were from the sale of reagents, research materials and
services relating to collaborative agreements.
Cost of sales for the nine months ended September 30, 1998 was $315,000
or 37% of sales.
Research and development expenses decreased $1,013,000 from $2,676,000
to $1,663,000 in the 1998 period primarily due to the absence of costs
incurred during the first six months of 1997 relating to the relocation
of the Company's research laboratories from South Bend, Indiana to
Boston, Massachusetts and reduced consulting costs offset, in part, by
increases in the cost of TpP clinical studies and POC development costs.
The costs of such relocation included severance, relocation and moving
costs as well as duplicate facility costs.
Selling, general and administrative expenses increased $263,000 from
$2,950,000 in the 1997 period to $3,213,000 in the 1998 period as a
result of increased personnel costs, selling expenses relating to the
marketing and promotion of TpP and the inclusion of Stellar from April
23, 1998.
Interest expense decreased $382,000 from $878,000 in the 1997 period to
$496,000 in the 1998 period due to a reduction of $238,000 in
amortization of the debt discount ($492,000 related to the Company's 7%
Convertible Debentures included in the first quarter of 1997 as compared
to $254,000 of amortization related to the Company's 5% Convertible
Debentures issued May 20, 1998) and lower outstanding Debentures during
the first five months of 1998. Upon the conversion of the Company's
Convertible Debentures ($1,783,000 and $8,450,000 during the nine months
of 1998 and 1997, respectively), the related unamortized debt issuance
costs ($33,000 and $357,000 during the nine months of 1998 and 1997,
respectively) were charged to paid-in capital. As a result of the
November 1998 repurchase of the Company's 5% Convertible Debentures,
ongoing interest expense related to these debentures ceased. The
Company will record a one time charge to earnings of approximately
$1,140,000 in the fourth quarter of 1998, relating to the early
extinguishment of the 5% Convertible Debentures.
Investment income decreased $191,000 from $453,000 in the 1997 period to
$262,000 in the 1998 period as a result of lower average cash balances
offest, in part, by slightly higher interest rates on U.S. Government
obligations in which most of the Company s available cash is invested.
Liquidity and Capital Resources
As of September 30, 1998, the Company had working capital of $5,802,000
compared to $6,961,000 at December 31, 1997. The Company's management
believes that current working capital will be sufficient to fund its
liquidity needs beyond 1998.
During the nine months ended September 30, 1998, the Company's cash,
position decreased by $1,426,000 to $5,695,000. Operating activities
used $3,839,000 in cash, resulting primarily from a cash loss of
$3,825,000, net of non cash expenses of $747,000, and cash used by a net
change in operating assets and liabilities of $14,000. Investing
activities used $336,000 in cash (primarily related to the acquisition
of Stellar and payments for patent costs and fixed assets). Financing
activities provided a net of $2,779,000 in cash, principally from the
sale of $4,000,000 principal amount 5% Convertible Debentures for
$3,727,000, after expenses, offset, in part, primarily by payments made
in lieu of issuing shares of Class A Common Stock to holders of the
Company's 7% Convertible Debentures upon conversion thereof. During the
nine months ended September 30, 1998, $83,000 of the 5% Convertible
Debentures, $1,350,000 of the 7% Convertible Debentures and $350,000 of
the 8% Convertible Debentures were converted into an aggregate of
1,036,142 Class A Common Stock.
On October 27, 1998, the Company agreed to issue an aggregate of
10,800,000 shares of its Class A Common Stock to a group of accredited
investors at a price of $.25 per share, a price above the market price
of the Company's Class A Common Stock at the time. Of such shares,
4,000,000 shares were purchased by Alfred J. Roach, the Company's
Chairman of the Board of Directors and Chief Executive Officer, for an
aggregate price of $1,000,000. The Company has agreed to register the
shares issued in the private placement under the Securities Act of 1933,
as amended (the "Securities Act"), within six months after the issuance
of the shares. The $2,700,000 proceeds thereof, together with
$1,152,000 of the Company's funds, were used to repurchase the remaining
$3,248,000 outstanding principal amount plus accrued interest and a 16%
premium of the Company's 5% Convertible Debentures and Warrants to
purchase 261,228 shares of the Company's Class A Common Stock, each of
which had been issued in May 1998 as part of a private placement of
$4,000,000 of such debentures, of which $752,000 has been converted
into an aggregate of 4,000,000 shares of the Company's Class A Common
Stock. As a result, in the fourth quarter of fiscal 1998, the Company
will record a one time charge to earnings of approximately $1,140,000
for the loss on the early extinguishment of the 5% Convertible
Debentures.
The Company expects to continue to incur substantial expenditures
relating to new diagnostic and therapeutic product development, ongoing
clinical studies for TpP, marketing and manufacturing of TpP and the
Company's FiF reagents and kits, developing point of care (POC) formats
for TpP, additional preclinical development of neurological compounds
(ABS 103 and ABS 205), additional investment in Stellar's product line
by filing 510K's for FDA approval and developing new monoclonal
antibodies and products based on the proprietary antigen free mouse
technology. In addition, the Company is seeking strategic acquisitions
of products and/or companies which may entail the use of cash, issuance
of stock or debt. While the Company has begun marketing its products
directly, its product development plans still include entering into
collaborative, licensing and co-marketing arrangements with other
diagnostic and pharmaceutical 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. There can be no assurance that such arrangement will be
entered into, or if entered into, that the terms thereof will be
favorable to the Company. Without such collaborative, licensing or co-
marketing arrangements, additional sources of funding will be required
to finance the Company. There can be no assurance that such financing
will be available, or if available, the terms thereof.
Year 2000
The Company has been assessing the impact of the Year 2000 issue on its
information systems. In connection with these assessments, which are
ongoing, the Company has identified potential deficiencies and is
addressing them through upgrades and other remediation. In accordance
with accounting rules, costs associated with modifying existing computer
software for Year 2000 will be expensed as incurred. In addition, the
Company is in the process of evaluating the measures being undertaken by
its customers and suppliers to address the Year 2000 issues. The
Company is not dependent on any one customer nor supplier and believes
alternate sources of supply for product components are widely available.
The cost of implementing the upgrades and remediations are not expected
to be material to the Company's results of operations.
PART II
OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ended September 30, 1998, holders of $83,000 of
the Company's 5% Convertible Debentures converted such debentures into
184,524 shares of the Company's Class A Common Stock. The Company
believes that the exemption from registration afforded by Section
3(a)(9) of the Securities Act of 1933, as amended (the "Act"), is
applicable to the issuances of such shares as such issuances involved a
security exchanged by the Company with existing securityholders
exclusively where no commission or other remuneration was paid or given
directly or indirectly for soliciting such exchanges.
In connection with a lease agreement for certain facilities, the
Company may, at its option, pay a portion of the annual lease obligation
with Class A Common Stock (the "Issued Shares") plus a warrant (the
"Warrant") to purchase shares of Class A Common Stock (the "Warrant
Shares"). The number of Issued Shares are computed using the average
market price of the Company's Class A Common Stock during the ten days
prior to issuance. The Warrant Shares are to be exercisable at a price
equal to the closing price of the underlying Class A Common Stock on the
date the Warrant is issued and for a period of four years from the date
of issuance. Pursuant to the lease agreement, on August 28, 1998, the
Company issued 54,293 shares of Class A Common Stock and a Warrant to
purchase 54,293 shares of Class A Common Stock at an exercise price of
$.63 per share. The purchaser agreed to acquire the Issued Shares, the
Warrant and the Warrant Shares for investment and not with a view to the
distribution of such securities. In connection therewith, the Company
has granted the purchaser certain rights to cause the Warrant Shares to
be registered under the Act at the Company's expense. The Company
believes that the exemption from registration afforded by Section 4(2)
of the Act is applicable to the issuance of such securities.
On October 27, 1998, after the close of the period covered by this
report, the Company agreed to issue an aggregate of 10,800,000 shares of
its Class A Common Stock to a group of accredited investors at a price
of $.25 per share, a price above the market price of the Company's Class
A Common Stock at the time. Of such shares, 4,000,000 shares were
purchased by Alfred J. Roach, the Company's Chairman of the Board of
Directors and Chief Executive Officer, for an aggregate purchase price
of $1,000,000. The Company has agreed to register the shares issued in
the private placement under the Act, as amended, within six months of
the issuance of the shares. The $2,700,000 proceeds thereof, together
with $1,152,000 of the Company's funds were used to repurchase the
remaining $3,248,000 outstanding principal amount plus accrued interest
and a 16% premium of the Company's 5% Convertible Debentures and
Warrants to purchase 261,228 shares of the Company's Common Stock, each
of which had been issued in May 1998 as part of a private placement of
$4,000,000 of such debentures, of which $752,000 had been converted into
an aggregate of 4,000,000 shares of the Company's Class A Common Stock.
Each of the investors represented to the Company that such investor was
acquiring the shares issued to such investors for investment only and
not with a view to the distribution of all or any part thereof as the
phrases "investment only" and "distribution" have meaning under the Act,
and that each is an accredited investor within the meaning of Rule
501(a) of Regulation D under the Act. Accordingly, the Company believes
that the exemption from registration afforded by Section 4(2) of the
Securities Act is applicable to the issuance of the shares so issued.
Item 4. Submission of Matters to a Vote of Securityholders
At a Special Meeting of Stockholders of the Company held on
November 11, 1998, after the close of the period covered by this Report,
stockholders of the Company authorized an Amendment to the Company's
Restated Certificate of Incorporation in order to effect a stock
combination (reverse split) pursuant to which the Company's outstanding
shares of Class A Common Stock and Class B Common Stock would be
exchanged for new shares of Class A Common Stock and Class B Common
Stock, respectively, in an exchange ratio to be approved by the Board of
Directors, ranging from one newly issued share for each four outstanding
shares to one newly issued share for each eight outstanding shares by
vote of 33,637,605 shares in favor and 3,096,323 shares against, with
139,256 shares abstaining. As a result of the Company's repurchase of
all remaining outstanding 5% Convertible Debentures, the second proposal
scheduled for consideration at such stockholders meeting (to approve the
issuance of more than 4,000,000 shares of Class A Common Stock upon
conversion of such debentures) became moot and was not considered by
stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter
ended September 30, 1998.
SIGNATURES
Pursuant to the requirements 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.
AMERICAN BIOGENETIC SCIENCES, INC.
(Registrant)
Date November 13, 1998 /s/ Josef C. Schoell
Josef C. Schoell
Vice President, Finance
(Principal Financial and
Accounting Officer)