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 year ended December 31, 1998
[ ] 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)
516-789-2600
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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_____
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 19, 1999, there were outstanding
36,018,841 shares of the registrant's Class A Common Stock and 3,000,000 shares
of its Class B Common Stock. The approximate aggregate market value (based upon
the closing price on The Nasdaq Stock Market's National Market) of shares held
by non-affiliates of the registrant as of March 19, 1999 was $43,583,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 1999
Annual Meeting of Stockholders are incorporated by reference into Part III of
this report.
PART I
Item 1. Business
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General
American Biogenetic Sciences, Inc. ("ABS" or the "Company") is engaged
in researching, developing and marketing cardiovascular and neurobiology
products for commercial development. The Company commenced selling its products
during the last quarter of 1997.
Certain ABS products are designed to be used for in vivo, while others
are designed for in vitro, diagnostic procedures. 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. During in vitro
procedures, blood, urine or other bodily fluid or tissue is extracted from the
body and the diagnostic tests are performed in a test tube or other laboratory
equipment.
ABS' main products are:
o Functional Intact Fibrinogen diagnostic test, referred to as
the FiF(TM) test. This is an in vitro diagnostic test which
measures the levels of fibrinogen in blood. Fibrinogen is a
protein used in the blood-clotting process.
o Thrombus Precursor Protein diagnostic test, referred to as the
TpP(TM) test. This is an in vitro diagnostic test used to
assess the risk of blood clots in the veins or arteries. This
test is also used to monitor the performance of anti-clotting
therapy or drugs used in the prevention of blood clots.
o In vitro diagnostics products that focus on the infectious
diseases and auto-immune disease markets to determine the
status of such diseases as human herpes and lupus
o Mouse serum used in diagnostic tests of other manufacturers.
The latter two products are manufactured by Stellar Bio Systems, Inc.
("Stellar"), all of the issued and outstanding capital stock of which was
acquired by the Company on April 23, 1998. Stellar is a manufacturer and
distributor of in vitro diagnostic products and research reagents. Reagents are
individual components of diagnostic products, such as antibodies, calibrators
and serum used in the biotechnology industry. The purchase price was $120,000 in
cash and $700,000 in Class A Common Stock (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 acquisition agreement anniversary
dates. Stellar's in vitro diagnostic products focus on the infectious disease
and auto-immune disease markets. Stellar markets a complete line of products to
determine the immune status of numerous human herpes viruses. In addition,
auto-immune diseases, such as lupus, are detected using Stellar's products.
Stellar is also the largest domestic provider of mouse serum, a blood component
that lacks blood cells and which is used in diagnostic tests by major in vitro
diagnostic product manufacturers for a variety of purposes.
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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 516-789-2600.
Forward Looking Statements
In order to keep investors informed of ABS' future plans and
objectives, this Report (and other reports and statements issued by the Company
and its officers from time to time) contains certain statements concerning the
Company's future results, future performance, intentions, objectives, plans and
expectations that are or may be deemed to be "forward-looking statements". The
Company's ability to do this has been fostered by the Private Securities
Litigation Reform Act of 1995 which provides a "safe harbor" for forward-
looking statements to encourage companies to provide prospective information so
long as those statements are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the statement. The Company believes it is in
the best interests of investors to take advantage of the "safe harbor"
provisions of that Act. 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 ABS also 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. Factors that
could cause or contribute to such differences include, but are not limited to,
ABS' ability to complete products under development and to maintain superior
technological capability, foresee changes and identify, develop and
commercialize innovative and competitive products (see "Products in Development"
below), obtain widespread acceptance of its products by the medical community,
including the reliability, safety and effectiveness of such products (see
"Marketing and Sales" below), meet competition (see "Competition" below), comply
with various governmental regulations related to the Company's products and
obtain government clearance to market its products (see "Government Regulation"
below), successfully expand its manufacturing capability (see "Manufacturing"
below), attract and retain technologically qualified personnel (see "Personnel"
below), 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).
Global Scientific Network(R)
ABS' operations are comprised of a portfolio of interrelated programs
and projects. In order to promote and facilitate collaborative research leading
to product development, the Company has formed the Global Scientific Network.
This network brings together teams of scientists from various
disciplines in a joint effort to expedite the research, development and
commercialization of ABS's diagnostic and therapeutic products. This resource
offers the Company's management an opportunity to review and evaluate new
technologies available in addition to a network of certain scientific leaders
who offer advice and direction. To facilitate the identification and screening
of new technologies, the Company has scientific coordinators in St. Petersburg,
Russia; and Beijing, China. These activities are coordinated from the Company's
office in Dublin, Ireland.
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The Company is currently collaborating with leading medical and
scientific institutions worldwide including University College Dublin, Ireland;
University of Hanover, Germany; William Harvey Research Institute, London,
England.
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. Pursuant to these agreements, the Company is paying certain
research expenses and the costs of filing and processing patent applications in
the United States and other countries, and is to pay the inventors or the
university a royalty, which is typically 5% of net product sales. The term of
each agreement, generally, is the duration of any patents that may be granted
with a minimum term of 10 years. See "-- Agreements for Neuroscience Programs."
The Antigen-Free Mouse Colony -- Monoclonal Antibodies
ABS' enabling technology is a patented antigen-free (AF) 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 AF mouse colony is maintained in a germ-free
environment and fed a chemically defined and ultrafiltered diet. When the
antigen-free mice are challenged with a foreign entity, there is a large immune
response that eventually results in the proliferation of a large number of
specific monoclonal antibody secreting cells. The AF mouse colony is covered
under ABS' United States Patent No. 5,223,410, entitled "Method for Production
of Antibodies Utilizing an Antigen-Free Animal", and United States Patent No.
5,721,122, entitled "Method Comprising Immunization of Antigen-Free Mice." In
addition, United States Patent No. 5,837,540, entitled "Method of Producing
Fibrin-Specific Antibodies Using Soluble Fibrin Polymers as an Immunogen" has
been issued and extends the method of producing antibodies to include a
hybridoma cell line. This gives the Company greater flexibility in producing its
TpP-related antibodies.
Stellar
Stellar manufactures in vitro immunodiagnostic assays utilizing an
immunofluorescent antibody assay format for infectious diseases and autoimmune
conditions. These assays determine the presence of: human herpes simplex virus
1, human herpes simplex virus 2, Epstein-Barr virus, cytomegalovirus, varicella
zoster virus, respiratory syncytial virus, human herpes virus 6, human herpes
virus 7, human parvovirus B-19, measles virus, rubella virus, adenovirus, mumps
virus, antinuclear bodies Hep-2, anti-nuclear bodies KB, anti- mitochondrial
bodies, and anti-native DNA bodies. Stellar is also a supplier of high quality,
domestic mouse serum. Stellar's mouse serum is used as an assay component by in
vitro diagnostic assay manufacturers. Stellar also provides contract services
for the development, process scale up, manufacture and purification of
monoclonal and polyclonal antibodies.
Medical Background For Cardiovascular Products
Two of ABS' main products, its FiF and TpP tests, assist doctors in
diagnosing and treating blood clots lodged in the legs and the lungs, known as
thrombosis, a condition which can be fatal. Thrombosis is also associated with
other medical conditions, like heart attacks, strokes and complications during
pregnancies. ABS is pursuing the application of its tests in these areas with
additional clinical testing. The Company has also developed patented antibodies,
45J and MH1, which are used in its TpP(TM) and FiF(TM) tests.
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Several epidemiological studies have revealed a significant causal
relationship between high fibrinogen levels and coronary artery disease (CAD).
It is widely accepted that events leading to CAD 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 CAD is the Framingham epidemiology
study (1985) conducted at the Institute for Prevention of Cardiovascular Disease
at the Deaconess Hospital, Harvard Medical School. That study concluded that
elevated levels of fibrinogen "exceeded that of all risk factors except elevated
systolic blood pressure".
Other studies indicate that individuals with elevated levels of
fibrinogen are predisposed to thrombosis. On the other hand, diminished levels
may result in hemorrhage. Thus, reagents that can be used to measure fibrinogen
can play a vital role in determining the appropriate level of thrombolytic
therapy, as well as determine an individual's risk of CAD.
ABS has developed, through its AF mouse colony, monoclonal antibodies
that react specifically with both fibrinogen and fibrin.
Some of the most hazardous sites for inappropriate blood clot formation
include the coronary arteries where a blood clot can lead to myocardial
infarction (heart attack); the arteries leading to the brain, where a blood clot
can cause stroke; and the veins of the legs which can lead to a pulmonary
embolism.
Thrombi (blood clots) that form in the bloodstream consist of two major
parts: a cellular component made up of platelets, and a meshwork of fibrin
fibers that cements the platelets into an insoluble mass which has the
mechanical strength to withstand the pressure of blood in the circulation. The
fibrin component is insoluble and is derived from a blood protein, fibrinogen,
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
to fibrin at the site of vascular injury.
Just as the generation of thrombin is the seminal event in fibrin
formation, 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 fibrinogenolysis, e.g., dissolution
of fibrinogen, 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.
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Products Developed and Under Development
In Vitro Diagnostic Tests Based on Monoclonal Antibody 45J
In February 1992, ABS obtained United States Patent No. 5,091,512 for a
monoclonal antibody, designated 45J, that recognizes fibrinogen. This antibody
is intended to be used as an in vitro diagnostic tool for measuring fibrinogen
in blood.
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.
Functional Intact Fibrinogen Assay (FiF(TM)): This test, known as
Functional Intact Fibrinogen (FiF(TM)), has been cleared by the Federal Drug
Administration (the "FDA"), and is intended to provide a direct and accurate
quantitative measurement of the amount of fibrinogen present in plasma. In May
1996, a research group of the Framingham Heart Study reported that the FiF(TM)
test 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 the FiF(TM) test were correlated with the
prevalence of cardiovascular disease both by itself and when adjusted for age,
weight, smoking and diabetes. The Company has been marketing the FiF test in a
manual format kit since late 1997 and continues to seek corporate partners to
include the FiF test on automated equipment. 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.
Diagnostic and Therapeutic Products Based on Monoclonal Antibody MH1
In 1992, ABS obtained United States Patent No. 5,120,834 for a
monoclonal antibody (designated MH1) that specifically identifies fibrin and
does not react to fibrinogen or fibrin degradation products. Since levels of
fibrin degradation products become extremely elevated during clot development as
well as thrombolytic (clot dissolving) therapy. This property sets it apart from
all other fibrin specific antibodies known to the Company. The Company is using
MH1 for its TpP assay and is seeking to use MH1 in three potential products.
Thrombus Precursor Protein (TpP(TM)): The TpP(TM) is an enzyme test
which uses ABS' monoclonal antibodies MH1 and 45J. TpP measures soluble fibrin
polymers in blood to indicate active blood clot formation (thrombosis) in
individuals with possible myocardial infarction (MI) heart attack and other
clinical conditions precipitated by clot formation such as deep vein thrombosis
(DVT) blood clots in the leg. Approximately 10 million people in the United
States present with chest pain each year at emergency rooms. However, as much as
80% of these individuals do not have a heart attack and may be suffering from
some
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less serious conditions. An early warning test that establishes those patients
that are not having a heart attack will eliminate expensive diagnostic
procedures and unnecessary hospital admissions. Furthermore, the early
identification of those patients who are forming life threatening blood clots or
suffering from a heart attack would permit earlier use of clot dissolving drugs
or anticoagulants.
Current biochemical tests for acute myocardial infarction (AMI) measure
cardiac muscle proteins which leak out as a result of dying heart muscle.
Examples of muscle cell proteins used to confirm MI include, creatine kinase
(CK), creatine kinase MB isoform (CKMB), lactate dehydrogenase (LD), troponin
and myoglobin. This release of cardiac specific proteins only occurs 4-6 hours
after the onset of clinical symptoms; therefore, there is a clinical need for an
earlier warning of MI. The detection of blood clot formation early in the
clinical event should facilitate proper identification and treatment of MI
patients with life saving, clot dissolving drugs. 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.
There are 12 million surgical procedures performed each year in the
United States alone which put patients at risk of forming a blood clot. TpP
provides a means to measure intravascular coagulation (fibrin formation) in
post-operative patients to determine the risk of deep vein thrombosis and its
clinical sequelae, pulmonary embolism. Soluble fibrin polymers have been
identified by electrophoretic techniques in the plasma of patients with
different clinical conditions including MI and DVT. Elevated soluble fibrin
levels, as determined by ELISA (Enzyme Linked ImmunoSorbent Assay), a laboratory
format of an immuno- diagnostic test, have also been reported in other clinical
conditions where intravascular fibrin formation has been indicated, including
disseminated intravascular coagulation (DIC) and patients undergoing surgical
procedures who are experiencing thrombotic complications. It has also been
demonstrated that TpP levels are significantly lower in patients who are
undergoing invasive surgical procedures (e.g. PTCA) and have been adequately
anticoagulated. The Company's TpP test 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 the Company's TpP test to monitor patients
post-operatively was conducted at Johns Hopkins School of Medicine and at the
University of Perugia, Italy in 1997. These studies showed that TpP was elevated
post operatively.
In September 1995, ABS obtained United States Patent No. 5,453,359 for
the use of this test to measure intravascular fibrin polymer formation in
patients with symptoms indicating a blood clotting event. In December 1998, ABS
obtained a United States patent which applies to the TpP test kit itself and
extends the Company's claims regarding the antibodies used to recognize the
presence of TpP in blood. The new patent claims the use of any antibody that
recognizes or binds to the epitope, an antibody binding site on the TpP protein,
that is recognized by MH-1 or 45J.
In October 1995, ABS entered into a license and collaboration agreement
with F. Hoffmann-La Roche, Ltd. ("Hoffman-La Roche") for the co-development and
marketing of the Company's TpP test for the detection of active thrombosis
(blood clot formation). The agreement grants Hoffmann-La Roche a worldwide
license to market the TpP test in a latex based particle agglutination format.
Under the agreement, the Company received a $60,000 non-refundable development
payment to adapt the TpP test in the latex based particle agglutination format
to Hoffmann-La Roche's automated diagnostic systems. The Company is also to
receive milestone payments upon achievement of certain commercialization goals.
The TpP test is to be manufactured by the Company for use on Hoffmann-La Roche's
instruments. ABS is to receive a
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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.
In October 1996, ABS received 510(k) clearance from the FDA to market
the TpP test to aid in the risk assessment of thrombosis (blood clot formation)
and the monitoring of anticoagulant therapy. The Company began to market TpP in
late 1997 through independent distributors.
In 1998, ABS 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. Dr. Yale Arkel was appointed as the
Company's Coordinator of Clinical Development for TpP. Dr. Arkel, director of
the Blood Disorder Center for Hemostasis and Thrombosis at Overlook Hospital in
Summit, New Jersey, maintains his current clinical and research duties and acts
as an outside consultant to the Company.
In addition, ABS is developing a hand-held, disposable, point-of-care
device which will measure TpP levels in plasma. An initial prototype of a
portable, hand-held device for obtaining semi-quantitative test results has been
produced and the Company plans to submit a 510(k) to the FDA for marketing
approval of the point-of-care TpP test in 1999. The Company believes that the
more user-friendly and rapid point-of- care format will greatly enhance the
market opportunity for the TpP test. The Company intends to seek outside sources
for the manufacture of its point-of-care device and corporate partners to market
this product.
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 in
pre-clinical animal studies and clinical human studies which generates an image
with the resolution required for commercial use. The product is intended to
permit the rapid imaging of blood clots in the lungs, a condition known as
pulmonary embolism (PE); and the detection of blood clots in the legs (a
clinical condition known as deep vein thrombosis (DVT)). The primary protein
component of a thrombus is fibrin, and an antibody that can differentiate fibrin
from its plasma precursor, fibrinogen, can be used when appropriately labeled
with a radioisotope, to image the site and extent of an occlusion and to carry
thrombolytic reagents to the site.
Traditional methods for detecting a thrombus in the circulatory system
have consisted of angiography, venography, duplex doppler and monitoring radio
labeled blood clot components, derived from a human donor, injected into the
circulatory system and then absorbed by the clot. These procedures are costly,
often may lack sensitivity and some can pose potential risks to the patient. The
large quantity of dye required in angiography and venography may cause kidney
problems and may irritate the walls of blood vessels. Also,
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in angiography a catheter is used for delivery of the dye into the arterial
system which adds further to the risk of the patient. In contrast, only a
minimum quantity of ABS' radio labeled MH1 need be used, and since the antibody
is not derived from man, there is no risk of human blood-borne disease. However,
whenever a foreign substance is introduced into the human body, there is the
risk of an immune reaction and cases of reactions to mouse-derived antibody have
been reported.
In March 1993, ABS was cleared by the FDA, under an Investigational New
Drug (IND) application, to begin Phase I human clinical testing of MH1 in
imaging blood clots for PE and DVT, thus becoming the Company's first product to
be evaluated in humans. In January 1995, ABS completed Phase I testing for PE
and DVT. 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. ABS is seeking corporate partners to fund,
collaborate, license and to conduct full Phase II and Phase III trials and
market the product.
MH1 as a Delivery Vehicle for Thrombolytic Therapy: The Company is
seeking to develop a product using MH1 as a delivery-vehicle for known
thrombolytics (drugs that dissolve blood clots). Tests by the Company have
demonstrated the ability to link MH1 to a known thrombolytic agent to form a
potent, fibrin specific, therapeutic agent which, in animals, has demonstrated
superior clot dissolving properties. In March 1998, ABS obtained United States
Patent No. 5,723,126 for this clinical application.
MH1 as an Antithrombotic: The Company is also investigating the utility
of MH1 as an antithrombotic agent (potential product 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 United States
Patent No. 5,487,892 for this clinical application.
There can be no assurance that the Company's products in development
will prove to be commercially viable, that any of the products will receive
regulatory clearance or clearance for particular indications, or that ABS will
successfully market any products or achieve significant revenues or profitable
operations. The Company is seeking to enter into additional collaborative,
licensing, distribution, and/or co-marketing arrangements with third parties to
expedite the commercialization of its products. However, there can be no
assurance that ABS will be able to enter into any such additional arrangements
or, if it does, that any such arrangements will be on terms that will be
favorable to ABS.
Neurobiology Program
The goal of this longer term program is to develop fine chemical
compounds for the treatment of epilepsy, migraine and mania and to treat and
halt the progression of neurodegenerative diseases such as Alzheimer's,
Parkinson's, neuropathy, trauma and stroke. Most of the applications developed
to date, have been developed in conjunction with scientists in the Company's
Global Scientific Network.
Therapeutics
The Company, in collaboration with the National University of Ireland,
Dublin, University of Hanover, Germany, University of Notre Dame, United States
and fellow researchers within the Company's Global Scientific Network, has
identified chemical compounds for the potential treatment of neurodegenerative
diseases.
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The Company has filed two United States provisional patent applications
relating to small molecules which may be useful for enhancing memory - ABS 300
series. This technology has resulted from the collaboration of scientists at the
National University of Ireland, Dublin and the University of Notre Dame.
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 (NGF)-like
activity. The ABS 200 series of compounds can penetrate the blood-brain barrier,
unlike NGF, which requires specific development of a delivery system. A lead
compound, ABS 205, has been identified which can induce the expression of a
protein known as neural cell adhesion molecule (NCAM) in vitro. NCAM is involved
in memory, neurodevelopment and other neuroplastic events. ABS 205 can also
enhance NCAM function in the rat hippocampus and cortex, areas known to be
involved in memory formation. Moreover, ABS 205 protects against chemical
induced amnesia (memory loss) in animals. The Company has received United States
Patent No. 5,672,746 relating to this technology. ABS has recently filed a
reissue application for this patent. An interference in the United States Patent
and Trademark Office was declared regarding this technology. See "Proprietary
Technology, Patents and Trade Secrets".
Epilepsy
ABS is developing a series of anticonvulsant compounds that relate to
valproate, which is currently used for the treatment of epilepsy, migraine and
mania. In pre-clinical trials in Germany, the Company's lead compound, ABS-103,
has been shown to potently control seizure activity without sedative action or
birth defects commonly associated with other anticonvulsants. The Company has
isolated the R-isomer (R-103) ABS-103. Isomers can be described as mirror images
of the same compound. R-103 is an enantiomer, which is a specific type of
isomer. ABS scientists were able to isolate the R (right) isomer from the S
(left) to produce R-103. The value of isolating R-103 lies in its superior
safety and efficacy profile. Scientists have recently discovered that for many
drugs one of the isomers is responsible for the therapeutic effects and that the
other isomer may be inactive or cause unwanted side effect. R-103 is the
preferred chemical entity for commercial development. ABS has received United
States Patent No. 5,786,380 relating to the use of ABS- 103 as an
anticonvulsant. Patents have been obtained in Europe and additional applications
relating to this technology are pending.
Agreements for Neuroscience Programs
ABS has entered into various agreements, with universities and/or
individual scientists under the Company's Global Scientific Network, which
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 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 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
development partners.
ABS has also entered into development agreements with the National
Institutes of Health (NIH) for some of its neurobiology products, including an
agreement with the NIH (epilepsy branch) in 1998 to evaluate ABS-103 and R-103.
Results of these evaluations are expected to be available in mid 1999. In
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addition, ABS received Phase I Small Business Innovation Research (SBIR) grant
funding from the NIH to further evaluate the effect of ABS-205 on learning and
memory.
There can be no assurance that the Company's neurobiology products will
prove to be commercially viable, or that ABS will successfully market the
products or achieve significant revenues or profitable operations or enter into
any arrangements with third parties for development of the neurobiology
products, or if it does, that any such arrangements will be on terms that will
be favorable to ABS.
Various Other Agreements
As part of its development stage activities, ABS, in the ordinary
course of business, enters into various agreements that provide for the
expenditure by the Company of funds for research and development activities.
These agreements typically provide for the payment of royalties (typically 2% to
8% of net sales) by ABS if any products are successfully developed and marketed
as a result of the work being performed under the agreement. Reference is made
to Note 10 of the Notes to Consolidated Financial Statements for a discussion of
various arrangements which the Company has entered into for collaborative
research and development projects (including arrangements for the use of space
and services) and technology license arrangements for the development and
prospective manufacturing and sale of products being developed.
Marketing and Sales
During fiscal year 1998, the Company had one customer account for 34%
of the Company's revenue, another customer accounted for 17%, while a third
customer accounted for 10% of the Company's revenues. The Company does not
believe that the loss of any of these customers would have a material adverse
effect on the Company.
The Company anticipates that commercial sales of its in vitro test kits
will be directed to hospitals, laboratories, clinical laboratories and
physicians in large group medical practices. The Company believes that sales to
hospitals and clinical laboratories will be dependent on general acceptance by
physicians using direct fibrinogen level measurement as part of routine and
special blood analyses.
Because ABS lacks the necessary financial resources, it intends to rely
on collaborative arrangements with pharmaceutical firms to conduct and fund the
major portion of the human clinical trials that are necessary to obtain
regulatory approval for any in vivo products it may develop. The Company also
intends to rely on these firms to market and sell the products exclusively,
especially during the first few years of the collaboration. While each
arrangement 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 other arrangements or, if the arrangements which it has entered into
or may enter into in the future are not successful, the Company will likely seek
to market such products, through distributors, which would require ABS to
develop a marketing program to support sales. The Company has begun marketing
through distributors its TpP diagnostic kit which requires, among other things,
the Company to pay the expenses of developing promotional literature and aides,
hiring sales support personnel and completing studies to support clinical use of
the product which will aid distributors in selling ABS's in vitro diagnostic
tests. Independent distributors that ABS uses also market similar products.
11
There can be no assurance that any marketing arrangements will be
entered into or, that if entered into, they will be on terms similar to those
discussed above or on terms that will be favorable to the Company. If no
arrangements are entered into, ABS will require substantial alternative
financing in order to market its products. There can be no assurance that any
such financing arrangements will be available to the Company or, if available
to, it will be available on terms acceptable or favorable to the Company.
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 the general acceptance in the
medical community of the Company's proposed products. Such promotional
approaches may include: publicizing existing studies; offering the products to
current practitioners and researchers who are leaders in their fields for their
use and publication of their findings; conducting comparative studies with
competitive products and methodologies and publishing the results of the
studies; and sponsoring professional symposia and seminars.
The personnel and financial resources of the Company are not sufficient
to permit the Company to alone gain the acceptance of the medical community for
ABS' proposed in vivo pharmaceutical products or vaccines. Accordingly, the
Company may be required to collaborate with one or more pharmaceutical
companies, which will provide the necessary financing and expertise to obtain
the acceptance of the medical community of ABS' proposed in vivo products. Such
arrangements are likely to entail, among other things, the sharing of revenue or
profits with such companies.
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 to, and if so the length of time it would take to, gain such acceptance.
Competition
The biotechnology industry is characterized by rapid technological
advances, evolving industry standards and technological obsolescence.
ABS has numerous competitors, none of whom is believed to be dominant,
and it is likely that others may enter the field. Competitors may develop
products which may render ABS' products obsolete or which have advantages ABS'
products, such as greater accuracy and precision or greater acceptance by the
medical community. ABS' inability to meet and surpass its competitors'
technological advances, could have a material adverse effect on the Company's
business, financial condition and results of operations. Competing products may
also get through the regulatory approval process sooner than ABS' products,
enabling those competitors to market their products earlier than ABS can.
Usually, the first person to market a product has a significant marketplace
advantage. In addition, other products now in use, presently undergoing the
regulatory approval process, or under development by others, may perform similar
functions as our existing products or those under development.
12
Proprietary Technology, Patents and Trade Secrets
ABS' policy is to seek patent protection for its proposed products,
whether resulting from its own research and development activities or any
development and licensing arrangements that the Company enters into. ABS has
been issued United States Patents, Nos. 4,870,023 and 5,041,379, which will
expire 2006 and 2008, respectively; one 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 a United States Patent No.
5,223,410, which will expire in 2010, covering the use of its AF 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. Additional patent applications are pending
covering alternative embodiments of the Company's proprietary fibrin-specific
monoclonal antibody, as well as improved methods of raising fibrin-specific
monoclonal antibodies and of using the soluble fibrin immunoassay. ABS has
twenty-two counterpart applications (including designated countries under patent
treaties) covering monoclonal antibodies specific for fibrinogen, monoclonal
antibodies specific for fibrin, methods for use of the Company's proprietary
fibrin-specific monoclonal antibody in a soluble fibrin assay, and as an
antithrombotic agent, and the use of the AF mouse colony to generate monoclonal
antibodies. ABS presently has issued three patents in Australia covering
monoclonal antibodies specific for fibrinogen, monoclonal antibodies specific
for fibrin, methods for localizing a blood clot in a patient, an immunoassay for
determining fibrin levels in a patient's blood, and use of the AM 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 compound that contains 2-n-propyl-4-hexynoic
acid. Patents protect this technology on behalf of the Company in the United
States and the European Patent Office. The European Patent has been activated in
16 European countries. ABS has filed additional patent applications in the
United States and other foreign jurisdictions to further protect this
technology. The Company also has exclusive worldwide rights in technology
related to certain novel neurotrophic methods and compositions. United States
Patent No. 5,672,746 issued September 30, 1997. Foreign applications to protect
this technology worldwide are pending. ABS is the worldwide exclusive licensee
of United States Patent No. 5,492,812, issued to Trinity College (Dublin,
Ireland), which will expire in 2013, covering a method for diagnosing
Alzheimer's disease, and a corresponding pending European patent application.
13
Ono Pharmaceutical, Ltd., ("Ono"), has filed third party observations
in ABS' patent applications relating to its neurotrophic compounds in the Japan,
and Australian patent offices as well as the European Patent Office. 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. On November 30, 1998, the United
States Patent and Trademark 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. As a
result of the interference, a determination will be made as to whether ABS or
Ono was the first to invent the invention within the scope of the interference
and therefore entitled to a patent, based on information not presently available
to ABS. Because interferences are interparty disputes, the cost of conducting
the interference may be substantial, whether or not the Company prevails.
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 and prevent infringement can be substantial.
Furthermore, there can be no assurance that others have not independently
developed or will not 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.
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, in general, ABS has 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 to assign to the Company all rights in any
inventions made while in ABS' engagement relating to Company activities.
However, all members of the Company' Scientific Advisory Committee may be
employed by or have consulting agreements with third parties, the business of
which may conflict 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, or 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."
14
Trademarks
ABS owns trademarks registered with the United States Patent and
Trademark Office for the names 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
for TpP(TM) and FiF(TM), may claim common law trade name rights as to other
potential products, and 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 any other countries in which the Company may
choose to market its proposed products or conduct product development, research
or manufacturing. ABS has not determined those countries, other than the United
States, where it will seek regulatory approvals to market its proposed products.
The following is a discussion of the processes required in order to obtain FDA
approval for marketing a product, which are different for the three types of
products being developed by ABS: monoclonal antibodies for in vitro use,
monoclonal antibodies for in vivo use and drugs to test neurological diseases.
In Vitro Diagnostic Products
For some in vitro diagnostic products, a process known as a "510(k)
review" is available to enable the manufacturer to demonstrate that 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) (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 FDA determines that the
device is not substantially equivalent.
In cases where ABS' product is determined by the FDA not to be
"substantially equivalent" to the predicate device, an approved pre-market
approval application ("PMA"), which involves a lengthier and more burdensome
process, will be required 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 invariably requires clinical data for a PMA and, although the
FDA may grant 510(k) clearance without supporting clinical data, such data may
be required by the FDA. ABS expects that it will submit clinical data in at
least some of its anticipated 510(k) notices. The Clinical data must be gathered
in accordance with FDA's regulations.
Medical devices may be exported before receiving 510(k) clearance or
PMA approval under certain conditions. Once cleared for marketing in the United
States, a diagnostic device must comply with certain regulatory requirements,
such as good manufacturing practices (also known as the Quality System
15
Regulation), medical device reporting, and restrictions on advertising and
promotion. The failure to comply can lead to FDA enforcement actions.
The European Union 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.
Monoclonal Antibodies for In Vivo Use and Vaccines
Any products intended for in vivo use, including vaccines, will be
subject to regulation by the FDA. The products produced, depending on their
characteristics, may be classified as "biologics" or Products regulated under
the Public Health Service Act (the "PHS" Act) and the Federal Food, Drug, and
Cosmetic Act (the "FDCA") or may be classified as non-biologic drugs regulated
only under the FDCA. Development of a pharmaceutical product for use in humans
under either statute is a multistep process. First, laboratory animal testing
establishes probable safety and parameters of use of the experimental product
for testing in humans and suggests potential efficacy with respect to a given
disease. Once the general investigative plan and protocols for specific human
studies are developed, an investigational new drug ("IND") application is
submitted to the FDA. FDA clearance of the IND is required before the study can
begin.
In general the initial phase of clinical testing (Phase I) is conducted
to evaluate the pharmacological actions and side effects of the experimental
product in humans and, possibly, to gain early evidence of possible
effectiveness. Phase I studies evaluate 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 are well-controlled,
closely monitored studies in a relatively small number of patients. Routes,
dosages and schedules of administration may also be studied. If Phase II trials
are successfully completed, Phase III trials may be commenced. Phase III trials
are expanded, controlled trials which are intended to gather additional
information about safety and effectiveness in order to evaluate the overall
risk/benefit relationship of the product and provide the evidence of safety and
effectiveness necessary for product approval. Although this is the standard drug
testing pattern, different approaches are often used, such as combining Phases I
and II.
It is not possible to estimate the time in 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.
ABS completed its agreement with Verax Corporation ("Verax"), which
manufactured the MH1 monoclonal antibody for the Phase I human trials. ABS is
party to an agreement with Creative BioMolecules Inc. ("Creative"), a bioprocess
technology company which succeeded Verax, to manufacture a sufficient quantity
of the Company's in vivo monoclonal antibody to enable the Company to conduct
human trials for Phase II, at a total cost of approximately $250,000.
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. With any given product, there is no
16
assurance that an application will be approved in a timely manner, or at all.
Failure to obtain such approvals would prevent ABS from commercializing its
products and would have a material adverse effect on the Company's business.
The FDA also has extensive regulations concerning good manufacturing
practices. ABS' compliance with good manufacturing practice, and its ability to
assure the potency, purity and quality of the drugs and biologics manufactured,
must be documented in the applications submitted for the products, and
manufacturing facilities will be subject to pre-approval and other inspections
by the FDA and other government agencies.
Continued compliance with current good manufacturing practices is
required to market both biologic and non-biologic drug products once they are
approved. Failure to comply with the good manufacturing practice regulations, or
to comply with other applicable legal requirements, can lead to seizure of
violative products, injunctive actions, other enforcement actions, and potential
criminal and civil liability on the part of a Company and of the officers and
employees of a Company.
Furthermore, the process of seeking and obtaining FDA approval for a
new product generally requires substantial funding. ABS anticipates that, in
most instances where it develops a product, the Company will seek to enter into
a joint venture or similar arrangement with an established chemical or
pharmaceutical company that will help conduct the required preclinical studies
and clinical trials and bear a substantial portion of the expense of obtaining
FDA approval.
In addition to complying with FDA regulations, ABS and the facilities
used by it are also required to comply with federal and state environmental,
occupational health and other applicable regulations. ABS believes that its
facilities comply with such regulations.
Manufacturing
While ABS has produced a limited quantity of monoclonal antibodies for
testing and evaluation of its in vitro products, there can be no assurances that
ABS will be able to either finance or meet FDA regulations for good
manufacturing practices required in order to convert and operate such 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 seek additional
third parties to manufacture its in vivo monoclonal antibody for commercial
production or enter into a joint venture or license agreement with a partner who
will be responsible for future manufacturing. Each joint venture partner or
contract manufacturer participating in the manufacturing process of 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 four different GMP manufacturers for the
production of antibodies and the TpP(TM) and FiF(TM) kits. With the acquisition
of Stellar and management's plan to consolidate its facilities in Boston, MA
into Stellar's facilities in Columbia, MD, the Company intends that the
manufacture and assembly of TpP(TM) and FiF(TM) kits will be performed in house.
Stellar's facility meets GMP regulations.
There is no assurance that third parties in the future will be able to
manufacture sufficient quantities of the Company's in vivo monoclonal antibody
necessary to obtain full FDA clearance, that the FDA will
17
accept the Company's manufacturing arrangements, or find the facilities in GMP
compliance, or that these 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.
Additionally, ABS' monoclonal antibodies are generated from an antigen free
mouse colony and instances of the human immune system negatively reacting to
mouse derived antibodies have been reported. 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, FiF and Stellar products).
Claims may also be asserted against ABS by end users of the Company's products,
including persons who may be treated with any in vivo diagnostic or
therapeutics.
Certain distributors of pharmaceutical products require minimum product
liability insurance coverage as a condition precedent to purchasing or accepting
products for distribution. Failure to satisfy such insurance requirements could
impede the ability of ABS to achieve broad distribution of its proposed
products, which would have a material adverse effect upon the business and
financial condition of ABS.
ABS has obtained product liability insurance covering its TpP and FiF
products. Although ABS will attempt to obtain product liability insurance prior
to the marketing of any of its other proposed products, there is no assurance
that ABS will be able to obtain such insurance. Also, there can be no assurance
that any insurance obtained (including its existing policies) can be maintained
or that such insurance can be acquired or maintained at a reasonable cost or
will be sufficient to cover all possible liabilities. In the event of a
successful suit against ABS, lack or insufficiency of insurance coverage could
have a material adverse effect on ABS.
Scientific Advisory Committee
ABS has a Scientific Advisory Committee (the "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
Committee generally make themselves available on an informal basis for
consultations with ABS. Members of the Committee are selected by the Company's
management.
Members of the Committee review the feasibility of the Company's
proposed research and development programs, the progress of programs undertaken
and assist in establishing both the scientific goals of ABS and the priorities
of its product development. All members of the Company' Scientific Advisory
Committee may be employed by or have consulting agreements with third parties,
the business of which may conflict 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. These individuals are not required to
devote any, and expected to devote only a small portion, of their time to ABS,
and are not expected to actively participate in the development of the Company's
technology. It is possible regulations or policies now in effect or adopted in
the future might limit the ability of the scientific advisors to continue their
relationship with ABS. Members of the Scientific Advisory Committee were used on
an informal basis for consultations in 1998.
18
Payments to the members, exclusive of expenses, is $1,000 per meeting attended.
Members of the Advisory Committee have been granted ten year options to purchase
from 5,000 to 15,000 shares of Common Stock from the Company, an aggregate of
203,000 shares held by members of the Committee (in addition to options held by
Dr. Born in his capacity as a non-employee director of the Company), at exercise
prices ranging from $1.94 per share to $7.75 per share, as of December 31, 1998.
The 1998 payments to for the advisors for informal meetings and other
consultations as a group was approximately $115,000. Certain members of the
Committee are associated with institutions with which ABS has undertaken or may
in the future engage in collaborative research efforts. Arrangements with such
institutions may result in one or more members of the Committee receiving
royalties or other compensation from such institution or ABS if such member
works as a scientist in the collaborative effort.
The members of the 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 19, 1998 are:
Giancarlo Agnelli, M.D., is Associate Professor of Internal Medicine at
the University of Perugia, Italy, where he received his medical education. Prior
to appointment to his present post he was a research fellow and clinical fellow
in the Department of Pathology and Department of Medicine at McMaster
University, Hamilton, Ontario, Canada. He continues as an associate member of
the Hamilton Civic Hospital Research Center at McMaster University. He is
co-chairman of the Sub-Committee on Control of Anti- coagulation of the
Scientific and Standardization Committee of the International Society on
Thrombosis Research. He has presented lectures at more than 200 international
and national meetings and is the author or co-author of more than 200 scientific
articles.
Denian Ba, M.D., 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, received his
Master of Science of Biochemistry from Beijing 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 Munich, Germany.
Gustav Victor Rudolf Born, M.D., D. Phil., F.R.S., is presently
Research Director of The William Harvey Research Institute at St. Bartholomew's
Hospital Medical College, London, England, and Emeritus Professor of
Pharmacology in the University of London. Among Professor Born's distinctions,
appointments and activities are: Fellowship and Royal Medal of the Royal
Society; Foundation President of the British Society for Thrombosis and
Haemostasis; Corresponding Member of the Belgian Royal Academy of Medicine;
Professor of the Foundation de France, Paris; Robert Pfleger, Paul Morawitz and
Alexander-von- Humbolst Prizes; Honorary Life Member of the New York Academy of
Sciences; Medical Advisor of the
19
Heineman Medical Research Center, Charlotte, North Carolina; Co-Director for
Centre for Thrombosis Research, Perugia, Italy; Honorary Doctorates from eight
universities including Brown and Loyola. Dr. Born is also a director of the
Company.
Francis J. Castellino, Ph.D., is Dean of the College of Science, and
Kleiderer-Pezold Professor of Biochemistry at the University of Notre Dame. He
earned a doctorate in biochemistry at the University of Iowa, and was a
postdoctoral fellow at Duke University Medical Center. He maintains a research
program studying blood coagulation and fibrinolysis.
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 expertise are in DNA repair, molecular basis of
mutagenesis and molecular biology in general.
Thomas W. Meade, CBE, DM, FRCP, FRS, is presently Director of the
Medical Research Council Epidemiology and Medical Care Unit, Wolfson Institute
of Preventive Medicine, St. Bartholomew's and the Royal London Hospital School
of Medicine and Dentistry, London, England. Additional appointments include:
Professor of Epidemiology University of London, Hon. Consultant in Epidemiology,
Northwick Park and St. Mark's NHS Trust, Hon. Consultant in Epidemiology, The
Royal Hospitals NHS Trust. He is: Doctor of Medicine, Fellow of the Royal
College of Physicians and Fellow of the Royal Society.
Daniel M. Michaelson, Ph.D., is presently Professor of Neurobiology,
Department of Neurobiochemistry, Tel Aviv University, Tel Aviv, Israel. He
earned a Ph.D. in Biophysics from the University of California, Berkeley. Among
Professor Michaelson's distinctions, appointments and activities are: Membership
of the International Society of Neurochemistry, International Society for
Developmental Neuroscience, International Brain Research Organization, the New
York Academy of Sciences, Israel Society of Neurosciences, Israel Biochemical
Society and the Israel Society for Pharmacology and Physiology. He is a member
of the Scientific Advisory Board of the Alzheimer Foundation, and a board member
of Ramot University Authority for Applied Research and Industrial Development
Ltd.
Peter Victorovich Morozov, M.D., Ph.D., is Professor of Psychiatry at
the Russian State Medical University, Moscow. He has served as the Secretary of
the International Section of the National Scientific Society of Psychiatrists
and is currently secretary of the Russian Section of French-Russian Society of
Psychiatrists. Dr. Morozov's primary area of research is psychopharmacology,
problems of classification and diagnosis, post-traumatic stress disorders. Dr.
Morozov graduated from Pirogov II Medical School and received his doctorate from
the Institute of Psychiatry AMS USSR.
20
Gerald P. Murphy, M.D., before joining The Pacific Northwest Research
Foundation in 1993 was with the American Cancer Society as the Chief Medical
Officer since 1988, served as the Associate Director and Director of the Roswell
Park Memorial Institute, Cancer Research and Treatment Center, Buffalo, New
York, from 1968 to 1985. Dr. Murphy was Professor of Urology and in charge of
the Urologic Cancer Research Laboratory at the State University of New York at
Buffalo from 1985 to June 1988. Dr. Murphy was National American Cancer Society
President for 1983 & 1984. Dr. Murphy received his B.Sc. degree (Summa Cum
Laude) from Seattle University and a M.D. degree from the University of
Washington.
Alfred Nisonoff, Ph.D., is Professor of Biology (Emeritus) at the
Rosenstiel Research Center, Brandeis University, Waltham, Massachusetts. He
earned a doctorate in chemistry from Johns Hopkins University, Baltimore,
Maryland and was a postdoctoral fellow at the Johns Hopkins Medical School. Dr.
Nisonoff is on the Scientific Advisory Committee of the Roswell Park Cancer
Institute, Buffalo, New York and was employed by ABS from November 1996 to
November 1997 as Research and Development Executive. His expertise is in the
field of immunology and idiotypic antibodies. He was also Executive Secretary
for the Task Force on Immunology, National Institute of Allergy and Infectious
Diseases (1998). Member, United States National Academy of Sciences; Former
President, American Association of Immunologists; Member, American Academy of
Avis and Sciences; Foreign Correspondent; Belgian Academy of Medicine.
Rem V. Petrov, M.D., is currently Vice-President of Russian Academy of
Sciences, Moscow, Russia and chief of the Immunology Department of the Institute
of Bioorganic Chemistry of the Academy. His main scientific interests are in
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
immunodulators).
Craig M. Pratt, M.D., currently is a Professor of Medicine, 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
Chairman of the Cardiovascular and Renal Drugs Advisory Board to the Food and
Drug Administration. Dr. Pratt also serves on the Program Planning Committee for
the Annual Meeting, American College of Cardiology.
John H. Proctor, Ph.D., Fellow and formerly Secretary General of the
World Academy of Art and Science from 1986-1997, and Past President and Life
Fellow of the Washington Academy of Sciences in Washington, D.C., and a
corresponding member of the Spanish Royal Academy of Sciences. He has
facilitated national and international technology transfer, organizational
development and productivity improvement projects for over thirty years. Dr.
Proctor has written three books and has published seventy- three technical
papers.
Ciaran M. Regan, Ph.D., D.Sc. is presently Associate Professor
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.
21
Jacob Szmuszkovicz, Ph.D., is a Professor of Chemistry at the
University of Notre Dame, Notre Dame, 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 ACS
(American Chemical Society).
Personnel
As of March 12, 1999, ABS had 34 full time employees and 9 part-time
employees. Of the full-time employees 16 are research and development personnel,
including 7 Ph.D.s, and the remaining are executive and administrative
personnel.
ABS' President and Chief Executive Officer, Executive Vice President
and Senior Vice President Business Development are parties to employment
agreements with the Company ending December 31, 1999, September 30, 2001 and
November 30, 2001, respectively. They also are parties to agreements with ABS to
keep corporate information with regard to the business of the Company
confidential during and subsequent to their employment with ABS.
None of ABS' employees are represented by a labor organization. ABS
believes its relationship with its employees is satisfactory. The Company has
standardized procedures for recruiting, interviewing and reference checking
prospective personnel.
Item 2. Properties
- - ------ ----------
ABS leases 7,700 square feet of space from Boston University in Boston,
Massachusetts which houses all of ABS's research and development activities for
an annual base rent of $275,000 for a three year term ending December 31, 1999,
of which a portion may be paid in shares of Class A Common Stock and warrants.
See Item 5 of this Report. The Company is negotiating an early termination of
this lease and intends to consolidate its research and development activities at
Stellar's facility.
ABS' subsidiary, Stellar has a lease covering 16,000 square feet in
Columbia, Maryland, with an annual base rent of $136,000 and terms ending March
31, 2001.
ABS leases office space in Copiague, New York (6,000 square feet) under
a lease expiring July 1999 (with an annual base rent of $30,000), which it
intends to renew, and in Dublin, Ireland under a short-term arrangement.
Item 3. Legal Proceedings
- - ------ -----------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
- - ------ ---------------------------------------------------
At a Special Meeting of Stockholders of the Company held on November
11, 1998, stockholders of ABS authorized an Amendment to the Company's Restated
Certificate of Incorporation in order to permit
22
the Company to effect, at any time prior to June 30, 1999 without further
stockholder approval, 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.
PART II
Item 5. Market for Registrant's Common Stock and Related Security
- - ------ ---------------------------------------------------------
Holder Matters
--------------
ABS' Class A Common Stock ("Common Stock") is traded on the Nasdaq
National Market tier of the Nasdaq Stock Market under the trading symbol MABXA.
The following table sets forth the high and low closing bid prices for the
Company's Common Stock for the periods indicated, as reported by Nasdaq, without
retail mark-ups, mark-downs or commissions.
Fiscal Years
- - ------------
High Low
1998 ---- ---
- - ----
First Quarter $2 3/8 $ 1 17/32
Second Quarter 2 31/32
Third Quarter 1 3/16 13/32
Fourth Quarter 1 23/32 5/32
1997
- - ----
First Quarter $6 $ 3 3/8
Second Quarter 3 15/16 2 1/8
Third Quarter 3 15/16 2 15/16
Fourth Quarter 3 3/4 1 1/2
23
There were approximately 694 holders of record of Common Stock as of
March 19, 1999 (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.
In connection with its Boston, Massachusetts lease agreement, ABS 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 ABS' 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 November 30, 1998, ABS issued 31,250 shares
of Class A Common Stock and a Warrant to purchase 31,250 shares of Class A
Common Stock at an exercise price of $1.03 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,
ABS has granted the purchaser certain rights to cause the Warrant Shares to be
registered under the Act at the Company's expense. ABS believes that the
exemption from registration afforded by Section 4(2) of the Act is applicable to
the issuance of such securities.
24
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,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating Results
Revenues:
Sales $1,197,000 $150,000 - - -
Royalties/License - - - $100,000 -
Collaborative Agreements - $9,000 $54,000 $27,000 -
Net Loss ($7,548,000) ($7,147,000) ($7,700,000) ($5,607,000) ($7,431,000)
Net Loss Per Share
Basic and Diluted ($.29) ($.35) ($.45) ($.39) ($.52)
Weighted Average Shares 25,740,000 20,223,000 17,209,000 14,455,000 14,399,000
As of December 31,
- - -----------------------------------------------------------------------------------------
Balance Sheet 1998 1997 1996 1995 1994
- - ------------- ---- ---- ---- ---- ----
Working Capital $2,947,000 $4,761,000 $13,697,000 $9,485,000 $7,055,000
Total Assets $6,514,000 $9,388,000 $16,473,000 $12,521,000 $8,964,000
Long-Term Debt $56,000 $8,000 $10,319,000 $7,865,000 -
Total Liabilities $918,000 $2,705,000 $10,931,000 $8,376,000 $408,000
Accumulated Deficit ($56,963,000) ($49,415,000) ($42,268,000) ($34,568,000) ($28,961,000)
ABS has not paid any cash dividends on its Common Stock since its inception.
25
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.
Liquidity and Capital Resources
ABS, a development stage company incorporated in September 1983,
launched two commercial products ( TpP(TM), ABS' Thrombus Precursor Protein
diagnostic test, and FiF(TM), ABS' Functional Intact Fibrinogen diagnostic test)
in the fourth quarter of 1997. Although to date has not derived any significant
revenues from the sale of these products. On April 23, 1998, the Company
acquired Stellar Bio Systems, Inc. ("Stellar") a manufacturer and distributor of
in vitro diagnostic products and research reagents. Reagents are individual
components of diagnostic products, such as antibodies, calibrators and serum
used in the biotechnology industry. The purchase price was $120,000 in cash and
$700,000 in Class A Common Stock (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 acquisition agreement anniversary dates.
The Company has funded its research and development activities to date
principally from (i) the sale of Common Stock issued in an initial public
offering, (ii) the exercise of the Class A and Class B Warrants issued in ABS'
initial public offering, (iii) private placements of Convertible Debentures and
Class A Common Stock, (iv) the exercise of stock options, (v) capital
contributions to ABS by it's Chairman of the Board, (vi) initial license fee
payments and, (vii) the income on funds invested in bank deposits, United States
Treasury bills and notes and other high grade liquid investments.
ABS expects to continue to incur substantial expenditures in research
and product development in the neurobiology program and in the development and
commercialization of a point of care format for TpP(TM), as well as in the FDA
approval process relating to additional 510(k) filings for TpP(TM), FiF(TM)and
Stellar's products.
As of December 31,1998, ABS had working capital of $2,947,000, compared
to $4,761,000 at December 31,1997. ABS' management believes that current working
capital along with the projected receipt of licensing fees and/or financing or
other contingency plans, will be sufficient to fund its planned activities
through the first quarter of 2000. Currently, product development plans of ABS
include licensing TpP(TM) and the neurobiology compound ABS 103, to large
pharmaceutical companies to provide additional funding and clinical expertise,
to perform additional testing necessary to obtain regulatory approvals, to
provide manufacturing expertise and to market ABS' products. Without such
licensing or co-marketing arrangements, additional sources of funding will be
required to finance ABS.
The Company's cash and cash equivalents decreased by $4,074,000 to
$3,047,000 during fiscal year 1998, primarily because cash used in operations
($5,181,000) and investing activities ($389,000) exceeded net proceeds from
financing activities ($1,496,000). Net cash of $5,181,000 was used in operations
to fund the
26
Company's cash loss from operations of $5,288,000 (net of non cash expenses of
$497,000 for depreciation and amortization, $306,000 incurred in connection with
the issuance of stock and warrants, $317,000 for debt discount amortization and
a $1,140,000 loss related to the repurchase of the Company's 5% Convertible
Debentures). Cash of $107,000 was provided by changes in operating assets
primarily as a result of an increase in accounts payable and accrued expenses
($265,000), partially offset by higher accounts receivable ($69,000) and
inventory ($91,000) due the increased operations. Cash used in investing
activities was for purchase of equipment ($41,000), the acquisition of Stellar
Bio Systems ($119,000) and capitalized patent costs ($229,000). Financing
activities provided $1,496,000. In May 1998, the Company raised $3.7 million
(net of issuance costs) from the issuance of 5% Convertible Debentures. The
debentures were convertible into Class A Common Stock at a discount to the
market price. The Company's stock price subsequently decreased to $.16 on
October 23, 1998, when the Company raised an additional $2.7 million in a
private placement of Class A Common Stock at $.25 per share (a premium over the
market). The proceeds of this private placement, plus an additional $1.1
million, was used to repurchase the outstanding debentures in order to reduce
the level of potential dilution of the Common Stock.
At December 31, 1998, ABS had net operating loss carryforwards of
approximately $55,045,000 for income tax purposes. The net operating loss
carryforwards will expire in varying amounts through 2013. In addition, ABS has
approximately $1,150,000 of available research and development tax credits to
offset future taxes. These credits expire through 2012. In accordance with
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," ABS has recorded a valuation allowance of $56,195,000 to fully reserve
for the deferred tax benefit attributable to its net operating loss and tax
credit carryforwards due to the uncertainty as to their ultimate realizability.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of a corporation of greater than 50 percentage points within
a three-year period places an annual limitation on the corporation's ability to
utilize its existing net operating loss carryforwards, investment tax and
research and development credit carryforwards (collectively "tax attributes").
Such a change in ownership was deemed to have occurred in connection with ABS'
1990 initial public offering at which time ABS' tax attributes amounted to
approximately $4.9 million. The annual limitation of the utilization of such tax
attributes is approximately $560,000. To the extent the annual limitation is not
utilized, it may be carried forward for utilization in future years. At December
31, 1998, ABS has approximately $4,830,000 of the $4.9 million of net operating
losses that are no longer subject to this limitation.
Results of Operations
ABS has not generated any significant revenues from the sale of any
products. Revenues from inception through December 31, 1998 of $2,649,000 are
attributable to nonrefundable initial license fees and collaborative research
agreements, since the fourth quarter of 1997, sales of TpP and FiF and, since
April 1998, sales of Stellar products. As a result of ABS' substantial start-up
expenses and minimal revenues, ABS had an accumulated deficit of $56,963,000 as
of December 31, 1998. ABS' research and development expenses are anticipated to
be substantial for the foreseeable future and ABS expects to continue to incur
significant operating losses.
ABS initiated its marketing efforts for TpP and FiF in the microtiter
plate format, in November 1997. ABS made initial sales of TpP kits in 1997 and
continued sales of TpP kits to European, Japanese and United States
distributors. ABS' efforts in 1999 will be directed toward increasing sales of
TpP and FiF in the EIA
27
format by adding distributors, completing the development of the point of care
(POC) format of TpP, entering into license agreements for the POC TpP and the
neuro compound, ABS 103, continuing clinical studies with TpP for additional
indications and expanding Stellar's product base through FDA 510K filings and
product acquisitions. ABS has licenses for TpP with Abbott and Roche in the
automated instrument format and a license for 45J with Yamanouchi. ABS does not
have any performance obligations under these agreements. In order to market the
product, the licensees will be required to file for the appropriate governmental
clearances. ABS has a sufficient quantity of antibodies to initially supply
these licensees. Management believes that the POC format will increase the
commercial potential of the TpP test and encourage the licensees to complete the
commercialization process under these agreements.
Comparison of Years Ended December 31, 1998 and 1997
ABS' net loss was $7,548,000 for the year ended December 31, 1998
compared to $7,147,000 for the year ended December 31, 1997. The increase was
primarily the result of an extraordinary charge for the early retirement of
debentures of $1,140,000 discussed above. The loss before the extraordinary
charge decreased by $739,000. This decrease is due to Stellar operations
(included from April 23, 1998), continued sales of TpP and FiF and reduced
research and development costs offset, in part, by increased selling, general
and administrative and the facility consolidation costs.
Sales during 1998 of $1,197,000 include sales of Stellar products since
the date of acquisition in late April 1998 and sales of TpP and FiF. TpP sales
were comparable to the 1997 sales of $150,000. Stellar product sales increased
over 1997 (prior to its acquisition and accordingly, prior to the inclusion of
it's results in the Company's consolidated results of operations).
Cost of sales increased by $433,000 during the twelve months ended
December 31, 1998 compared to the twelve months ended December 31, 1997 due
primarily to increased sales. Cost of sales as a percentage of sales was 38.8%
in 1998 and 21.3% in 1997. The percentage increase was due to Stellar products
having a higher cost, plus an increase in the cost of TpP and FiF kits.
Research and development costs decreased $1,081,000 from $3,242,000 to
$2,161,000 in the 1998 period. The decrease was primarily due to the absence of
costs incurred during the first six months of 1997 relating to the relocation of
ABS' research laboratories from South Bend, Indiana to Boston, Massachusetts.
The cost of relocation included severance, relocation and moving costs as well
as duplicate facility costs. The decrease was also attributable to a reduction
in personnel (FDA filing related) and consulting costs offset, in part, by
increases in the cost of TpP clinical studies and the TpP point of care
development costs.
Selling, general and administrative expenses increased by $765,000 from
$3,667,000 in the 1997 period to $4,432,000 in the 1998 period, primarily as a
result of the inclusion of Stellar, selling expenses relating to the marketing
and promotion of TpP and increased personnel cost relating to marketing of TpP
and business development.
Facility consolidation cost of $252,000 includes severance costs, lease
termination expenses and a write-down of leasehold improvements. In order to
conserve resources and operate more efficiently with less duplication,
management decided to close the Boston facility and consolidate the research and
development and antigen free mouse colony at the Stellar facilities in Columbia,
Maryland. The process of closing the Boston facility is expected to be completed
in the first half of 1999.
28
Interest expense was $301,000 lower in 1998 than in 1997 due to a lower
average amount of debentures being outstanding during the year, with those being
outstanding bearing a lower average interest rate.
Interest income, net, was $230,000 lower in 1998 than in 1997 due to
lower average cash balances.
Comparison of Years Ended December 31, 1997 and 1996
ABS' net loss was $7,147,000 for the year ended December 31, 1997
compared to $7,700,000 for the year ended December 31, 1996. The decrease of
$553,000 was primarily due to a decrease in interest expense of $1,035,000 and
increase in cost and expenses of $598,000 and product revenue of $150,000.
Revenue in fiscal year 1997 was primarily from the sale of TpP(TM) diagnostic
kits.
Research and development expenses increased $539,000 from $2,703,000 in
the 1996 fiscal year to $3,242,000 in the 1997 fiscal year as a result of
relocating ABS' research laboratories from South Bend, Indiana to Boston
Massachusetts ( including severance, relocation and moving costs), increased
rent costs offset in part by a reduction in payments for research /
collaborative projects.
General and administrative expenses increased $27,000 from $3,640,000
in the 1996 period to $3,667,000 in the 1997 period as a result of increased
personnel as to investor relations and travel and meeting costs relating to the
launch of the TpP, offset by a reduction in consulting costs, primarily relating
to investor and public relations.
Interest expenses decreased by $1,035,000 from $1,950,000 in the 1996
period to $915,000 in the 1997 period, as a result of $1,351,000 amortization of
debt discount and $431,000 of debt issuance costs included in the 1996 period as
compared to $492,000 amortization of debt discount included in the 1997 period.
During fiscal year 1997, $8,600,000 of Convertible Debentures plus $161,000 of
accrual interest were converted into 2,995,006 shares of Class A Common Stock.
Year 2000
State of Readiness: The Year 2000 problem is the result of some
computer programs being written using two-digits rather than four to define the
applicable year. Therefore, it is possible that programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in a system failure or miscalculation.
ABS has been assessing the impact of the Year 2000 issue on its information
systems. ABS uses software developed and supported by third parties for various
applications, including financial reporting, sales, purchasing and inventory,
which will require upgrade.
In addition, ABS may face some risk to the extent that suppliers of
products and others with whom ABS has a material business relationship will not
be Year 2000 compliant. Accordingly, ABS has initiated formal communications
with significant suppliers and third parties in order to determine the extent to
which ABS may be vulnerable to the failure of these suppliers and third parties
to remediate their own Year 2000 issues. ABS will review and evaluate the
responses it receives and periodically monitor the progress of these suppliers
and third parties in addressing their own Year 2000 issues. However, ABS is not
dependent upon any one supplier and believes that it could readily replace
non-compliant suppliers, should that become necessary.
29
ABS has reviewed its non-information technology systems to determine
the extent of any changes that may be necessary and currently believes that
minimal changes are necessary for Year 2000 compliance.
Costs: The estimated cost of the Year 2000 project is approximately
$50,000. This cost estimate may change as ABS progresses in its Year 2000
project, obtains additional information and conducts further testing.
Risks: ABS is not aware, at this time, of any Year 2000 non-compliance
that will not be cured by the Year 2000 and that will materially affect ABS.
However some risks that ABS faces include: the failure of internal information
systems, a slow down in receipt of manufactured product and in customers'
ability to make payments.
Contingency Plans: As an additional precaution, ABS is in the process
of developing contingency plans to mitigate the possible disruption in business
operations that could result. These plans, which are dependent in large part on
the responses ABS receives from third parties with whom ABS has a business
relationship, are expected to be completed during the first half of 1999. Once
developed, contingency plans and related cost estimates will be continually
refined as additional information becomes available.
Item 7 a. 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 as it has no variable interest rate
debt outstanding. ABS does not believe it has any other material exposure to
market risks associated with interest rates.
Item 8. Financial Statements and Supplementary Data
- - ------ --------------------------------------------
The response to this item is submitted in a separate section of this
report, starting on page F-1.
30
Item 9. Disagreements on Accounting and Financial Disclosure
- - ------ ----------------------------------------------------
Not applicable.
PART III
--------
The information called for by Part III (Items 10, 11, 12 and 13 of Form
10-K) is incorporated herein by reference to such information which will be
contained in ABS' Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 with respect to ABS' 1999 Annual Meeting of
Stockholders.
PART IV
-------
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
- - ------- ------------------------------------------------------
(a) 1. and 2. Financial Statements and Financial Statement Schedules
The following consolidated financial statements of ABS are annexed
hereto immediately following the signature page of this Report.
Page
----
Index to Consolidated Financial Statements F -1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6 - F-8
Notes to Consolidated Financial Statements F-9 - F-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.
31
Exhibits
Exhibit No. Description
- - ---------- -----------
3.1 Restated Certificate of Incorporation of ABS, as filed with
the Secretary of State of Delaware on July 30, 1996.
Incorporated herein by reference to Exhibit 4.01 to ABS'
Registration Statement on Form S-8, File No. 333-09473.
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(a) Form of ABS' 8% Convertible Debentures due October 13, 1998.
Incorporated herein by reference to Exhibit 4.1 to ABS'
Current Report on Form 8-K dated October 12, 1995 (date of
earliest event reported), File No. 0-19041.
4.1(b) Form of the Company's 7% Convertible Debentures due September
30, 1998. Incorporated herein by reference to Exhibit 4.01 to
the Company's Current Report on Form 8-K dated September 30,
1996 (date of earliest event reported), File No. 0-19041.
4.1(c)(1) Form of ABS' 5% Convertible Debentures due May 20, 2001 (the
"5% Debentures"). Incorporated herein by reference to Exhibit
4.1 to ABS' Current Report on Form 8-K dated May 20, 1998
(date of earliest event reported), File No. 0-19041.
4.1(c)(2) Form of Securities Subscription Agreement between ABS and each
of the purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 99.1 to ABS' Current Report on Form 8-K
dated May 20, 1998 (date of earliest event reported), File No.
0-19041.
4.1(c)(3) Registration Rights Agreement between ABS and each of the
purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 99.2 to ABS' Current Report on Form 8-K
dated May 20, 1998 (date of earliest event reported), File No.
0-19041.
4.1(c)(4) Form of ABS' Series WA Warrant issued to each of the
purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 99.3(a) to ABS' Current Report on Form
8-K dated May 20, 1998 (date of earliest event reported), File
No. 0-19041.
4.1(c)(5) Form of ABS' Series WB Warrant issued to each of the
purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 99.3(b) to ABS' Current Report on Form
8-K dated May 20, 1998 (date of earliest event reported), File
No. 0-19041.
4.1(c)(6) Form of ABS' Series WC Warrant issued to each of the
purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 4.1 to ABS' Current Report on Form 8-K
dated May 20, 1998 (date of earliest event reported), File No.
0-19041.
4.1(d) Form of Purchase and Investment Agreement executed by the
Company and several investors on October 27, 1998.
Incorporated by reference to Exhibit 99 to the Company's
Registration Statement on Form S-3, file number 333-69735,
filed with the Commission on December 24, 1998.
32
4.1(e)* Form of Warrant issued to several individuals under the
Company's Financial Advisory Agreement with M.H. Meyerson &
Co., Inc., dated as of August 13, 1998 and schedule of holders
thereof.
10.1(a) + Employment Agreement dated October 1, 1996 between ABS and
Ellena M. Byrne. Incorporated herein by reference to Exhibit
10.1(b) to ABS's Form 10-K/A dated April 30, 1997, File No.
0-19041.
10.1(b)+* Employment Agreement dated November 3, 1998 between ABS and
Mr. John S. North.
10.1(c)+ Employment Agreement dated November 12, 1997 between ABS and
Dr. Emer Leahy. Incorporated by reference to Exhibit 10.1(c)
to ABS' Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (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.
Incorporated herein by reference to Exhibit 99.01 to ABS'
Registration Statement on Form S-8, File No. 33-65416.
10.2(c)+ The Company's 1996 Stock Option Plan. Incorporated herein by
reference to Exhibit A to the Company's Proxy Statement dated
April 29, 1996 used in connection with the Company's 1996
Annual Meeting of Stockholders, File No. 0-19041.
10.3 Exclusive License Agreement dated January 24, 1992 between ABS
and Yamanouchi Pharmaceutical Co., Ltd. Incorporated herein by
reference to Exhibit 10.29 to ABS' Current Report on Form 8-K
dated January 24, 1992 (date of earliest event reported), File
No. 0- 19041.
10.4 Warrant dated October 25, 1995 issued to Swartz Investments,
Inc. Incorporated herein by reference to Exhibit 10.13 to ABS'
Current Report on Form 8-K dated October 12, 1995 (date of
earliest event reported), File No. 0-19041.
21* List of Subsidiaries.
24* Consent of Independent Public Accountants.
27* Financial Data Schedule.
- - --------------------------------------------------------------------------------
* Filed herewith. All other exhibits are incorporated by
reference to the document following the description thereof.
+ Management contract or compensatory plan.
(b) Reports on Form 8-K
None
33
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.
AMERICAN BIOGENETIC SCIENCES, INC.
(Registrant)
March 25, 1999
- - -------------------------------
(Date) By /s/ Josef C. Schoell
----------------------------------
Josef C. Schoell
Vice President, Finance
(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 23, 1999 /s/ Alfred J. Roach
-------------- ---------------------------------------
(Date) Alfred J. Roach, Chairman of the
Board of Directors
March 25, 1999 /s/ Josef C. Schoell
-------------- ---------------------------------------
(Date) Josef C. Schoell
Vice President, Finance
March 25, 1999 /s/ John S. North
-------------- ---------------------------------------
(Date) John S. North
President and Chief Executive Officer
34
Signatures
----------
March 25, 1999 /s/ Timothy J. Roach
-------------- ---------------------------------------
(Date) Timothy J. Roach, Secretary,
Treasurer, and Director
March 25, 1999 /s/ Ellena M. Byrne
-------------- ---------------------------------------
(Date) Ellena M. Byrne, Executive
Vice President and Director
March 25, 1999 /s/ Joseph C. Hogan
-------------- ---------------------------------------
(Date) Joseph C. Hogan, Director
March 25, 1999 /s/ William G. Sharwell
-------------- ---------------------------------------
(Date) William G. Sharwell, Director
March 25, 1999 /s/ Gustav Victor Rudolf Born
-------------- ---------------------------------------
(Date) Gustav Victor Rudolf Born, Director
March 25, 1999 /s/ Glenna M. Crooks
-------------- ---------------------------------------
(Date) Glenna M. Crooks, Director
35
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6 - F-8
Notes to Consolidated Financial Statements F-9 - F-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
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998 and for the period
from inception (September 1, 1983) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 and for the period from inception to December
31, 1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Melville, New York
March 22, 1999
F - 2
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED BALANCE SHEETS December 31,
----------------------------------------
Assets 1998 1997
---------------- --------------
Current Assets:
Cash and cash equivalents $3,047,000 $7,121,000
Accounts receivable 177,000 -
Inventory 545,000 296,000
Other current assets 40,000 41,000
---------------------------------------
Total current assets 3,809,000 7,458,000
---------------------------------------
Fixed assets, net 631,000 511,000
Patent costs, net of accumulated amortization
of $390,000 and $292,000, respectively 1,468,000 1,337,000
Debt issuance costs, net of accumulated amortization
of $0 and $520,000, respectively - 59,000
Intangible assets, net 580,000 -
Other assets 26,000 23,000
---------------------------------------
$6,514,000 $9,388,000
---------------------------------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $797,000 $494,000
Current portion of capital lease obligation 8,000 3,000
Current portion of notes payable 57,000 -
7% convertible debentures - 1,350,000
8% convertible debentures - 850,000
---------------------------------------
Total current liabilities 862,000 2,697,000
---------------------------------------
Long Term Liabilities:
Notes Payable, less current portion 56,000 -
Long-term portion of capital lease obligation - 8,000
---------------------------------------
Total liabilities 918,000 2,705,000
---------------------------------------
Commitments (Notes 1, 5, 8 and 10)
Stockholders' Equity:
Class A common stock, par value $.001 per share;
50,000,000 shares authorized; 35,559,556 and 19,341,617
shares issued and outstanding, respectively 36,000 19,000
Class B common stock, par value $.001 per share;
3,000,000 shares authorized; 3,000,000 and 1,725,500
shares issued and outstanding, respectively 3,000 2,000
Additional paid-in capital 62,520,000 56,077,000
Deficit accumulated during the development stage (56,963,000) (49,415,000)
---------------------------------------
Total stockholders' equity 5,596,000 6,683,000
---------------------------------------
$6,514,000 $9,388,000
---------------------------------------
The accompanying notes are an integral part
of these consolidated balance sheets.
F-3
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS For the Period
From Inception
(September 1,
Year Ended December 31, 1983) Through
------------------------------------------------------------- December 31,
1998 1997 1996 1998
---------------- --------------- --------------------- ------------------
Revenues:
Sales $1,197,000 $150,000 $ - $1,347,000
Royalties / license fees - - - 1,000,000
Collaborative agreements - 9,000 54,000 302,000
----------------------------------------------------------------------------------
1,197,000 159,000 54,000 2,649,000
Costs and expenses:
Cost of sales 465,000 32,000 - 497,000
Research and development 2,161,000 3,242,000 2,703,000 28,806,000
Selling, general and administrative 4,432,000 3,667,000 3,640,000 29,093,000
Facility consolidation cost 252,000 - - 252,000
----------------------------------------------------------------------------------
Loss from operations (6,113,000) (6,782,000) (6,289,000) (55,999,000)
----------------------------------------------------------------------------------
Other Income (Expense):
Interest expense (614,000) (915,000) (1,950,000) (4,356,000)
Net gain on sale of fixed assets - 1,000 - 7,000
Investment income, net 319,000 549,000 539,000 4,525,000
----------------------------------------------------------------------------------
Loss before extraordinary charge (6,408,000) (7,147,000) (7,700,000) (55,823,000)
Extraordinary charge for early
retirement of debentures, net (1,140,000) - - (1,140,000)
----------------------------------------------------------------------------------
Net loss ($7,548,000) ($7,147,000) ($7,700,000) ($56,963,000)
----------------------------------------------------------------------------------
Per Share Information (Note 2):
Basic and Diluted loss per share
Loss before extraordinary charge ($0.25) ($0.35) ($0.45)
-------------------------------------------------------------
Extraordinary charge for early
retirement of debentures, net ($0.04) - -
-------------------------------------------------------------
Net loss ($0.29) ($0.35) ($0.45)
-------------------------------------------------------------
Common shares used in computing
per share amounts:
Basic and Diluted 25,740,000 20,223,000 17,209,000
-------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated statements.
F - 4
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Period
From Inception
(September 1,
1983)
Year Ended December 31, Through
------------------------------------------ December 31,
1998 1997 1996 1998
----------- ------------ ----------- ------------
Cash Flows From Operating Activities:
Net income (loss) ($7,548,000) ($7,147,000) ($7,700,000) ($56,963,000)
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 497,000 531,000 541,000 2,722,000
Net (gain) loss on sale of fixed assets - (1,000) - (7,000)
Net (gain) loss on sale of marketable securities - - - (217,000)
Other non-cash expenses accrued primarily for stocks and warrants 306,000 299,000 285,000 2,042,000
Amortization of debt discount included in interest expense 317,000 492,000 1,351,000 2,160,000
Extraordinary loss on repurchase of debt 1,140,000 - - 1,140,000
Write-off of patent costs - - - 93,000
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (69,000) - - (69,000)
(Increase) decrease in inventory (91,000) (296,000) - (387,000)
(Increase) decrease in other current assets 1,000 487,000 (365,000) (40,000)
(Increase) decrease in other assets 1,000 (2,000) 2,000 73,000
Increase (decrease) in accounts payable and accrued expenses 265,000 46,000 267,000 976,000
Increase in interest payable to stockholder - - - 112,000
----------------------------------------------------------
Net cash used in operating activities (5,181,000) (5,591,000) (5,619,000) (48,365,000)
----------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (41,000) (222,000) (158,000) (2,043,000)
Proceeds from sale of fixed assets - 2,000 - 18,000
Payments for patent costs and other assets (229,000) (434,000) (275,000) (1,928,000)
Business acquisition, net of stock issued and cash acquired (119,000) - - (119,000)
Proceeds from maturity and sale of marketable securities - 5,817,000 11,098,000 67,549,000
Purchases of marketable securities - (2,796,000) (9,722,000) (67,332,000)
----------------------------------------------------------
Net cash provided by (used in) investing activities (389,000) 2,367,000 943,000 (3,855,000)
----------------------------------------------------------
Cash Flows From Financing Activities:
Payments to debentureholders (1,000,000) (1,246,000) - (2,246,000)
Proceeds from issuance of common stock, net 3,182,000 834,000 1,439,000 39,484,000
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 8,565,000
Proceeds from issuance of 8% convertible debentures, net - - - 7,790,000
Principal payments under capital lease obligation and notes payable (61,000) (3,000) (4,000) (70,000)
Redemption of 8% convertible debentures (500,000) - - (500,000)
Repurchase of 5% convertible debentures (3,852,000) - - (3,852,000)
Capital contributions from chairman - - - 1,000,000
Increase in loans payable to stockholder / affiliates - - - 2,669,000
Repayment of loans payable to stockholder / affiliates
(remainder contributed to capital by the stockholder) - - - (1,300,000)
-----------------------------------------------------------
Net cash provided by (used in) financing activities 1,496,000 (415,000) 10,000,000 55,267,000
----------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,074,000) (3,639,000) 5,324,000 3,047,000
Cash and Cash Equivalents at Beginning of Period 7,121,000 10,760,000 5,436,000 -
-----------------------------------------------------------
Cash and Cash Equivalents at End of Period $3,047,000 $7,121,000 $10,760,000 $3,047,000
----------------------------------------------------------
Supplemental Disclosure of Non-cash Activities:
Capital expenditure made under capital lease obligation - - - $20,000
----------------------------------------------------------
Convertible debentures converted into 4,851,618, 2,995,006,
2,269,755 and 10,470,853 shares of Common Stock, respectively $1,447,000 $7,155,000 $5,485,000 $14,658,000
----------------------------------------------------------
Warrants issued to debentureholders and placement agents $63,000 - $45,000 $588,000
----------------------------------------------------------
Conversion of stockholder loan to paid-in capital - - - $1,481,000
----------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
F - 5
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Class A Class B Accumulated
Per Common Stock Common Stock Additional During the
Share Paid-in Development
Amount Shares Dollars Shares Dollars Capital Stage Total
------------------- --------- ---------- --------- ----------- ------------- -------
BALANCE, AT INCEPTION, (SEPTEMBER 1, $ - $ - - $ - $ - $ - $ -
1983)
Sale of common stock to chairman for cash .33 78,000 - - - 26,000 - 26,000
Net (loss) for the period - - - - - (25,000) (25,000)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1983 78,000 - - - 26,000 (25,000) 1,000
--------------------------------------------------------------------------------
Sale of common stock to chairman for cash .33 193,500 - - - 65,000 - 65,000
Net (loss) for the period - - - - - (242,000) (242,000)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1984 271,500 - - - 91,000 (267,000) (176,000)
---------------------------------------------------------------------------------
Sale of common stock to chairman for cash .33 276,700 - - - 92,000 - 92,000
Net (loss) for the period - - - - - (305,000) (305,000)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1985 548,200 1,000 - - 183,000 (572,000) (388,000)
--------------------------------------------------------------------------------
Sale of common stock to chairman for cash .33 404,820 - - - 134,000 - 134,000
Net (loss) for the period - - - - - (433,000) (433,000)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1986 953,020 1,000 - - 317,000 (1,005,000) (687,000)
---------------------------------------------------------------------------------
Sale of common stock to chairman for cash .33 48,048 - - - 16,000 - 16,000
Net (loss) for the period - - - - - (730,000) (730,000)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1987 1,001,068 1,000 - - 333,000 (1,735,000) (1,401,000)
---------------------------------------------------------------------------------
Exchange of common stock for Class B stock (1,001,068) (1,000) 1,001,068 1,000 - - -
Sale of Class B stock to chairman for cash .33 - - 1,998,932 2,000 664,000 - 666,000
Net (loss) for the period - - - - - (1,031,000) (1,031,000)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1988 - - 3,000,000 3,000 997,000 (2,766,000) (1,766,000)
---------------------------------------------------------------------------------
Net (loss) for the period - - - - - (1,522,000) (1,522,000)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1989 - - 3,000,000 3,000 997,000 (4,288,000) (3,288,000)
---------------------------------------------------------------------------------
Conversion of loans payable to stockholder into
additional paid-in capital - - - - 1,481,000 - 1,481,000
Sale of 1,150,000 Units to public consisting of
3,450,000 shares of Class A common stock and
warrants (net of $1,198,000 underwrit 2.00 3,450,000 3,000 - - 5,699,000 - 5,702,000
expenses)
Conversion of Class B stock into
Class A stock 668,500 1,000 (668,500) (1,000) - - -
Net (loss) for the period - - - - - (2,100,000) (2,100,000)
---------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1990 4,118,500 $4,000 2,331,500 $2,000 $8,177,000 ($6,388,000) $1,795,000
---------------------------------------------------------------------------------
CONTINUED
F - 6
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Class A Class B Accumulated
Per Common Stock Common Stock Additional During the
Share Paid-in Development
Amount Shares Dollars Shares Dollars Capital Stage Total
-------- -------------- ------- -------- ------- --------- ----------- ---------
BALANCE, DECEMBER 31, 1990 4,118,500 $4,000 2,331,500 $2,000 $8,177,000 ($6,388,000) $1,795,000
Exercise of Class A Warrants (net of
$203,000
in underwriting expenses) for cash 3.00 3,449,955 3,000 - - 10,143,000 - 10,146,000
Exercise of Class B Warrants for cash 4.50 79,071 - - - 356,000 - 356,000
Conversion of Class B stock
into Class A stock 850,000 1,000 (850,000)(1,000) - - -
Exercise of stock options 2.00 417,750 1,000 - - 835,000 - 836,000
Expense for warrants issued - - - - 900,000 - 900,000
Net (loss) for the period - - - - - (4,605,000) (4,605,000)
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1991 8,915,276 9,000 1,481,500 1,000 20,411,000 (10,993,000) 9,428,000
--------------------------------------------------------------------------------
Exercise of Class B Warrants (net of
$701,000
in underwriting expenses) for cash 4.50 3,370,884 3,000 - - 14,465,000 - 14,468,000
Conversion of Class B stock
into Class A stock 106,000 - (106,000) - - - -
Exercise of stock options 2.49 348,300 1,000 - - 865,000 - 866,000
Net (loss) for the period - - - - - (4,016,000) (4,016,000)
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 12,740,460 13,000 1,375,500 1,000 35,741,000 (15,009,000) 20,746,000
--------------------------------------------------------------------------------
Sale of common stock to Medeva PLC. 7.50 200,000 - - - 1,500,000 - 1,500,000
Exercise of stock options 2.00 32,700 - - - 65,000 - 65,000
Net (loss) for the period - - - - - (6,521,000) (6,521,000)
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 12,973,160 13,000 1,375,500 1,000 37,306,000 (21,530,000) 15,790,000
--------------------------------------------------------------------------------
Exercise of stock options 2.16 91,250 - - - 197,000 - 197,000
Net (loss) for the period - - - - - (7,431,000) (7,431,000)
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 13,064,410 13,000 1,375,500 1,000 37,503,000 (28,961,000) 8,556,000
--------------------------------------------------------------------------------
Conversion of 8% convertible debentures
into
Class A Common Stock 1.85 354,204 - - - 571,000 - 571,000
Exercise of stock options 1.82 12,750 - - - 23,000 - 23,000
Expense for warrants/options issued - - - - 602,000 - 602,000
Net (loss) for the period - - - - - (5,607,000) (5,607,000)
--------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 13,431,364 $13,000 1,375,500 $1,000 $38,699,000 ($34,568,000) $4,145,000
--------------------------------------------------------------------------------
CONTINUED
F - 7
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Class A Class B Accumulated
Per Common Stock Common Stock Additional During the
Share Paid-in Development
Amount Shares Dollars Shares Dollars Capital Stage Total
-------- ------------ -------- --------- ------- ------------ -------------- --------
BALANCE, DECEMBER 31, 1995 13,431,364 $13,000 1,375,500 $1,000 $38,699,000 ($34,568,000) $4,145,000
Conversion of 8% convertible debentures
into
Class A Common Stock 2.74 2,269,755 2,000 - - 5,483,000 - 5,485,000
Exercise of stock options 2.53 569,875 1,000 - - 1,438,000 - 1,439,000
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 16,270,994 16,000 1,375,500 1,000 47,793,000 (42,268,000) 5,542,000
----------------------------------------------------------------------------------
Conversion of 7% and 8% convertible
debentures into
Class A Common Stock 2.93 2,995,006 3,000 - - 7,152,000 - 7,155,000
Sale of Class B Common Stock to 2.23 - - 350,000 1,000 778,000 - 779,000
Chairman for cash
Exercise of stock options 2.00 27,500 - - - 55,000 - 55,000
Expense for warrants issued - - - - 149,000 - 149,000
Class A Common Stock issued 3.12 48,117 - - - 150,000 - 150,000
Net (loss) for the period - - - - - (7,147,000) (7,147,000)
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 19,341,617 19,000 1,725,500 2,000 56,077,000 (49,415,000) 6,683,000
-----------------------------------------------------------------------------------
Conversion of 5%, 7% and 8% convertible
debentures
into Class A Common Stock 0.32 4,851,618 5,000 - - 1,442,000 - 1,447,000
Sale of Class B Common Stock to 0.37 - - 1,274,500 1,000 465,000 - 466,000
Chairman for cash
Exercise of stock options 1.75 4,000 - - - 7,000 - 7,000
Expense for warrants issued - - - - 205,000 - 205,000
Class A Common Stock issued 1.06 163,915 - - - 174,000 - 174,000
Class A Common Stock issued for Stellar 1.76 398,406 1,000 699,000 - 700,000
Class A Common Stock issued for Private 0.25 10,800,000 11,000 - - 2,689,000 - 2,700,000
Placement
Discount on 5% convertible debentures - - - - 762,000 - 762,000
Net (loss) for the period - - - - - (7,548,000) (7,548,000)
-----------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 35,559,556 $36,000 3,000,000 $3,000 $62,520,000 ($56,963,000) $5,596,000
-----------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
F-8
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
1. Business and Development Stage Risks:
American Biogenetic Sciences, Inc. (together with its subsidiaries
(Note 2), the "Company" or "ABS") was incorporated in Delaware on September 1,
1983. The Company was formed to engage in the research, development and
production of bio-pharmaceutical products. As a development stage company, the
Company has not materially commenced its principal operations. Most of its
efforts have been devoted to research and development, acquiring equipment,
recruiting and training personnel, and financial planning. The Company's
research efforts have been focused on the development of products to diagnose,
prevent and treat diseases in humans.
The Company has had limited product sales to date and has had limited
revenues from collaborative and licensing agreements (Note 10). Since its
inception, the Company has been dependent upon the receipt of capital investment
or other financing to fund its continuing research and commercialization
activities. The Company expects to incur substantial expenditures in research
and product development and the Food and Drug Administration approval process
relating to 510(k) applications for its TpP and other diagnostic tests.
Currently product development plans of the Company include entering into
collaborative, licensing and co- marketing arrangements with large
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. 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 employees and advisors.
While losses from development stage activities are expected to continue
in 1999, management believes that its liquidity and capital resources at
December 31, 1998 along with the projected receipt of licensing fees and/or
additional financing or other contingency plans will be sufficient to fund its
planned activities through the first quarter of 2000.
F -9
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.
Marketable Securities
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". This Statement requires the classification of debt and
equity securities based on whether the securities will be held to maturity, are
considered trading securities or are available for sale. Classification within
these categories may require the securities to be reported at their fair market
value with unrealized gains and losses included either in current earnings or
reported as a separate component of stockholders' equity, depending on the
ultimate classification.
Concentration of Credit Risk
As of December 31, 1998, the Company had four customers whose balances
exceeded 10% of the accounts receivable balance. These customers accounted for
22%, 21%, 18% and 11% of the accounts receivable balance.
During fiscal year 1998, one customer accounted for 34% of the
Company's revenues, another customer accounted for 17% while a third customer
accounted for 10% of the Company's revenues. There were no customers in fiscal
years 1997 and 1996 that exceeded 10% of revenues.
Inventory
Inventory is valued at the lower of cost (first-in, first-out) or
market.
F - 10
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and 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 assets measured by the future net cash flows (on an undiscounted basis)
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized would be measured by the amount by
which the carrying amount of the assets exceeds the underlying fair value of the
assets. ABS has performed a review of its long-lived assets and has determined
that no impairment of the respective carrying values has occurred as of December
31, 1998.
Depreciation and Amortization
Depreciation and amortization is generally provided for by the
straight-line method over the estimated useful lives of the assets.
Patent Costs
Costs of certain patent applications are capitalized. Upon issuance of
a patent, such costs are charged to operations over the estimated period of
benefit or 17 years, whichever is shorter, on the straight-line method. Costs of
unsuccessful patent applications or discontinued projects are charged to
expense.
Deferred Financing Costs
Deferred financing cost incurred by the Company in connection with the
issuance of convertible debentures (Note 7) were capitalized and charged to
operations as additional interest expense over the life of the related debt.
Upon conversion of the underlying debt, any unamortized deferred financing costs
are charged to paid-in capital.
Intangible Assets
Intangible assets include goodwill and intellectual know how relating
to the acquisition of Stellar. Intangible assets are being amortized over a
10-year period.
Fair Value of Financial Instruments
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, 1998 and
December 31, 1997, respectively.
F - 11
Revenue Recognition
Revenue on product sales is recognized at the time the products are
shipped to customers. 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
Effective January 1, 1995, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation." This statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
SFAS No. 123 encourages entities to adopt a fair value based method of
accounting for stock compensation plans. However, SFAS No. 123 also permits the
Company to continue to measure compensation costs under pre-existing accounting
pronouncements. If the fair value based method of accounting is not adopted,
SFAS No. 123 requires pro forma disclosures of net (loss) and net (loss) per
common share in the notes to consolidated financial statements. The Company has
elected to provide the necessary pro forma disclosures (Note 8).
Net Loss Per Common Share
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share." Basic net loss per common share ("Basic EPS") is computed
by dividing net loss by the weighted average number of common shares
outstanding. Diluted net loss per common share ("Diluted EPS") is computed by
dividing net loss by the weighted average number of common shares and dilutive
potential common shares then outstanding. SFAS No. 128 requires the presentation
of both Basic EPS and Diluted EPS on the face of the consolidated statements of
operations. The impact of the adoption of this statement was not material to all
previously reported EPS amounts. Diluted EPS for 1998, 1997 and 1996 is the same
as Basic EPS because the inclusion of stock options and convertible debentures
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
F - 12
class. The following equity instruments were not included in the diluted net
loss per share calculation as their effect would be antidilutive:
December 31,
1998 1997 1996
---- ---- ----
Stock Options - Exercisable 3,279,334 3,018,543 2,546,750
Conversion of Convertible Debentures - 1,160,000 1,249,000
Exercise of Warrants 709,445 445,216 397,099
-------------- -------------- -----------
Total Shares 3,988,779 4,623,759 4,192,849
============== ============== ===========
Reclassifications
Certain reclassifications of prior period balances have been made to
conform with the current year presentation.
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.
3. Inventory
Inventory consists of the following:
December 31,
---------------------------
1998 1997
----- -----
Raw Materials $339,000 $236,000
Work in Progress 91,000 --
Finished Goods 115,000 60,000
---------- ---------
$545,000 $296,000
========== =========
4. Fixed Assets
Fixed assets consists of the following:
December 31,
-------------------------------
1998 1997
---- ----
Laboratory equipment $1,261,000 $1,241,000
Office equipment, furniture and vehicles 554,000 521,000
Leasehold improvements 534,000 230,000
------------- ------------
2,349,000 1,992,000
Accumulated depreciation and amortization (1,718,000) (1,481,000)
------------- ------------
$ 631,000 $ 511,000
============= ============
F - 13
5. Acquisition
On April 23, 1998, the Company acquired all of the capital stock of
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. 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
value of net assets acquired of $621,000 has been allocated to intangible assets
(intellectual know-how of $100,000 and goodwill of $521,000) and is being
amortized over a 10-year period. Any additional future payments required under
the contingent earnout provisions of the purchase agreement will be accounted
for as additional goodwill and will be amortized over the remaining life of the
goodwill. Accumulated amortization of intangible assets was $41,000 as of
December 31, 1998.
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued liabilities consist of the following:
December 31,
1998 1997
---- ----
Accounts Payable $355,000 $216,000
Accrued Interest - 149,000
Professional Fees 110,0000 70,000
Payroll and Related Expenses 85,000 59,000
Facility Consolidation Reserve 247,000 --
------------ ------------
$797,000 $494,000
============ ============
7. Long Term Debt:
On October 26, 1995, the Company completed an $8,500,000 private
placement of 8% Convertible Debentures due on October 13, 1998 which accrued
interest, payable at maturity, at a rate of 8% per annum. Each holder of
Debentures was entitled to convert the aggregate principal amount and accrued
interest of the Debentures through October 13, 1998 at an exercise price equal
to the lesser of the closing bid price of the Company's Common Stock on October
13, 1995 ($3.375) or 85% of the average closing bid price of the Company's
Common Stock for the five trading days prior to the conversion date. The Company
had the right to demand conversion of the Debentures and any accrued interest on
or after April 13, 1997. The Company also had the right to redeem Debentures
submitted for conversion for an amount determined under a formula related to the
F - 14
market price of the shares which would otherwise be issued upon conversion. In
conjunction with this offering, the Company incurred both cash and noncash
issuance costs totaling $1,190,000. These issuance costs have been amortized on
a straight line basis as a component of interest expense over the term of the
Debentures which approximated the effective interest rate method. Upon the
conversion of the Debentures, the related unamortized deferred financing costs
were charged to paid-in capital. As compensation to the placement agent of the
Debentures, the Company paid the placement agent an 8% commission and issued
warrants entitling the placement agent to purchase 201,481 shares of Common
Stock at an exercise price of $4.05 per share at any time until October 23,
2000. The fair value of the warrants as determined using an option-pricing model
of $480,000 was recorded as additional paid-in capital, and included in the
$1,190,000 total issuance costs described above. As of December 31, 1998, these
debentures have been fully converted or redeemed.
On September 30, 1996, the Company completed a $9,000,000 private
placement of 7% Convertible Debentures due September 30, 1998. Interest on the
Debentures was payable quarterly at the rate of 7% per annum. The Debentures
(together with any accrued interest) were convertible to the extent of 25% of
the principal amount thereof commencing on December 23, 1996, with an additional
25% of the principal amount of the Debentures becoming convertible on each of
the 30th, 60th and 90th days thereafter, at a conversion price equal to 83% of
the average of the closing prices of the Company's Class A Common Stock for the
five consecutive trading days ending on the trading day immediately preceding
the conversion date of the Debentures (the "Current Market Price"); provided,
however, that in no event could the conversion price be less than $3.00 per
share (the "Minimum Conversion Price") nor greater than $8.00 per share (the
"Maximum Conversion Price"). In the event that, but for the Minimum Conversion
Price, the number of shares that would have been issued was greater than the
number of shares actually issued, the holder converting such Debenture was also
entitled to receive cash in an amount equal to such difference multiplied by the
Current Market Price. In the event any Debenture remained outstanding at its
maturity date, the Company had the option to either convert such Debenture into
shares of Class A Common Stock on the same basis as the Debenture holder could
have converted such Debenture or pay the outstanding principal amount thereof,
plus any accrued interest thereon, in cash. In conjunction with this offering,
the Company incurred both cash and noncash issuance costs totaling $480,000.
These issuance costs were amortized on a straight-line basis as a component of
interest expense over the term of the Debentures which approximated the
effective interest rate method. Upon the conversion of the Debentures, the
related unamortized deferred financing costs were charged to paid-in-capital. As
compensation to the placement agent, the Company paid the placement agent a 4%
commission and issued to brokers affiliated with the placement agent warrants
entitling them to purchase an aggregate of 15,618 shares of Common Stock at an
exercise price of $5.76 per share at any time until September 30, 1998. The fair
value of the warrants as determined using an option-pricing model of $45,000,
was recorded as additional paid-in capital, and included in the $480,000 of
total issuance costs related to these Debentures. In addition, the Company
recorded additional paid-in capital and debt discount of $1,843,000 to reflect
the intrinsic value of the market price conversion discount (17%) related to
these Debentures. The debt discount was amortized on a straight-line basis which
approximated the effective interest
F - 15
method, and charged to interest expense from October 1, 1996 through March 23,
1997, the period during which the Debentures became 100% convertible. In 1996,
$1,351,000 of this debt discount was amortized and charged to interest expense
and the balance of $492,000 was amortized in 1997. As of December 31, 1998 these
debentures have been fully converted.
On May 20, 1998, the Company completed a private placement to three
accredited investors of an aggregate of $4,000,000 of 5% Convertible Debentures
due May 20, 2001, and three series of Warrants to purchase up to an aggregate of
261,288 shares of the Company's Class A Common Stock. 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; 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. Interest on the Debentures
was payable only on maturity, conversion, redemption or when other payment was
made on the Debentures in cash or, if registered for resale under the Securities
Act of 1933, as amended, in shares of the Company's Class A Common Stock valued
at the applicable Debenture conversion price. 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 Company had the option of: (i) issuing
additional shares of Common Stock if stockholder approval had been obtained or
if stockholder approval was 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. These debentures were repurchased on November 11, 1998 (see below).
The Company also issued to the investors warrants in series entitling
the investors to purchase, at an exercise price of $1.9141 per share, an
aggregate of 261,228 shares of the Company's Class A Common Stock at any time to
and including May 19, 2002. These warrants were canceled on November 11, 1998
(see below).
In conjunction with this offering, the Company incurred both cash and
noncash issuance costs totaling $525,000. These issuance costs were amortized on
a straight-line basis as a component of interest expense through November 11,
1998. Upon conversion of the Debentures, the related unamortized deferred
financing costs were charged to paid-in capital. The fair value of the warrants
F - 16
as determined using an option-pricing model of $252,000, was recorded as
additional paid-in capital and included in the $525,000 total issuance costs
related to these Debentures. In addition, the Company recorded additional
paid-in capital and debt discount of $762,000 to reflect the intrinsic value of
the maximum market price conversion discount (16%) related to these Debentures.
The debt discount was amortized and charged to interest expense from May 20,
1998 through November 11, 1998. The unamortized issuance costs and debt discount
were included in the extraordinary charge for early extinguishment discussed
below.
On November 11, 1998, the Company repurchased the then outstanding
principal amount of the debentures, of $3,248,000 plus accrued interest thereon
of $79,000 and a $525,000 premium for a total of $3,852,000. As a result of the
repurchase the Company has recorded a one-time extraordinary charge to earnings
of $1,140,000 which represents the loss on early extinguishment.
For each of the aforementioned debt instruments and warrants the fair
value of each was estimated on the date of the agreement using an option-pricing
model with the following assumptions: dividend yield of 0%; expected volatility
of 135% in 1998 and 84% in 1995 and 1996; risk-free interest rate of range 5.7%
to 6.5% and expected lives of 2 to 5 years dependent on the life of the
instrument.
8. Stockholders' Equity:
Description of Class A and Class B Common Stock
Holders of Class A Common Stock and Class B Common Stock have equal
rights to receive dividends, equal rights upon liquidation, vote as one class on
all matters requiring stockholder approval, have no preemptive rights, are not
redeemable and do not have cumulative voting rights; however, holders of Class A
Common Stock have one vote for each share held while holders of the Class B
Common Stock have ten votes for each share held on all matters to be voted on by
the stockholders. All Class B Common Stock is owned by the Chairman of the Board
and may be converted into Class A Common Stock on a share-for-share basis at the
option of the holder and generally are automatically converted in the event of
sale or, with certain exceptions, transfer.
Initial Public Offering
In May and June 1990, the Company completed an initial public offering
of 1,150,000 units of its equity securities. Each unit consisted of three shares
of Class A Common Stock and three redeemable Class A Warrants. As a result of
this offering, the Company received approximately $5,702,000 of proceeds, net of
underwriting and other expenses. Each holder of a Class A Warrant was entitled
to purchase one share of Class A Common Stock and one Class B Warrant at an
exercise price of $3.00 at any time until five years from the date of the public
offering. Each holder of a Class B Warrant was entitled to purchase one share of
F - 17
Class A Common Stock at an exercise price of $4.50 at any time after exercise of
the Class A Warrants and until May 1995. During 1991, 3,449,955 Class A Warrants
and 79,071 Class B Warrants were exercised yielding net proceeds to the Company
of approximately $10,502,000 (after expenses of approximately $203,000). During
1992, 3,370,884 Class B Warrants were exercised for $14,468,000 (net of
approximately $701,000 of expenses). At December 31, 1998 and December 31, 1997,
there were no outstanding Class A and Class B Warrants.
Private Placement
On October 27, 1998, the Company entered into an agreement to issue an
aggregate of 10,800,000 shares of its Class A Common Stock to a group of
accredited investors at a price of $.25 per share, a price above the market
price of the Company's Class A Common Stock at the time. Of such shares,
4,000,000 shares were purchased by Alfred J. Roach, the Company's Chairman of
the 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, within six months after
the issuance of the shares. The proceeds from this private placement were used
to repurchase the 5% Convertible Debentures (see Note 7).
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 of
up to an aggregate of 4,450,000 shares of Class A Common Stock to employees,
officers and consultants of the Company. Options were granted at exercise prices
not less than the fair market value at the date of grant and for a term not to
exceed ten years from the date of grant; except that an incentive stock option
granted under the 1986 Plan to a stockholder owning more than 10% of the
outstanding Common Stock of the Company could not have a term which exceeded
five years nor have an exercise price of less than 110% of the fair market value
of the Class A Common Stock on the date of the grant. The outstanding options
have a vesting period ranging two years to four years ratably from the date of
grant.
F-18
Changes in outstanding options and options available for grant under
the 1986 Plan, expressed in number of shares, are as follows:
For the Years Ended
December 31, 1998 December 31, 1997
---------------------------------------------------
Shares Weighted Avg. Shares Weighted Avg.
Under Option Under Option
Option Price Option Price
Options outstanding,
beginning of year 2,873,625 $4.10 2,979,500 $4.07
Granted -- -- -- --
Exercised (4,000) $1.75 (27,500) $2.01
Canceled (79,125) $3.74 (78,375) $3.86
Options outstanding,
end of year 2,790,500 $4.11 2,873,625 $4.10
Options exercisable,
end of year 2,730,750 $4.13 2,737,125 $4.13
Options available
for grant, end
of year -- --
The Company's 1993 Non-Employee Director Stock Option Plan (the "1993
Plan") provides for the issuance of stock options for up to 500,000 shares of
Class A Common Stock to outside directors of the Company. Options to purchase
10,000 shares of Class A Common Stock are automatically granted immediately
following each Annual Meeting of the Company to each outside director elected at
the Annual Meeting. The option exercise price is 100% of the fair market value
of the Class A Common Stock on the date of grant and the option may be exercised
during a period of five years from the date of grant at the rate of 25% each
year on a cumulative basis, commencing one year from the date of grant.
F - 19
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, 1998 December 31, 1997
-----------------------------------------------------
Shares Weighted Avg. Shares Weighted Avg.
Under Option Under Option
Option Price Option Price
Options outstanding,
beginning of year 110,000 $4.05 80,000 $4.25
Granted 30,000 $1.00 30,000 $3.50
Exercised -- -- -- --
Canceled/Expired (20,000) $4.13 -- --
Options outstanding,
end of year 120,000 $3.27 110,000 $4.05
Options exercisable,
end of year 52,500 $3.86 50,000 $3.89
Options available
for grant, end
of year 367,500 377,500
The Company's 1996 Stock Option Plan, as amended (the "1996 Plan"),
which replaced the 1986 plan, provides for the issuance of incentive stock
options and/or non-qualified options to purchase up to an aggregate of 2,000,000
shares of Class A Common Stock to employees, officers and consultants of the
Company. Options may be granted at exercise prices not less than the fair market
value at the date of grant and may be exercisable for a period not to exceed ten
years from the date of grant; except that the term of an incentive stock option
granted under the 1996 plan to a stockholder owning more than 10% of the
outstanding Common Stock of the Company must not exceed five years nor have an
exercise price of less than 110% of the fair market value of the Class A Common
Stock on the date of the grant. The majority of options outstanding are
exercisable 25% each year on a cumulative basis, commencing one year from the
date of grant.
F - 20
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, 1998 December 31, 1997
--------------------------------------------------
Shares Weighted Avg. Shares Weighted Avg.
Under Option Under Option
Option Price Option Price
Options outstanding,
beginning of year 821,000 $3.35 80,000 $4.94
Granted 741,500 $.58 917,000 $3.34
Exercised -- -- - -
Canceled (74,750) $2.95 (176,000) $4.02
Options outstanding,
end of year 1,487,750 $1.99 821,000 $3.35
Options exercisable,
end of year 496,084 $3.41 231,418 $3.46
Options available
for grant, end 512,250 179,000
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock- Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plans.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for options granted in 1998, 1997, and
1996 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:
1998 1997 1996
- - --------------------------------------------------------------------------------
Net loss - as reported ($7,548,000) ($7,147,000) ($7,700,000)
Net loss - pro forma ($8,243,000) ($7,522,000) ($8,075,000)
Basic and diluted loss per share -
as reported ($.29) ($.35) ($.45)
Basic and diluted loss per share - ($.32) ($.37) ($.47)
pro forma
- - --------------------------------------------------------------------------------
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 1998, 1997 and 1996:
F - 21
dividend yield of 0%; expected volatility of 135% in 1998 and 84% in 1997 and
1996; risk-free interest rate of range 4.4% to 7.0% and expected lives of seven
years.
The weighted average fair value of all three option plans for options
granted were $.50, $2.10 and $3.77 in 1998, 1997 and 1996, respectively. The
following table sets forth additional SFAS No. 123 disclosure information as to
options outstanding for all three plans at December 31, 1998:
Shares Exercisable Exercise Weighted Average Weighed Average
Outstanding Shares Price Range Exercise Price Remaining
Contractual Life
425,000 -- $ .25 - $ .28 $ -- 8.7
162,500 -- $ .53 - $ .66 $ -- 9.8
90,000 7,500 $1.00 - $1.50 $ 1.50 7.5
901,250 733,000 $1.52- $2.25 $ 1.89 5.5
504,000 372,250 $2.38 - $3.50 $ 3.34 7.1
1,852,250 1,726,834 $3.63 - $5.38 $ 4.66 4.1
462,250 438,750 $5.50 - $7.75 $ 5.61 3.3
1,000 1,000 $10.00 $10.00 3.2
- - ----------- ----------
4,398,250 3,279,334
Other Options Granted
The Company entered into a consulting agreement with an unaffiliated
third party to assist in the strategic planning and implementation of the
Company's licensing, collaborative and co-marketing plans, which expired
February 29, 1996. Pursuant to the agreement, the Company granted an option to
purchase 50,000 shares of Class A Common Stock on or before February 28, 2000 at
$2.25 per share. The Company also granted performance options to purchase 50,000
shares of Class A Common Stock at $2.25 for licensing or collaborative agreement
entered into which met certain criteria. These options are exercisable for five
years from the date of grant.
The Company has granted an investor relations consultant a warrant to
purchase 50,000 shares of Class A Common Stock on or before November 14, 2000 at
$3.50 per share pursuant to an agreement dated November 27, 1995.
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. These options are exercisable for five years from the date of grant.
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
F - 22
granted for 150,000 shares at $.75 per share, 150,000 shares at $1.00 per share
and 100,000 shares at $1.50 per share. The options are exercisable for four
years from the agreement date. The fair value of these options as determined
using an option-pricing model was $124,000 which is being recorded as a noncash
charge over the vesting/service period of the options. The following assumptions
were used for this fair value computation: dividend yield of 0%, volatility of
135%, risk-free interest rate of 4.26% and expected lives of 4 years. The 1998
charge was $43,000.
The Company performed a valuation of the aforementioned options and
warrants using an option- pricing model at the date of grant and recorded a
charge to operations over the related service period.
9. Federal Income Taxes:
At December 31, 1998, the Company had net operating loss carry forwards
of approximately $55,045,000 for income tax purposes. The net operating loss
carry forwards will expire in varying amounts through 2013. In addition, the
Company has approximately $1,150,000 of available research and development tax
credits to offset future taxes. These credits expire through 2012. In accordance
with Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes," the Company has recorded a valuation allowance of $56,195,000 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 carry forwards, investment tax and
research and development credit carry forwards (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, 1998, the Company has approximately $4,830,000 of
the $4.9 million of net operating losses that are no longer subject to this
limitation.
10. Various Agreements
Agreements with Boston University
On December 1, 1996, the Company entered into a Sublease Agreement and,
effective January 1, 1997, an Agreement for Services with Boston University.
These two agreements provide for the Company's use of approximately 7,700 square
feet of space for laboratories and for its antigen-free technology at a total
annual payment of $275,000. The agreements have an initial term of three years.
In connection with this lease agreement, the Company may, at its option, pay a
portion of the annual lease obligation with Class A Common Stock plus a warrant
to purchase shares of Class A Common Stock. The number of shares are computed
using the average market price of the Company's Class A Common Stock during the
ten days prior to issuance. The warrant shares are to be exercisable at a price
equal to the closing price of the underlying Class A Common Stock on the date
the warrant is issued and for a period of four years from the date of issuance.
During 1997, the Company issued 48,117 shares of Class A Common Stock and
warrants to purchase 48,117 shares of Class A Common Stock with the exercise
price ranging from $2.13 to $4.75. During 1998, the Company issued 129,847
shares of Class A Common Stock and warrants to purchase
F - 23
129,847 shares of Class A Common Stock with the exercise price ranging from $.63
to $2.19. The fair value of the warrants were calculated using an option-pricing
model at the date of issue and recorded a charge to operations of $99,000 in
1998 and $93,000 in 1997. In the fourth quarter of 1998, the Company implemented
a consolidation of its research and development facilities. The Boston
facilities will be closed in the first half of 1999 and consolidated at the
Stellar facilities in Baltimore, Maryland. In 1998, the Company has recorded a
reserve for consolidating facilities of $252,000. This reserve includes
severance costs, lease termination, and the write-down of leasehold
improvements.
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 and
was a five-year lease with three one-year renewal options after the initial
five-year period. In September 1996, the Company entered into a second lease in
South Bend, Indiana for approximately 3,000 square feet with an annual base rent
of $30,400. This lease is a three year lease. In 1997, the Company moved its
research and development activities from South Bend, Indiana to Boston,
Massachusetts. The Company closed both facilities and has terminated both
leases.
Under the Notre Dame Agreement, the Company was required to pay Notre
Dame for the direct and indirect payroll cost of substantially all of the
Company's research and development personnel, purchases of laboratory supplies,
items of equipment or other costs associated with the research projects.
Notre Dame has granted the Company all rights, title and interest in
and to any inventions, patents and patent applications for research projects
funded by the Company. Inventors of any processes or technology which receive
Company support have assigned his or her interest in the product, patent or
patent applications to the Company. The Company incurred costs under the Notre
Dame Agreement of approximately $0, $0 and $14,000 during the years ended
December 31, 1998, 1997, and 1996, respectively, and $6,150,000 for the period
from inception (September 1, 1983) through December 31, 1998.
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.
Employment Agreements
The President and Chief Executive Officer, Executive Vice-President and
Senior Vice President Business Development are parties to employment agreements
with the Company ending November 15, 2001, September 30, 2001 and November 30,
2001, respectively. The aggregate annual minimum compensation under these
agreements as of December 31, 1998 was approximately $500,000. They also are
parties to
F - 24
confidentiality agreements with the Company during and subsequent to their
employment with the Company.
Scientific Advisory Committee Agreements
The Company has entered into advisory board agreements with certain
research scientists with respect to specific projects in which the Company has
an interest. The 1998 payment to the advisors for informal meetings and other
consultations as a group was approximately $115,000. Generally, members of the
Company's Scientific Advisory Committee are employed by or have consulting
agreements with third parties, the businesses of which may conflict or compete
with the Company and any inventions discovered by such individuals will not
become the property of the Company.
As part of its development stage activities, the Company enters into
various agreements that provide for the expenditure of funds for research and
development activities and typically provide for the payment of royalties
(between 2% to 8% of net sales) by the Company if any products are successfully
developed and marketed as a result of the work being performed under the
agreement. The following is a summary of significant agreements the Company has
entered into:
License Agreements
On January 24, 1992, the Company entered into an exclusive, 15 year
license agreement with Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"), a
Japanese pharmaceutical company. Under this agreement, Yamanouchi may
manufacture, use or market diagnostic assays that contain the Company's
monoclonal antibody, 45-J, in Japan and Taiwan. Yamanouchi paid a
non-refundable, initial sign-up payment to the Company of $900,000 (net of
Japanese taxes). The agreement provides that Yamanouchi is to pay the Company a
fixed percentage over the Company's manufacturing costs of the 45-J antibody
supplied to Yamanouchi. On an ongoing basis, Yamanouchi is to pay the Company
royalties at the rate of 10% of all net sales of diagnostic assays sold by
Yamanouchi or its affiliates during each calendar year of the agreement term.
Additionally, Yamanouchi is to pay the Company 50% of any initial fees,
royalties or other consideration received with respect to any sublicense granted
by Yamanouchi. To date, Yamanouchi has not made any sales.
On December 10, 1992, the Company entered into an agreement (as
amended) with University College Dublin, Ireland granting the Company an
exclusive license for drugs/compounds to halt the onset and/or progression of
neurodegenerative diseases, in general, and Alzheimer's Disease, in particular.
The agreement's term is the duration of any patents that may be granted to the
university with a minimum of 10 years. Pursuant to the agreement, the Company is
to pay the university a royalty of 5% of net income relating to product sales.
The Company expensed $5,000 in 1998, $12,000 in 1997 and $62,000 in 1996 for
certain research expenses, supplies and equipment under this agreement.
On August 10, 1993, the Company entered into a five-year collaboration
agreement with the Free University of Berlin to develop therapeutic compounds.
The Company also acquired a series of anticonvulsant compounds. Pursuant to the
agreement, the Company is to pay a royalty of 5% of the net product sales. The
agreement lasts the life of the patent or a minimum of 10 years. The Company
expensed $103,000 in 1998, $116,000 in 1997 and $117,000 in 1996 for research
expenses and supplies under this agreement.
F - 25
In October 1995, ABS entered into a license and collaboration agreement
with F. Hoffmann-La Roche, Ltd. ("Hoffman-La Roche") for the co-development and
marketing of the Company's TpP test for the detection of active thrombosis
(blood clot formation). The agreement grants Hoffmann-La Roche a worldwide
license to market the TpP test in a latex based particle agglutination format.
Under the agreement, the Company received a $60,000 non-refundable development
payment, to adapt the TpP test in the latex based particle agglutination format
to Hoffmann-La Roche's automated diagnostic systems. The Company is also to
receive milestone payments upon achievement of certain commercialization goals.
The TpP test is to be manufactured by the Company for use on Hoffmann-La Roche's
instruments. ABS is to receive a percentage of Hoffmann-La Roche's net selling
price for the Company's manufacturing of the TpP test plus a 5% royalty on net
sales made by Hoffmann-La Roche. Under the agreement, the TpP test is also to be
sold by ABS and Hoffmann-La Roche to other diagnostic companies using similar
particle agglutination technology. On these sales, gross profit is to be shared
equally between the Company and Hoffmann-La Roche. To date, ABS has not received
any milestone or royalty payments.
In December 1995, ABS entered into a license agreement with Abbott
Laboratories ("Abbott") for the marketing of the Company's TpP assay. The
license agreement grants Abbott a worldwide license to market the TpP test for
Abbott's immunoassay formats. The Company received a $100,000 non-refundable
up-front payment and is to receive milestone payments upon achievement of
certain development and commercialization goals. The Company is to receive a 5%
royalty on net sales made by Abbott. In addition, the reagent for the TpP test
is to be manufactured by the Company for use by Abbott. To date, ABS has not
received any milestone or royalty payments.
F - 26
Commission File No. 0-19041
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
to
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998
AMERICAN BIOGENETIC SCIENCES, INC.
Exhibit
Number Document
- - ------- --------
3.1 Restated Certificate of Incorporation of ABS, as filed
with the Secretary of State of Delaware on July 30, 1996.
Incorporated herein by reference to Exhibit 4.01 to ABS'
Registration Statement on Form S-8, File No. 333-09473.
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(a) Form of ABS' 8% Convertible Debentures due October 13,
1998. Incorporated herein by reference to Exhibit 4.1 to
ABS' Current Report on Form 8-K dated October 12, 1995
(date of earliest event reported), File No. 0-19041.
4.1(b) Form of the Company's 7% Convertible Debentures due
September 30, 1998. Incorporated herein by reference to
Exhibit 4.01 to the Company's Current Report on Form 8-K
dated September 30, 1996 (date of earliest event
reported), File No. 0-19041.
4.1(c)(1) Form of ABS' 5% Convertible Debentures due May 20, 2001
(the "5% Debentures"). Incorporated herein by reference
to Exhibit 4.1 to ABS' Current Report on Form 8-K dated
May 20, 1998 (date of earliest event reported), File No.
0-19041.
4.1(c)(2) Form of Securities Subscription Agreement between ABS and
each of the purchasers of the 5% Debentures. Incorporated
herein by reference to Exhibit 99.1 to ABS' Current
Report on Form 8-K dated May 20, 1998 (date of earliest
event reported), File No. 0-19041.
4.1(c)(3) Registration Rights Agreement between ABS and each of the
purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 99.2 to ABS' Current Report on Form
8-K dated May 20, 1998 (date of earliest event reported),
File No. 0-19041.
4.1(c)(4) Form of ABS' Series WA Warrant issued to each of the
purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 99.3(a) to ABS' Current Report on
Form 8-K dated May 20, 1998 (date of earliest event
reported), File No. 0-19041.
4.1(c)(5) Form of ABS' Series WB Warrant issued to each of the
purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 99.3(b) to ABS' Current Report on
Form.
4.1(c)(6) Form of ABS' Series WC Warrant issued to each of the
purchasers of the 5% Debentures. Incorporated herein by
reference to Exhibit 4.1 to ABS' Current Report on Form
8-K dated May 20, 1998 (date of earliest event reported),
File No. 0-19041.
4.1(d) Form of Purchase and Investment Agreement executed by the
Company and several investors on October 27, 1998.
Incorporated by reference to Exhibit 99 to the Company's
Registration Statement on Form S-3, file number
333-69735, filed with the Commission on December 24,
1998.
4.1(e)* Form of Warrant issued to several individuals under the
Company's Financial Advisory Agreement with M.H. Meyerson
& Co., Inc., dated as of August 13, 1998 and schedule of
holders thereof.
10.1(a) + Employment Agreement dated October 1, 1996 between ABS
and Ellena M. Byrne. Incorporated herein by reference to
Exhibit 10.1(b) to ABS's Form 10-K/A dated April 30,
1997, File No. 0-19041.
10.1(b)+ Employment Agreement dated November 12, 1997 between ABS
and Dr. Emer Leahy. Incorporated by reference to Exhibit
10.1(c) to ABS' Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (File No. 0-19041).
10.1(c) +* Employment Agreement dated November 3, 1998 between ABS
and Mr. John S. North.
10.2(a) + ABS' Stock Option Plan, as amended. Incorporated herein
by reference to Exhibit 28.1 to ABS' Registration
Statement on Form S-8, File No. 33-51240.
10.2(b) + ABS' 1993 Non-Employee Director Stock Option Plan.
Incorporated herein by reference to Exhibit 99.01 to ABS'
Registration Statement on Form S-8, File No. 33-65416.
10.2(c) + The Company's 1996 Stock Option Plan. Incorporated herein
by reference to Exhibit A to the Company's Proxy
Statement dated April 29, 1996 used in connection with
the Company's 1996 Annual Meeting of Stockholders, File
No. 0-19041.
10.3 Exclusive License Agreement dated January 24, 1992
between ABS and Yamanouchi Pharmaceutical Co., Ltd.
Incorporated herein by reference to Exhibit 10.29 to ABS'
Current Report on Form 8-K dated January 24, 1992 (date
of earliest event reported), File No. 0-19041.
10.4 Warrant dated October 25, 1995 issued to Swartz
Investments, Inc. Incorporated herein by reference to
Exhibit 10.13 to ABS' Current Report on Form 8-K dated
October 12, 1995 (date of earliest event reported), File
No. 0-19041.
21* List of Subsidiaries.
24* Consent of Independent Public Accountants.
27* Financial Data Schedule.
- - --------------------------------------------------------------------------------
* Filed herewith. All other exhibits are incorporated by
reference to the document following the description
thereof.
+ Management contract or compensatory plan.