As filed pursuant to Rule 424(b)(3)
under the Securities Act of 1933
Registration No. 333-66386
PROSPECTUS DATED OCTOBER 17, 2001
P R O S P E C T U S
14,288,977 Shares
ADVANCED BIOTHERAPY, INC.
COMMON STOCK
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This Prospectus relates to 14,288,977 shares (the "Shares") of common
stock, par value $0.001 per share ("Common Stock"), of Advanced Biotherapy, Inc.
The Shares may be offered by stockholders of the Company ("Selling
Stockholders") as described herein. During the year 2000, the Company completed
a private placement of 10% Convertible Subordinate Debt due September 30, 2004
("Convertible Debt"). The Convertible Debt is convertible into shares of Company
Common Stock at a conversion price of $0.25 per share. Interest upon the
Convertible Debt is payable in cash, or in equivalent principal amount of
Convertible Debt, at the option of the Company. The Company has elected to pay
the entire amount of accrued and unpaid interest through June 30, 2001, in
additional Convertible Debt. The amount of Shares to be registered consists of
four components: (i) 6,550,145 Shares with respect to the currently outstanding
principal amount of Convertible Debt; (ii) an additional 2,449,497 Shares
reserved for issuance in connection with additional Convertible Debt which may
be issued by the Company as interest payments (in lieu of cash); (iii) 604,200
Shares reserved for issuance in connection with additional Convertible Debt
issuable upon the exercise of certain options granted by the Company; and (iv)
4,685,135 Shares issuable upon exercise of certain warrants granted by the
Company.
None of the proceeds from the sale of the Shares by the Selling
Stockholders will be received by us.
Our Common Stock is traded on the OTC Bulletin Board under the symbol
"ADVB." On September 19, 2001, the last closing price for the Common Stock as
reported by the OTC Bulletin Board was $0.40 per share.
------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is October 17, 2001
PLEASE READ THIS PROSPECTUS CAREFULLY. IT DESCRIBES ADVANCED BIOTHERAPY, INC.,
INCLUDING OUR FINANCIAL CONDITION AND BUSINESS. YOU SHOULD RELY ONLY ON THE
INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF
THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR OF
ANY SALE OF COMMON STOCK. THE SELLING STOCKHOLDERS ARE OFFERING TO SELL, AND
SEEKING OFFERS TO BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS
AND SALES ARE PERMITTED.
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TABLE OF CONTENTS PAGE
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Prospectus Summary 5
Risk Factors 8
Forward Looking Statements 15
Use of Proceeds 16
Selling Stockholders 16
Plan of Distribution 19
Legal Proceedings 20
Directors, Executive Officers, Promoters
and Control Person 20
Security Ownership of Certain Beneficial Owners
and Management 23
Description of Securities 26
Disclosure of Commission Position on
Indemnification for Securities and Liabilities 27
The Company 28
Business Objective 30
Technical Background 30
IFN-(Gamma) as a Therapeutic Target 31
Product Development Plan 32
Clinical Studies/Rheumatoid Arthritis (RA) 34
Clinical Data/Multiple Sclerosis (MS) 34
Manufacturing 35
Government Regulation 35
Federal Drug Administration Regulation 36
Competition 38
Product Liability Exposure 38
Glossary of Terms 38
Patent Status and Protection of Proprietary Technology 41
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TABLE OF CONTENTS PAGE
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Dependence Upon Key Personnel 41
Uncertainties Associated with Research and
Development Activities 41
Marketing 42
Executive Offices 42
Management Discussion and Analysis 42
Description of Property 44
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 45
Certain Relationships and Related Transactions 45
Market for Registrant's Common Stock and Related
Stockholder Matters 45
Executive Compensation 46
Legal Matters 50
Experts 50
Where You Can Find More Information 50
Financial Statements F-1
PROSPECTUS SUMMARY
The following summary highlights selected information from this
prospectus but may not contain all the information that is important to you. For
a more complete understanding of this offering, we encourage you to read this
entire prospectus. This investment involves a high degree of risk and we
encourage you to read "Risk Factors" beginning on page 8. Certain terms used
in this Prospectus are explained in "Glossary of Terms" which starts on page
38. This Prospectus covers the offer of 14,288,977 shares of our Common Stock
by the Selling Stockholders, of which 6,550,145 shares are reserved for issuance
in connection with the Company's outstanding Convertible Debt, none of which has
been converted into Common Stock, an additional 2,449,497 shares are reserved
for issuance in connection with additional Convertible Debt which may in the
future be issued by the Company as interest payments (in lieu of cash) upon the
outstanding Convertible Debt, an additional 604,200 shares are reserved for
issuance in connection with additional Convertible Debt which may be issued by
the
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Company upon exercise of certain outstanding options, and the remaining
4,685,135 shares are reserved for issuance upon the exercise of certain
outstanding warrants granted by the Company.
THE COMPANY
Advanced Biotherapy Inc. is a corporation organized and existing under
the laws of the State of Delaware, headquartered in Woodland Hills, California.
We are a biotechnology company developing therapeutics for a range of autoimmune
diseases based on an anti-cytokine platform technology. Cytokines are soluble
components of the immune system that are largely responsible for regulating the
immune response. When overproduced, as in certain autoimmune diseases,
interferons and cytokines can lead to immune system disturbance and
inflammation. This results in localized tissue damage and leads to the pathology
seen in autoimmune diseases (AD). The Company plans to develop drugs designed to
reduce the levels of certain cytokines. To date, our activities have consisted
primarily of research, development and non-United States clinical trials.
Our technology is based upon the work of Dr. Simon Skurkovich and Dr.
Boris Skurkovich who first suggested that autoimmune disease may be the result
of augmented cytokine production. We have conducted clinical trials at major
institutes of the Medical Academy of Sciences in Russia, in which we have
evaluated the efficacy of a series of polyclonal antibodies (such antibodies
used solely for the purpose of establishing "proof-of-principal"), raised
against a variety of cytokines, in autoimmune diseases such as rheumatoid
arthritis (RA), multiple sclerosis (MS) and acquired immunodeficiency disease
(AIDS).
We believe we have demonstrated efficacy of our anti-cytokine strategy
in both RA and MS in both pilot and two randomized, placebo-controlled, double
blind trials conducted in Russia. These studies have permitted us to determine
which cytokines are most active in the AD process and therefore, which need to
be reduced to treat the disorder. With a five-day treatment course,
statistically significant and clinically relevant responses were obtained that
persisted for as long as four to sixteen months after treatment termination in
the MS studies and for one month in the RA studies.
Before marketing the Company's products, we must obtain United States
Food and Drug Administration (FDA) approval. The Company needs additional
funding to complete the product development process, obtain FDA approval and
market its products. We plan to seek additional financing through the private
sale of restricted securities and joint ventures or licensing or similar
arrangements with large pharmaceutical companies.
DEVELOPMENT STAGE ACTIVITIES
The Company has been in the development stage since its formation in
1985. We have generated little revenue in the past years and have suffered
recurring losses from operations, resulting in an accumulated deficit of
$4,587,157 at June 30, 2001. The Company anticipates that it will incur
substantial losses in the foreseeable future as a result of its continued
product development. Our research and development expenditures for the fiscal
years ending December 31, 2000 and 1999 were $39,579 and $156,280, respectively.
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BUSINESS STRATEGY
The business strategy of the Company is twofold. First, we seek to
engage a corporate partner to assist in the clinical development of our drug
treatments. This will involve filing documents with the FDA, conducting clinical
trials and obtaining the necessary regulatory approvals of a new drug
application. We intend to seek a royalty arrangement with a corporate partner to
market our drug products when and if they are approved by the FDA.
The second element of our strategy is to seek merger and acquisition
candidates that either can expand the Company's technology base in autoimmune
disease therapeutics or bring approved products into the Company that will
generate recurring revenue.
MANUFACTURING
We also intend to out-source fully human or humanized antibody product
manufacturing and have identified several contract manufacturers with suitable
facilities for manufacturing large quantities of antibodies. The Company has not
entered into any manufacturing agreement for antibodies.
GOVERNMENT REGULATION
The Company's activities are subject to extensive federal, state,
county, local and foreign laws and regulations controlling the development,
testing, manufacture and distribution of medical treatments. To comply with the
FDA regulations regarding the manufacture and marketing of such products, the
Company would likely incur substantial costs relating to laboratory and clinical
testing of products and preparing and filing documents.
PATENT STATUS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company has been issued United States Patent Nos. 5,626,843 and
5,888,511, and Australia Patent No. 730498. We also have received a "notice of
allowance" from the United States Patent and Trademark Office (PTO) for a
utility patent to be issued for an antibody to treat five autoimmune diseases.
Management believes that the notice of allowance is a critical milestone for the
Company. Management expects that the patent will be issued in December, 2001,
and upon issuance the Company plans to disclose details about the patent. The
PTO issues a notice of allowance when a company has completed the application
and review process for a United States patent and has satisfied all of the legal
criteria for patentability of the invention. The Company also has ten United
States utility patents pending, which have been consolidated into six pending
utility patent applications, two foreign applications pending in Europe and
Canada and one PCT application.
We believe that our most recently allowed patent gives the Company
patent protection for a new anti-cytokine approach to treating different
autoimmune diseases via both the extracorporeal and the injectable treatment
route, including rheumatoid arthritis, multiple sclerosis, juvenile rheumatoid
arthritis, psoriatic arthritis and ankylosing spondylitis. The
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patented treatment uses various methods to neutralize or block specific
combinations of cytokines and their receptors. In management's opinion, the
Company's patented approach is broader in scope than certain other patented
treatments.
PROCEEDS OF OFFERING
We will not receive any proceeds from the sale of shares by the Selling
Stockholders. However, we have received loan proceeds from the private placement
of our Convertible Debt to Selling Stockholders and, if the Investment Option to
purchase Convertible Debt was fully exercised, then we would receive additional
loan proceeds of $151,050. If all the Warrants were exercised, we would receive
aggregate proceeds of $702,770.
COMMON STOCK OFFERED BY THE SELLING SHAREHOLDERS
Our Common Stock is offered on the OTC Bulletin Board under the symbol
"ADVB." The last reported closing price of the Common Stock on July 18, 2001,
was $0.19.
RISK FACTORS
Except for the historical information contained herein, the discussion
in this Prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
here. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in the following risk factors as well as
those discussed elsewhere in this Prospectus.
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be carefully considered in evaluating us and our
business.
BECAUSE OF CONTINUING OPERATING LOSSES, THERE IS A NEED FOR ADDITIONAL
FINANCING, WHICH IF NOT SUCCESSFULLY MET WILL LIKELY RESULT IN A LACK OF
LIQUIDITY WHICH COULD ADVERSELY AFFECT THE COMPANY
The Company has been in the development stage since its formation in
1985. We have generated little revenue in the past years and have suffered
recurring losses from operation, resulting in an accumulated deficit of
$4,587,157 at June 30, 2001.
For the fiscal year ending December 31, 2000, we realized a net loss of
$653,270 and expect such losses to continue for the foreseeable future.
Therefore, we believe that we will need to raise additional capital during the
next twelve months. If we are unable to raise additional capital and/or generate
a positive cash flow before our cash is depleted, we will be required to curtail
operations substantially. We are seeking to obtain additional funds through
public and private equity and debt financings, collaborative or other
arrangements with corporate partners, acquisitions or mergers with companies
with strong capital positions or cash flow from product sales or from other
sources. There is no assurance that we will be able to obtain additional capital
if required, or if capital is available, to obtain it on terms favorable to us.
We may suffer from a lack of liquidity in the future that could impair our
research and development efforts and adversely affect our results of operations.
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THERE CAN BE NO ASSURANCE THAT ANY PRODUCTS THE COMPANY DEVELOPS WILL SATISFY
THE EXTENSIVE AND RIGOROUS STANDARDS SET BY THE VARIOUS GOVERNMENTAL AUTHORITIES
OR EVEN IF SATISFIED, THAT APPROVALS WILL BE EITHER DELAYED OR RESTRICTED AND
THEREFORE HAVE A MATERIAL ADVERSE EFFECT ON COMMERCIALIZATION OF OUR PRODUCTS
AND OUR SALES REVENUES
Our products are in the development stage, have not been subjected to
clinical studies in the United States, have limited clinical data based upon
studies conducted in Russia, have not been cleared for marketing by the FDA or
foreign regulatory authorities, and cannot be commercially distributed in the
United States and/or in foreign markets unless and until such clearance is
obtained. Failure to obtain FDA clearance would delay sales of our products and
would materially affect our financial condition.
The development, manufacture and sale of drug products are subject to
extensive and rigorous regulation by federal, state, local and foreign
governmental authorities. In particular, products for human health are subject
to substantial preclinical and clinical testing and other approval requirements
by the FDA and comparable foreign regulatory authorities. The process for
obtaining the required regulatory approvals from the FDA and other regulatory
authorities takes many years and is very expensive. There can be no assurance
that any product developed by us will prove to meet all of the applicable
standards to receive marketing approval. There can be no assurance that any such
approvals will be granted on a timely basis, if at all. Delays in and costs of
obtaining these approvals could adversely affect our ability to commercialize
our products, if any, and to generate sales revenues. If regulatory approval of
a product is obtained, such approval may involve restrictions and limitations on
the use of the product.
OUR RESEARCH AND DEVELOPMENT AND MARKETING EFFORTS ARE DEPENDENT ON CORPORATE
COLLABORATORS AND OTHER THIRD PARTIES WHO MAY NOT DEVOTE SUFFICIENT TIME,
RESOURCES AND ATTENTION TO OUR PROGRAMS, WHICH MAY LIMIT OUR EFFORTS TO
SUCCESSFULLY DEVELOP AND MARKET POTENTIAL PRODUCTS
Because we have limited resources, we anticipate entering into a number
of collaboration agreements with other companies. At present, however, we have
no such agreements. These agreements may be expected to call for our partners to
control the supply of bulk or formulated drugs for commercial use or for use in
clinical trials; design and execution of clinical studies; process of obtaining
regulatory approval to market the product; and/or marketing and selling of any
approved product.
In each of these areas, our partners may not support fully our research
and commercial interests since our program may compete for time, attention and
resources with the internal programs of our corporate collaborators. As such, we
cannot be sure that our corporate collaborators will share our perspectives on
the relative importance of our program, that they will commit sufficient
resources to our program to move it forward effectively, or that the program
will advance as rapidly as it might if we had retained complete control of all
research, development, regulatory and commercialization decisions. We also rely
on several of these collaborators and other third parties for the production of
compounds and the manufacture and
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supply of pharmaceutical products. Additionally, we may find it necessary from
time to time to seek new or additional partners to assist us in commercializing
our products. It is uncertain whether we would be successful in establishing any
such new or additional relationships.
OUR RELIANCE UPON CLINICAL TRIALS CONDUCTED IN RUSSIA MAY HAVE A MATERIAL
ADVERSE AFFECT ON OUR RESEARCH, DEVELOPMENT AND FUND RAISING EFFORTS
We have conducted a number of clinical trials at major institutes of the
Medical Academy of Sciences in Russia as more fully discussed above under the
caption "The Company." The results of these clinical trials are essential to our
further research and development of pharmaceutical products. There can be no
assurance that variations between the standards and conventions of such clinical
trials in Russia from those in the United States may not have a material impact
on the acceptance of such results by either governmental authorities or
potential sources of financing of the continued research and development program
of the Company or that such results can be duplicated under United States
standards and procedures. Accordingly, such variations could have a material
adverse impact on the Company and its research and development and financial
prospects.
THE RESULTS AND TIMING OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES, INCLUDING
FUTURE CLINICAL TRIALS ARE DIFFICULT TO PREDICT, SUBJECT TO FUTURE SETBACKS AND,
ULTIMATELY, MAY NOT RESULT IN ANY PHARMACEUTICAL PRODUCTS, WHICH MAY ADVERSELY
AFFECT OUR BUSINESS
Preclinical testing and clinical trials must demonstrate that a product
candidate is safe and efficacious. The results from preclinical testing and
early clinical trials may not be predictive of results obtained in subsequent
clinical trials, and we cannot be sure that these clinical trials will
demonstrate the safety and efficacy necessary to obtain regulatory approval for
any product candidates. A number of companies in the biotechnology industries
have suffered significant setbacks in advanced clinical trials, even after
obtaining promising results in earlier trials. In addition, certain clinical
trials are conducted with patients having the most advanced stages of disease.
During the course of treatment, these patients often die or suffer other adverse
medical effects for reasons that may not be related to the pharmaceutical agent
being tested. Such events can have a negative impact on the statistical analysis
of clinical trial results.
We cannot be sure that we will be permitted by regulatory authorities to
undertake clinical trials for any of our product candidates, or that if such
trials are conducted, any of our product candidates will prove to be safe and
efficacious or will receive regulatory approvals. Any delays in or termination
of these clinical trial efforts may have a material adverse effect on our
business.
The completion of clinical trials of our product candidates may be
delayed by many factors. One such factor is the rate of enrollment of patients.
Neither we nor our prospective collaborators can control the rate at which
patients present themselves for enrollment, and we cannot be sure that the rate
of patient enrollment will be consistent with our expectations or be sufficient
to enable clinical trials of our product candidates to be completed in a timely
manner or at all. Any significant delays in, or termination of, clinical trials
of our product candidates may have a material adverse effect on our business.
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PRODUCT SALES, IF ANY, AND RELATED FINANCIAL RESULTS ARE LIKELY TO FLUCTUATE AND
THESE FLUCTUATIONS MAY CAUSE OUR STOCK PRICE TO FALL, ESPECIALLY IF THEY ARE NOT
ANTICIPATED BY INVESTORS
Forecasting revenue growth is difficult, especially when there is no
commercial history and when the level of market acceptance of the product is
uncertain. Forecasting is further complicated by the difficulties in estimating
stocking levels by corporate collaborators and in estimating potential product
returns. As a result, even assuming our product development efforts are
successful, it is likely that there will be significant fluctuations in
revenues, which may not meet with market expectations and which also may
adversely affect our stock price. Other factors which cause our financial
results to fluctuate unexpectedly include the cost of product sales, achievement
and timing of research and development milestones, co-promotion and other
collaboration revenues, cost and timing of clinical trials, marketing and other
expenses and manufacturing or supply disruption.
THE PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE
The market price of our Common Stock is volatile, and we expect it to
continue to be volatile for the foreseeable future. For example, during the
period January 1, 2000 through July 18, 2001, our Common Stock traded at a high
price of $3.93 and a low price of $0.16. Negative announcements (such as adverse
regulatory decisions, disappointing clinical trial results, disputes concerning
patent or other proprietary rights, or operating results that fall below the
market's expectations) could trigger significant declines in the price of our
Common Stock. In addition, external events, such as news concerning our
competitors, changes in government regulations that may impact the biotechnology
industries or the movement of capital into or out of our industry, also are
likely to affect the price of our Common Stock.
MANUFACTURING, SALES AND DISTRIBUTION RELATED PROBLEMS MAY CREATE DISRUPTIONS
THAT COULD RESULT IN A REDUCTION OF PRODUCT SALES REVENUE AND DAMAGE COMMERCIAL
PROSPECTS FOR PRODUCTS WE MAY SUCCESSFULLY DEVELOP
Our management has limited sales, distribution and marketing experience,
and therefore, if the necessary regulatory approvals are obtained, we intend to
market, distribute and sell our products, through a network of qualified
independent distributors, agents, and key strategic partners, none of which are
currently in place. There are no assurances that we can establish the necessary
relationships for marketing and selling products or that the network will
successfully implement an effective marketing and sales strategy. We expect to
rely on third parties to provide customer service activities and accept and
process returns. Although it is anticipated that we will employ a small number
of persons to coordinate and manage the activities undertaken by these third
parties, we have relatively limited experience in this regard. Any disruption in
these activities could impede our ability to sell our products and could reduce
sales revenues.
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MANUFACTURING PROBLEMS WOULD MATERIALLY IMPAIR OUR COMPETITIVE POSITION AND OUR
POSSIBILITY OF ACHIEVING PROFITABILITY
We lack the facilities to manufacture our products and do not have an
adequate supply of product to begin clinical studies in the United States. If we
are unable to contract for manufacturing capabilities on acceptable terms, it
would result in the delay of sales, which in turn could materially impair our
competitive position, and our possibility of achieving profitability.
OUR DEPENDENCE ON PRODUCTS COULD HAVE A MATERIAL ADVERSE AFFECT ON THE COMPANY'S
FINANCIAL CONDITION
We expect to derive a substantial majority of our revenues from our
proprietary development stage products through product licensing and royalty
fees. The life cycle of our products, if approved for marketing, is difficult to
estimate in terms of current and future technological developments, competition,
and other factors. Our failure to successfully commercialize products or to
realize significant revenues from the products would have a material adverse
effect on our financial condition. As of the date hereof, we have not realized
any revenues from the sale of products.
IF AND AS OUR PRODUCTS ARE USED COMMERCIALLY, UNINTENDED SIDE EFFECTS, ADVERSE
REACTIONS OR INCIDENTS OF MISUSE MAY OCCUR WHICH COULD RESULT IN ADDITIONAL
REGULATORY CONTROLS, AND REDUCE SALES OF OUR PRODUCTS
The developmental use of our products will be limited principally to
clinical trial patients under controlled conditions and under the care of expert
physicians. If these efforts are successful, we cannot predict whether the
widespread commercial use of our products will produce undesirable or unintended
side effects not evident in our clinical trials or other limited use. In
addition, in patients who take multiple medications, drug interactions could
occur which can be difficult to predict. Additionally, incidents of product
misuse may occur. These events, among others, could result in additional
regulatory controls that could limit the circumstances under which the products
are prescribed or even lead to the withdrawal of the product from the market.
UNCERTAINTY RELATING TO FAVORABLE THIRD-PARTY REIMBURSEMENT MAY HAVE A MATERIAL
ADVERSE EFFECT ON THE COMMERCIAL SUCCESS OF PRODUCTS WE DEVELOP
In the United States, success in obtaining favorable third-party payment
for a new product depends greatly on the ability to present data which
demonstrates positive outcomes and reduced utilization of other products or
services, as well as cost data which shows that treatment costs using the new
product are equal to or less than what is currently covered for other products.
Our failure to present such clinical data would adversely affect our ability to
obtain favorable third-party reimbursement as well as the commercial success of
our products.
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OUR DEPENDENCE ON SCIENTISTS AND KEY EXECUTIVES COULD HAVE AN ADVERSE IMPACT THE
DEVELOPMENT AND MANAGEMENT OF OUR BUSINESS
There is intense competition for qualified personnel in the
biotechnology industry, and we cannot be sure that we will be able to attract
and retain the qualified personnel necessary for the development and management
of our business. Our research and development programs and our business might be
harmed by the failure to recruit additional key scientific, technical and
managerial personnel in a timely manner. Much of the know-how we have developed
resides in our scientific and technical personnel and is not readily
transferable to other personnel. We do not maintain "key man" life insurance on
any of our employees.
WE MAY NOT BE ABLE TO MAINTAIN ADEQUATE PATENT PROTECTION WHICH WOULD HAVE A
MATERIAL ADVERSE IMPACT ON OUR ABILITY TO DEVELOP COMMERCIAL PRODUCTS AND A
PATENT APPLICATION APPEAL, IF NOT SUCCESSFUL, MAY HAVE A MATERIAL ADVERSE IMPACT
ON THE COMPANY
We have two issued United States patents and one patent issued in
Australia. We also have received a "notice of allowance" for a third United
States patent, which management expects to be issued in December, 2001. Our
success and ability to compete effectively will depend, in part, on the strength
of our patents and the ability to obtain protection for our products, if any, in
foreign markets. No assurance can be given that any patents issued to us will
not be challenged, invalidated, or circumvented. Litigation, which could result
in substantial cost to us, may also be necessary to enforce any patents issued
to us and/or determine the scope and validity of other parties' proprietary
rights.
We have six United States utility patent applications pending. The
United States patent position of pharmaceutical companies involves many complex
legal and technical issues and has recently been the subject of much litigation.
There is no clear policy establishing the breadth of claims or the degree of
protection afforded under such patents. As a result, there can be no assurance
that any of our patent applications will be approved, except where claims under
an application have already been examined and allowed, nor that we will develop
additional proprietary products that are patentable. There can be no assurance
that any United States patents issued to us will provide us with any competitive
advantages or will not be challenged by third parties or that patents issued to
others will not have an adverse effect on our ability to conduct our business.
We could incur substantial costs in asserting our patent rights and in defending
patent infringement suits against us or our executives relating to ownership of,
or rights to, patents and other intellectual property of third parties. Such
disputes could substantially delay our drug development or commercialization.
Furthermore, because until November 29, 2000, patent applications in the
United States were maintained in secrecy until issue, and are only published now
following certain rules, and because publication of discoveries in the
scientific and patent literature often lag behind actual discoveries, we cannot
be certain that we were the first chronologically to make the inventions covered
by each of our pending patent applications or that we were the first to file
patent applications for such inventions. In the event that a third party has
also filed a patent application for any of its inventions,
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we may have to participate in interference proceedings declared by the United
States Patent and Trademark Office (PTO) to determine priority of the invention,
which could result in substantial cost to us, even if the eventual outcome is
favorable to us. In the event of an adverse decision as to priority of
invention, we would not be entitled to a patent on the invention at issue in the
interference proceeding. The PTO or a private party could also institute
reexamination proceedings involving us in connection with one or more of our
patents, and such proceedings could result in an adverse decision as to the
validity or scope of the patents. In addition, there can be no assurance that
our patents would be held valid by a court of law of competent jurisdiction. We
could be forced to either seek a license to intellectual property rights of
others, which may not be available to us on acceptable terms, if at all, or
alter our products or processes so that they no longer infringe on the
proprietary rights of others.
GOVERNMENTAL REFORMS AND THE EFFORTS OF GOVERNMENT ENTITIES AND THIRD PARTY
PAYORS TO CONTAIN OR REDUCE THE COSTS OF HEALTH CARE MAY ADVERSELY AFFECT OUR
SALES AND LIMIT THE COMMERCIAL SUCCESS OF OUR PRODUCTS
Health care reform is an area of increasing national and international
attention and a priority of many elected officials in the United States. Several
proposals to modify the current health care system in the United States to
improve access and control costs are currently being considered by federal and
state governments. It is uncertain what legislation, if any, will be adopted or
what actions governmental or private payors for health care goods and services
may take in response to proposed or actual legislation in the United States. We
cannot predict the outcome of health care reform proposals or the effect such
reforms may have on our business.
WE MAY FACE SIGNIFICANT PRODUCT LIABILITY RISKS, WHICH MAY HAVE A NEGATIVE
EFFECT ON OUR FINANCIAL PERFORMANCE
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims whether or not the drugs
are actually at fault for causing an injury. Furthermore, if we are successful
in developing our products, they may cause, or may appear to have caused,
serious adverse side effects (including death) or potentially dangerous drug
interactions that we may not learn about or understand fully until the drug has
been administered to patients for some time. Product liability claims can be
expensive to defend and may result in large judgments or settlements against us,
which could have a negative effect on our financial performance. The Company
does not maintain any product liability insurance. Even if the Company obtains
product liability insurance, there is no assurance that available amounts of
coverage will be sufficient to adequately protect the Company in the event of a
successful product liability claim. Thus, we cannot be certain that we will be
able to purchase sufficient insurance at an affordable rate and in any event
there is an additional risk that claims could exceed coverage limits.
Accordingly, if litigation is initiated against the Company, the Company may
have to pay all costs associated with the litigation as well as any judgment
rendered against the Company. In the event a large judgment is entered against
the Company, the Company may not be able to pay the same and the Company could
be forced to cease operations. However, the Company believes that it would not
be held liable for injuries suffered by participants in its clinical trials
because it plans to require each participating patient to
14
execute a waiver of claims as a result of adverse reaction to the Company's
products. There can be no assurance that such waivers will be effective to
protect the Company against such claims. Even if a product liability claim is
not successful, the adverse publicity and time and expense of defending such a
claim may interfere with our business.
THERE CAN BE NO ASSURANCE THAT WE CAN SUCCESSFULLY COMPETE AGAINST OUR
COMPETITION, SOME OF WHOM HAVE SUBSTANTIALLY GREATER CAPITAL RESEARCH AND
DEVELOPMENT STAFF AND FACILITIES THAN THE COMPANY OR THAT TECHNOLOGICAL ADVANCES
WILL NOT RENDER OUR PRODUCTS LESS COMPETITIVE OR OBSOLETE
The products that we are planning to develop may compete for market
share with alternate therapies. A number of companies are pursuing the
development of novel products which target the same diseases as we are
targeting. Many of these competitors have substantially greater capital
resources, research and development staffs and facilities than we do. They may
develop and introduce products and processes competitive with those of ours.
They represent significant long-term competition for us. For certain of our
products, an important factor in competition may be the timing of market
introduction of these competitive products. This timing will be based on the
effectiveness with which we or the competition can complete clinical trials and
approval processes and supply quantities of these products to market.
Competition among products approved for sale will be based on, among other
things, efficacy, safety, reliability, price, marketing capability and patent
position.
FORWARD-LOOKING STATEMENTS
In addition to historical facts or statements of current condition, this
Prospectus contains forward-looking statements. Forward-looking statements
provide our current expectations or forecasts of future events. These may
include statements regarding anticipated scientific progress in our research
programs, development of potential pharmaceutical products, prospects for
regulatory approval, manufacturing capabilities, market prospects for our
products, sales and earnings projections, and other statements regarding matters
that are not historical facts. Some of these forward-looking statements may be
identified by the use of words in the statements such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe" or other words and
terms of similar meaning. Our performance and results could differ materially
from those reflected in these forward-looking statements due to general
financial, economic, regulatory and political conditions affecting the
biotechnology and pharmaceutical industries as well as more specific risks and
uncertainties such as those set forth above and in this report. Given these
risks and uncertainties, any or all of these forward-looking statements may
prove to be incorrect. Therefore, you should not rely on any such
forward-looking statements. Furthermore, we do not intend (and we are not
obligated) to update publicly any forward-looking statements. You are advised,
however, to consult any further disclosures we make on related subjects in our
reports to the Securities and Exchange Commission. Risks that we anticipate are
discussed in more detail in the section entitled "Risk Factors." Other
unanticipated occurrences besides those listed in this Prospectus could also
adversely affect us.
15
USE OF PROCEEDS
We will not receive any proceeds from the sale of Common Stock reserved
for conversion of the Convertible Debt or exercise of the Warrants held by
Selling Stockholders covered by this Prospectus. See the "Selling Stockholders"
section of this Prospectus, which follows, for more information. We have,
however, received loan proceeds from the private placement of our Convertible
Debt to Selling Stockholders and, if the Investment Option to purchase
Convertible Debt was to be fully exercised, we would receive additional loan
proceeds of $151,050. If all the Warrants were to be exercised, we would receive
aggregate proceeds of $702,770.
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock of the Selling Stockholders as of July 18,
2001 and as adjusted to give effect to the sale of the Shares offered hereby.
The Shares are being registered to permit public secondary trading of the
Shares, and the Selling Stockholders may offer the Shares for resale from time
to time. See "Plan of Distribution."
In connection with the placement of the Convertible Debt, we entered
into an agreement with the Selling Stockholders pursuant to which we were
obligated to file a registration statement under the Securities Act of 1933, as
amended, registering the shares of Common Stock underlying the Convertible Debt
("Convertible Debt Shares"). We are further obligated to use our reasonable best
efforts to maintain the effectiveness of this Registration Statement through
September 30, 2004, upon the request of the Selling Stockholders who hold a
majority of the shares of common stock of the Company registered pursuant to
this Registration Statement. The investor rights agreement further provides that
the Company is required to file and maintain the effectiveness of any
registration statement that contemplates a distribution of securities on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act. The
Company also is obligated to register the shares underlying the Convertible Debt
for which the Investment Option may be exercised, and Warrant Shares as
described herein.
The information presented below is based on data furnished to us by the
Selling Stockholders. The number of Shares that may be actually sold by the
Selling Stockholders will be determined by the Selling Stockholders. Because
each Selling Stockholder may sell all, some or none of the shares of Common
Stock that it owns, no estimate can be given as to the number of shares of
Common Stock that will be owned by the Selling Stockholders upon termination of
the offering.
Number of Shares
Beneficially Owned
Prior Number of Shares Being
Name of Selling Stockholder to Offering Offered
--------------------------- ------------------ ----------------------
Cappello Capital Corp.(1) 2,009,741 2,009,741
Alexander L. and Linda Cappello Family
Trust(2)(10) 1,324,149 1,224,149
Robert & Ellen Deutschman Family
Trust(3) 852,695 852,695
16
Number of Shares
Beneficially Owned
Prior Number of Shares Being
Name of Selling Stockholder to Offering Offered
--------------------------- ------------------ ----------------------
Gerard Cappello(4)(7) 764,107 764,107
Thomas Pernice(5)(7)(10) 755,919 755,919
Graham Beachum(7) 437,845 437,845
Doris Ruff(7)(9) 437,387 437,387
Karpnale Investment PTE(7) 427,751 427,751
Bio-Shenk Investment(7) 265,623 265,623
Earl Gales(7) 218,865 218,865
Gerald Bedrin(7) 218,693 218,693
Jeff Lotman(7) 218,234 218,234
Thomas Turner(7) 217,489 217,489
Larry Fleischman(7) 216,915 216,915
Harold Kaufman(7) 215,768 215,768
John Bendheim(6)(10) 208,744 108,744
Bothwell International(7) 173,441 173,441
Leon Watne(7) 156,261 156,261
Stephen and Brenda Delaney(7) 148,548 148,548
Brad Farmer(7) 130,941 130,941
Murdeen Johnson(7) 130,493 130,493
Charles and Phyllis Tighe(7) 109,691 109,691
Robert Hayman(7) 109,117 109,117
Howard Posner(7) 109,117 109,117
Robert Deutschman(7) 109,088 109,088
Jonathan Shapiro(7) 109,031 109,031
Kenneth Staub(7) 109,031 109,031
Robin Ferracone(7) 108,916 108,916
Lloyd Brune(7) 108,515 108,515
Don Montague(7) 108,429 108,429
Paul and Leslie Aronzon(7) 107,884 107,884
Matthew Dolan(7) 107,884 107,884
Arthur Miles(7) 107,884 107,884
Greg Nagel(7) 107,425 107,425
Gary and Gloria Gottesman(7) 106,106 106,106
William Ross(7) 106,106 106,106
Bonchar LTD(7) 86,789 86,789
Cort Wagner(7) 65,677 65,677
Thomas Bendheim(7)(8) 65,320 65,320
Gregory Sain(7) 54,559 54,559
Carl Peterson(7) 54,430 54,430
John and Carolyn Alt(7) 54,257 54,257
David and Andrea Szott(7) 53,942 53,942
Blossom Deutschman(7) 53,827 53,827
Arlene Rohkohl(7) 53,655 53,655
John Lloyd(7) 52,938 52,938
Ted and Susan Samuelson(7) 52,528 52,528
Roberta Wieman(7) 43,773 43,773
Blake Mirkin(7) 43,773 43,773
Howard Berman(7) 43,647 43,647
Charles A. and Sophia Pernice(7) 43,647 43,647
Leonard Kirtman(7) 43,154 43,154
17
Number of Shares
Beneficially Owned
Prior Number of Shares Being
Name of Selling Stockholder to Offering Offered
--------------------------- ------------------ ----------------------
Greg and Rajshree Chapman(7) 43,154 43,154
Nancy Aossey(7) 27,258 27,258
Michael Bascetta, Jr.(7) 26,526 26,526
Charles Pernice, Esq.(7) 21,892 21,892
----------
(1) Cappello Capital Corp. ("CCC") was retained by the Company to render
financial advisory and investment banking services, and CCC was granted warrants
to purchase 4,685,135 shares of Common Stock at $0.15 per share ("Warrant
Shares"). CCC retained a warrant to purchase 1,405,541 of the Warrant Shares,
which are being registered hereunder, and assigned warrants for the remaining
Warrant Shares to various individuals disclosed herein. In connection with the
closing of the private placement of Convertible Debt, CCC received an option to
purchase up to $151,050 principal amount of Convertible Debt at par ("Investment
Option"), and Shares held by CCC include 604,200 Shares underlying such
Convertible Debt.
(2) Shares held by the Alexander L. and Linda Cappello Family Trust
include a warrant issued to Alexander L. Cappello to purchase 100,000 shares of
Common Stock of the Company at $0.25 per share ("Board Warrant"), but neither
the Board Warrant nor the underlying shares are being registered hereunder;
warrants indirectly assigned by CCC to the Family Trust to purchase 1,115,061 of
the Warrant Shares which are being registered hereunder; and includes 109,088
Shares underlying Convertible Debt held by the Family Trust. Mr. Cappello is
Chairman of the Board of the Company, and since May 2000 has served as a member
of the Board of Directors.
(3) CCC assigned to the Robert and Ellen Deutschman Family Trust
warrants to purchase 852,695 of the Warrant Shares, which are being registered
hereunder.
(4) CCC assigned to Gerard Cappello warrants to purchase 655,919 of the
Warrant Shares which are being registered hereunder. Mr. Cappello is the sole
shareholder, president and chief executive officer of CCC and is the brother of
Alexander Cappello.
(5) CCC assigned to Thomas Pernice warrants to purchase 655,919 of the
Warrant Shares which are being registered hereunder; also includes a Board
Warrant to purchase 100,000 shares of Common Stock, but neither the Board
Warrant nor the underlying shares are being registered hereunder. Since April
2001, Mr. Pernice has served as a member of the Board of Directors.
(6) Shares held in the name of John Bendheim include a Board Warrant to
purchase 100,000 shares of Common Stock at $0.25 per share, but neither the
Board Warrant nor the underlying shares are being registered hereunder; and
includes 108,744 Shares underlying Convertible Debt held by a trust for the
benefit of his minor child. Since June, 2000, Mr. Bendheim has served as a
member of the Board of Directors.
(7) Represents the number of Shares underlying the principal amount of
the Convertible Debt purchased by this Selling Stockholder, together with
accrued interest thereon through June 30, 2001, paid in additional Convertible
Debt (in lieu of cash).
(8) Shares held in the name of Thomas Bendheim include ownership of
65,280 Shares underlying Convertible Debt held by trusts for the benefit of his
minor children.
(9) Shares held in the name of Doris Ruff includes 109,347 Shares
underlying Convertible Debt beneficially owned by her as trustee of a revocable
trust for her benefit.
(10) Assuming all Shares to be registered are sold in the offering, then
the percent of the Common Stock owned after the offering would be less than 1%.
18
PLAN OF DISTRIBUTION
Sales of the Shares are for the Selling Stockholders' own account. We
will not receive any proceeds from the sale of the Shares offered hereby. The
Selling Stockholders may sell the Shares from time to time, as market conditions
permit on the OTC Bulletin Board, or otherwise, through brokerage transactions,
in negotiated transactions, at fixed prices which may be changed, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Shares to or through broker-dealers, and all such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the Shares
for whom such broker-dealers may act as agent or to whom they sell as principal,
or both (which compensation as to a particular broker-dealer might be in excess
of customary commissions). The aforementioned methods of sale may not be
all-inclusive.
Any broker-dealer acquiring the Shares in the over-the-counter market
from the holder may sell the Shares either directly, in its normal market-making
activities, through or to other brokers on a principal or agency basis or to its
customers. Any such sales may be at prices then prevailing in the
over-the-counter market, at prices related to such prevailing market prices or
at negotiated prices to its customers or a combination of such methods. The
Selling Stockholders and any broker-dealers that act in connection with the sale
of Shares hereunder may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933; any commissions received by them and profits on any
resale of the Shares as principal might be deemed to be underwriting discounts
and commissions under the Securities Act of 1933. Any such commissions, as well
as other expenses of the Selling Stockholders and applicable transfer taxes, are
payable by such parties, as the case may be.
In order to comply with certain states' securities laws, if applicable,
the Shares will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In certain states, the Shares may not be sold
unless the Shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied with.
Under applicable rules and regulations under Regulation M under the
Securities Exchange Act of 1934, any person engaged in the distribution of our
Common Stock may not simultaneously engage in market making activities, subject
to certain exceptions, with respect to our Common Stock for a specified period
set forth in Regulation M prior to the commencement of such distribution and
until its completion. In addition and without limiting the foregoing, each
Selling Stockholder will be subject to the applicable provisions of the
Securities Act of 1933 and Securities Exchange Act of 1934 and the rules and
regulations thereunder, including, without limitation, Regulation M, which
provisions may limit the timing of purchases and sales of Shares by the Selling
Stockholders. The foregoing may affect the marketability of the Shares.
Notwithstanding the registration of the Shares, John Bendheim, Alexander
Cappello and Thomas Pernice have agreed not to sell any Shares until January 1,
2002, unless, in the interim, the SEC declares this registration statement
effective and the market price for the Company's Common
19
Stock has been at least seventy-five cents ($0.75) per share for at least twenty
(20) consecutive trading days.
We entered into an agreement with the Selling Stockholders in connection
with the private placement of Convertible Debt and the issuance of the Warrants,
respectively, which required us to register the Selling Stockholders'
Convertible Debt Shares and the Warrant Shares under applicable federal and
state securities laws. Except with respect to the holders of the Warrants, the
registration rights agreement provides for cross-indemnification of the Selling
Stockholders and us and our respective directors, officers and controlling
persons against certain liabilities in connection with the offer and sale of the
shares of our Common Stock, including liabilities under the Securities Act of
1933 and requires the Selling Stockholders and us to contribute to payments the
parties may be required to make in respect thereof.
LEGAL PROCEEDINGS
The Company is not the subject of any pending legal proceeding; and to
the knowledge of management, no proceedings are presently contemplated against
the Company by any federal, state or local governmental agency.
Further, to the knowledge of management, no director or executive
officer is party to any action in which such director or executive officer has
an interest adverse to the Company.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth the names and nature of all positions and
offices held by all directors and executive officers of the Company as of August
17, 2001, and the period or periods during which each such director or executive
officer served in his or her respective positions.
Name Age Position Held Director Since
---- --- ------------- --------------
Simon Skurkovich, M.D. 78 Chairman Emeritus, Director, and November, 1985
Director of Research and
Development
Alexander L. Cappello 45 Chairman of the Board, Director(1)(2)(3) April, 2000
Edmond F. Buccellato 56 President and Chief Executive Officer, November, 1995
Director
Thomas J. Pernice 39 Treasurer and Secretary, Director(3) April, 2001
William M. Finkelstein 42 Chief Financial Officer April, 2001
Lawrence Loomis 58 Director(2) December, 1986
Leonard Millstein 59 Director(1) December, 1986
Boris Skurkovich, M.D. 46 Director(2) December, 1986
John M. Bendheim 47 Director(1)(2)(3) June, 2000
---------------------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
20
(3) Member of the Executive Committee of the Board of Directors.
TERM OF OFFICE
Each director serves for a term of one year or until his successor is
duly elected once qualified. The Company's officers are appointed by the Board
of Directors and hold office at the discretion of the Board.
BIOGRAPHICAL DESCRIPTIONS OF DIRECTORS AND OFFICERS
John M. Bendheim - Since June 2000, Mr. Bendheim has served as a member
of the Board of Directors. Mr. Bendheim is Chairman of the Cedars-Sinai Medical
Center Board of Governors in Los Angeles, California and President of Bendheim
Enterprises, Inc., a real estate investment holding company. He received his
B.S. degree in Business Administration in 1975 and his M.B.A. in 1976 from the
University of Southern California.
Edmond F. Buccellato -- Since April, 2001, Mr. Buccellato has served as
President and Chief Executive Officer. Mr. Buccellato served as President and
Chief Operating Officer of the Company from September 1, 2000 to December 12,
2000. Mr. Buccellato served as Chief Executive Officer and a member of the Board
of Directors from 1995 to August 31, 2000. He was co-founder, member of the
Board of Directors and Vice President of Finance of Phase Medical, Inc., an
infusion therapy company sold to Becton Dickinson in 1994. He was also
co-founder, member of the Board of Directors and Vice President of Finance of
Synergistic Systems, Inc., a company that became the largest medical billing
company in the western United States. He is also co-founder and member of the
Board of Directors of Polymer Safety, LLC, a manufacturer of synthetic medical
and industrial examination gloves. He is also co-founder and member of the Board
of Directors of Physicians' choice LLC, a medical billing company. Mr.
Buccellato received his undergraduate degree From California State University at
San Diego, and his graduate degree from the University of Southern California.
Alexander L. Cappello -- Since April, 2001, Mr. Cappello has served as
Chairman of the Board. Since May 2000, Mr. Cappello has served as a member of
the Board of Directors. Mr. Cappello is Chairman and Chief Executive Officer of
Cappello Group, Inc., a merchant banking firm, facilitating equity and project
financing and since 1975. Currently, he is a Member of the Board of Directors of
the following: Cappello Group, Inc., RAND Corporation (Center for Middle East
Public Policy), CytRx Corporation (NASDAQ), Independent Colleges of Southern
California (ICSC), USC Marshall School of Business Entrepreneur Advisory
Council, USC Advancement Council, USC Marshall School of Business, Chairman of
Catholic Big Brothers of Los Angeles, Chairman and President of YPO
International (Young Presidents' Organization) for 2003-2004. He received his
B.S. Degree in finance (Order of the Palm) from the University of Southern
California in 1977.
Formerly, Mr. Cappello was a Member of the Board of Directors of the
following; Koo Koo Roo, Inc. (NASDAQ), Arcus Data Security, Inc. (NASDAQ),
Maritime Bank of California (OTC), Executive Publications, Inc., and The Joffrey
Foundation.
21
Lawrence Loomis - Since 1986, Mr. Loomis has served as a member of the
Board of Directors. Mr. Loomis is President and majority shareholder of New
Horizons Diagnostics, Inc., a company that develops bacteriological screening
methods, monoclonal antibodies for detection of various infectious disease
agents, and rapid bacterial and viral assay kits. Prior to founding New Horizons
Diagnostics, Inc. in 1980, Mr. Loomis was in charge of the Immunology Department
for BBL, a division of Becton Dickinson. Mr. Loomis received his undergraduate
degree in Chemistry from New York University and his graduate degree in
Chemistry from City University.
Leonard Millstein - Since 1986, Mr. Millstein has served as a member of
the Board of Directors. Mr. Millstein received his MSCE and Ph.D. in Civil
Engineering from Moscow State Construction University in 1964 and 1974,
respectively. After immigrating to the United States in 1978, he held teaching
positions at Howard University in Washington D.C. and Johns Hopkins University
in Baltimore, Maryland. He has over 200 publications and is a member of the
American Concrete Institute and American Society of Civil Engineers. From 1981
to the present, he has been a CEO of Radcon Products, a company involved in
manufacturing of proprietary concrete sealants. From 1990 until the present, he
has been a Chairman of the Board of TTLTIC, a private consulting company.
Boris Skurkovich, M.D. - Since 1986, Mr. Skurkovich has served as a
member of the Board of Directors, and from that same date until December 2000,
he was a Vice President of the Company. He completed a clinical and research
fellowship at the Maxwell Finland Laboratory for Infectious Diseases, Boston
City Hospital, Boston, Massachusetts, and presently is a professor at Brown
University Medical School. He has collaborated with his father, Simon, on the
development of the Company's treatment of autoimmune diseases. Dr. Skurkovich
received his M.D. from the Moscow State Medical Institute.
Simon Skurkovich, M.D. - From 1985 until September 2000, Dr. Skurkovich
served as Chairman of the Board. He has previously been granted five patents in
Russia, and eight in the U.S. He is the creator of immune preparations from
human blood against antibiotic resistant bacteria that saved thousands of lives
in the Soviet Union and Eastern Europe. In Russia, he was professor and Chief of
the Immunology Laboratory of the Institute of Hematology and Blood Transfusion
and was awarded gold and silver medals for his scientific discoveries. His
laboratory was also awarded the nation's highest honor, the Lenin Prize, for his
patented work. Dr. Skurkovich received an M.D., Ph.D. and a Doctorate in Medical
Sciences (D.Sc.) from Pirogov State Medical Institute in Moscow. He has written
more than 200 articles for scientific publications.
Thomas J. Pernice -- Since April, 2001, Mr. Pernice has served as the
Treasurer and Secretary of the Company and as a member of the Board of
Directors. Mr. Pernice is a managing director of Cappello Group, Inc., a
merchant banking firm. Prior to joining the Cappello Group in January, 1999, Mr.
Pernice served as a senior corporate executive in government and industry for
more than 17 years. Most recently, he was Vice President, Public Affairs and a
corporate officer for Dole Food Co. Inc. (NYSE:DOL), reporting to the chairman
22
and CEO, David H. Murdock. He also served in similar capacities for the
conglomerate of publicly and privately held business interests of Murdock,
including the Castle & Cooke Inc. real estate company, formerly (NYSE:CCS), now
privately held. Prior to joining Dole Food Co., Mr. Pernice served in the White
House for more than seven years in various capacities for the Reagan and Bush
administrations. Mr. Pernice earned a bachelor of arts degree from the
University of Southern California.
FAMILY RELATIONSHIPS
The only known family relationship between any directors is Simon
Skurkovich, father to Boris Skurkovich, and father-in-law to Leonard Millstein.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, no present director or executive officer of
the Company has been the subject matter of any of the following legal
proceedings:
(a) any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
(b) any criminal convictions;
(c) any order, judgment, or decree permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; and
(d) any finding by a court, the SEC or the CFTC to have violated a
federal or state securities or commodities law.
Further, no such legal proceedings are known to be contemplated by
governmental authorities against any director or executive officer.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth the Common Stock ownership, including
options to purchase stock, of each person known by the Company to be the
beneficial owner of five percent (5%) or more of the Company's Common Stock,
each director individually and all officers and directors of the Company as a
group as of July 18, 2001. Each person has sole voting and investment power with
respect to the shares of Common Stock shown, unless otherwise noted, and all
ownership is of record and beneficial. As of July 18, 2001, the Company had
39,848,265 shares of Common Stock outstanding.
Name and Address Number of Shares
of Owner Beneficially Owned Percentage of Total
---------------- ------------------ -------------------
Leonard Millstein 5,400,159(1) 13.5%
Ellen Millstein
1677 Calle Alta
La Jolla, CA 92037
Boris V. Skurkovich, M.D. 5,177,270(1) 12.9%
18 Blaisdell Ave
Pawtucket, RI 01860
23
Name and Address Number of Shares
of Owner Beneficially Owned Percentage of Total
---------------- ------------------ -------------------
Gerard K. Cappello 2,765,660(3) 6.5%
1299 Ocean Avenue
Suite 306
Santa Monica, CA 90401
Edmond F. Buccellato 2,144,443(4) 5.3%
6355 Topanga Canyon
Boulevard, Suite 510
Woodland Hills, CA 91367
Simon Skurkovich, M.D.
802 Rollins Avenue 2,026,770(5) 5.0%
Rockville, MD 20852
Lawrence Loomis
9110 Red Branch Road 1,610,000(6) 4.0%
Columbia, MD 21045
Alexander L. Cappello
1299 Ocean Avenue 1,324,149(7) 3.2%
Suite 306
Santa Monica, CA 90401
John M. Bendheim
2001 S. Barrington Street 208,744(8) *
Suite 100
Los Angeles, CA 90025
Thomas J. Pernice
1299 Ocean Avenue, Suite 306 755,919(9) 1.9%
Santa Monica, CA 90401
William M. Finkelstein 0 *
6355 Topanga Canyon Boulevard, Suite 510
Woodland Hills, CA 91367
All officers and directors as a group (9) 18,647,454(10) 42.5%
24
----------
(1) Leonard and Ellen Millstein are husband and wife. Shares held in their names
comprise shares held in his name (565,100), shares held in her name (2,713,359),
shares held in the name of William Millstein (888,350), shares held in the name
of Melvin Millstein (1,108,350), and options in his name to purchase up to
125,000 shares of Common Stock at an exercise price of $0.20 per share. Mr.
Millstein and Mrs. Millstein disclaim beneficial ownership of the shares held in
the other's name and disclaim that they are part of any "group" for SEC
purposes.
(2) Shares held in the name of Boris Skurkovich include shares held in his name
(2,505,270), and shares held in the name of Carol Marjorie Dorros (550,000),
Samuel Skurkovich (701,000), and Samuel Aaron Skurkovich (1,121,000). Includes
options to purchase up to 100,000 shares of Common Stock at an exercise price of
$0.01 per share; options to purchase up to 150,000 shares of Common Stock at an
exercise price of $0.20 per share, and options to purchase 50,000 shares of
Common Stock at an exercise price of $0.10 per share.
(3) Shares held in the name of Gerard Cappello include warrants held in his name
to purchase 655,919 shares of Common Stock at an exercise price of $0.15 per
share and warrants to purchase 1,405,541 shares of Common Stock at an exercise
price of $0.15 per share held in the name of Cappello Capital Corp. ("CCC"), a
company wholly-owned by Mr. Cappello. Shares held also include the right to
acquire 100,000 shares of Common Stock upon conversion of Convertible Debt held
in Mr. Cappello's name, and the right of CCC to acquire 604,200 shares of Common
Stock upon exercise of the Investment Option for up to $151,050 principal amount
of Convertible Debt and conversion of such Convertible Debt.
(4) Shares held in the name of Edmond F. Buccellato comprise shares held in his
name (500,000), and shares held in the names of Edmond F. and Leana J.
Buccellato Living Trust (1,331,666 shares), Amy Buccellato (8,400 shares),
Matthew Buccellato (10,490 shares) and Buccellato & Finkelstein, Inc. (88,334).
Includes options to purchase up to 105,543 shares of Common Stock at an exercise
price of $0.10 per share, options to purchase up to 50,000 shares of Common
Stock at an exercise price of $0.10 per share and options to purchase up to
50,000 shares of Common Stock at an exercise price of $0.20 per share.
(5) Shares held in the name of Simon Skurkovich include options to purchase up
to 300,000 shares of Common Stock at an exercise price of $0.10 per share, and
options to purchase up to 623,000 shares of Common Stock at an exercise price of
$0.10 per share. Simon Skurkovich is the father of Boris Skurkovich and Ellen
Millstein but disclaims beneficial ownership of the shares attributed to both of
them and disclaims that the three of them are part of a "group" for SEC
purposes.
(6) Includes shares held in the names of Larry Loomis (1,325,000 shares) and New
Horizons Diagnostics, Inc. (200,000 shares). Includes options to purchase up to
75,000 shares of Common Stock at an exercise price of $0.20 per share and
options to purchase up to 10,000 shares of Common Stock at an exercise price of
$0.10 per share.
(7) Shares held in the name of Alexander Cappello include warrants held in his
name to purchase 100,000 shares of Common Stock at an exercise price of $0.25
per share, and warrants held by the Alexander L. and Linda Cappello Family Trust
to purchase 1,115,061 shares of Common Stock at an exercise price of $0.15 per
share. Also includes the right to acquire 109,088 shares of Common Stock upon
conversion of Convertible Debt. Alexander Cappello is the brother of Gerard
Cappello.
25
(8) Shares held in the name of John Bendheim comprise warrants to purchase
100,000 shares of Common Stock at an exercise price of $0.25 per share, and the
right to acquire 108,744 shares of Common Stock upon conversion of Convertible
Debt.
(9) Shares held in the name of Thomas J. Pernice include warrants to purchase
100,000 shares of Common Stock at an exercise price of $0.25 per share, and
warrants assigned by CCC to him to purchase 655,919 shares of Common Stock at an
exercise price of $0.15 per share.
(10) Includes 2,070,980 shares of Common Stock underlying warrants, 1,638,543
shares of Common Stock underlying options and 317,832 shares of Common Stock
underlying Convertible Debt.
* Represents less than 1% of the outstanding Shares of Common Stock.
DESCRIPTION OF SECURITIES
COMMON STOCK AND PREFERRED STOCK
The Company's authorized capital stock consists of 100,000,000
authorized shares of common stock, $.001 par value, and 20,000,000 authorized
shares of preferred stock, $.001 par value ("Preferred Stock"). The Certificate
of Incorporation ("Certificate") authorizes a class of preferred stock commonly
known as a "blank check" preferred stock. The Preferred Stock may be issued from
time to time in one or more series, and the Board of Directors, without further
approval of the Company's stockholders, is authorized to fix the relative
rights, preferences, privileges and restrictions applicable to each series of
Preferred Stock. Such shares of Preferred Stock, if and when issued, may have
rights, powers and preferences superior to those of the Common Stock.
The holders of Common Stock are entitled to one (1) vote for each share
on all matters voted on by stockholders, including the election of directors
and, except as otherwise required by law, or provided in any resolution adopted
by the Board of Directors with respect to any series of Preferred Stock,
exclusively possess all voting power. The holders of Common Stock do not have
any cumulative voting, conversion, redemption or preemptive rights. Subject to
any preferential rights of any outstanding series of Preferred Stock designated
by the Board of Directors from time to time, the holders of Common Stock are
entitled to such dividends as may be declared from time to time by the Board of
Directors from funds available therefor, and upon liquidation will be entitled
to receive pro rata all assets of the Company available for distribution to such
holders.
The Certificate provides that directors may be removed with or without
cause, and only upon the affirmative vote of holders of at least 66-2/3% of the
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors, voting together as a single class,
subject to any rights of holders of Preferred Stock; provided, however, that
where such action is approved by a majority of the directors the affirmative
vote of only a majority of the holders of all outstanding shares of Common Stock
will be required for approval of such action.
The Certificate contains provisions requiring the affirmative vote of
the holders of at least 66-2/3% of the voting power of the voting stock, to
amend certain provisions of the Certificate, or to amend any provision of the
Bylaws; provided, however, that where such action is approved by a majority of
the directors the affirmative vote of only a majority of the holders of all
outstanding shares of Common Stock will be required for approval of such action.
26
As of July 18, 2001, there were approximately 1560 holders of record of
our Common Stock. This number does not include those beneficial owners whose
securities are held in street name. We estimate that the total number of record
and beneficial stockholders is more than 3,500.
CONVERTIBLE SUBORDINATED DEBT
During the year ending December 31, 2000, the Company sold in a private
placement to accredited investors an aggregate of $1,510,500 in principal amount
of 10% Convertible Subordinated Debt due September 30, 2004. Under the terms of
the Convertible Debt, the principal bears interest at 10% per annum payable
semi-annually in cash or in additional convertible subordinated debt and is
convertible into shares of Common Stock of the Company at a conversion price per
share equal to twenty-five cents ($0.25), subject to certain anti-dilution
provisions. The Company sold the Convertible Debt to accredited investors
pursuant to Section 4(2) of the Securities Act of 1933, as amended (Act), and
Rule 506 of Regulation D, promulgated under the Act.
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES AND LIABILITIES
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the person is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by the person in
connection with such action, suit or proceeding if the person indemnified acted
in good faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe the person's
conduct was unlawful. If the person indemnified is not wholly successful in such
action, suit or proceeding, but is successful, on the merits or otherwise, in
one or more but less than all claims, issues or matters in such proceeding, such
person may be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by such person in connection with each successfully
resolved claim, issue or matter. In the case of an action or suit by or in the
right of the corporation, no indemnification may be made in respect to any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that despite the adjudication of liability but in the view of
all the circumstances of the case such person is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper. Section 145
provides that to the extent a present or former director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to above or in the defense of any claim, issue or matter
27
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
The Certificate of Incorporation of the Company provides that a director
of the Company will not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of the law, (iii) under Section
174 of the General Corporation Law of the State of Delaware or (iv) for any
transaction from which the director derived an improper personal benefit.
The Bylaws of the Company provide that each person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company), by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Company (which term includes any predecessor corporation of the
Company) or is or was serving at the request of the Company as a director,
officer, employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise, will be indemnified by the Company to the
fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended against all expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
actually and reasonably incurred in connection therewith and such
indemnification will inure to the benefit of the indemnitee's heirs, executors
and administrators.
There is no pending material litigation or proceeding involving a
director, officer, employee or other agent of the Company as to which
indemnification is being sought, nor is the Company aware of any pending or
threatened material litigation that may result in claims for indemnification by
any director, officer, employee or other agent.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officer and controlling persons of
the small business issuer pursuant to the provisions of the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
THE COMPANY
Advanced Biotherapy, Inc. is a corporation organized and existing under
the laws of the State of Delaware, headquartered in Woodland Hills, California.
We are a biotechnology company developing therapeutics for a range of autoimmune
diseases based on an anti-cytokine platform technology. Cytokines are soluble
components of the immune system that are largely responsible for regulating the
immune response. When overproduced, as in certain autoimmune diseases,
interferons and cytokines can lead to immune system disturbance and
inflammation. This results in localized tissue damage and leads to the pathology
seen in autoimmune diseases (AD). The Company plans to develop drugs designed to
reduce the levels of certain cytokines.
28
To date, our activities have consisted primarily of research, development and
non-United States clinical trials. Such activities have resulted in accumulated
losses at June 30, 2001.
We develop drugs that may effectively treat a range of autoimmune
diseases. Our technology is based upon the work of Dr. Simon Skurkovich and Dr.
Boris Skurkovich who first suggested that autoimmune disease may be the result
of augmented cytokine production (Nature, Vol. 241, P 551-552, 1974). We have
conducted a number of clinical trials at major institutes of the Medical Academy
of Sciences in Russia, in which we have evaluated the efficacy of a series of
polyclonal antibodies, raised against a variety of cytokines, in autoimmune
diseases such as rheumatoid arthritis (RA), multiple sclerosis (MS) and acquired
immunodeficiency disease (AIDS).
In two randomized, placebo-controlled, double blind trials conducted in
Russia, we believe we have demonstrated efficacy of our anti-cytokine strategy
in both RA and MS. These studies have permitted us to determine which cytokines
are most active in the AD process, and therefore, which need to be reduced to
treat the disorder. With a five-day treatment course, statistically significant
and clinically relevant responses were obtained that persisted for as long as
one year after treatment termination in the MS studies and for one month in the
RA studies.
Prior to marketing the Company's development stage products, the Company
must obtain regulatory approval from the United States Food and Drug
Administration ("FDA"). The Company is not sufficiently funded to allow it to
complete the product development process, obtain FDA approval, and market its
products. However, the Company plans to seek additional financing through the
private sale of restricted securities to investors, enter into joint ventures or
licensing or similar arrangements with large pharmaceutical companies to provide
the funding necessary for additional activities. There can be no assurance that
the Company will enter into any such arrangements, obtain the appropriate
regulatory approvals, or develop, manufacture, market, or distribute
commercially viable products.
To date, the Company's activities have consisted primarily of research,
development and human clinical testing. Such activities have resulted in
accumulated deficit of $4,587,157 at June 30, 2001. The Company anticipates that
it will incur substantial losses in the foreseeable future as a result of its
continued product development. There are no assurances that the Company will be
successful in completing its product development, receive FDA approval,
implement manufacturing operations and commercially market its development stage
products.
The Company develops drugs that may effectively treat a range of
autoimmune diseases. The technology of the Company is based upon the work of
Drs. Simon and Boris Skurkovich who first suggested that autoimmune disease may
be the result of augmented cytokine production (Nature, Vol. 241, P 551-552,
1974). The Company has conducted both a pilot and two clinical trials (conducted
at major institutes of the Medical Academy of Sciences in Russia), in which it
has evaluated the efficacy of a series of polyclonal antibodies, raised against
a variety of cytokines, in autoimmune diseases such as rheumatoid arthritis
(RA), multiple sclerosis (MS) and acquired immunodeficiency disease (AIDS).
The Company anticipates that it will incur substantial losses in the
foreseeable future as a result of its continued product development. There are
no assurances that the Company will be
29
successful in completing its product development, receive FDA approval,
implement manufacturing operations and commercially market its development stage
products.
BUSINESS OBJECTIVE
The business strategy of the Company is twofold in nature and involves
the engagement of a corporate partner to assist in the clinical development of
its drug treatments for autoimmune disorders. This will involve, upon the
identification of such a partner, the filing of the necessary documents with the
FDA, conducting clinical trials and obtaining the necessary new drug application
regulatory approvals. The Company does not intend to market its drug products if
they are approved by the FDA, but will instead seek a royalty arrangement with a
corporate partner who will market the product when and if it is approved.
The second element of the Company's business strategy is to seek out
merger and acquisition candidates that can either expand the Company's
technology base in the area of autoimmune disease therapeutics or bring approved
products into the Company that will generate recurring revenue.
The amount spent on research and development by the Company for the
fiscal year ended December 31, 2000 and 1999 was $39,579 and $156,280,
respectively.
TECHNICAL BACKGROUND
The Company's main biotechnology platform involves the use of antibodies
directed against certain carefully selected cytokines. An antibody is a protein
that is secreted by cells in the blood and is part of the body's natural defense
system against foreign invaders such as viruses or bacteria. Antibodies seek out
and selectively bind to their targets, triggering such effects as neutralizing
toxins and marshaling the immune system against infectious microorganisms and
cancer cells. The Company believes that its development-stage antibody treatment
removes or neutralizes certain interferons and cytokines. These are soluble
components of the immune system that are largely responsible for regulating the
immune response and inflammation. During certain ADs, such as RA, MS and Type I
diabetes, certain interferons (IFN) and other cytokines are over produced by the
human body which results in localized damage to organs and tissues and
constitutes the pathology of AD.
In particular, interferon-alpha (IFN-(alpha)) or interferon-gamma
(IFN-(gamma)) is known to trigger or exacerbate ADs in animals prone to AD, and
in patients who have had underlying autoimmune conditions or a predisposition to
them. In animal models of a number of human ADs, the administration of
antibodies to IFN-(alpha) or IFN-(gamma) halted or delayed these diseases. This
includes antibodies to IFN-(gamma) given to:
1. New Zealand Black and White mice known to develop a severe AD similar
to systemic lupus erythematosus in humans.
2. Lewis rats afflicted with actively-induced experimental AD of the
peripheral nervous system.
3. NOD mice, an animal model of human Type I Diabetes.
30
4. BB/Wor rats, a diabetes-prone strain, and CBA/J mice, a strain
susceptible to experimental autoimmune thyroiditis (EAT). In all cases, the
anti-IFN-y antibodies suppressed or reduced the disease.
The biological basis for which the immune system launches an immune
response directed against a "self antigen" is still considered unclear. Many of
the autoimmune diseases are, however, associated with identifiable antigens of
the Human Leukocyte Antigen (HLA) complex, specifically, the Class II proteins.
The cells which constitute the immune system are not confined to one location or
organ, so there is a need for them to communicate with each other in order for
the various components (mediator cells, phagocytic cells, T-cells and B-cells)
of the system to function in a coordinated manner. The agents, which effect this
communication, are the cytokines. Biochemically, the cytokines are small
proteins or polypeptides and include the interferons, IFN, (alpha, beta and
gamma), as well as the Interleukins (IL) and the Tumor Necrosis Factors (TNF),
that include TNF alpha (TNF-(alpha)) and TNF beta (TNF-(beta)).
The cytokines are divisible into the pro-inflammatory (IL-1, 2 and 12,
INF-(gamma), INF-(alpha), TNF-alpha and TNF-beta) and the anti-inflammatory
cytokines (IL-4, 5, 6, 10, 13 and IFN-Beta). Transforming growth factor
(TGF)-beta is also an anti-inflammatory cytokine.
There is substantial data in the literature documenting that upon immune
system activation, the cytokines spring into action in a coordinated manner that
can best be described as a pseudo-cascade. Each cytokine has a specific role in
the coordination of the immune response and in the inflammatory process.
Cytokine interactions with cells can result in cell proliferation, suppression,
or differentiation and may also result in the synthesis of other cytokines by
the target cell.
IFN-(GAMMA) AS A THERAPEUTIC TARGET
The cytokine pseudo-cascade is initiated by IFN-(gamma) which is
followed by the production of other inflammatory cytokines such as TNF-(alpha)
and IFN-(alpha) that exert effects on yet other cells which result in the actual
pathology of various ADs. The relevant cascade for the production of killer
T-Cells (TH-1 Line) is as follows:
IFN-(gamma)+IL1+antigen--Killer T cell--TNF-(alpha) + IFN-(gamma) +
IFN-(alpha) secretion
Simply sequestering TNF-(alpha), as do Embrel(TM) and Remicade(TM), two
products that are already on the market, may not effectively deal with the
overproduction of IFN-(alpha) and IFN-(gamma), both of which are
pro-inflammatory. Removing IFN-(gamma) would, however, remove or lower all three
inflammatory cytokines since IFN-(gamma) is upstream in location to TNF-(alpha)
in the cytokine cascade. IFN-(gamma) is responsible for the activation of killer
T-cells that produce many inflammatory cytokines. It, therefore, is upstream to
many of the other cytokines and its reduction in AD may represent an effective
therapeutic strategy. The Company's drug development strategy therefore centers
on the reduction of IFN-(gamma) levels in AD patients.
31
A global effect on reducing the cytokine cascade may be possible by
removing or reducing IFN-(gamma). The Company believes that treatment by
TNF-(alpha) lowering drugs alone has little to no effect on the activation of
killer T-cells that produce many of the harmful cytokines. The Company's product
development is conceptually based on this immunological postulate.
IFN-(gamma) also leads to the synthesis of MHC class II antigens in a
variety of cell types. Induction of these antigens is thought to be associated
with the autoimmune pathology in a number of diseases. The induction of
activated T-cells requires that these specific MHC class II antigens be
expressed, and this induction is a component of the resulting tissue destruction
and inflammation in autoimmune disorders. Reduction of IFN-(gamma) would,
therefore, be expected to inhibit activation of killer T-cells and, therefore,
reduce or avoid the autoimmune reaction.
In addition, a recent study has shown that IFN-(gamma) levels correlate
with the disability score in MS patients (Mult. Scler, Feb. 2000, Vol. 6, P.
19-23), and another study showed that sequestering of IFN-(gamma) in mice
prevented the onset of autoimmune Diabetes Mellitus (Gene Ther., May 1999, Vol.
6, P. 771-7). Both of these observations provide further support the central
role of IFN-(gamma) in the etiology of autoimmune diseases, and further suggest
that reducing the levels of this cytokine may have therapeutic benefit.
PRODUCT DEVELOPMENT PLAN
The process of the cytokine pseudo-cascade is extremely complex and not
fully understood, but it appears that this process results in the overproduction
of the inflammatory cytokines, IFN-(gamma) and TNF-(alpha), that can contribute
to the pathology of AD. The Company, and much of the immunology community,
agrees that the regulation of TNF-(alpha) and IFN-(gamma) presents an
opportunity for new drug development in a variety of autoimmune diseases.
Clearly the autoimmune diseases are associated with high levels of cytokines in
the blood, and there is now ample evidence that sequestration of certain
cytokines, such as TNF-(alpha) and IFN-(gamma), is associated with symptomatic
relief of autoimmune diseases such as RA, MS and Crohn's disease. The two
products that are already on the market that target the reduction of
TNF-(alpha), Embrel(TM) and Remicade(TM), are, in the Company's opinion, not
optimal for the management of AD. The therapeutic proof of principle therefore
already exists for the usefulness of cytokine mediating strategies as
therapeutic interventions in autoimmune disease.
The Company believes that the existing cytokine mediating drugs
(TNF-(alpha) based) only represent the first approximation of the full potential
of this therapeutic strategy, and that enhanced efficacy may be obtained by
targeting other cytokines such as IFN-(gamma), which occupies a more upstream
position in the cytokine cascade than TNF-(alpha). The Company also believes
that the systemic administration of anti-cytokine biologically based drugs is
not the ideal strategy because of the development of neutralizing antibodies and
the potential for the development of hyperimmune sensitization. These issues are
becoming increasingly apparent
32
with the biologically based products currently on the market and constitute the
rationale for the Company's anti-cytokine extracorporeal device development
program which will employ antibodies to both IFN-(gamma) and TNF-(alpha) that
are coupled to a solid phase matrix on a filtration column. The patient's blood
is passed through the column and the antibodies coupled to the column effect a
removal of the targeted cytokines. This treatment strategy has the advantage of
avoiding completely the exposure of the patient to any drug or foreign substance
and in so doing removing any toxicity issues in the drug development process.
Toxic side effects are a major reason drugs fail to be approved by the FDA.
ADs probably represent one of the single largest disease classes,
comparable to the cardiovascular, central nervous system, and type II diabetes
markets. The major autoimmune diseases are RA, MS, Crohn's disease, and type I
diabetes, but also include a host of other disorders, (See Table I). In addition
to the extensive list of diseases that have been demonstrated to be autoimmune
in character, there are numerous other large market indications that have been
suggested to have an autoimmune etiology. These include Alzheimer's disease,
schizophrenia and others.
TABLE I
MAJOR AUTOIMMUNE DISEASES
Addison's disease Hasimoto's disease
Amyotrophic lateral sclerosis Systemic lupus erythematosus
(Lou Gehrig's disease) Male infertility
Autoimmune diseases of the ear Multiple sclerosis
Autoimmune diseases of the eye Myasthenia Gravis
Autoimmune hepatitis Psoriasis
Corneal transplant rejection Rheumatic fever
Crohn's disease Rheumatoid arthritis
Diabetes (Type I) Sarcoidosis
Epididymitis Scleroderma
Glomerulonephritis Sjogren's syndrome
Graves' disease Thyroiditis
Guillan-Barre syndrome Vasculitis
NEUROLOGICAL DISEASES WITH A SUSPECTED AUTOIMMUNE COMPONENT
Alzheimer's Disease Depression
Autism Parkinson's disease
Schizophrenia
Current treatment of autoimmune diseases is inadequate and involves
rather primitive and global immunosuppression by using adrenal steroids,
cytotoxic agents, immunosuppressants, and antimitotics, all of which have
substantial toxicity associated with them due to their lack of specificity.
Recently, the cytokine strategy has emerged in the therapeutic arena in the form
of
33
administering anti-inflammatory cytokines, such as Beta Interferon (IFN-(beta))
and specifically Betaseron(TM) and Avonex(TM) for treating MS. Also, the recent
introduction of two anti-TNF-alpha products (Embrel(TM) and Remicade(TM)) has
further demonstrated the efficacy of the cytokine mediation therapeutic
strategy. Although each of these products is useful in treating ADs, they
clearly only represent the first wave of products based on this strategy and
were conceived and developed at a time when the knowledge of the cytokine
cascade was far less understood than it is today.
The now appreciated pivotal position of IFN-(gamma) in the cytokine
cascade, coupled with the clinical data generated in our studies, suggests that
the Anti-IFN-(gamma) therapeutic strategy may be superior to existing therapies
for both MS and RA, with regard to both efficacy and safety. The mission of the
Company is to develop these improved cytokine mediating therapeutic strategies
and bring them to market as new drugs.
CLINICAL STUDIES / RHEUMATOID ARTHRITIS (RA)
In an effort to demonstrate clinical proof of principle that IFN-(gamma)
antibodies show clinical efficacy, two double-blind, randomized,
placebo-controlled studies were conducted in RA patients in Russia. These
studies employed the Company's polyclonal antibodies to IFN-(gamma), which were
raised in goats. The IgG fraction was obtained by purification and used directly
via intramuscular injection. The results of both clinical studies were similar,
showing that a five-day treatment course with Anti-IFN-(gamma) given twice a day
produces a marked and statistically significant response within the first week
of treatment. In addition, the patients in the Anti-IFN-(gamma) treatment group
showed a therapeutic response at one month post-treatment, suggesting a rather
long lasting effect of the therapy.
Being mindful of the study limitations, the data indicate that the
Anti-IFN-(gamma) group had a significant and clinically relevant response to the
drug. The rather long response experienced by the patients who received
Anti-IFN-(gamma) could be of substantial clinical significance, especially given
the fact that the treatment course was only five days. Management believes that
both studies provide supportive proof of principle in humans that sequestering
IFN-(gamma) is a viable therapeutic strategy in RA. Longer treatment periods may
further enhance the duration of Anti-IFN-(gamma) therapeutic efficacy. The
application of the extracorporeal treatment strategy may further enhance
therapeutic efficacy and the Company intends to seek out a corporate partner to
evaluate this possibility.
CLINICAL DATA / MULTIPLE SCLEROSIS (MS)
Although smaller in size, the MS market is substantial and lucrative.
Avonex(TM) and Betaseron(TM) have made significant inroads into this market but
they still leave much to be desired from an efficacy standpoint. These two drugs
are different forms of interferon-beta, an anti-inflammatory cytokine that is
thought to act by reducing the blood levels of IFN-(gamma). The Company has
sponsored a 30-patient trial (in Russia) in secondary progressive MS patients
comparing Anti-IFN-(gamma) to placebo and employing a similar study design to
that used in the two RA studies. The Anti-IFN-(gamma) treatment group
experienced statistically significant
34
improvements in a variety of clinical outcomes, including magnetic resonance
imaging data and degree of progression.
As seen in the pilot RA studies, the Anti-IFN-(gamma) treatment group
experienced a protracted therapeutic effect. After 12 months post-treatment, the
Anti-IFN-(gamma) patients still showed significant improvement relative to the
placebo group on a number of endpoints, including disease progression and the
number of active MRI lesions.
Although preliminary in nature, both the RA and MS pilot clinical trial
results provide a proof of concept that Anti-IFN-(gamma) is a potentially viable
therapeutic strategy for both of these ADs. The data suggest that the autoimmune
cascade may be more permanently blunted, (compared to reducing TNF-(alpha)
levels) by reducing IFN-(gamma) levels for a relatively short period of time.
The Company believes that longer-term treatments with Anti-IFN-(gamma) or
employing the extracorporeal treatment strategy could provide enhanced efficacy
and longer remission.
The amount spent on research and development by the Company for the
fiscal year ended December 31, 2000 and 1999 was $39,579 and $156,280,
respectively.
MANUFACTURING
The Company intends to out-source product manufacturing and has
identified several contract manufacturers as having suitable facilities for
manufacturing large quantities of antibodies. The raw materials are used as base
components in a number of drug products and are commercially available
nationally and internationally.
The Company has not entered into any manufacturing agreement for
antibodies and there is no assurance that any agreements will be entered into in
the future.
GOVERNMENT REGULATION
The Company's activities are subject to extensive federal, state, county
and local laws and regulations controlling the development, testing, manufacture
and distribution of medical treatments. The type of antibody-based products
described in the section entitled "Product Development Plan" above will be
subject to regulation as therapeutics or devices by the FDA, as well as varying
degrees of regulation by a number of foreign governmental agencies. To comply
with the FDA regulations regarding the manufacture and marketing of such
products, the Company would likely incur substantial costs relating to
laboratory and clinical testing of new products, and for the preparation and
filing of documents in the formats required by the FDA. There are no assurances
that the Company will receive FDA approval necessary to commercially market its
products, if any, and that if the Company is successful, it will not encounter
delays in bringing its new products to market as a result of being required by
the FDA to conduct and document additional investigations of product safety and
effectiveness.
35
FEDERAL DRUG ADMINISTRATION REGULATION
The FDA approved process for conducting clinical trials in the United
States consists of four steps that all new drugs, antibiotics and biologicals
must follow.
They are:
1. Investigational new drug application (IND)
2. Clinical trials
3. New drug application (review and approval)
4. Post-marketing surveys
On January 11, 1993, the FDA approved new procedures to accelerate the
approval of certain new drugs and biological products directed at serious or
life-threatening illnesses. These new procedures will expedite the approvals for
patients suffering from terminal illness when the drugs provide a therapeutic
advantage over existing treatments. The Company believes that the products under
consideration by the Company will fall under the FDA guidelines for accelerated
approval for drugs and biological products directed at serious and life
threatening disease because the Company's products are targeted as potential
treatments for RA and MS and are expected to be non-toxic in the extracorporeal
treatment paradigm.
The Company believes that the first step in the approval process, IND
approval, will take approximately 24 to 36 months. The Company will provide the
FDA with the results of comprehensive human clinical trials already conducted
outside the U.S.
Upon successful completion of the IND phase, the next step typically
would be to commence large-scale clinical trials with the Company's compounds.
Clinical trials are conducted in three phases, normally involving progressively
larger numbers of patients. The Company, in conjunction with its FDA consultant
and to-be-identified corporate partner, would plan to select key physicians and
hospitals to actively conduct these studies. Phase I clinical trials will be
concerned primarily with learning more about the safety of the drug, though they
may also provide some information about the safety of the drug and information
about effectiveness. Phase I testing is normally performed on healthy volunteers
although for drugs directed at HIV/AIDS and cancer, testing on infected people
is permitted. The test subjects are paid to submit to a variety of tests to
learn what happens to a drug in the human body; how it is absorbed, metabolized
and excreted, what effect it has on various organs and tissues; and what side
effects occur as the dosages are increased. The principal objective is to
determine the drugs' toxicity. Phase I trials generally involve 20-40 people at
an estimated cost of $10,000 per patient, taking three to six months to
complete.
Assuming the results of Phase I testing present no toxic or unacceptable
safety problems, Phase II trials may begin. In many cases, Phase II trials may
commence before all the Phase I trials are completely evaluated if the disease
is life threatening and preliminary toxicity data in Phase I shows no toxic side
effects. In the case of clinical trials on drugs to treat life threatening
36
disease, Phase I and Phase II trials are sometimes combined to show initial
toxicity and efficacy in a shorter period of time. The primary objective of this
stage of clinical testing is designed to show whether the drug is effective in
treating the disease or condition for which it is intended, and to establish the
optimal dose level for pivotal efficacy phase III trials. Phase II studies may
take one or more years or longer and involve a few hundred patients in
randomized, controlled trials that also attempt to disclose short-term side
effects and risks in people whose health is impaired. A number of patients with
the disease or illness will receive the treatment while a control group will
receive a placebo. The cost per patient is estimated at $10,000.
At the conclusion of Phase II trials, the FDA and the Company will have
a clear understanding of the short-term safety and effectiveness of the drugs
and their optimal dosage levels. Phase III clinical trials will generally begin
after the results of Phase II are evaluated. The objective of Phase III is to
develop information that will allow the drug to be marketed and used safely.
Phase III trials will involve hundreds, and sometimes thousands, of people with
the objective of expanding on the research.
Patient estimates for each phase of the clinical trial process are as
follows for both the MS and RA indications:
Phase I- 30
Phase II- 200
Phase III- 500
The third step that is necessary prior to marketing a new drug is the
New Drug Application (NDA) submission and approval for an injectable product
that is administered directly to a patient. In this step, all the information
generated by the clinical trials will be reviewed and if successful, the drug
will be approved for marketing.
The final step is the post-marketing surveillance or surveys of patients
being treated with the drug to determine its long-term effects. This has no
effect on the marketing of the drug unless highly toxic conditions arise. The
time required to complete the above procedures averages seven years, however,
there is no assurance that the Company will ever receive FDA approval of any of
its products.
The Company's clinical trials are at a very early stage and the Company
has not received approval from the FDA or any other governmental agency for the
manufacturing or marketing of any products under development. Consequently, the
commencement of manufacturing and marketing of any products in the U.S. is, in
all likelihood, a number of years away. The FDA may also require post-marketing
testing and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of
such products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit them.
37
Upon contracting with a strategic partner, the Company anticipates that
it will take up to 60 months before an injectable product will be available for
FDA investigation and approval.
COMPETITION
The Company will encounter significant competition from firms currently
engaged in the biotechnology industries. The majority of these companies will be
substantially larger than the Company, and have substantially greater resources
and operating histories. The Company is aware of other competitors seeking
treatments for ADs such as MS and RA, however, the Company is not aware of any
competitors seeking to produce the same antibody-based products as the Company.
PRODUCT LIABILITY EXPOSURE
The Company does not maintain any product liability insurance. Even if
the Company obtains product liability insurance, there is no assurance that
available amounts of coverage will be sufficient to adequately protect the
Company in the event of a successful product liability claim. Accordingly, if
litigation is initiated against the Company, the Company will have to pay all
costs associated with the litigation as well as any judgment rendered against
the Company. In the event a large judgment is entered against the Company, the
Company may not be able to pay the same and the Company could be forced to cease
operations. However, the Company believes that it would not be held liable for
injuries suffered by participants in its clinical trials because it plans to
require each participating patient to execute a waiver of claims as a result of
adverse reaction to the Company's products.
GLOSSARY OF TERMS
Antibody A protein in the blood that is
generated by B-lymphocytesor plasma
cells in reaction to foreign
proteins or antigens. Antibodies
neutralize antigens and may result
in immunity to the antigens.
Antigen substance (usually foreign) that
induces the formation of antibodies.
Autoimmune disease A disease in which the body produces
an immune response to some
constituent of its own tissue. Such
diseases include MS, RA, insulin
dependent diabetes, systemic lupus
erythematosis, and AIDS.
Cytokine A soluble substance produced by
cells of the immune system to
communicate with other immune system
cells. These include
colony-stimulating factors,
interferons, interleukins, and tumor
necrosis factors. Cytokines can be
38
either pro or anti-inflammatory in
nature. Also referred to as soluble
mediators.
Extracorporeal Treatment A treatment strategy where the blood
of a patient is passed through a
device that is designed to
selectively remove a molecular
component of the blood, for example,
IFN-(gamma) and/or TNF-(alpha).
Humanized antibody An antibody produced by generating
human antibodies with fully human
protein sequences using genetically
engineered strains of mice in which
mouse antibody gene expression is
suppressed and functionally replaced
with human antibody gene expression,
while leaving intact the rest of the
mouse immune system.
Ig (immunoglobulin) (IgA, IgD, IgE, IgG, and IgM) A
group of serum proteins representing
antibodies. See Antibody.
Immune response The events that occur in humans and
other vertebrate animals when the
body is invaded by foreign protein.
It is characterized by the
production of antibodies and may be
stimulated by an infectious organism
or parasite (bacteria, yeast, fungi,
protozoa, etc.), transplanted
material, vaccine, sperm or even the
host's own tissue.
Immunegenecity The study of genetic aspects of the
type and formation of
immunoglobulins (antibodies).
Immune System The cells and tissues that
collectively recognize and eliminate
invading foreign substances like
microorganisms, parasites, and tumor
cells from the body.
Immunosuppressive Something that suppresses the immune
system response.
Interferon-gamma A glycoprotein inflammatory cytokine
induced in different cell sites and
in response to a appropriate
stimulus.
Lymphocyte A type of white blood cell arising
from tissue of the lymphoid systems.
There are two types of lymphocytes:
B cells and T cells. These cells are
capable of being stimulated by an
antigen to produce a specific
antibody to that antigen and to
proliferate to produce a population
of such antibody-producing cells.
39
Lymphokine Any of a number of soluble
physiologically active factors
produced by T lymphocytes in
response to specific antigens.
Important in cell-mediated immunity,
lymphokines include interferon,
macrophage arming factor, lymphocyte
inhibition factor, macrophage
inhibition factor, chemotactic
factor and various cytotoxic
factors.
Macrophage A motile white cell type found in
vertebrate tissue, including
connective tissue, the spleen, lymph
nodes, liver, adrenal glands and
pituitary, as well as, in the
endothelial lining of blood vessels
and the sinusoids of bone marrow,
and in the monocytes. They display
phagocytic activity and process
antigens for presentation to
lymphocytes, which then prepare
antigen-specific antibodies.
Pathogenic Descriptive of a substance or
organism that produces a disease.
Placebo An indifferent substance in the form
of a medicine given for the
suggestive effect.
Polyclonal antibody An antibody produced in the normal
immune response to an antigen
consisting of a number of closely
related, but not identical,
proteins. The variation in
Polyclonal antibodies reflects the
fact that they are formed by a
number of different lymphocytes, in
contrast to monoclonal antibodies,
which are formed by a clone of
identical cells
Protein Any group of complex nitrogenous
organic compounds of high molecular
weight that has amino acids as their
basic structural units. Proteins are
found in all living matter and are
required for the growth and repair
of tissue.
T-Cell A type of lymphocyte that matures in
the thymus gland. These cells are
responsible for the cellular
immunity processes, such as direct
cell binding to an antigen, thus
destroying it. T lymphocytes also
act as regulators of the immune
response as helper T cells, or
suppressor T cells.
Tumor Necrosis Factor (TNF) A substance that is capable of
killing tumor cells and eliciting
inflammatory responses. It is
produced by host monocytes and
macrophages and is also referred to
as cachectin.
40
PATENT STATUS AND PROTECTION OF PROPRIETARY TECHNOLOGY
The Company has been issued United States patent Nos. 5,626,843 and
5,888,511, and Australia patent No. 730498. We also have received a "notice of
allowance" from the United States Patent and Trademark Office (PTO) for a
utility patent to be issued for an antibody to treat five autoimmune diseases.
Management believes that the notice of allowance is a critical milestone for the
Company. Management expects that the patent will be issued in December, 2001,
and upon issuance the Company plans to disclose details about the patent. The
PTO issues a notice of allowance when a company has completed the application
and review process for a United States patent and has satisfied all of the legal
criteria for patentability of the invention. The Company also has ten United
States utility patents pending filed between December 22, 1997, and February 24,
2000, which have now been consolidated into six (6) pending utility patent
applications. The Company also has two foreign applications pending in Europe
and Canada and one PCT application.
The Company believes that its most recently allowed patent gives the
Company patent protection for a new anti-cytokine approach to treating different
autoimmune diseases via both the extracorporeal and the injectable treatment
route. These include rheumatoid arthritis, multiple sclerosis, juvenile
rheumatoid arthritis, psoriatic arthritis and ankylosing spondylitis. The
patented treatment uses various methods to neutralize or block specific
combinations of cytokines and their receptors. In management's opinion, the
Company's patented approach is broader in scope than certain other patented
treatments.
DEPENDENCE UPON KEY PERSONNEL
The Company relies greatly in its efforts on the services and expertise
of its key staff, such as the Chief Executive Officer, the Director of Research
and Development and other officers and directors. The operation and future
success of the Company would be adversely affected in the event that any of them
is incapacitated or the Company otherwise loses their services.
UNCERTAINTIES ASSOCIATED WITH RESEARCH AND DEVELOPMENT ACTIVITIES
The Company intends to continue its research and development activities
on its products and for the purpose of developing proprietary products. Research
and development activities, by their nature, preclude definitive statements as
to the time required and costs involved in reaching certain objectives. If
research and development requires more funding than anticipated, the Company may
have to reduce product development efforts or seek additional financing. There
can be no assurance that the Company would be able to secure any necessary
additional financing or that such financing would be available on favorable
terms.
41
MARKETING
Assuming the Company is able to obtain FDA approval of its products
currently in development, it intends to market the same through collaborative
relationships with other companies. It is the Company's intention that joint
venture partners will be selected on the basis of experience and the degree of
financial success they exhibit in the industry. There are no assurances that the
Company will obtain FDA approval for its products, and there are no assurances
that the Company will be successful in entering into agreements with established
multinational companies.
EXECUTIVE OFFICES
Our executive offices are located at 6355 Topanga Canyon Boulevard,
Woodland Hills, California 91367, and our telephone number is (818) 883-6716.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company is considered to be in the development stage as
defined in Statement of Financial Accounting Standards No. 7. We have generated
little revenue in the past years and have suffered recurring losses from
operations, resulting in an accumulated deficit of $4,587,157 at June 30, 2001.
As of June 30, 2001, the Company has issued and outstanding 39,848,265 shares of
its Common Stock. The Company is a development stage company and has no material
assets other than cash. The Company had $304,360 in cash and short-term
investments as of June 30, 2001. For the twelve-month period subsequent to June
30, 2001. The Company anticipates that its minimum cash requirements to continue
as a going concern for the next twelve months will be approximately $800,000,
and therefore, believes that it has inadequate cash to maintain operations
during that period. In order to meet the foregoing cash requirements, the
Company will have to raise additional capital or obtain a loan. There is no
assurance, however, that the Company will be able to raise additional capital or
obtain a loan. The Company's objective is to establish collaborative
relationships with either a pharmaceutical or biotechnological company that
could result in the generation of royalty payments to the Company. As of the
date hereof, the Company has not entered into agreements with any pharmaceutical
or biotechnological companies. In the event that the Company does not raise
additional capital from any of the foregoing sources, it may have to curtail
operations. The Company is also seeking out merger and acquisition candidates
that can either expand the Company's technology base in the area of autoimmune
disease therapeutics or bring FDA-approved products into the Company that will
generate recurring revenue and cash flow.
42
The Company's development goal is to produce, or have produced, a series
of antibody-based products through collaborations with other biotechnology
companies. The Company has identified several biotechnology companies that can
develop and manufacture such antibodies and extracorporeal devices for the
Company. The availability of this technology will make it possible to produce
safer and more standardized antibodies for commencement of human clinical
trials, under FDA guidelines, in the United States.
The Company has no expected purchases or sales of significant equipment.
There are no expected significant changes in the number of employees of
the Company.
FISCAL 2000 COMPARED TO FISCAL 1999
For the year ending December 31, 2000, the Company realized a net loss
of $653,270 and a loss from operations of $827,084, compared to net income of
$1,143,892 and a loss from operations of $334,278 for the year ending December
31, 1999. The loss from operations for the current year is principally due to a
substantial increase in outside expense relating general corporate, SEC and
patent legal costs, accounting, investment banking, investor relations,
strategic partnering and other contract services, as the Company became an SEC
reporting company, moved the listing of its Common Stock to the OTC Bulletin
Board and embarked on an investor relations program, reincorporated in Delaware,
raised additional capital, expanded its intellectual property portfolio and
began an active corporate partnering initiative. All of these activities also
caused salary, travel, entertainment, telephone and other office expenses to
increase substantially during the year. The operating loss was partially offset
by total other income of $173,814, principally as the result of an internal gain
of $157,520 on the sale of Common Stock by certain officers of the Company, as a
result of Section 16(b) of the Securities Exchange Act of 1934, which requires
insiders to disgorge "short-swing profits." Total other income also benefited
from the forgiveness of $45,396 of accounts payable, resulting from the failure
of the vendors to pursue payment from the Company within the applicable statute
of limitations.
The net income for the year ending December 31, 1999 was the result of
recognizing an extraordinary item related to an agreement by three key employees
to forgive the Company of the cumulative accrued salaries owed to them through
December 31, 1999 in the aggregate amount of $1,472,247 for salaries and $9,962
for interest. The Company also issued 842,953 non-qualified stock options to
these employees, exercisable immediately and expiring on December 31, 2005 at an
exercise price of $0.05 per share of Common Stock.
Except for the historical information contained herein, the matters
discussed herein are by their nature forward-looking. Investors are cautioned
that forward-looking statements or projections made by the Company, including
those made in this document, are subject to risks and uncertainties that may
cause actual results to differ materially from those projected. Reference is
made in particular to forward-looking statements regarding product development,
capital sources, plan of operations and expenses. The Company operates in a
rapidly changing environment that involves a number of risks, some of which are
beyond the Company's control. Future operating results and the Company's stock
price may be affected by a number of factors,
43
including, without limitation: (i) availability of capital for research and
development (ii) availability of capital for clinical trials; (iii)
opportunities for joint ventures and corporate partnering; (iv) opportunities
for mergers and acquisitions to expand the Company's biotechnology base or
acquire revenue generating products; (v) the results of preclinical and clinical
trials; (vi) regulatory approvals of product candidates, new indications and
manufacturing facilities (vii) health care guidelines and policies relating to
prospective Company products; (viii) intellectual property matters (patents) and
(ix) competition.
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
For the three months ended June 30, 2001, the Company realized a net
loss of $259,340 compared to a net loss of $93,111 for the three months ended
June 30, 2000, which $93,111 represented a loss from operations of $121,673
reduced by an extraordinary internal gain on sale of securities. The Company had
increases in expenses over 2000 related to the following: professional fees in
the amount of $47,887 principally due to increased legal fees related to its
regulatory filing requirements with the Securities and Exchange Commission and
other corporate matters, increased research and development expenses in the
amount of $34,435, increased insurance in the amount of $11,500, increased
depreciation and amortization in the amount of $9,029, increased rent in the
amount of $18,493, and increased interest expense in the amount of $37,222
related to the Company's convertible subordinated debt.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
For the six months ended June 30, 2001, the Company realized a net loss
of $539,032 compared to a net loss of $170,088 for the six months ended June 30,
2000, which $170,088 represented a loss from operations of $329,671 reduced by
an extraordinary internal gain on sale of securities. The Company had increases
in expenses over 2000 related to the following: increased research and
development expenses in the amount of $60,716, increased insurance in the amount
of $23,959, increased depreciation and amortization in the amount of $17,977,
increased rent in the amount of $127,079, increased interest expense in the
amount of $75,543 related to the Company's convertible subordinated debt, and
increased expenditures for legal fees related to its regulatory filing
requirements with the Securities and Exchange Commission, other corporate
matters, and patents and patents pending in the amount of $61,801. During the 6
months ended June 30, 2000, two officers of the Company sold stock at a gain
after purchasing stock through a stock bonus plan. In compliance with the
Securities and Exchange Rule 16b, the stockholders remitted the gains to the
Company. The gains amounted to $129,445 for one officer, $28,075 for the other
officer, both which are reflected in the income statement as internal gain on
sale of securities.
DESCRIPTION OF PROPERTY
The Company receives the use of approximately 3,500 square feet of
commercial building space on a rent-free basis from a firm owned by a director.
The Company receives use of office space on a rent-free basis from a firm owned
by Edmond F. Buccellato. No formal agreement memoralizes these month-to-month
arrangements.
44
The Company owns a nominal amount of lab equipment, office equipment and
furniture, all of which have been entirely or substantially written off as
depreciated assets.
FINANCIAL STATEMENTS
The financial statements are included herewith and incorporated herein
by reference beginning with the Table of Contents on Page F1.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements on accounting and financial disclosures
from the inception of the Company through the date of this Form SB-2/A.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with issuance of bonus shares to various individuals
pursuant to the Company's Stock Bonus Plan adopted in January, 2000, as an
incentive for performance by eligible employees, the Company financed the $0.05
per share purchase price for the shares for Edmond F. Buccellato, Lawrence
Loomis and Boris Skurkovich, M.D. in the amounts of $75,000, $50,000 and
$75,000, respectively. The notes for these amounts mature on December 31, 2002
and bear interest at 6.5% per annum. The Company also set off the $200,000
purchase obligation of Simon Skurkovich, M.D. against an obligation of the
Company to him for accrued but unpaid salary.
Alexander L. Cappello is the brother of Gerard K. Cappello, the sole
shareholder, president and chief executive officer of Cappello Capital Corp.
which was retained by the Company in January, 2000 to render financial advisory
and investment banking services and thereupon was granted warrants to purchase
4,685,135 shares of Common Stock at $0.15 per share. Such warrants have been
assigned to certain Selling Shareholders including Alexander Cappello. Cappello
Capital Corp. raised $1,510,500 in convertible subordinated debt for the
Company, was paid $124,981 in fees and expenses related thereto, and was granted
an option to purchase $151,050 principal amount of Convertible Debt at par.
Thomas J. Pernice is an officer of Cappello Group, Inc.
MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
As of February 15, 2000, the Company's Common Stock was quoted again on
the Bulletin Board operated by the National Association of Securities Dealers,
Inc. (the "Bulletin Board") under the symbol "ADVB." During 1999, the Common
Stock was quoted on the Bulletin Board for part of the year and quoted on other
electronic marketplaces for the rest of the year. The table shows the high and
low bid quotations of the Company's Common Stock during each of the four
quarters of the 1999 and 2000 fiscal years, and the first two quarters of the
2001
45
fiscal year, and reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions:
1999 FISCAL QUARTER ENDED: HIGH BID LOW BID
----- -----
March 31 $0.20 $0.10
June 30 $0.08 $0.05
September 30 $0.10 $0.01
December 31 $0.35 $0.05
2000 FISCAL QUARTER ENDED:
March 31 $2.63 $1.75
June 30 $1.81 $0.44
September 30 $1.00 $0.50
December 31 $0.75 $0.20
2001 FISCAL QUARTER ENDED:
March 31 $0.53 $0.24
June 30 $0.34 $0.20
HOLDERS
As of July 18, 2001, the Company had approximately 1,560 holders of
record of its Common Stock. This number does not include those beneficial owners
whose securities are held in street name. The total number of record and
beneficial stockholders is estimated to be more than 3,500.
DIVIDENDS
The Company has never paid a cash dividend on its Common Stock and has
no present intention to declare or pay cash dividends on the Common Stock in the
foreseeable future. The Company intends to retain any earnings that it may
realize in the future to finance its operations. Future dividends, if any, will
depend on earnings, financing requirements and other factors, and the payment of
cash dividends, if any, will be at the sole discretion of the Board of
Directors.
EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid by the Company
since January 1, 1998 through December 31, 2000, for the Chief Executive Officer
of the Company and each other executive officer of the Company who was paid more
than $100,000 during the year ended December 31, 2000 (the "Named Executive
Officers"):
46
Summary Compensation Table
Name and Position Year Salary Bonus
--------------------------- ---- -------- --------
Paul J. Marangos
Chief Executive Officer (1) 2000 $ 40,000 $ 25,000
Edmond F. Buccellato 2000 $ 72,500 $ 0
Chief Executive Officer (2) 1999 $ 75,000 $ 0
1998 $ 50,000 $ 0
Simon Skurkovich 2000 $ 30,000 $ 0
Chairman of the Board (3) 1999 $100,000 $ 0
1998 $100,000 $ 0
(1) Dr. Marangos joined the Company in August 2000 at an annual salary of
$120,000. In addition, he was paid a signing bonus of $25,000. In April, 2001,
Dr. Marangos resigned as an officer and employee of the Company.
(2) Mr. Buccellato was the Chief Executive Officer of the Company prior to the
hiring of Dr. Marangos. Since April, 2001, Mr. Buccellato has served as
President and Chief Executive Officer of the Company.
(3) Dr. Skurkovich was the Chairman of the Board prior to the hiring of Dr.
Marangos.
For the year ending December 31, 2001, the annual salary of Dr. Simon
Skurkovich and Edmond Buccellato is $80,000 and $120,000, respectively, prorated
for any shorter employment period.
There are no retirement, pension, or profit sharing plans for the
benefit of the Company's officers and directors. The Company has previously
granted non-qualified stock options and warrants for the benefit of officers and
directors, and in December 2000, the Board of Directors of the Company approved
the 2000 Omnibus Equity Incentive Plan (the "OEI Plan") and reserved 4,000,000
shares of Common Stock to be issued thereunder, subject to annual increases
equal to the lesser of 2.5% of outstanding shares or 250,000 shares. No shares
have been issued under the OEI Plan to date.
OPTION/SAR GRANTS
None of the named executive officers received any grants of stock
options, whether or not in tandem with stock appreciation rights ("SARs"), or
freestanding SARs during the fiscal year ending December 31, 2000 in their
capacity as officers. During that period though, Dr. Marangos received a 5-year
warrant exercisable into 100,000 shares of Common Stock at $0.25 per share for
Board service.
47
None of the Named Executive Officers exercised any options or SARs
during the year. Set forth below are the December 31, 2000 fiscal year end
Option/SAR values:
Value of unexercised
in-the-money
options/SARs at
Number of unexercised FY-end ($)
options/SARs at FY-end Exercise Price exercisable/
Name (#) exercisable/unexercisable Per Share unexercisable(1)
----------------- ---------------------------- -------------- -------------------
Edmond Buccellato
50,000/0 $ 0.20 $1,500/$0
50,000/0 $ 0.10 $6,500/$0
105,453/0 $ 0.10 $13,708.89
Simon Skurkovich
300,000/0 $ 0.10 $39,000/$0
623,000/0 $ 0.10 $80,990
(1) The dollar amounts calculated in this table use the closing bid on the
Common Stock of the Company on the last trading day in December 2000, which was
$0.23 per share.
LONG-TERM INCENTIVE PLAN AWARDS
THE STOCK BONUS PLAN
The Board of Directors of the Company adopted the Stock Bonus Plan in
January 2000 as an incentive for performance by eligible employees (the "Plan").
The Plan's purpose is to keep personnel of experience and ability in the employ
of the Company and to compensate them for their contributions to the growth of
the Company, thereby inducing them to continue to make such contributions in the
future.
During the fiscal year ended December 31, 2000, as previously disclosed
in the Company's Form 10-KSB for the fiscal year ended December 31, 1999, the
following directors were awarded 8.0 million shares of the Company's Common
Stock under the Plan at a price of $0.05 per share:
Individual Number of Bonus Shares
Edmond F. Buccellato 1,500,000
Lawrence Loomis 1,000,000
Boris Skurkovich, M.D. 1,500,000
Simon Skurkovich, M.D. 4,000,000(1)
48
----------
(1) Dr. Skurkovich subsequently gifted all of these shares to various
individuals, including 1,935,000 to Boris Skurkovich and 1,735,000 to Leonard
Millstein and three members of Mr. Millstein's family.
Such stock bonuses were issued at the weighted average price at which
the Company has been selling shares of Common Stock to third parties during the
six months immediately preceding the issuance of the bonus shares, or $0.05 per
share.
Each recipient of such bonus shares was issued a promissory note in
favor of the Company, except for Dr. Simon Skurkovich, whose $200,000 purchase
obligation was set off against an obligation of the Company to him for accrued
but unpaid salary. The promissory notes of Messrs. Buccellato and Loomis and Dr.
Boris Skurkovich mature on December 31, 2002, and bear interest at 6.5% per
annum.
THE OEI PLAN
The Board of Directors of the Company adopted the OEI Plan in December
2000. The purpose of the OEI Plan is to promote the long-term success of the
Company and the creation of stockholder value by (a) encouraging employees,
outside directors and consultants to focus on critical long-term objectives, (b)
encouraging the attraction and retention of employees, outside directors and
consultants with exceptional qualifications and (c) linking employees, outside
directors and consultants directly to stockholder interests through increased
stock ownership. The OEI Plan seeks to achieve this purpose by providing for
awards in the form of restricted shares, stock units, incentive and nonstatutory
stock options and stock appreciation rights. The OEI Plan will be administered
by the Board of Directors unless and until the Board delegates administration to
a committee.
The Board reserved 4,000,000 shares of Common Stock to be issued under
the OEI Plan, subject to annual increases equal to the lesser of 2.5% of
outstanding shares or 250,000 shares. No shares have been issued under the OEI
Plan to date.
COMPENSATION OF DIRECTORS
Directors did not receive any cash compensation for serving as members
of the Board of Directors for the year ending December 31, 2000, but in January,
2000 several Board members received stock grants under the Plan as described
above under "Stock Bonus Plan" and Board members are eligible for awards under
the OEI Plan. In addition, during the fiscal year ended December 31, 2000, each
of Dr. Marangos and Messrs. Cappello and Bendheim received grants of warrants
exercisable into 100,000 shares of Common Stock at $0.25 per share for their
Board service. During the current fiscal year, Thomas J. Pernice received a
grant of warrants exercisable into 100,000 shares of Common Stock at $0.25 per
share for Board service. There are no other contractual arrangements for
compensation with any member of the Board of Directors.
49
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby have been
passed upon for us by Rutter, Hobbs & Davidoff Incorporated, 1900 Avenue of the
Stars, Suite 2700, Los Angeles, California 90067-4301.
EXPERTS
Our financial statements for the quarter ended June 30, 2001, have been
reviewed, and our financial statements for the fiscal years ended December 31,
2000 and December 31, 1999, have been audited, by Williams & Webster, P.S.,
independent auditors, to the extent and for the period set forth in their
reports, which include an explanatory paragraph regarding our ability to
continue as a going concern and are included in this prospectus and the related
registration statement, in reliance upon such reports given upon the authority
of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Securities
Exchange Act of 1934, which means we are required to file annual, quarterly and
current reports, proxy statements and other information with the SEC. Copies of
the registration statement and any other materials that we file with the SEC and
may be read and copied at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Room by calling the SEC at (800) SEC-0330. The SEC maintains a
Website that contains all information filed electronically by us, including
reports, proxy and information statements. The address of the SEC's Website is
http://www.sec.gov.
We have filed a registration statement on Form SB-2/A under the
Securities Act, of which this Prospectus forms a part, to register with the SEC
the Shares of Common Stock being offered by this Prospectus. As allowed by SEC
rules, this Prospectus does not contain all the information you can find in the
registration statement or the exhibits to the registration statement. You may
read and copy any document we file at the prescribed rates from the public
reference of securities maintained by the SEC as described above.
50
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
FINANCIAL STATEMENTS
WILLIAMS & WEBSTER PS
CERTIFIED PUBLIC ACCOUNTANTS
BANK OF AMERICA FINANCIAL CENTER
W 601 RIVERSIDE, SUITE 1940
SPOKANE, WA 99201
(509) 838-5111
F-1
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
CONTENTS
Accountant's Review Report F-1
Financial Statements:
Balance Sheets F-3
Statements of Operations F-4
Statement of Stockholders' Equity (Deficit) F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
F-2
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
ASSETS
June 30, December 31, December 31,
2001 2000 1999
----------- ----------- -----------
(Unaudited)
CURRENT ASSETS
Cash $ 53,928 $ 758,267 $ 34,958
Deposits and prepaid expenses 26,477 32,692 -
----------- ----------- -----------
Total Current Assets 80,405 790,959 34,958
----------- ----------- -----------
PROPERTY AND EQUIPMENT, net of accumulated depreciation 6,238 10,287 -
----------- ----------- -----------
OTHER ASSETS
Notes receivable - related party 246,619 246,619 -
Interest receivable 29,105 15,548 -
Investments 250,432 - -
Deferred loan origination fees, net of accumulated amortization 88,647 102,503 -
Patents and patents pending, net of accumulated amortization 227,411 173,509 113,319
----------- ----------- -----------
Total Other Assets 842,214 538,179 113,319
----------- ----------- -----------
TOTAL ASSETS $ 928,857 $ 1,339,425 $ 148,277
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 85,261 $ 46,609 $ 93,934
Loan payable to related party - - 257,076
----------- ----------- -----------
Total Current Liabilities 85,261 46,609 351,010
----------- ----------- -----------
LONG-TERM DEBT
Convertible notes payable 1,637,431 1,560,169 -
Notes payable to related parties 127,631 127,631 213,381
----------- ----------- -----------
Total Long-Term Debt 1,765,062 1,687,800 213,381
----------- ----------- -----------
Total Liabilities 1,850,323 1,734,409 564,391
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES - - -
----------- ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, par value $0.001 per share; 20,000,000
shares authorized; no shares issued and outstanding - - -
Common stock, par value $0.001 per share; 100,000,000 shares
authorized; 39,848,265; 39,848,265 and 30,198,265 shares
issued and outstanding, respectively 39,848 39,848 30,198
Additional paid-in capital 3,238,640 3,233,890 2,770,305
Subscriptions receivable - - (32,500)
Stock options and warrants 387,203 379,403 210,738
Deficit accumulated during development stage (4,587,157) (4,048,125) (3,394,855)
----------- ----------- -----------
Total Stockholders' Equity (Deficit) (921,466) (394,984) (416,114)
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 928,857 $ 1,339,425 $ 148,277
=========== =========== ===========
F-3
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
From Inception
Six Months Year Ended Year Ended (December 2, 1985)
Ended December 31, December 31, Through
June 30, 2001 2000 1999 June 30, 2001
------------- ------------ ------------ ------------------
(Unaudited) (Unaudited)
REVENUES $ -- $ -- $ -- $ 89,947
------------ ------------ ------------ ------------
OPERATING EXPENSES
Research and development 66,408 39,579 156,280 2,211,033
Promotional fees 625 7,558 -- 8,183
Professional fees 179,380 430,608 35,308 1,731,739
Depreciation and amortization 23,579 24,222 9,134 455,583
Salaries and benefits 84,185 174,613 120,000 1,010,299
Insurance 23,959 10,898 -- 34,857
Shareholder relations and transfer fees 10,421 19,613 7,600 158,180
Rent 27,979 11,100 1,800 150,133
Travel and entertainment 22,998 60,816 544 84,358
Telephone and communications 10,852 12,238 2,378 25,468
Office 12,291 27,222 690 40,203
General and administrative 14,032 8,617 544 582,030
------------ ------------ ------------ ------------
Total Operating Expenses 476,709 827,084 334,278 6,492,066
------------ ------------ ------------ ------------
Loss From Operations (476,709) (827,084) (334,278) (6,402,119)
Other income (expense)
Miscellaneous income -- -- 22,000 22,000
Interest income 21,013 29,995 259 52,104
Internal gain on sale of securities -- 157,520 -- 157,520
Accounts payable forgiveness -- 45,396 -- 45,396
Loss on disposal of office equipment (2,224) -- -- (2,224)
Interest expense (81,112) (59,097) (26,298) (507,271)
------------ ------------ ------------ ------------
Total Other Income (Expense) (62,323) 173,814 (4,039) (232,475)
------------ ------------ ------------ ------------
Loss Before Extraordinary Item (539,032) (653,270) (338,317) (6,634,594)
Extraordinary item, forgiveness of debt -- -- 1,482,209 2,047,437
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (539,032) $ (653,270) $ 1,143,892 $ (4,587,157)
============ ============ ============ ============
BASIC NET INCOME (LOSS)
PER COMMON SHARE $ (0.01) $ (0.02) $ 0.04 $ (0.20)
============ ============ ============ ============
DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ (0.01) $ (0.02) $ 0.04 $ (0.20)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
BASIC COMMON STOCK
SHARES OUTSTANDING 39,848,265 39,278,866 28,946,467 22,735,731
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
DILUTED COMMON STOCK
SHARES OUTSTANDING 39,848,265 39,278,866 30,981,467 22,735,731
============ ============ ============ ============
See accompanying notes and accountant's review report.
F-4
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL STOCK DURING
--------------------------- PAID-IN STOCK OPTIONS AND DEVELOPMENT
SHARES AMOUNT CAPITAL SUBSCRIPTIONS WARRANTS STAGE
----------- ----------- ----------- ------------- ----------- -----------
Balance, December 31, 1998 27,141,075 $ 27,141 $ 2,552,654 $ -- $ -- $(4,538,747)
Common stock issued at
approximately $0.05 per share 3,158,000 3,158 151,993 -- -- --
Cancellation of escrowed shares (850,000) (850) 850 -- -- --
Common stock issued for services
at approximately $0.05 per share 99,190 99 4,860 -- -- --
Contribution of capital by
shareholders in form of
foregone interest and rent -- -- 28,098 -- -- --
Stock subscriptions issued 650,000 650 31,850 (32,500) -- --
Stock options issued in exchange
for forgiveness of accrued wages -- -- -- -- 210,738 --
Net income for the year ended
December 31, 1999 -- -- -- -- -- 1,143,892
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 30,198,265 30,198 2,770,305 (32,500) 210,738 (3,394,855)
Contribution of capital by
shareholders in form of
foregone interest and rent -- -- 9,735 -- -- --
Stock subscriptions paid -- -- -- 32,500 -- --
Stock issued as part of stock
bonus plan in exchange for loan
payable and notes receivable
at $0.05 per share 9,200,000 9,200 450,800 -- -- --
Stock warrants issued in exchange
for services -- -- -- -- 168,665 --
Stock issued for cash at $0.01 from
the exercise of options 350,000 350 3,150 -- -- --
Stock adjustment 100,000 100 (100) -- -- --
Net loss for the year ended
December 31, 2000 -- -- -- -- -- (653,270)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 39,848,265 39,848 3,233,890 -- 379,403 (4,048,125)
Contribution of capital by
shareholders in form of
foregone interest and rent -- -- 4,750 -- -- --
Stock warrants issued in exchange
for services -- -- -- -- 7,800 --
Net loss for the six months ended
June 30, 2001 -- -- -- -- -- (539,032)
----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2001 (Unaudited) 39,848,265 $ 39,848 $ 3,238,640 $ -- $ 387,203 $(4,587,157)
=========== =========== =========== =========== =========== ===========
Summary of required information regarding stock issuances can be found in Note
9.
See accompanying notes and accountant's review report.
F-5
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
From Inception
Six Months Year Ended Year Ended (December 2, 1985)
Ended December 31, December 31, through
June 30, 2001 2000 1999 June 30, 2001
------------- ------------ ------------ ------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (539,032) $ (653,270) $ 1,143,892 $ (4,587,157)
Extraordinary gain -- -- (1,482,209) (1,684,068)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 23,579 24,222 9,134 455,583
Loss on disposal of equipment 2,224 -- -- 2,224
Investment income -- (157,520) -- (157,520)
Expenses paid through issuance
of common stock -- -- 4,959 231,340
Expenses paid through issuance
of common stock warrants 7,800 168,665 -- 176,465
Interest expense accrued to convertible debt 77,262 49,669 -- 126,931
Expenses paid through contribution
of additional paid-in capital 4,750 9,735 28,098 42,583
Organization costs -- -- -- (9,220)
Decrease (increase) in:
Deposits and prepaid expenses 6,215 (32,692) -- (26,477)
Interest receivable (13,556) (15,548) -- (29,104)
Deferred loan origination cost -- (113,288) -- (113,288)
Increase (decrease) in:
Accounts payable 38,652 (47,325) 39,052 85,261
Accounts and notes payable, related parties -- (129,445) -- 127,631
Payroll and payroll taxes payable -- -- 181,624 1,682,984
Accrued interest -- -- -- 9,962
------------ ------------ ------------ ------------
Net cash used in operating activities (392,106) (896,797) (75,450) (3,665,870)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets -- (11,030) -- (48,003)
Internal gain on sale of securities -- 157,520 -- 157,520
Purchase of investments (250,432) -- -- (250,432)
Acquisition of patents (61,801) (72,884) (45,925) (312,922)
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities (312,233) 73,606 (45,925) (453,837)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock -- 36,000 155,151 2,449,754
Proceeds from convertible note -- 1,510,500 -- 1,510,500
Proceeds from notes payable -- 100,000 -- 388,508
Payments on notes payable -- (100,000) -- (175,127)
------------ ------------ ------------ ------------
Net cash provided by financing activities -- 1,546,500 155,151 4,173,635
------------ ------------ ------------ ------------
Net increase (decrease) in cash (704,339) 723,309 33,776 53,928
Cash, beginning 758,267 34,958 1,182 --
------------ ------------ ------------ ------------
Cash, ending $ 53,928 $ 758,267 $ 34,958 $ 53,928
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest expense paid $ -- $ 984 $ -- $ 339,927
============ ============ ============ ============
Income taxes paid $ -- $ -- $ -- $ --
============ ============ ============ ============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Common stock issued in exchange for
professional fees and expenses $ -- $ -- $ 4,959 $ 340,869
Contributed expenses $ 4,750 $ 9,735 $ 28,098 $ 42,583
Common stock issued for a loan payable $ -- $ 213,381 $ -- $ 213,381
Common stock issued for notes receivable $ -- $ 246,619 $ -- $ 246,619
Warrants issued for services $ 7,800 $ 168,665 $ -- $ 176,465
Accrued interest paid by convertible debt $ 77,262 $ 49,669 $ -- $ 126,931
See accompanying notes and accountant's review report.
F-6
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 1 -- ORGANIZATION AND DESCRIPTION OF BUSINESS
Advanced Biotherapy, Inc. (formerly Advanced Biotherapy Concepts, Inc.) was
originally incorporated December 2, 1985 under the laws of the State of Nevada.
The Company is involved in the research and development of the treatment of
autoimmune diseases in humans, most notably, multiple sclerosis and rheumatoid
arthritis. The Company conducts its research in Maryland. The Company's fiscal
year-end is December 31. The Company is a development stage enterprise.
On July 14, 2000, the Company incorporated a wholly owned subsidiary, Advanced
Biotherapy, Inc. in the state of Delaware. On September 1, 2000, the Company
merged with its wholly owned subsidiary, effectively changing its name to
Advanced Biotherapy, Inc. (hereinafter "the Company") and its domicile to
Delaware.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of Advanced Biotherapy, Inc. is
presented to assist in understanding the Company's financial statements. The
financial statements and notes are representations of the Company's management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of the
financial statements.
Going Concern
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.
As shown in the accompanying financial statements, the Company incurred a net
loss of $539,032 for the six months ended June 30, 2001. At June 30, 2001, the
Company has an accumulated deficit during the development stage of $4,587,157.
The future of the Company is dependent upon future profitable operations from
the commercial success of its medical research and development of products to
combat diseases of the human immune system and products for treatment of viral
and bacterial diseases of animals. Management has established plans designed to
increase the capitalization of the Company and is actively seeking additional
capital that will provide funds needed to fund the research and development and
therefore the internal growth of the Company in order to fully implement its
business plans. For the twelve-month period subsequent to June 30, 2001, the
Company anticipates that its minimum cash requirements to continue as a going
concern will be less than $800,000. The anticipated source of funds may be the
issuance for cash of additional debt and/or equity instruments. See Note 13. In
addition, management is actively seeking a collaborative relationship with
either a pharmaceutical or biotechnology company. If successful, cash
requirements may be met through royalty or licensing fees. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue in
existence.
F-7
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Development Stage Activities
The Company has been in the development stage since its formation in 1985 and
has not realized any significant revenues from its planned operations. It is
primarily engaged in the research and development of the treatment of autoimmune
diseases in humans, most notably, multiple sclerosis and rheumatoid arthritis.
Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting.
Cash and Cash Equivalents
For purposes of the Statement of Cash Flows, the Company considers all bank
accounts, certificates of deposit, money market accounts and short-term debt
securities purchased with a maturity of three months or less to be cash
equivalents.
Provision for Taxes
Income taxes are provided based upon the liability method of accounting pursuant
to SFAS No. 109 "Accounting for Income Taxes." Under this approach, deferred
income taxes are recorded to reflect the tax consequences on future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year end. A valuation allowance is recorded against
deferred tax assets if management does not believe the Company has met the "more
likely than not" standard imposed by SFAS No. 109 to allow recognition of such
an asset.
At June 30, 2001, the Company had net deferred tax assets of approximately
$1,313,500, principally arising from net operating loss carryforwards for income
tax purposes. As management of the Company cannot determine that it is more
likely than not that the Company will realize the benefit of the net deferred
tax asset, a valuation allowance equal to the net deferred tax asset has been
established at June 30, 2001.
At June 30, 2001, the Company has net operating loss carryforwards of
approximately $3,714,500, which expire in the years 2001 through 2020.
Use of Estimates
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements. Accordingly,
upon settlement, actual results may differ from estimated amounts.
Reclassifications
Certain amounts from prior periods have been reclassified to conform with the
current period presentation. This reclassification has resulted in no changes to
the Company's accumulated deficit or net losses presented.
F-8
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impaired Asset Policy
In March 1995, the Financial Accounting Standards Board issued a statement
titled "Accounting for Impairment of Long-lived Assets." In complying with this
standard, the Company reviews its long-lived assets quarterly to determine if
any events or changes in circumstances have transpired which indicate that the
carrying value of its assets may not be recoverable. The Company determines
impairment by comparing the undiscounted future cash flows estimated to be
generated by its assets to their respective carrying amounts. The Company does
not believe any adjustments are needed to the carrying value of its assets at
June 30, 2001.
Promotional Fees
Promotional fees are charged to operations in the year incurred. Promotional
fees amounted to $625 for the six months ended June 30, 2001, $7,558 for the
year ended December 31, 2000, and $0 for the year ended December 31, 1999.
Interim Financial Statements
The interim financial statements as of and for the six months ended June 30,
2001, included herein, have been prepared for the Company without audit. These
statements reflect all adjustments, which are, in the opinion of management,
necessary to present fairly the results of operations for these periods. All
such adjustments are normal recurring adjustments. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year.
Research and Development Costs
Costs of research and development are expensed as incurred.
Compensated Absences
Employees of the Company are entitled to paid vacation, paid sick days and
personal days off, depending on job classification, length of service, and other
factors. It is impracticable to estimate the amount of compensation for future
absences, and, accordingly, no liability has been recorded in the accompanying
financial statements. The Company's policy is to recognize the costs of
compensated absences when actually paid to employees.
Revenue Recognition
Upon entering into license agreements with other companies, revenue will be
recognized when fees are received. Prior to 1994, revenues were recognized when
fees for services related to research activities were received.
Deferred Loan Origination Fees
During the year ended December 31, 2000, the Company entered into convertible
subordinated debt, which required the payment of loan origination fees. See Note
14. These loan origination fees, which totaled $88,647, net of accumulated
amortization at June 30, 2001, are amortized over the life of the related debt.
The Company recorded amortization expense related to these fees of $13,856 for
the six months ended June 30, 2001, and $10,785 for the year ended December 31,
2000.
F-9
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Derivative Instruments
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB No.
133", and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", which is effective for the Company as of January 1,
2001. This standard establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the consolidated
balance sheet and measure those instruments at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.
Historically, the Company has not entered into derivatives contracts to hedge
existing risks or for speculative purposes.
At June 30, 2001, the Company has not engaged in any transactions that would be
considered derivative instruments or hedging activities.
Fair Value of Financial Instruments
The carrying amounts for cash, deposits, prepaid expenses, receivables,
investments, accounts payable, loans and notes payable, accrued liabilities, and
convertible debt approximate their fair value.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets. The
following is a summary of property, equipment and accumulated depreciation at
June 30, 2001:
Accumulated
Cost Depreciation
------------ ------------
Lab equipment $ 27,582 $ 27,582
Office equipment 12,874 6,636
Furniture and fixtures 1,302 1,302
------------ ------------
$ 41,758 $ 35,520
============ ============
F-10
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 3 -- PROPERTY AND EQUIPMENT (CONTINUED)
Depreciation expense for the six months ended June 30, 2001 was $1,824, $743 for
the year ended December 31, 2000, and $0 for the year ended December 31, 1999.
NOTE 4 -- INVESTMENTS
The Company's investments in debt securities that are intended to be held for an
indefinite period, yet not to maturity, are classified as available-for-sale.
Available-for-sale securities are recorded at fair value under investments in
other assets on the balance sheet with the change in fair value during the
period excluded from earnings and recorded net of tax as a component of other
comprehensive income. At June 30, 2001 the Company's investment included a
single corporate bond. There had not been a material change in the fair value of
the bond at June 30, 2001.
NOTE 5 -- INTANGIBLE ASSETS
Patents and Patents Pending
Costs relating to the development and approval of patents, other than research
and development costs which are expensed, are capitalized and amortized using
the straight-line method over seventeen years. The Company's patents relate to
the treatment of autoimmune diseases.
The following is a summary of the costs of patents and patents pending at June
30, 2001:
Accumulated
Cost Amortization Net Amount
------------ ------------ ------------
Balance, at December 31, 1998 $ 132,311 $ (55,784) $ 76,527
1999 Activity 45,925 (9,133) 36,792
------------ ------------ ------------
Balance, December 31, 1999 178,236 (64,917) 113,319
2000 Activity 72,884 (12,694) 60,190
------------ ------------ ------------
Balance, December 31, 2000 251,120 (77,611) 173,509
2001 Activity 61,802 (7,900) 53,902
------------ ------------ ------------
Balance, June 30, 2001 $ 312,922 $ (85,511) $ 227,411
============ ============ ============
NOTE 6 -- RELATED PARTY TRANSACTIONS
Transactions in 2000
The Company has notes receivable in the amount of $246,619 from shareholders of
the Company in connection with a payment plan for the purchase of Company stock.
The notes accrue interest at a rate of 6.5% per annum and are payable on
December 31, 2002.
F-11
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 6 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions in 2000 (Continued)
Notes payable to related parties consist of notes payable to the former chairman
and principal shareholder. During 2000, $85,750 of the notes was used to offset
a bonus stock sale. The note has no specific due date, is currently
uncollateralized, and is non-interest bearing, however, interest is calculated
at the applicable federal rate each quarter. This interest was recorded as
interest expense and contributed capital in the accompanying financial
statements.
Transactions in 1999
The Company's former chairman and principal shareholder has advanced funds to
pay a significant portion of the Company's expenses since 1989. At December 31,
1999, the cumulative amounts owed to him for expenses amount to $257,076. Even
though he was not charging interest to the Company, interest was calculated at
the applicable federal rate of 5.59% at December 31, 1999. This interest was
recorded as interest expense and contributed capital in the accompanying
financial statements. During 2000, the Company paid part of this note and the
balance was used to offset a bonus stock sale to the chairman. At December 31,
1998, the amounts owing for accrued salary was $1,146,000. During 1999,
additional salary was accrued in the amount of $100,000. At December 31, 1999,
in accordance with an agreement with other employee/shareholders of the Company,
he received options to purchase 623,000 shares of common stock at $0.10 per
share. The value of these options, in the amount of $155,750, was used to reduce
his accrued salary. See Note 11. In 1999, he forgave the balance of accrued
salary of $1,090,250 along with accrued interest of $9,962. This is recorded in
the financial statements as a component of extraordinary income in 1999.
At December 31, 1999, the Company owed its then secretary/treasurer $13,381 for
expenses paid in previous years and recorded in notes payable. During 2000, this
note was used as partial payment for a bonus stock purchase by the
secretary/treasurer. At December 31, 1998, the Company also owed this employee
$184,000 in unpaid salary recorded as salary payable. During 1999, additional
salary in the amount of $45,000 was accrued for this employee. At December 31,
1999, in accordance with an agreement with other employee/shareholders of the
Company, she received options to purchase 114,500 shares of common stock at
$0.10 per share. The value of these options, in the amount of $28,625, was used
to reduce the accrued salary of this employee/shareholder. See Note 11. In 1999,
she forgave the balance of accrued salary in the amount of $200,375. This is
recorded in the financial statements as a component of extraordinary income in
1999.
At December 31, 1998, the then president of the Company was owed $171,360 in
accrued salary. During 1999, a portion of this liability was paid. Also during
1999, additional salary in the amount of $75,000 was accrued. At December 31,
1999, in accordance with an agreement with other employee/shareholders of the
Company, he received options to purchase 105,453 shares of common stock at $0.10
per share. The value of these options in the amount of $26,363 was used to
reduce the accrued salary of the president. See Note 11. In 1999, he forgave the
balance of accrued salary in the amount of $181,622. This is recorded in the
financial statements as a component of extraordinary income in 1999.
F-12
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 6 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Transactions Involving Leased Space
During 2000 and 1999, the Company received the use of approximately 3,500 square
feet of commercial building space on a rent-free basis from a firm owned by one
of the Company's directors. The utilization of the facility in this manner was
mutually beneficial to the Company and the owner of this otherwise empty
facility. No formal agreement memorialized this month-to-month arrangement. The
value of the use of the facility was approximately $150 per month, and was
recorded in the financial statements as rent expense and contributed capital.
During 2000, the Company leased office space from a company owned in part by a
shareholder. The minimum base lease payment was $4,800 annually. This lease was
terminated effective December 31, 2000. See Note 15.
NOTE 7 -- INTERNAL GAIN ON SALE OF SECURITIES
During the year ending December 31, 2000, officers of the Company sold stock at
a gain shortly after purchasing stock through a stock bonus plan. In compliance
with the Securities and Exchange Rule 16b, the stockholders remitted the gain to
the Company. The gain amounted to $157,520 and is reflected in the income
statement as internal gain on sale of securities.
NOTE 8 -- CONCENTRATIONS
As of June 30, 2001, the Company maintains cash in a money market account at a
bank in California. The funds on deposit are not insured by the FDIC, and
therefore, a total of $53,928 is at risk.
NOTE 9 -- COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
Effective with the merger of Advanced Biotherapy Concepts, Inc. into its wholly
owned subsidiary, each issued and outstanding share of Advanced Biotherapy
Concepts, Inc. common stock has been converted automatically into one share of
$0.001 par value common stock of Advanced Biotherapy, Inc.
F-13
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 9 -- COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
Information regarding the number of shares issued and consideration received is
as follows:
Common Stock
---------------------------------------
Average Additional
price per Paid-in
share Shares Amount Capital
--------- ------------ ---------- ------------
Common stock issued for cash:
1985 $.50 100,000 $ 100 $ 49,900
1986 1.00 639,500 640 678,861
1987 1.00 850,500 850 759,650
1988 1.00 25,000 25 24,975
1993 .25 2,402,000 2,402 475,900
1995 .05 1,000,000 1,000 49,000
1996 .05 520,000 520 25,480
1997 .09 1,800,500 1,801 153,749
1998 .10 305,000 305 30,195
1999 .05 3,158,000 3,158 151,993
------------ ---------- ------------
10,800,500 10,801 2,399,703
------------ ---------- ------------
Common stock issued for patents assigned:
1984 .01 550,000 5,500 -
1985, adjustment to reflect change in
number and par value of shares outstanding - 2,750,000 (2,200) 2,200
------------ ---------- ------------
3,300,000 3,300 2,200
------------ ---------- ------------
Common stock issued for acquisitions:
1985 .01 13,333,500 13,334 (41,112)
------------ ---------- ------------
Common stock issued for note receivable:
1986 1.00 10,000 10 9,990
2000 .05 4,932,380 4,932 241,687
------------ ---------- ------------
4,942,380 4,942 251,677
------------ ---------- ------------
Contribution of additional paid-in capital:
1991 - - - 35,825
1999 - - - 28,098
2000 - - - 9,735
2001 - - - 4,750
------------ ---------- ------------
- - 78,408
------------ ---------- ------------
F-14
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 9 -- COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
Common Stock
---------------------------------------
Average Additional
price per Paid-in
share Shares Amount Capital
--------- ------------ ---------- ------------
Stock subscriptions:
1999 $.05 650,000 $ 650 $ 31,850
------------ ---------- ------------
Cancellation of escrowed shares:
1999 .001 (850,000) (850) 850
------------ ---------- ------------
Common stock issued for services (1):
1988 .50 25,000 25 12,475
1989 .38 25,000 25 9,475
1990 .66 37,375 37 24,635
1991 .51 159,500 160 81,010
1992 .75 62,500 62 46,563
1993 .25 120,000 120 29,880
1996 .05 308,500 308 13,832
1997 .05 155,500 155 7,619
1999 .05 99,190 99 4,860
------------ ---------- ------------
992,565 991 230,349
------------ ---------- ------------
Common stock issued to replace
unrecorded certificates:
1988 .001 1,200 1 (1)
1992 .001 500 1 (1)
2000 .001 100,000 100 (100)
------------ ---------- ------------
101,700 102 (102)
------------ ---------- ------------
Common stock issued for forgiveness of
accounts payable (1):
1990 .50 25,000 25 12,475
1996 .05 150,000 150 7,350
------------ ---------- ------------
175,000 175 19,825
------------ ---------- ------------
Common stock issued in payment of notes
payable (1):
1993 .25 200,000 200 49,800
2000 .05 1,714,995 1,715 84,035
------------ ---------- ------------
1,914,995 1,915 133,835
------------ ---------- ------------
F-15
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 9 -- COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
Common Stock
---------------------------------------
Average Additional
price per Paid-in
share Shares Amount Capital
--------- ------------ ---------- ------------
Common stock issued in payment of loans
payable (1):
2000 $.05 2,552,625 $ 2,553 $ 125,078
------------ ---------- ------------
Common stock issued for commissions (1):
1993 .001 1,260,000 1,260 -
------------ ---------- ------------
Stock options exercised:
1997 .01 325,000 325 2,929
2000 .01 350,000 350 3,150
------------ ---------- ------------
675,000 675 6,079
------------ ---------- ------------
Total 39,848,265 $ 39,848 $3,238,640
============ ========== ============
(1) Per share amounts determined by information deemed most reliable based on
circumstances of each case: trading price at time of issuance or value of
services received.
Stock Bonus Plan
On January 11, 2000, the Company issued 9,200,000 shares of common stock to
certain key officers and directors under a stock bonus plan, subject to various
restrictions. The plan's purpose is to keep personnel of experience and ability
in the employ of the Company and to compensate them for their contributions to
the growth of the Company, thereby inducing them to continue to make such
contributions in the future. Such stock bonuses were issued at the weighted
average price at which the Company had been selling shares of stock out of
authorized but yet unissued common stock to third parties during the six months
immediately preceding the issuance of the bonus shares, or $0.05.
Omnibus Equity Incentive Plan
During December 2000, the Board of Directors of the Company approved an Equity
Incentive Plan. A maximum of 4,000,000 shares of common stock will be available
for the incentive plan with annual increases equal to the lesser of 2.5% of
outstanding shares or 250,000 shares.
NOTE 10 -- PREFERRED STOCK
With the merger into its Delaware subsidiary, the Company has authorized
20,000,000 shares of $0.001 par value preferred stock. As of June 30, 2001 and
as of the date of these financial statements, the Company has not issued any of
its preferred stock.
F-16
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 11 -- STOCK OPTIONS AND ISSUANCE COMMITMENTS
On February 25, 1991, the Corporation granted non-statutory options to purchase
stock to members of its board of directors, officers, and outside consultants.
These remaining options offer a total of 860,000 shares at a price of $0.20 per
share with an exercise period of February 25, 1991, to February 25, 2001. The
expiration of these options has been extended to February 23, 2002. Additional
options were issued effective February 1, 1993, for a total of 250,000 shares at
a price of $0.01 per share, with an exercise period of February 1, 1993, to
February 1, 2003. During 1995, options for 50,000 shares were granted at $0.20
per share, which expire in 2005. Also in 1995, options for 350,000 shares were
granted at $0.01 per share expiring in 2005. During 1996, options for 525,000
shares were granted at $0.10 per share, which expire in 2006. The shares
purchased will be restricted and, therefore, may not be transferred without
registration under applicable federal and state securities laws.
Stock options granted to a director of the Company for 325,000 shares at a price
of $0.01 were exercised in 1997. On December 31, 1999, three officers of the
Company received 842,953 stock options in partial payment of accrued salaries in
the amount of $210,738. In addition the same three officers forgave the balance
of their accrued salaries and interest in the amount of $1,482,209. See Note 6.
In accordance with Statement of Financial Accounting Standard No. 123, the fair
value of the options was estimated using the Black-Scholes Option Price
Calculation. The following assumptions were made to value the stock options:
strike price at $0.10, risk free interest rate of 5%, expected life of 5 years,
and expected volatility of 30% and no dividends are expected to be paid. At
December 31, 1999, the Company recorded $210,738 ($0.25 per option) to reduce
accrued wages for the value of these options based upon these Black-Scholes
assumptions. These stock options are exercisable immediately, and expire on
December 31, 2005. See Note 6. During the six months ended June 30, 2001, no
options were exercised, 350,000 options were exercised at $0.01 per share for
the year ended December 31, 2000, and no options were exercised for the year
ended December 31, 1999.
Following is a summary of the status of the options during the six months ended
June 30, 2001 and the years ended December 31, 2000 and 1999:
Weighted
Number of Average
Shares Exercise Price
------------ --------------
Outstanding at January 1, 1999 2,035,000 $ .12
Granted 842,953 .05
Exercised - -
Forfeited - -
------------ ------------
Outstanding at December 31, 1999 2,877,953 .10
Granted - -
Exercised (350,000) .01
Forfeited - -
------------ ------------
Outstanding at December 31, 2000 2,527,953 .11
F-17
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 11 -- STOCK OPTIONS AND ISSUANCE COMMITMENTS (CONTINUED)
Weighted
Number of Average
Shares Exercise Price
------------ --------------
Balance Forward, December 31, 2000 2,527,953 $ .11
Granted - -
Exercised - -
Forfeited - -
------------ ------------
Outstanding at June 30, 2001 2,527,953 .11
============ ============
Options exercisable at June 30, 2001 2,527,953 $ .11
============ ============
During January 2001, the Company enacted an Equity Incentive Plan for the
issuance of stock options to employees, outside directors and consultants.
NOTE 12 -- INCOME (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing the net income (loss) by
the weighted average number of shares outstanding during the period. The
weighted average number of shares is calculated by taking the number of shares
outstanding and weighting them by the amount of time that they were outstanding.
Diluted earnings (loss) per share is computed by dividing the net income (loss)
adjusted for interest expense on convertible debt by the weighted average number
of basic shares outstanding increased by the number of shares that would be
outstanding assuming conversion of the stock options, warrants, and convertible
debt. Diluted net loss per share is the same as basic net loss per share at June
30, 2001 and December 31, 2000 as inclusion of the common stock equivalents
would be antidilutive. Diluted net loss per share at December 31, 1999 is
reflected in the accompanying financial statements.
Required earnings per share information related to extraordinary income is as
follows:
From Inception
(December 2, 1985)
June 30, December 31, December 31, through
2001 2000 1999 June 30, 2001
------------ ------------ ------------ ------------
Earnings per share
Extraordinary gains $ - $ - $ 0.05 $ 0.09
============ ============ ============ ============
Earnings per share--assuming
dilution
Extraordinary gains $ - $ - $ 0.05 $ 0.09
============ ============ ============ ============
F-18
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 13 -- NON-CASH COMMITMENT AND WARRANTS
On May 25, 2001, the Company issued to a director of the Company warrants to
purchase up to 100,000 shares of common stock with an exercise price of $0.25
per share. The warrants expire on May 8, 2005. During the period ended June 30,
2001, the Company recorded $7,800 as consulting fees for these warrants.
On January 19, 2000, the Company engaged an investment banking firm and, as
partial compensation for its services, issued warrants to purchase up to
4,685,135 shares of the Company's common stock with an exercise price of $0.15
per share. The warrants are exercisable for ten years. In accordance with
Statement of Financial Accounting Standards No. 123, the fair value of the
warrants was estimated using the Black-Scholes Option Price Calculation. The
following assumptions were made to value the warrants: strike price at $0.09,
risk free interest rate of 6.2%, expected life of 10 years, and expected
volatility of 30%. During the year ended December 31, 2000, the Company recorded
$168,665 as consulting fees for the aforementioned investment banking firm
services. A cash-less exercise may be used for all warrant transactions. No fees
are payable to the investment advisor in connection with the exercise of the
warrants, which contain full, unconditional piggy-back registration rights
without any holdback obligations.
At June 30, 2001, the total of the Company's exercisable warrants is 4,785,135.
The average exercise price of the warrants at June 30, 2001 is $0.15 per share.
Subsequently, on July 23, 2001, the Company issued warrants to purchase up to
300,000 shares of common stock to new directors of the Company. The warrants
have an exercise price of $0.25 per share and expire on May 8, 2005.
NOTE 14 -- CONVERTIBLE DEBT
During the year ended December 31, 2000, the Company sold in a private placement
to accredited investors $1,510,500 of convertible subordinated debt due and
payable September 30, 2004. The debt bears interest at the rate of 10% per annum
and is payable semi-annually in cash or additional convertible subordinated
debt. The unpaid accrued interest at June 30, 2001 and December 31, 2000 of
$77,262 and $49,669, respectively, was re-characterized as additional
convertible debt. This debt is convertible into shares of Company common stock
at a conversion price equal to $0.25 per share, subject to certain anti-dilution
provisions. The Company offered the convertible subordinated debt pursuant to
Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D, promulgated under the Securities Act. In connection with the
placement of the debt, the Company paid a loan origination fee of $113,288 to
its financial advisor, in additional to the granting of an option to purchase an
equivalent principal amount of convertible subordinated debt at the face amount
thereof over a period of ten years. The aforementioned fee is currently included
in other assets and is being amortized over the term of the debt. Amortization
was $13,865 for the six months ended June 30, 2001, and $10,785 for the year
ended December 31, 2000.
F-19
ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2001
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
Office Leases
The Company leased office space from a related party during 2000 at a minimum
annual rate of $4,800. This lease was terminated effective December 31, 2000.
During January 2001, the Company signed an office lease agreement for three
years beginning March 1, 2001. The lease calls for monthly rental payments of
$3,600 plus its portion of operating expenses with an annual escalation clause
of 4%. The lease required a $15,580 deposit. Effective June 28, 2001, the
Company cancelled this lease. The cost of such cancellation included the payment
of rent for the months of July and August 2001 in the amount of $7,200, and the
payment of a broker's commission of approximately $6,700.
Consulting Contract
During July 2000, the Company signed a contract with a consultant to provide
information on possible partnering companies to divest or license certain rights
to its technologies or products. The contract calls for the payment of a $5,000
monthly retainer. This contract can be cancelled with a 60 day written notice.
On January 24, 2001, the contract was modified to waive the termination notice.
The contract was terminated effective February 1, 2001.
Financial Services Agreement
During January 2001, the Company signed a contract with a financial advisor to
provide information on possible candidates for acquisition, merger or
combination. The contract term is for two months and continues thereafter on a
month-to-month basis. A monthly retainer of $3,000 is payable and is credited
toward the fee if a successful candidate is found. The contract was terminated
effective March 31, 2001.
NOTE 16 -- SUBSEQUENT EVENTS
On July 23, 2001, the Company issued warrants to purchase up to 300,000 shares
of common stock to new directors of the Company. The warrants have an exercise
price of $0.25 per share and expire on May 8, 2005.
F-20