10-K405/A 1 b38784a1e10-k405a.txt AMERICAN BIOGENETICS SCIENCES, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NUMBER 0-19041 AMERICAN BIOGENETIC SCIENCES, INC. ---------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-2655906 --------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1375 AKRON STREET, COPIAGUE, NEW YORK 11726 ------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) 631-789-2600 ------------ (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: CLASS A COMMON STOCK -------------------- (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of the close of business on March 16, 2001, there were outstanding 41,102,255 shares of the registrant's Class A Common Stock and 3,000,000 shares of its Class B Common Stock. The approximate aggregate market value (based upon the closing price on the Nasdaq SmallCap Market) of shares held by non-affiliates of the registrant as of March 16, 2001 was $22,742,000. DOCUMENTS INCORPORATED BY REFERENCE None 2 Explanatory Note: This Form 10-K/A is being filed in order to include information required by Part III of the Report originally intended to be incorporated by reference to the information to be included in the Definitive Proxy Statement of American Biogenetic Sciences, Inc. (the "Company") for the 2001 Annual Meeting of Stockholders and to correct a typographical error in the table relating to the Company's 1996 Stock Option Plan in Footnote 8 to the Financial Statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company are as follows: Name Position ---- -------- Alfred J. Roach Chairman of the Board, Chief Executive Officer and Director Josef C. Schoell President, Chief Operating Officer and Director Ellena M. Byrne Executive Vice President and Director Timothy J. Roach Treasurer, Secretary and Director James M. McLinden Senior Vice President and Chief Scientific Officer Glenna M. Crooks Director Joseph M. Danis Director Joseph C. Hogan Director Alfred J. Roach, 85, has been Chairman of the Board of Directors of the Company since its organization in September 1983 and, from September 1983 until November 1998 and since January, 2001 has also served as the Company's Chief Executive Officer. Mr. Roach has served as Chairman of the Board and/or President of TII Industries, Inc. ("TII"), a corporation engaged in manufacturing and marketing telecommunications products, and its predecessor since its founding in 1964. Mr. Roach devotes a majority of his time to the business of the Company. Josef C. Schoell, 51, has been President and Chief Operating Officer and a member of the Board of Directors of the Company since January 2001. From July 1995 until January 2001 he was Chief Financial Officer and Vice President-Finance of the Company. Mr. Schoell joined the Company in 1992 as Controller. From 1988 until joining ABS, Mr. Schoell was an independent consultant providing financial accounting and computer services. From 1978 until 1988, Mr. Schoell served in various financial and accounting positions with JP Stevens. Mr. Schoell is a graduate of New York University Stern School of Business, is a Certified Public Accountant in New York State and a member of the New York State Society of Certified Public Accountants, American Institute of Certified Public Accountants and Financial Executives International. Ellena M. Byrne, 50, has been Executive Vice President and a director of the Company since March 1995. From January 1986 until December 1991, Ms. Byrne served as Vice President-Administration of the Company and from December 1991 until March 1995, Ms. Byrne served in various capacities with the Company, including Director of Operations for Europe and Asia. 2 3 Timothy J. Roach, 54, has been Treasurer, Secretary and a director of the Company since September 1983. He has also been affiliated with TII since 1974, serving as its President since July 1980, Chief Operating Officer since May 1987, Vice Chairman of the Board since October 1993, Chief Executive Officer since January 1995 and a director since January 1978. Mr. Roach devotes such time as is necessary to the business of the Company to discharge his duties as Treasurer, Secretary and a director. Timothy J. Roach is the son of Alfred J. Roach. Glenna M. Crooks, Ph.D., 51, has been a director of the Company since March 1999. Dr. Crooks has been President of Strategic Health Policy International, Inc., a health care consulting and planning firm that advises governments, businesses and industry trade associations in the U.S. and overseas on the development and application of business strategy, a company she formed in October 1994. From January 1991 until September 1994, Dr. Crooks served as Vice President -- Worldwide Sales and Operations for the Vaccines Division of Merck & Co., Inc., a pharmaceutical company that develops, manufactures and markets human and animal health products. Joseph M. Danis, 55, has been a director of and a business development consultant to the Company since January 2001. Mr. Danis has been President of Danis Associates since April 1996, a consulting firm he founded that focuses on technology transfers, structuring ventures and all phases of due diligence for pharmaceutical and biotechnology companies. From January 1996 to March 1996, Mr. Danis served as Executive Director of Cultor Food Science, Inc. From 1986 to January 1996, he served in various capacities with Pfizer, Inc., including Director of Technical Service and Licensing and Director, Acquisitions and Licensing. Joseph C. Hogan, Ph.D., 78, has been a director of the Company since December 1983. Dr. Hogan served as Dean of the College of Engineering of the University of Notre Dame from 1967 until 1981, following which he performed various services for the University of Notre Dame until 1985, where he remains Dean Emeritus. From 1985 until his retirement in 1987, Dr. Hogan was Director of Engineering Research and Resource Development at Georgia Institute of Technology ("Georgia Tech"). Dr. Hogan is a director of TII. The only executive officer of the Company in addition to Alfred J. Roach, Josef C. Schoell, Timothy J. Roach and Ellena M. Byrne is James H. McLinden, Ph.D. Dr. McLinden, 50, has been Senior Vice President and Chief Scientific Officer of the Company since January 2001. From November 1991 until January 2001 he served as Vice President -- Molecular Biology of the Company, and from January 1987 to November 1991 as Director of Molecular Biology of the Company. 3 4 ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth information concerning the annual and long-term compensation for services in all capacities to the Company during 2000, 1999 and 1998 of each person who served as the Company's chief executive officer during 2000 and each other person who served as an executive officer of the Company during 2000 and whose annual compensation for 2000 exceeded $100,000:
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES NAME AND ----------------------- UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($) ------------------ ---- ---------- --------- ------------ ---------------- Alfred J. Roach,............... 2000 250,000 -- 100,000 -- Chairman of the Board(1) 1999 250,000(4) -- 300,000 -- 1998 250,000 -- 100,000 -- John S. North,................. 2000 235,000 -- 50,000 -- President and Chief 1999 260,000(5) 25,000(2) 250,000 100,000(2) Executive Officer(2) 1998 25,000 -- 300,000 -- Josef C. Schoell,.............. 2000 120,000 -- 50,000 -- Vice President Finance and 1999 120,000(6) -- 200,000 -- Chief Financial Officer(3) 1998 120,000 -- -- --
--------------- (1) Mr. Roach served as the Company's Chief Executive Officer until November 16, 1998, and was again appointed to that position in January 2001. (2) Mr. North joined the Company as President and Chief Executive Officer on November 16, 1998 and resigned effective January 11, 2001. Under the terms of his employment agreement, he received a one-time $25,000 bonus in January 1999 and a $100,000 interest free loan during 1999. The entire amount of the loan had been forgiven as of December 31, 2000. (3) Mr. Schoell was appointed President and Chief Operating Officer of the Company by the Board of Directors in January 2001. (4) Includes $115,000 which was deferred during 1999 at the election of Mr. Roach and paid in February 2000. (5) Includes $110,000 which was deferred during 1999 at the election of Mr. North and paid in February 2000. (6) Includes $10,000 which was deferred during 1999 at the election of Mr. Schoell and paid in February 2000. 4 5 OPTION GRANTS IN LAST FISCAL YEAR The following table contains information concerning options to purchase shares of the Company's capital stock granted by the Company during the year ended December 31, 2000 to the executive officers named in the Summary Compensation Table. No stock appreciation rights have been granted by the Company.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL OPTIONS TERM(3) ---------------------------------------------------------- ---------------------- PERCENT OF NUMBER OF TOTAL SHARES OPTIONS UNDERLYING GRANTED TO OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION NAME GRANTED(1) FISCAL YEAR PER SHARE(2) DATE 5% 10% ---- ---------- ------------ -------------- ---------- --------- --------- Alfred J. Roach....... 100,000 19% $.41 1/7/2005 $11,328 $25,031 John S. North......... 50,000 10% .38 1/7/2010 11,792 29,883 Josef C. Schoell...... 50,000 10% .38 1/7/2010 11,792 29,883
--------------- (1) Exercisable as to 50% of the number of shares of Class A Common Stock underlying the option during each six months commencing six months after the date of grant, on a cumulative basis. (2) The exercise price of the options granted to Messrs. Roach, North and Schoell was 110%, 100% and 100%, respectively, of the market value of the Class A Common Stock on the date of grant. (3) These are hypothetical values using assumed 5% and 10% compound growth rates prescribed by Securities and Exchange Commission rules and are not intended to forecast possible future appreciation, if any, in the market price of the Company's Class A Common Stock. 5 6 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END VALUES The following table contains information concerning options exercised during 2000 by the executive officers named in the Summary Compensation Table and Class A Common Stock underlying unexercised options held at December 31, 2000 by such persons.
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED IN-THE- UNEXERCISED OPTIONS AT MONEY OPTIONS AT SHARES ACQUIRED FISCAL YEAR-END(#) FISCAL YEAR-END($) NAME ON EXERCISE(#) VALUE REALIZED($)(1) (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)(2) ---- --------------- -------------------- --------------------------- ------------------------------ Alfred J. Roach...... -- -- 1,450,000/1,525,000 $86,138/20,813 John S. North........ 262,500 $696,375 150,000/ 337,500 32,813/77,344 Josef C. Schoell..... 100,000 198,488 242,500/ 280,000 24,281/11,719
--------------- (1) The "value realized" reflects the appreciation on the date of exercise (based upon the excess of the market price of the shares on that date over the exercise price). However, because the named executive officers may keep the shares acquired upon exercise or sell them at a different price, these amounts do not necessarily reflect cash realized upon sale of those shares. (2) Based upon the closing price of the Company's Class A Common Stock on the Nasdaq SmallCap Market on December 31, 2000 ($.6875), less the exercise price of each option. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors, consisting of Joseph C. Hogan and Glenna M. Crooks, two non-employee directors, is authorized to consider and recommend to the Board of Directors salaries, bonuses and other compensation arrangements for executive officers and to grant all options under, and administer, the Company's employee stock option plans. The Compensation Committee believes that the Company, as a development stage company, should create compensation packages to attract and retain executives who can bring the experience and skills to the Company necessary for the development of the Company and development and marketing of its products. To date, this has been accomplished by utilizing salary as the base compensation and stock options to promote long-term incentives and conserve the Company's available cash and, in certain cases, a bonus as an inducement to an executive to join the Company. As the Company grows, other forms of annual and long-term compensation arrangements may be developed to provide appropriate incentives and to reward specific accomplishments. In determining base salaries, the Compensation Committee examines, among other factors, the executive's performance, degree of responsibility and experience, as well as general employment conditions, competition and economic factors. No specific weights are assigned to any of the factors employed by the Compensation Committee. 6 7 The Compensation Committee also makes use of stock options to provide long-term incentive compensation to many of the Company's employees, including executive officers, enabling them to benefit, along with all stockholders, if the market price for Class A Common Stock rises. The Compensation Committee believes that the use of stock options ties employee interests to those of the Company's stockholders through stock ownership and potential stock ownership, while also providing the Company with a means of compensating employees using a method which enables the Company to conserve its available cash for operations, including research and development and product development. To assure the long-term nature of the incentive, options granted have generally not become exercisable during the first six months to one year after grant and thereafter have become exercisable over a period of two to four years. Decisions of the Compensation Committee as to option grants are based, in large measure, upon a review of such factors as the executive's level of responsibility, other compensation, accomplishments and goals, and when the last option was granted to such executive, as well as recommendations and evaluations of the executive's performance and prospective contributions by the Company's Chairman of the Board and Chief Executive Officer. Determinations have been made subjectively without giving weight to specific factors. Chief Executive Officer Compensation. Mr. John S. North joined the Company as President and Chief Executive Officer in November 1998 and served in this capacity until his resignation in January 2001. His base salary, bonus, stock option grant and other benefits were negotiated in connection with Mr. North's agreement to join the Company. Mr. Alfred J. Roach reassumed the position of Chief Executive Officer of the Company in January 2001. The salary of Mr. Roach has remained unchanged for the past eight years. Certain Tax Legislation. Section 162(m) precludes a public company from taking a federal income tax deduction for annual compensation in excess of $1,000,000 paid to its chief executive officer or any of its four other most highly compensated executive officers. Certain "performance based compensation" is excluded from the deduction limitation. Any compensation resulting from the exercise of stock options granted by the Company should be eligible for exclusion since all options were either granted prior to the adoption of Section 162(m) or under a plan approved by the Company's stockholders which was designed to conform to regulations for determining whether options are deemed "performance based compensation." The Committee believes that the limitations on compensation deductibility under Section 162(m) will have no effect on the Company in the foreseeable future, and intends to take such action as may be necessary, including obtaining stockholder approval where required, in order for compensation not to be subject to the limitation on deductibility imposed by Section 162(m) of the Code. Respectfully submitted, JOSEPH C. HOGAN GLENNA M. CROOKS 7 8 PERFORMANCE GRAPH The following graph compares the cumulative return to stockholders of Class A Common Stock for the last five calendar years with the Nasdaq Market Index and the Dow Jones Industry Group BTC -- Biotechnology Index for that period. The comparison assumes $100 was invested on December 31, 1995 in Class A Common Stock and in each of the comparison groups, and assumes reinvestment of all dividends (the Company paid no dividends during the periods): [Performance Graph]
---------------------------------------------------------------------------------------------------------------- At December 31, 1995 1996 1997 1998 1999 2000 ---------------------------------------------------------------------------------------------------------------- American Biogenetic Sciences, Inc. $100.00 $147.73 $ 69.32 $ 27.27 $ 18.18 $ 25.02 ---------------------------------------------------------------------------------------------------------------- Peer Group Index $100.00 $101.02 $103.17 $141.43 $283.95 $339.00 ---------------------------------------------------------------------------------------------------------------- NASDAQ Market Index $100.00 $124.27 $152.00 $214.39 $378.12 $237.66 ----------------------------------------------------------------------------------------------------------------
8 9 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth information as at the Record Date with respect to the beneficial ownership of the Company's Class A Common Stock and Class B Common Stock by (i) each person known by the Company to beneficially own more than 5% of the outstanding shares of Class A Common Stock or Class B Common Stock, (ii) each director or nominee for director of the Company, (iii) each executive officer named in the Summary Compensation Table under the caption "Executive Compensation" and (iv) all executive officers and directors of the Company as a group. Except as noted, each beneficial owner has sole voting and investment power with respect to all shares attributable to such owner. This information is based upon information provided by the person or upon Schedule 13D or Schedule 13G filings which they have made with the Securities and Exchange Commission. Each share of Class A Common Stock is entitled to one vote per share while each share of Class B Common Stock is entitled to ten votes per share.
CLASS A COMMON STOCK (1) CLASS B COMMON STOCK ----------------------------- --------------------- NO. PERCENT NO. PERCENT BENEFICIAL OWNERS OF SHARES OF CLASS OF SHARES OF CLASS ----------------- --------------- -------- --------- -------- Directors and Officers: Alfred J. Roach........................... 10,947,250(2) 23.0% 3,000,000 100% Josef C. Schoell.......................... 328,000(3)(4) * -- 0 Ellena Byrne.............................. 115,000(3)(5) * -- 0 Timothy J. Roach.......................... 855,000(3) 2.0% -- 0 Glenna M. Crooks.......................... 45,000(3) * -- 0 Joseph M. Danis........................... 10,000(3) * -- 0 Joseph C. Hogan........................... 70,000(3) * -- 0 John S. North............................. 296,200(6) * -- 0 All executive officers and directors as a group (9 persons, including the foregoing).............................. 12,908,950(7) 26.3% 3,000,000 100% 5% Owners: BVF Partners, L.P......................... 12,000,000(8) 23.0% -- 0 Abbott Laboratories....................... 2,782,931(9) 7.0% -- 0
--------------- (1) Asterisk indicates less than one percent. Shares of Class A Common Stock subject to issuance upon conversion of Class B Common Stock or of Series A Preferred Stock into Class A Common Stock and upon exercise of options and warrants that were exercisable on, or become exercisable within 60 days after, the Record Date are considered owned by the holder thereof and outstanding for purposes of computing the percentage of outstanding Class A Common Stock that would be owned by such person, but (except for the computation of beneficial ownership by all executive officers and directors as a group) are not considered outstanding for purposes of computing the percentage of outstanding Class A Common Stock owned by any other person. (2) The address of Mr. Roach is c/o American Biogenetic Sciences, Inc.. Beneficial ownership of Class A Common Stock includes 3,000,000 shares of Class A Common Stock issuable upon conversion of the same number of shares of Class B Common Stock on a share for share basis, 1,000,000 shares of Class A Common Stock issuable upon conversion of 1,000 shares of Series A Preferred Stock, 1,000,000 shares of Class A Common Stock subject to outstanding warrants and 1,475,000 shares of Class A Common Stock subject to outstanding options. 9 10 (3) Includes shares of Class A Common Stock subject to options as follows: for Josef C. Schoell, 255,000; for Ellena Byrne, 107,500; for Timothy J. Roach, 845,000; for Glenna M. Crooks, 45,000; for Joseph M. Danis, 10,000; and for Joseph C. Hogan, 50,000. (4) Includes 200 shares owned by his wife and 2,000 shares owned by his daughters. The inclusion of these amounts should not be construed as an admission that Mr. Schoell is the beneficial owner of these shares. (5) Includes 7,500 shares owned, and 20,000 shares subject to options held, by her husband. The inclusion of these amounts should not be construed as an admission that Ms. Byrne is the beneficial owner of these shares. (6) Mr. North resigned as President and Chief Executive Officer of the Company effective January 11, 2001 and his outstanding options were subsequently cancelled. (7) Includes 3,000,000 shares of Class A Common Stock issuable upon conversion of the same number of shares of Class B Common Stock, 1,000,000 shares of Class A Common Stock issuable upon conversion of 1,000 shares of Series A Preferred Stock, 1,000,000 shares of Class A Common Stock subject to outstanding warrants, and 3,015,000 shares of Class A Common Stock subject to outstanding options. (8) Beneficial ownership of Class A Common Stock consists of 6,000,000 shares issuable upon conversion of 6,000 shares of Series A Preferred Stock and 6,000,000 shares of Class A Common Stock subject to outstanding warrants. These securities are held by certain investment partnerships for which BVF Partners, L.P. serves as the general partner and BVF, Inc. (of which Mark Lampert is sole owner) acts as investment adviser, sharing the power to vote and dispose the shares with such investment partnerships. The address of BVF Partners is 227 West Monroe Street, Suite 4800, Chicago, IL 60606. (9) The address of Abbott Laboratories is 100 Abbott Park Road, Abbott Park, IL 60064. 10 11 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Between September 3, 1999 and January 19, 2000, Alfred J. Roach loaned the Company an aggregate of $776,000 at an interest rate of 6% per annum. On March 3, 2000, $500,000 of the principal amount of the Company's indebtedness to Mr. Roach was exchanged for 1,000 shares of the Company's Series A Preferred Stock which are convertible into 1,000,000 shares of the Class A Common Stock and 1,000,000 warrants to purchase the Class A Common Stock at a price of $1.00 per share. The Company made principal payments on Mr. Roach's loans in February and March 2000 and repaid the remaining principal amount of and accrued interest on these loans in April 2000. On March 8, 1999, Mr. Roach purchased directly from the Company 440,000 shares of the Company's Class A Common Stock for $495,000 ($1.1250 per share). 11 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. April 30, 2001 AMERICAN BIOGENETIC SCIENCES, INC. --------------------------- (Date) (Registrant) By: /s/ Josef C. Schoell ----------------------------------- Josef C. Schoell President, Chief Operating Officer, Chief Financial Officer (Principal Financial and Accounting Officer) 12 13 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Cash Flows F-5 Consolidated Statements of Stockholders' Equity F-6 - F-8 Notes to Consolidated Financial Statements F-9 - F-28
Information required by schedules called for under Regulation S-X is either not applicable or the information required therein is included in the consolidated financial statements or notes thereto. F-1 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To American Biogenetic Sciences, Inc.: We have audited the accompanying consolidated balance sheets of American Biogenetic Sciences, Inc. (a Delaware corporation in the development stage) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000 and for the period from inception (September 1, 1983) to December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Biogenetic Sciences, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 and for the period from inception to December 31, 2000 in conformity with accounting principles generally accepted in the United States. The accompanying consolidated financial statements for the year ended December 31, 2000 have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses since inception and anticipates that it will continue to incur significant losses in the foreseeable future. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Melville, New York March 23, 2001 F-2 15 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED BALANCE SHEETS
December 31, ------------------------------------- 2000 1999 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,194,000 $ 93,000 Accounts receivable 146,000 211,000 Inventories 531,000 511,000 Other current assets 74,000 76,000 ------------ ------------ Total current assets 1,945,000 891,000 ------------ ------------ Fixed assets, net 477,000 476,000 Patent costs, net of accumulated amortization of $633,000 and $502,000, respectively 1,967,000 1,895,000 Intangible assets, net 599,000 657,000 Other assets 98,000 19,000 ------------ ------------ $ 5,086,000 $ 3,938,000 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 368,000 $ 1,581,000 Current portion of capital lease obligation 16,000 - Current portion of notes payable 184,000 746,000 ------------ ------------ Total current liabilities 568,000 2,327,000 ------------ ------------ Long Term Liabilities: Notes payable, less current portion 7,000 33,000 Capital lease obligation 71,000 - ------------ ------------ Total liabilities 646,000 2,360,000 ------------ ------------ Commitments and Contingencies (Notes 1, 5, 8, 10 and 11) STOCKHOLDERS' EQUITY: Series A convertible preferred stock, par value $.001 per share 10,000,000 shares authorized; 7,000 and 0 shares issued and outstanding, respectively (liquidation preference of $3,500,000) - - Class A common stock, par value $.001 per share; 100,000,000 shares authorized; 41,027,255 and 36,918,510 shares issued and outstanding, respectively 41,000 37,000 Class B common stock, par value $.001 per share; 3,000,000 shares authorized; 3,000,000 shares issued and outstanding 3,000 3,000 Additional paid-in capital 72,935,000 63,852,000 Deficit accumulated during the development stage (68,539,000) (62,314,000) ------------ ------------ Total stockholders' equity 4,440,000 1,578,000 ------------ ------------ $ 5,086,000 $ 3,938,000 ------------ ------------
The accompanying notes are an integral part of these consolidated balance sheets. F-3 16 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period From Inception (September 1, Year Ended December 31, 1983) Through ---------------------------------------------------- December 31, 2000 1999 1998 2000 ----------- ----------- ------------ -------------- REVENUES: Sales $ 1,629,000 $ 1,361,000 $ 1,197,000 $ 4,337,000 Royalties / license fees 502,000 - - 1,502,000 Collaborative agreements 157,000 82,000 - 541,000 ----------- ----------- ------------ -------------- 2,288,000 1,443,000 1,197,000 6,380,000 COSTS AND EXPENSES: Cost of sales 617,000 598,000 465,000 1,712,000 Research and development 1,326,000 1,725,000 2,161,000 31,857,000 Selling, general and administrative 4,241,000 4,488,000 4,432,000 37,822,000 Facility consolidation cost - - 252,000 252,000 ----------- ----------- ------------ -------------- Loss from operations (3,896,000) (5,368,000) (6,113,000) (65,263,000) ----------- ----------- ------------ -------------- OTHER INCOME (EXPENSE): Interest expense (19,000) (16,000) (614,000) (4,391,000) Net gain on sale of fixed assets - 4,000 - 11,000 Investment income, net 140,000 29,000 319,000 4,694,000 ----------- ----------- ------------ -------------- Loss before extraordinary charge (3,775,000) (5,351,000) (6,408,000) (64,949,000) Extraordinary charge for early retirement of debentures, net - - (1,140,000) (1,140,000) ----------- ----------- ------------ -------------- NET LOSS $(3,775,000) $(5,351,000) $(7,548,000) $(66,089,000) Preferred stock dividend related to warrants (2,450,000) - - (2,450,000) ----------- ----------- ------------ -------------- Net loss attributable to common stockholders $(6,225,000) $(5,351,000) $(7,548,000) $(68,539,000) =========== =========== ============ ============== PER SHARE INFORMATION (NOTE 2): Basic and Diluted net loss per share $(0.14) $(0.14) $(0.29) =========== =========== ============ Common shares used in computing per share amounts: Basic and Diluted 43,475,000 39,266,000 25,740,000 =========== =========== ============
The accompanying notes are an integral part of these consolidated statements. F-4 17 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period From Inception (September 1, Year Ended December 31, 1983) Through ---------------------------------------------------- December 31, 2000 1999 1998 2000 ----------- ----------- ------------ -------------- Cash Flows From Operating Activities: Net income (loss) $(3,775,000) $(5,351,000) $ (7,548,000) $(66,089,000) Adjustments to reconcile net (loss) to net cash used in operating activities: Depreciation and amortization 328,000 318,000 497,000 3,368,000 Net (gain) loss on sale of fixed assets - (4,000) - (11,000) Net (gain) loss on sale of marketable securities - - - (217,000) Other noncash expenses accrued primarily for stocks and warrants 325,000 502,000 306,000 2,869,000 Amortization of debt discount included in interest expense - - 317,000 2,160,000 Extraordinary loss on repurchase of debt - - 1,140,000 1,140,000 Write-off of patent costs - - - 93,000 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 65,000 (34,000) (69,000) (38,000) (Increase) decrease in inventories (20,000) 34,000 (91,000) (373,000) (Increase) decrease in other current assets 2,000 (36,000) 1,000 (74,000) (Increase) decrease in other assets (22,000) 7,000 1,000 58,000 Increase (decrease) in accounts payable and accrued expenses (1,064,000) 840,000 265,000 752,000 Increase in interest payable to stockholder 8,000 - - 120,000 ----------- ----------- ------------ -------------- Net cash used in operating activities (4,153,000) (3,724,000) (5,181,000) (56,242,000) ----------- ----------- ------------ -------------- Cash Flows From Investing Activities: Capital expenditures (32,000) (13,000) (41,000) (2,088,000) Proceeds from sale of fixed assets - 4,000 - 22,000 Payments for patent costs and other assets (203,000) (539,000) (229,000) (2,670,000) Business acquisition, net of stock issued and cash acquired - - (119,000) (119,000) Proceeds from maturity and sale of marketable securities - - - 67,549,000 Purchases of marketable securities - - - (67,332,000) ----------- ----------- ------------ -------------- Net cash provided by (used in) investing activities (235,000) (548,000) (389,000) (4,638,000) ----------- ---------- ------------ -------------- Cash Flows From Financing Activities: Payments to debentureholders - - (1,000,000) (2,246,000) Proceeds from issuance of common stock, net 2,735,000 660,000 3,182,000 42,879,000 Proceeds from issuance of Series A convertible preferred stock 3,000,000 - - 3,000,000 Proceeds from issuance of 5% convertible debentures, net - - 3,727,000 3,727,000 Proceeds from issuance of 7% convertible debentures, net - - - 8,565,000 Proceeds from issuance of 8% convertible debentures, net - - - 7,790,000 Principal payments under capital lease obligation and notes payable (36,000) (44,000) (61,000) (150,000) Redemption of 8% convertible debentures - - (500,000) (500,000) Repurchase of 5% convertible debentures - - (3,852,000) (3,852,000) Capital contributions from chairman - - - 1,000,000 Increase in loans payable to stockholder / affiliates 81,000 702,000 - 3,452,000 Repayment of loans payable to stockholder / affiliates (remainder contributed to capital by the stockholder) (291,000) - - (1,591,000) ----------- ---------- ------------ -------------- Net cash provided by (used in) financing activities 5,489,000 1,318,000 1,496,000 62,074,000 ----------- ---------- ------------ -------------- Net Increase (Decrease) in Cash and Cash Equivalents 1,101,000 (2,954,000) (4,074,000) 1,194,000 Cash and Cash Equivalents at Beginning of Period 93,000 3,047,000 7,121,000 0 ----------- ---------- ------------ -------------- Cash and Cash Equivalents at End of Period $ 1,194,000 $ 93,000 $ 3,047,000 $ 1,194,000 =========== =========== ============ ============== Supplemental Disclosure of Non-cash Activities: Capital expenditure made under capital lease obligation $ 87,000 - - $107,000 =========== =========== ============ ============== Convertible debentures converted into 0, 0, 4,851,618, and 10,470,583 shares of Common Stock, respectively - - $ 1,447,000 $ 14,658,000 =========== =========== ============ ============== Warrants issued $ 2,792,000 - $ 63,000 $ 3,380,000 ----------- ---------- ------------ -------------- Conversion of stockholder loan to preferred stock or paid-in capital $ 500,000 - - $ 1,981,000 ----------- ---------- ------------ --------------
The accompanying notes are an integral part of these consolidated statements. F-5 18 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit Accumulated Per Class A Common Stock Class B Common Stock Additional During the Share --------------------- -------------------- Paid-in Development Amount Shares Dollars Shares Dollars Capital Stage Total -------- ----------- --------- --------- -------- ------------ ------------ ---------- BALANCE, AT INCEPTION, (SEPTEMBER 1, 1983) $ - - $ - 0 $ - $ - $ - $ - Sale of common stock to chairman for cash .33 78,000 - - - 26,000 - 26,000 Net (loss) for the period - - - - - (25,000) (25,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1983 78,000 - - - 26,000 (25,000) 1,000 ----------- ------- --------- -------- --------- ------------ ---------- Sale of common stock to chairman for cash .33 193,500 - - - 65,000 - 65,000 Net (loss) for the period - - - - - (242,000) (242,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1984 271,500 - - - 91,000 (267,000) (176,000) ----------- ------- --------- -------- --------- ------------ ---------- Sale of common stock to chairman for cash .33 276,700 1,000 - - 92,000 - 93,000 Net (loss) for the period - - - - (305,000) (305,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1985 548,200 1,000 - - 183,000 (572,000) (388,000) ----------- ------- --------- -------- --------- ------------ ---------- Sale of common stock to chairman for cash .33 404,820 - - - 134,000 - 134,000 Net (loss) for the period - - - - - (433,000) (433,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1986 953,020 1,000 - - 317,000 (1,005,000) (687,000) ----------- ------- --------- -------- --------- ------------ ---------- Sale of common stock to chairman for cash .33 48,048 - - - 16,000 - 16,000 Net (loss) for the period - - - - - (730,000) (730,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1987 1,001,068 1,000 - - 333,000 (1,735,000) (1,401,000) ----------- ------- --------- -------- --------- ------------ ---------- Exchange of common stock for Class B stock (1,001,068) (1,000) 1,001,068 1,000 - - 0 Sale of Class B stock to chairman for cash .33 - - 1,998,932 2,000 664,000 - 666,000 Net (loss) for the period - - - - - (1,031,000) (1,031,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1988 - - 3,000,000 3,000 997,000 (2,766,000) (1,766,000) ----------- ------- --------- -------- --------- ------------ ---------- Net (loss) for the period - - - - - (1,522,000) (1,522,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1989 - - 3,000,000 3,000 997,000 (4,288,000) (3,288,000) ----------- ------- --------- -------- --------- ------------ ---------- Conversion of loans payable to stockholder into additional paid-in capital - - - - 1,481,000 - 1,481,000 Sale of 1,150,000 Units to public consisting of 3,450,000 shares of Class A common stock and warrants (net of $1,198,000 underwriting expenses) 2.00 3,450,000 3,000 - - 5,699,000 - 5,702,000 Conversion of Class B stock into Class A stock 668,500 1,000 (668,500) (1,000) - - 0 Net (loss) for the period - - - - - (2,100,000) (2,100,000) ----------- ------- --------- -------- --------- ------------ ---------- BALANCE, DECEMBER 31, 1990 4,118,500 $ 4,000 2,331,500 $ 2,000 $8,177,000 $ (6,388,000) $1,795,000 ----------- ------- --------- -------- --------- ------------ ----------
F-6 19 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit Accumulated Per Class A Common Stock Class B Common Stock Additional During the Share --------------------- -------------------- Paid-in Development Amount Shares Dollars Shares Dollars Capital Stage Total -------- ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1990 $ 4,118,500 $4,000 2,331,500 $ 2,000 $ 8,177,000 $ (6,388,000) $ 1,795,000 Exercise of Class A Warrants (net of $203,000 in underwriting expenses) for cash 3.00 3,449,955 3,000 - - 10,143,000 - 10,146,000 Exercise of Class B Warrants for cash 4.50 79,071 - - - 356,000 - 356,000 Conversion of Class B stock into Class A stock 850,000 1,000 (850,000) (1,000) - - - Exercise of stock options 2.00 417,750 1,000 - - 835,000 - 836,000 Fair Value for warrants issued - - 900,000 - 900,000 Net (loss) for the period - - - (4,605,000) (4,605,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1991 8,915,276 9,000 1,481,500 1,000 20,411,000 (10,993,000) 9,428,000 ----------- ---------- --------- -------- ------------ ------------ ----------- Exercise of Class B Warrants (net of $701,000 in underwriting expenses) for cash 4.50 3,370,88 3,000 - - 14,465,000 - 14,468,000 Conversion of Class B stock into Class A stock 106,000 - (106,000) - - - - Exercise of stock options 2.49 348,300 1,000 - - 865,000 - 866,000 Net (loss) for the period - - - - - (4,016,000) (4,016,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1992 12,740,460 13,000 1,375,500 1,000 35,741,000 (15,009,000) 20,746,000 ----------- ---------- --------- -------- ------------ ------------ ----------- Sale of common stock to Medeva PLC. 7.50 200,000 - - - 1,500,000 - 1,500,000 Exercise of stock options 2.00 32,700 - - - 65,000 - 65,000 Net (loss) for the period - - - - - (6,521,000) (6,521,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1993 12,973,160 13,000 1,375,500 1,000 37,306,000 (21,530,000) 15,790,000 ----------- ---------- --------- -------- ------------ ------------ ----------- Exercise of stock options 2.16 91,250 - - - 197,000 - 197,000 Net (loss) for the period - - - - (7,431,000) (7,431,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1994 13,064,410 13,000 1,375,500 1,000 37,503,000 (28,961,000) 8,556,000 ----------- ---------- --------- -------- ------------ ------------ ----------- Conversion of 8% convertible debentures into Class A Common Stock 1.85 354,204 - - - 571,000 - 571,000 Exercise of stock options 1.82 12,750 - - - 23,000 - 23,000 Fair Value for warrants/options issued - - - - 602,000 - 602,000 Net (loss) for the period - - - - - (5,607,000) (5,607,000) ----------- ---------- --------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1995 13,431,364 $13,000 1,375,500 $ 1,000 $ 38,699,000 $(34,568,000) $ 4,145,000 ----------- ---------- --------- -------- ------------ ------------ -----------
F-7 20 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (a development stage company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit Accumulated Per Class A Common Stock Class B Common Stock Additional During the Share --------------------- --------------------- Paid-in Development Amount Shares Dollars Shares Dollars Capital Stage Total -------- ----------- ---------- ---------- -------- ------------ ------------ ----------- Conversion of 8% convertible debentures into Class A Common Stock 2.74 2,269,755 $ 2,000 - $ - $ 5,483,000 $ - $ 5,485,000 Exercise of stock options 2.53 569,875 1,000 - - 1,438,000 - 1,439,000 Fair Value for warrants/options issued - - - - 330,000 - 330,000 Discount on 7% convertible debentures - - - - 1,843,000 - 1,843,000 Net (loss) for the period - - - - - (7,700,000) (7,700,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1996 16,270,994 16,000 1,375,500 1,000 47,793,000 (42,268,000) 5,542,000 ----------- ---------- ---------- -------- ------------ ------------ ----------- Conversion of 7% and 8% convertible debentures into Class A Common Stock 2.93 2,995,006 3,000 - - 7,152,000 - 7,155,000 Sale of Class B Common Stock to Chairman for cash 2.23 - - 350,000 1,000 778,000 - 779,000 Exercise of stock options 2.00 27,500 - - - 55,000 - 55,000 Fair Value for warrants issued - - - - 149,000 - 149,000 Class A Common Stock issued 3.12 48,117 - - - 150,000 - 150,000 Net (loss) for the period - - - - - (7,147,000) (7,147,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1997 19,341,617 19,000 1,725,500 2,000 56,077,00 (49,415,000 6,683,000 ----------- ---------- ---------- -------- ------------ ------------ ----------- Conversion of 5%, 7% and 8% convertible debentures into Class A Common Stock 0.32 4,851,618 5,000 - - 1,442,000 - 1,447,000 Sale of Class B Common Stock to Chairman for cash 0.37 - - 1,274,500 1,000 465,000 - 466,000 Exercise of stock options 1.75 4,000 - - - 7,000 - 7,000 Fair Value for warrants issued - - - - 205,000 - 205,000 Class A Common Stock issued 1.06 163,915 - - - 174,000 - 174,000 Class A Common Stock issued for Stellar 1.76 398,406 1,000 699,000 - 700,000 Class A Common Stock issued for Private Placement 0.25 10,800,000 11,000 - - 2,689,000 - 2,700,000 Discount on 5% convertible debentures - - - - 762,000 - 762,000 Net (loss) for the period - - - - - (7,548,000) (7,548,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1998 35,559,556 36,000 3,000,000 3,000 62,520,000 (56,963,000) 5,596,000 ----------- ---------- ---------- -------- ------------ ------------ ----------- Sale of Class A Common Stock to Chairman for cash 1.13 440,000 - - - 495,000 - 495,000 Exercise of stock options 0.61 5,250 - - - 3,000 - 3,000 Fair Value for warrants issued - - - - 376,000 - 376,000 Class A Common Stock issued 0.50 913,704 1,000 - - 458,000 - 459,000 Net (loss) for the period - - - - - (5,351,000) (5,351,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 1999 36,918,510 37,000 3,000,000 3,000 63,852,000 (62,314,000) 1,578,000 ----------- ---------- ---------- -------- ------------ ------------ ----------- Sale of Series A Convertible Preferred Stock (7,000 shares) - - - - 3,500,000 - 3,500,000 Warrants issued with the Convertible Preferred Stock - - - - 2,450,000 - 2,450,000 Preferred stock dividend related to warrants - - - - - (2,450,000) (2,450,000) Exercise of stock options and warrants 0.97 1,278,675 1,000 - - 1,234,000 - 1,235,000 Fair Value for warrants issued - - - - 342,000 - 342,000 Class A Common Stock issued 0.55 2,830,070 3,000 - - 1,557,000 - 1,560,000 Net (loss) for the period - - - - - (3,775,000) (3,775,000) ----------- ---------- ---------- -------- ------------ ------------ ----------- BALANCE, DECEMBER 31, 2000 41,027,255 $41,000 3,000,000 $ 3,000 $ 72,935,000 $(68,539,000) $ 4,440,000 ----------- ---------- ---------- -------- ------------ ------------ -----------
The accompanying notes are an integral part of these consolidated statements. F-8 21 AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND DEVELOPMENT STAGE RISKS: American Biogenetic Sciences, Inc. (together with its subsidiaries (Note 2), the "Company" or "ABS") was incorporated in Delaware on September 1, 1983. The Company was formed to engage in the research, development and production of bio-pharmaceutical products. As a development stage company, the Company has not materially commenced its principal operations. Most of its efforts have been devoted to research and development, acquiring equipment, recruiting and training personnel, and financial planning. The Company's research efforts have been focused on the development of products to diagnose, prevent and treat diseases in humans. The Company has had limited product sales to date and has had limited revenues from collaborative and licensing agreements (Note 10). Since its inception, the Company has been dependent upon the receipt of capital investment or other financing to fund its continuing research and commercialization activities. The Company expects to incur substantial expenditures in research and product development of ABS205 and MH1 and the Food and Drug Administration approval process relating to 510(K) applications for its TpP and other diagnostic tests. Currently product development plans of the Company include entering into additional collaborative, licensing and co-marketing arrangements with pharmaceutical and or biotechnology companies to provide additional funding and clinical expertise to perform tests necessary to obtain regulatory approvals, provide manufacturing expertise and market the Company's products. Without such collaborative, licensing or co-marketing arrangements, additional sources of funding will be required to finance the Company. In addition to the normal risks associated with a business engaged in research and development of new products, there can be no assurance that the Company's research and development will be successfully completed, that any products developed will obtain the necessary U.S. regulatory approvals (principally from the FDA), that any approved product will be a commercial success, that adequate product liability insurance can be obtained or that sufficient capital will be available when required to permit the Company to realize its plans. In addition, the Company operates in an environment of rapid changes in technology and in an industry, which has many competitors who have far more resources available to them than does the Company. Further, the Company is dependent upon the services of several key employees and advisors. As of December 31, 2000, ABS, had working capital of $1,377,000, compared to a negative working capital of $1,436,000 at December 31, 1999. Additionally, the Company had cash and cash equivalents of $1,194,000 at December 31, 2000. As of March 16, 2001 the Company's cash and cash equivalents had decreased to approximately $506,000. As a result of the Company's continuing to incur cash expenses in excess of cash receipts, the Company will require the receipt of additional licensing fees and milestone payments, additional financing or the disposition of assets. If this does not occur, the Company will be required to carry out a significant cash conservation program to carry it beyond the next few months. Due to the uncertainties involved in the receipt of milestone payments and additional licensing fees F-9 22 or receipt of additional financing, many of which are outside the control of the Company, the Company's independent public accountants have qualified their audit opinion with regard to the Company's ability to continue as a going concern. In order to address the need for additional capital, ABS is actively seeking to license certain of its products and is aggressively working on those matters within its control with respect to achievement of contractual milestones for milestone payments. The Company's current products which it is aggressively seeking to license include TpP, MH1, and the ABS-205 neurobiology compound. If it is successful in licensing some of these products, the licensees might provide additional funding or might perform additional testing necessary to obtain regulatory approvals or provide clinical, manufacturing and marketing expertise which will indirectly lead to revenue for the Company. The Company is also discussing collaborations and contract services involving its patented Antigen-Free technology. The Company cannot guaranty that it will be successful in generating funding from these sources. In addition the Company has entered into preliminary discussions with a number of potential investors and private placement agents concerning additional financing. However, in the current economic environment, financing has become more difficult to obtain, including within the biotechnology industry, and there is no guaranty that the Company will be able to obtain additional financing on reasonable terms, or that it will be able to obtain financing at all. The Company's failure to raise sufficient additional funds, either through licensing, milestone payments or co-marketing activities or additional financing, will have a material adverse effect on its financial condition and ability to continue as a going concern. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION During 1989, the Company formed a subsidiary, American Biogenetic Sciences (Ireland), Ltd., which is 99% owned by the Company and, to fulfill legal requirements, 1% owned by an officer of the Company. On April 23, 1998, the Company acquired all of the capital stock of Stellar Bio Systems, Inc. ("Stellar") (Note 5). The financial statements reflect the accounts of the Company and these subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. CASH EQUIVALENTS Cash equivalents include highly liquid investments, which have an original maturity of less than three months from date of purchase. CONCENTRATION OF CREDIT RISK As of December 31, 2000, the Company had one customer whose balances exceeded 10% of the accounts receivable balance. This customer accounted for 50% of the accounts receivable balance. As of December 31, 1999, the Company had two customers whose balances exceeded 10% of the accounts receivable balance. These customers accounted for 35% and 24% of the accounts receivable balance, respectively. F-10 23 During fiscal year 2000, one customer accounted for 44% of the Company's sales, and a second customer accounted for 17% of the Company's sales. During fiscal year 1999, one customer accounted for 30% of the Company's sales, another customer accounted for 20% while a third customer accounted for 11% of the Company's sales. During fiscal year 1998, one customer accounted for 34% of the Company's sales, another customer accounted for 17% while a third customer accounted for 10% of the Company's sales. INVENTORY Inventory is valued at the lower of cost (first-in, first-out) or market. LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ABS periodically reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the fair value of the asset measured by the future net cash flows (on an undiscounted basis) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying amount of the assets exceeds the underlying fair value of the assets. ABS has performed a review of its long-lived assets and has determined that no impairment of the respective carrying values has occurred as of December 31, 2000. FIXED ASSETS Fixed assets are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is generally provided for by the straight-line method over the estimated useful lives of the assets. Laboratory equipment, office equipment and furniture are depreciated over five years. Leasehold improvements are amortized over the life of the lease, usually five years. PATENT COSTS Costs of certain patent applications are capitalized. Upon issuance of a patent, such costs are charged to operations utilizing the straight-line method over the lesser of the estimated useful life or 17 years. Costs of unsuccessful patent applications or discontinued projects are charged to expense. INTANGIBLE ASSETS Intangible assets include goodwill and intellectual know-how relating to the acquisition of Stellar. Intangible assets are being amortized over a 10-year period. FAIR VALUE OF FINANCIAL INSTRUMENTS F-11 24 The Company accounts for the fair value of its financial instruments in accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The carrying value of all financial instruments reflected in the accompanying balance sheets approximated fair value at December 31, 2000 and December 31, 1999, respectively. REVENUE RECOGNITION Revenue on product sales is recognized at the time the products are shipped, the customer accepts delivery and when collectibility is reasonably assured. Revenue from royalties and license fees are recognized when earned, provided that no significant performance obligations remain. RESEARCH AND DEVELOPMENT INCOME AND EXPENSES Revenues from collaborative agreements are recognized as the Company performs research activities under the terms of each agreement, provided that no further performance obligations remain. Research and development costs are charged to expense in the year incurred. STOCK-BASED COMPENSATION The Company follows the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." This statement establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 encourages entities to adopt a fair value based method of accounting for stock compensation plans. However, SFAS No. 123 also permits the Company to continue to measure compensation costs under pre-existing accounting pronouncements. If the fair value based method of accounting is not adopted, SFAS No. 123 requires pro forma disclosures of net loss and net loss per common share in the notes to consolidated financial statements. The Company has elected to provide the necessary pro forma disclosures (Note 8). NET LOSS PER COMMON SHARE The Company follows the provisions of SFAS No. 128, "Earnings Per Share." Basic net loss per common share ("Basic EPS") is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted net loss per common share ("Diluted EPS") is computed by dividing net loss by the weighted average number of common shares and dilutive potential common shares then outstanding. SFAS No. 128 requires the presentation of both Basic EPS and Diluted EPS on the face of the consolidated statements of operations. The impact of the adoption of this statement was not material to all previously reported EPS amounts. Diluted EPS for 2000, 1999 and 1998 is the same as Basic EPS because the inclusion of stock options, warrants and convertible debentures then outstanding would be anti-dilutive. For the purposes of the calculation of both basic and diluted EPS, Class A and Class B Common Stock have been treated as one class. The following equity instruments were not included in the diluted net loss per share calculation as their effect would be anti-dilutive:
December 31, ------------------------------------------------------ 2000 1999 1998 ------------ ----------- ----------- Stock Options 5,179,619 5,905,252 4,398,250
F-12 25 Conversion of Preferred Series A Stock 7,000,000 -- -- Warrants 8,187,814 1,039,295 709,445 ------------ ----------- ----------- 20,367,433 6,944,547 5,107,695 ============ =========== ===========
INCOME TAXES The Company recognizes deferred tax assets and liabilities for the estimated future tax effects of events that have been recognized in the Company's financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. COMPREHENSIVE INCOME In fiscal 1999 the Company adopted SFAS No. 130 "Reporting Comprehensive Income," which establishes new rules for the reporting of comprehensive income (loss) and its components. The adoption of this statement had no impact on the Company's net income (loss) or shareholders' equity. For the fiscal years ended 2000, 1999 and 1998, the Company's operations did not give rise to items includable in comprehensive income (loss) which were not already included in net income (loss). Therefore, the Company's comprehensive income is the same as its net income (loss) for all periods presented. DERIVATIVE INSTRUMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal years beginning after June 15, 2000 and will not require retroactive restatement of prior period financial statements. This statement requires the recognition of all derivative instruments as either assets or liabilities in the balance sheet measured at fair value. Derivative instruments will be recognized as gains or losses in the period of change. If certain conditions are met where the derivative instrument has been designated as a fair value hedge, the hedge items may also be marked to market through earnings, thus creating an offset. If the derivative is designed and qualifies as a cash flow hedge, the changes in fair value of the derivative instrument may be recorded in comprehensive income. The Company does not presently make use of derivative instruments. The adoption of SFAS No. 133 on January 1, 2001 was not material. F-13 26 3. INVENTORIES INVENTORIES CONSIST OF THE FOLLOWING:
December 31, ------------------------------ 2000 1999 ----------- ---------- Raw Materials $328,000 $334,000 Work in Progress 132,000 71,000 Finished Goods 71,000 106,000 ----------- ---------- $531,000 $511,000 =========== -=========
4. FIXED ASSETS FIXED ASSETS CONSISTS OF THE FOLLOWING:
December 31, ------------------------------ 2000 1999 ----------- ----------- Laboratory equipment $1,301,000 $1,279,000 Office equipment and furniture 523,000 523,000 Leasehold improvements 514,000 514,000 Equipment under capital lease 87,000 - ----------- ----------- 2,435,000 2,316,000 Accumulated depreciation and amortization (1,958,000) (1,840,000) ----------- ----------- $477,000 $ 476,000 =========== ===========
Depreciation and amortization of fixed assets was $118,000, $122,000 and $237,000 for the years ended December 31, 2000, 1999 and 1998, respectively. 5. ACQUISITION On April 23, 1998, the Company acquired Stellar Bio Systems, Inc. ("Stellar"), a manufacturer and distributor of in vitro diagnostic products and research reagents. Reagents are individual components of diagnostic products, such as antibodies, calibrators and serum used in the biotechnology industry. The purchase price was $120,000 in cash and $700,000 in Class A Common Stock at the market value on the acquisition date (398,406 shares), plus future contingent payments of $650,000 in Class A Common Stock to be paid over three years based upon future sales levels of Stellar, with the Class A Common Stock to be valued at its market value on the acquisition agreement anniversary dates. On April 23, 1999, the Company made the first contingent payment of $150,000 in Class A Common Stock (131,118 shares). On April 24, 2000, the Company made the second contingent payment of $20,000 in Class A Common Stock (10,811 shares). The Acquisition was accounted for by the purchase method. Results of operations of Stellar have been included in the Company's consolidated financial statements since the date of acquisition. The excess of the aggregate purchase price over the fair value of net assets acquired of $791,000 has been allocated to intangible assets (intellectual know-how of $100,000 and goodwill of $691,000) and is being amortized over a 10-year period. Any additional future payments required under the contingent earnout provisions of the purchase agreement will be accounted for as additional goodwill and will be amortized over the remaining life of the goodwill. Accumulated amortization of F-14 27 intangible assets was approximately $192,000, $114,000 and $41,000 as of December 31, 2000, 1999 and 1998, respectively. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following:
December 31, --------------------------------- 2000 1999 ----------- ------------ Accounts Payable $220,000 $1,117,000 Professional Fees 77,000 98,000 Payroll and Related Expenses 71,000 366,000 ----------- ------------ $368,000 $1,581,000 =========== ============
7. LONG TERM DEBT: On May 20, 1998, the Company completed a private placement to three accredited investors of an aggregate of $4,000,000 of 5% Convertible Debentures due May 20, 2001, and three series of Warrants to purchase up to an aggregate of 261,288 shares of the Company's Class A Common Stock. Interest on the Debentures was payable only on maturity, conversion, redemption or when other payment was made on the Debentures in cash or, if registered for resale under the Securities Act of 1933, as amended, in shares of the Company's Class A Common Stock valued at the applicable Debenture conversion price. These debentures were repurchased on November 11, 1998 (see below). The Company also issued to the investors warrants in series entitling the investors to purchase, at an exercise price of $1.9141 per share, an aggregate of 261,228 shares of the Company's Class A Common Stock at any time to and including May 19, 2002. These warrants were cancelled on November 11, 1998 (see below). In conjunction with the private placement, the Company incurred both cash and noncash issuance costs totaling $525,000. These issuance costs were amortized on a straight-line basis, which is not materially different than the effective interest rate method, as a component of interest expense through November 11, 1998. Upon conversion of the Debentures, the related unamortized deferred financing costs were charged to paid-in capital. The fair value of the warrants as determined using an option-pricing model of $252,000, was recorded as additional paid-in capital and included in the $525,000 total issuance costs related to these Debentures. In addition, the Company recorded additional paid-in capital and debt discount of $762,000 to reflect the intrinsic value of the maximum market price conversion discount (16%) related to these Debentures. The debt discount was amortized and charged to interest expense from May 20, 1998 through November 11, 1998. The unamortized issuance costs and debt discount were included in the extraordinary charge for early extinguishment discussed below. On November 11, 1998, the Company repurchased the then outstanding Debentures for a total of $3,852,000 (principal amount of $3,248,000 plus accrued interest of $79,000 and a $525,000 premium). As a result of the repurchase the Company has recorded a one-time extraordinary charge to earnings of $1,140,000 which represents the loss on early extinguishment. F-15 28 For each of the aforementioned debt instruments and warrants, the fair value of each was estimated on the date of the agreement using an option-pricing model with the following assumptions: dividend yield of 0%; expected volatility of 135% in 1998; risk-free interest rate of range 5.7% to 6.5% and expected lives of 2 to 5 years dependent on the life of the instrument. NOTES PAYABLE Notes payable at December 31, 2000 primarily represents the remaining balance of an obligation arising from services rendered. Notes payable at December 31, 1999 primarily represents demand notes payable to the Company's Chairman. CAPITAL LEASE OBLIGATION During fiscal 2000, the Company entered into lease obligations of $87,000 for the acquisition of computer equipment, which contains a bargain purchase option. As a result, the present value of the remaining future minimum lease payments, with imputed interest rates ranging from approximately 11.7% to 14.6%, are recorded as a capitalized lease asset and related capitalized lease obligation. Future minimum payments at December 31, 2000 are as follows: 2001 $ 24,000 2002 28,500 2003 28,500 2004 24,100 2005 4,100 -------- Total minimum lease payments 109,200 Less amounts representing interest (22,200) -------- Present value of net minimum capital lease payments $ 87,000 ======== 8. STOCKHOLDERS' EQUITY: DESCRIPTION OF CLASS A AND CLASS B COMMON STOCK Holders of Class A Common Stock and Class B Common Stock have equal rights to receive dividends, equal rights upon liquidation, vote as one class on all matters requiring stockholder approval, have no preemptive rights, are not redeemable and do not have cumulative voting rights; however, holders of Class A Common Stock have one vote for each share held while holders of the Class B Common Stock have ten votes for each share held on all matters to be voted on by the stockholders. All Class B Common Stock is owned by the Chairman of the Board and may be converted into Class A Common Stock on a share-for-share basis at the option of the holder and generally is automatically converted in the event of sale or, with certain exceptions, transfer. PRIVATE PLACEMENT On October 27, 1998, the Company entered into an agreement to issue an aggregate of 10,800,000 shares of its Class A Common Stock to a group of accredited investors at a price of $.25 per share, a price above the market price of the Company's Class A Common Stock at the time. Of such shares, 4,000,000 shares were purchased by Alfred J. Roach, the Company's Chairman of the F-16 29 Board of Directors and Chief Executive Officer, for an aggregate price of $1,000,000. The Company has registered the shares issued in the private placement under the Securities Act of 1933, as amended. The proceeds from this private placement were used to repurchase the 5% Convertible Debentures (see Note 7). On January 27, 2000, the Company entered into an Exclusive License Agreement with Abbott Laboratories under which the Company granted to Abbott an exclusive worldwide license to its ABS-103 compound, related technology and patent rights. The Exclusive License Agreement gives Abbott the exclusive right to develop and market the compound, which presently is in the pre-clinical stage. In consideration for the license grant and in addition to customary royalties on sales, Abbott paid the Company an initial non-refundable license fee of $500,000 and agreed to pay additional milestone payments aggregating up to $17 million depending upon successfully reaching development milestones, generally by indication. The Company has no obligation to provide any additional services under this agreement. In connection with the entering into of the Exclusive License Agreement, the Company and Abbott also entered into a Stock Purchase Agreement dated January 27, 2000 pursuant to which Abbott purchased 2,782,931 shares (the "Abbott Shares") of the Company's Class A Common Stock for $1,500,000. The Company also entered into a Registration Rights Agreement with Abbott pursuant to which, among other things, the Company agreed to register the Abbott Shares under the Securities Act of 1933, as amended upon Abbott's request at any time after the first anniversary of the sale and to include the Abbott Shares in any other registration of the Company's securities under the Securities Act after that date. All expenses of registration of the Abbott Shares, other than underwriting discounts, selling commissions and fees and disbursements of counsel for Abbott, are to be borne by the Company. PREFERRED STOCK On December 31, 1999 the Company and Biotechnology Value Fund, L.P. ("BVF") signed a letter agreement, subject to negotiation of definitive agreements, authorization of preferred stock and certain other matters, for BVF to invest between $2 and $3 million for the purchase of between 4,000 and 6,000 shares of Series A Convertible Preferred Stock (the "Preferred Stock") and related Warrants. When the Company and BVF began negotiating the definitive agreements for the sale transaction in January 2000, in order to induce BVF to purchase the full $3 million, at the suggestion of BVF, the Company's Chairman Mr. Roach agreed that rather than demand repayment of his demand notes, he would convert $500,000 of the approximately $776,000 plus accrued interest owed to him into an additional investment in the Company on terms identical to the terms previously negotiated with BVF and that the balance of the amount owed him (approximately $276,000 of principal) could be repaid at the rate of $100,000 of principal and interest per month until repaid in full. Accordingly, $500,000 of the amount owed Mr. Roach was converted into 1,000 shares of Preferred Stock and 1,000,000 Warrants. The Company entered into a Securities Purchase Agreement dated as of February 3, 2000 with BVF and Mr. Roach relating to the issuance of the 7,000 shares of Preferred Stock and Warrants for 7,000,000 shares of Class A Common Stock. On February 7, 2000, BVF loaned $3,000,000 to the Company, equaling the purchase price for 6,000 shares of Preferred Stock and F-17 30 6,000,000 Warrants. On March 3, 2000, after receiving stockholder consent to the proposed sale, the Company repaid BVF's loan and $500,000 of the Company's indebtedness to Mr. Roach by issuing 6,000 shares of Preferred Stock and 6,000,000 Warrants to BVF and 1,000 shares of Preferred Stock and 1,000,000 Warrants to Mr. Roach. Preferred stock dividend related to warrants of $2,450,000 represents the noncash fair value of the warrants issued to BVF and Mr. Roach, determined by using an option-pricing model, in the private placement. The following assumptions were used for this fair value computation: dividend yield of 0%, volatility of 106%, risk-free interest rate of 5.01% and expected lives of 5 years. The Shares of Preferred Stock: (i) have the right to participate with dividends declared on the Common Stock, if, as and when declared, on an as-converted basis; (ii) contain customary anti-dilution adjustments for mechanical adjustments in the event of stock splits and similar transactions; (iii) contain restrictions on subsequent issuances of other preferred stock ranking equal to or superior to the Preferred Stock without the consent of the holders of a majority of such Preferred Stock; (iv) have a liquidation preference equal to the original issue price of the Preferred Stock, plus any accrued and unpaid dividends; (v) will not be entitled to vote except as a separate class when its rights are affected; and (vi) will be convertible at any time after the original issue date at the option of the holder. Each share of Preferred Stock initially will be convertible into 1,000 shares of Class A Common Stock, or a conversion price of $.50 per share of Class A Common Stock. Under the terms of the Registration Agreement the Company has filed a Form S-3 Registration Statement covering Class A Common Stock issuable upon conversion of the Preferred Stock and the exercise of the warrants, which went effective June 2000. STOCK OPTION PLANS The Company's 1986 Stock Option Plan (the "1986 Plan") provided for the grant of incentive stock options and/or non-qualified options until July 1997 to purchase up to an aggregate of 4,450,000 shares of Class A Common Stock. Options were granted at exercise prices not less than the fair market value at the date of grant and for a term not to exceed ten years from the date of grant; except that an incentive stock option granted under the 1986 Plan to a stockholder owning more than 10% of the outstanding Common Stock of the Company could not have a term which exceeded five years nor have an exercise price of less than 110% of the fair market value of the Class A Common Stock on the date of the grant. The outstanding options have a vesting period ranging two years to four years ratably from the date of grant. Changes in outstanding options and options available for grant under the 1986 Plan, expressed in number of shares, are as follows: F-18 31
For the Years Ended ------------------------------------------------------------------- December 31, 2000 December 31, 1999 ---------------------------- ------------------------------- Shares Weighted Avg. Shares Weighted Avg. Under Option Under Option Option Price Option Price -------- ------------- ----------- ------------- Options outstanding, beginning of year 2,476,250 $4.20 2,790,500 $4.11 Exercised (147,250) $1.87 -- -- Cancelled (11,000) $2.32 (272,250) $3.65 Expired (135,000) $1.93 (42,000) $2.00 Options outstanding, end of year 2,183,000 $4.50 2,476,250 $4.20 Options exercisable, end of year 2,183,000 $4.50 2,453,250 $4.21 Options available for grant, end of year -- --
F-19 32 The Company's 1993 Non-Employee Director Stock Option Plan (the "1993 Plan") provides for the issuance of stock options for up to 500,000 shares of Class A Common Stock to outside directors of the Company. Options to purchase 10,000 shares of Class A Common Stock are automatically granted immediately following each Annual Meeting of the Company to each outside director elected at the Annual Meeting. The option exercise price is 100% of the fair market value of the Class A Common Stock on the date of grant and the option may be exercised during a period of five years from the date of grant at the rate of 25% each year on a cumulative basis, commencing one year from the date of grant. Changes in outstanding options and options available for grant under the 1993 Plan, expressed in number of shares, are as follows:
For the Years Ended ------------------------------------------------------------------- December 31, 2000 December 31, 1999 ---------------------------- ------------------------------- Shares Weighted Avg. Shares Weighted Avg. Under Option Under Option Option Price Option Price -------- ------------- ----------- ------------- Options outstanding, beginning of year 140,000 $2.63 120,000 $3.27 Granted 30,000 $1.53 40,000 $1.09 Exercised (15,000) $1.88 -- -- Cancelled (7,500) $4.58 -- -- Expired -- -- (20,000) $3.38 Options outstanding, end of year 147,500 $2.39 140,000 $2.63 Options exercisable, end of year 97,500 $2.94 57,500 $3.76 Options available for grant, end of year 325,000 347,500
F-20 33 The Company's 1996 Stock Option Plan, as amended (the "1996 Plan"), which replaced the 1986 plan, provides for the grant of incentive stock options and/or non-qualified options to employees, officers and consultants of the Company to purchase up to an aggregate of 4,000,000 shares of Class A Common Stock. Options may be granted at exercise prices not less than the fair market value at the date of grant and may be exercisable for a period not to exceed ten years from the date of grant; except that the term of an incentive stock option granted under the 1996 Plan to a stockholder owning more than 10% of the outstanding Common Stock of the Company must not exceed five years nor have an exercise price of less than 110% of the fair market value of the Class A Common Stock on the date of the grant. The majority of options outstanding are exercisable 25% each year on a cumulative basis, commencing one year from the date of grant. Changes in outstanding options and options available for grant under the 1996 Plan, expressed in number of shares, are as follows:
For the Years Ended ------------------------------------------------------- December 31, 2000 December 31, 1999 ------------------------- ------------------------- Shares Weighted Avg. Shares Weighted Avg. Under Option Under Option Option Price Option Price --------- ------------- --------- ------------- Options outstanding, beginning of year 3,289,002 $1.05 1,487,750 $1.99 Granted 792,500 $0.47 2,255,000 $0.70 Exercised (1,062,594) $0.77 (5,250) $0.61 Cancelled (169,789) $0.92 (448,498) $2.40 Options outstanding, end of year 2,849,119 $1.00 3,289,002 $1.05 Options exercisable, end of year 1,991,744 $1.17 1,250,382 $1.75 Options available for grant, end of year 83,037 705,748
The Company's 2000 Stock Option Plan, (the "2000 Plan"), which is in addition to the 1996 plan, provides for the grant of incentive stock options and/or non-qualified options to employees, officers and consultants of the Company to purchase up to an aggregate of 3,000,000 shares of Class A Common Stock. Options may be granted at exercise prices not less than the fair market value at the date of grant and may be exercisable for a period not to exceed ten years from the date of grant; except that the term of an incentive stock option granted under the 2000 Plan to a stockholder owning more than 10% of the outstanding Common Stock of the Company must not exceed five years nor have an exercise price of less than 110% of the fair market value of the Class A Common F-21 34 Stock on the date of the grant. There were no options granted under this plan in fiscal year 2000. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for options granted in 2000, 1999 and 1998 in accordance with the provisions of SFAS No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below:
2000 1999 1998 ----------- ----------- ----------- Net loss -- as reported ($6,225,000) ($5,351,000) ($7,548,000) Net loss -- pro forma ($6,881,000) ($6,130,000) ($8,243,000) Basic and diluted loss per share -- as reported ($.14) ($.14) ($.29) Basic and diluted loss per share -- pro forma ($.16) ($.16) ($.32) ----------- ----------- -----------
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2000, 1999 and 1998: dividend yield of 0%; expected volatility of 170% in 2000, 106% in 1999 and 135% in 1998; risk-free interest rate of range 4.4% to 6.8% and expected lives of seven years. The weighted average fair value of all three option plans for options granted were $.49, $.59 and $.50 in 2000, 1999 and 1998, respectively. The following table sets forth additional SFAS No. 123 disclosure information as to options outstanding for all three plans at December 31, 2000:
Weighted Average Shares Exercisable Exercise Weighted Average Remaining Outstanding Shares Price Range Exercise Price Contractual Life ----------- ----------- ---------------- ---------------- ---------------- 1,433,750 809,375 $0.25 $0.38 $0.30 8.7 196,125 116,125 $0.40 $0.66 $0.53 5.9 807,994 694,244 $1.00 $1.50 $1.05 7.1 442,550 370,050 $1.52 $2.25 $1.83 4.9 361,450 355,950 $2.38 $3.50 $3.37 6.0 1,864,250 1,853,000 $3.66 $5.50 $4.90 1.4 72,500 72,500 $5.75 $7.75 $6.32 2.9 1,000 1,000 $10.00 $10.00 1.2 --------- --------- 5,179,619 4,272,244
F-22 35 OTHER OPTIONS GRANTED The Company entered into a consulting agreement with an unaffiliated third party to assist in the strategic planning and implementation of the Company's licensing, collaborative and co-marketing plans, which expired February 29, 1996. Pursuant to the agreement, the Company granted an option to purchase 50,000 shares of Class A Common Stock on or before February 28, 2000 at $2.25 per share. The Company also granted performance options to purchase 50,000 shares of Class A Common Stock at $2.25 for licensing or collaborative agreements entered into which met certain criteria. These options are exercisable for five years from the date of grant. During 2000, the consultant exercised their option to purchase 50,000 shares of Class A Common Stock at $2.25 and the balance of 50,000 shares expired. The Company has granted an investor relations consultant a warrant to purchase 50,000 shares of Class A Common Stock on or before November 14, 2000 at $3.50 per share pursuant to an agreement dated November 27, 1995. This warrant expired on November 14, 2000. The Company entered into an agreement with an unaffiliated third party dated October 6, 1995 to assist with the marketing of the Company's products and intellectual property, which agreement has expired. Pursuant to this agreement, the Company granted performance options to purchase 25,000 shares of Class A Common Stock and issued 5,000 shares for services rendered under the agreement. Options were granted for 12,500 shares at $3.00 per share and 12,500 shares at $5.50 per share. These options are exercisable for five years from the date of grant. These options expired on February 28, 2001. The Company entered into an agreement with an unaffiliated third party to render financial consulting advice, dated August 13, 1998 and amended on October 1, 1998. Pursuant to this agreement, the Company granted performance options to purchase up to 400,000 shares of Class A Common Stock. Options were granted for 150,000 shares at $.75 per share, 150,000 shares at $1.00 per share and 100,000 shares at $1.50 per share. The options are exercisable for four years from the agreement date. The fair value of these options as determined using an option-pricing model was $124,000, which is being recorded as a noncash charge over the vesting/service period of the options. The following assumptions were used for this fair value computation: dividend yield of 0%, volatility of 135%, risk-free interest rate of 4.26% and expected lives of 4 years. The charge was $81,000 in 1999 and $43,000 in 1998. The Company has granted an investor relations consultant a warrant to purchase up to 300,000 shares of Class A Common Stock on or before January 19, 2004 at $1.00 per share pursuant to an agreement dated January 20, 1999. The warrant may be exercised in increments of 50,000 share amounts only if certain milestones are met during the period ending June 30, 2000. The consultant has earned 250,000 shares under this agreement and the balance of 50,000 shares were cancelled. The fair value of these warrants as determined using an option-pricing model was $264,000 which was recorded as a noncash charge over the one year service period (fiscal year 1999). The following assumptions were used for this fair value computation: dividend yield of 0%, volatility of 149%, risk-free interest rate of 4.6% and expected lives of 4 years. F-23 36 The Company has granted an investor relations consultant a warrant to purchase up to 300,000 shares of Class A Common Stock on or before March 14, 2002 at $3.00 per share pursuant to an agreement dated March 15, 2000. The warrant may be exercised in increments of 50,000 share amounts only if certain milestones are met during the period ending September 14, 2001. As of December 31, 2000, the consultant has earned 50,000 shares. The fair value of these warrants as determined using an option-pricing model was $342,000 which was recorded as a noncash charge over the one year service period (March 2000 to February 2001). The following assumptions were used for this fair value computation: dividend yield of 0%, volatility of 105%, risk-free interest rate of 6.5% and expected lives of 2 years. 9. FEDERAL INCOME TAXES: At December 31, 2000, the Company had net operating loss carryforwards of approximately $63,000,000 for income tax purposes. The net operating loss carryforwards will expire in varying amounts through 2020. In addition, the Company has approximately $1,300,000 of available research and development tax credits to offset future taxes. These credits expire through 2020. In accordance with SFAS No. 109 "Accounting for Income Taxes," the Company has recorded a valuation allowance of $64,300,000 to fully reserve for the deferred tax benefit attributable to its net operating loss and tax credit carryforwards due to the uncertainty as to their ultimate realizability. In accordance with certain provisions of the Tax Reform Act of 1986, a change in ownership of a corporation of greater than 50 percentage points within a three-year period places an annual limitation on the corporation's ability to utilize its existing net operating loss carryforwards, investment tax and research and development credit carryforwards (collectively "tax attributes"). Such a change in ownership was deemed to have occurred in connection with the Company's 1990 initial public offering, at which time the Company's tax attributes amounted to approximately $4.9 million. The annual limitation of the utilization of such tax attributes is approximately $560,000. To the extent the annual limitation is not utilized, it may be carried forward for utilization in future years. At December 31, 2000, $4,900,000 of net operating losses is no longer subject to this limitation. 10. VARIOUS AGREEMENTS AGREEMENTS WITH BOSTON UNIVERSITY On December 1, 1996, the Company entered into a Sublease Agreement and, effective January 1, 1997, an Agreement for Services with Boston University. These two agreements provided for the Company's use of approximately 7,700 square feet of space for laboratories and for its antigen-free technology at a total annual payment of $275,000. The agreements had an initial term of three years. In connection with this lease agreement, the Company may, at its option, pay a portion of the annual lease obligation with Class A Common Stock plus a warrant to purchase shares of Class A Common Stock. The number of shares are computed using the average market price of the Company's Class A Common Stock during the ten days prior to issuance. The warrant shares F-24 37 are to be exercisable at a price equal to the closing price of the underlying Class A Common Stock on the date the warrant is issued and for a period of four years from the date of issuance. During 1997, the Company issued 48,117 shares of Class A Common Stock and warrants to purchase 48,117 shares of Class A Common Stock with the exercise price ranging from $2.13 to $4.75. During 1998, the Company issued 129,847 shares of Class A Common Stock and warrants to purchase 129,847 shares of Class A Common Stock with the exercise price ranging from $.63 to $2.19. During 1999, the Company issued 29,850 shares of Class A Common Stock and warrants to purchase 29,850 shares of Class A Common Stock with the exercise price of $1.28. The fair values of the warrants were calculated using an option-pricing model at the date of issue and recorded a charge to operations of $32,000 in 1999, $99,000 in 1998 and $93,000 in 1997. In the fourth quarter of 1998, the Company implemented a consolidation of its research and development facilities. In 1998, the Company recorded a $252,000 reserve for consolidating facilities which included severance costs, lease termination, and the write-down of leasehold improvements. The Boston facilities were closed in June 1999 and consolidated at the Stellar facilities in Columbia, Maryland. UNIVERSITY OF NOTRE DAME AGREEMENT On December 1, 1983, the Company entered into a lease agreement with the University of Notre Dame ("Notre Dame Agreement") which was amended and extended until November 30, 1993, at which time it was terminated. On December 1, 1993, the Company entered into a lease with Notre Dame ("Notre Dame Lease") for substantially the same premises occupied by the Company under the Notre Dame Agreement for a term ending August 31, 1995. Notre Dame extended the rental of a portion of the space through August 31, 1996. In February 1996, the Company entered into a lease in South Bend, Indiana for approximately 5,200 square feet with an annual base rent of $52,200. This lease commenced on April 1, 1996 for an initial five-year term with three one-year renewal options. In September 1996, the Company entered into a second lease for a three year term in South Bend, Indiana for approximately 3,000 square feet with an annual base rent of $30,400. In 1997, the Company moved its research and development activities from South Bend, Indiana to Boston, Massachusetts. The Company closed both facilities and has terminated both leases. Under the Notre Dame Agreement, the Company was required to pay Notre Dame for the direct and indirect payroll cost of substantially all of the Company's research and development personnel, purchases of laboratory supplies, items of equipment or other costs associated with the research projects. Notre Dame has granted the Company all rights, title and interest in and to any inventions, patents and patent applications for research projects funded by the Company. Inventors of any processes or technology which receive Company support have assigned his or her interest in the product, patent or patent applications to the Company. The Company did not incur costs under the Notre Dame Agreement during the three years ended December 31, 2000, and incurred $6,150,000 for the period from inception (September 1, 1983) through December 31, 1996. The Company has agreed to pay Notre Dame a royalty of 5% of the net income the Company achieves from sales of products resulting from Company-sponsored research activities at Notre Dame. Royalty payments shall continue for a ten-year period from the date of the first commercial sale of a product, regardless of the continuation of the Notre Dame Agreement. F-25 38 EMPLOYMENT AGREEMENTS The Executive Vice-President is a party to an employment agreement with the Company ending September 30, 2001. The aggregate annual minimum compensation under this agreement as of December 31, 2000 was approximately $90,000. This officer also is party to a confidentiality agreement with the Company requiring them to maintain certain information in confidence during and subsequent to the employment with the Company. SCIENTIFIC ADVISORY COMMITTEE AGREEMENTS The Company has entered into advisory board agreements with certain research scientists with respect to specific projects in which the Company has an interest. The payments to the advisors for informal meetings and other consultations as a group were approximately $37,000, $65,000 and $115,000 for the three years ended December 31, 2000, 1999 and 1998, respectively. Generally, members of the Company's Scientific Advisory Committee are employed by or have consulting agreements with third parties, the businesses of which may conflict or compete with the Company and any inventions discovered by such individuals will not become the property of the Company. As part of its development stage activities, the Company enters into various agreements that provide for the expenditure of funds for research and development activities and typically provide for the payment of royalties (between 2% to 8% of net sales) by the Company if any products are successfully developed and marketed as a result of the work being performed under the agreement. The following is a summary of significant agreements the Company has entered into: LICENSE AGREEMENTS On January 24, 1992, the Company entered into an exclusive, 15 year license agreement with Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"), a Japanese pharmaceutical company. Under this agreement, Yamanouchi may manufacture, use or market diagnostic assays that contain the Company's monoclonal antibody, 45-J, in Japan and Taiwan. Yamanouchi paid a non-refundable, initial sign-up payment to the Company of $900,000 (net of Japanese taxes). The agreement provides that Yamanouchi is to pay the Company a fixed percentage over the Company's manufacturing costs of the 45-J antibody supplied to Yamanouchi. On an ongoing basis, Yamanouchi is to pay the Company royalties at the rate of 10% of all net sales of diagnostic assays sold by Yamanouchi or its affiliates during each calendar year of the agreement term. Additionally, Yamanouchi is to pay the Company 50% of any initial fees, royalties or other consideration received with respect to any sublicense granted by Yamanouchi. To date, Yamanouchi has not made any sales. On December 10, 1992, the Company entered into an agreement (as amended) with University College Dublin, Ireland granting the Company an exclusive license for drugs/compounds to halt the onset and/or progression of neurodegenerative diseases, in general, and Alzheimer's disease, in particular. The agreement's term is the duration of any patents that may be granted to the university with a minimum of 10 years. Pursuant to the agreement, the Company is to pay the university a royalty of 5% of net income relating to product sales. The Company expensed $82,000 F-26 39 in 2000, $18,000 in 1999 and $5,000 in 1998 for certain research expenses, supplies and equipment under this agreement. On August 10, 1993, the Company entered into a five-year collaboration agreement with the Free University of Berlin to develop therapeutic compounds. The Company also acquired a series of anticonvulsant compounds. Pursuant to the agreement, the Company is to pay a royalty of 5% of the net product sales. The agreement lasts the life of the patent or a minimum of 10 years. The Company expensed $72,000 in 2000, $75,000 in 1999 and $103,000 in 1998 for research expenses and supplies under this agreement. In October 1995, ABS entered into a license and collaboration agreement with F. Hoffmann-La Roche, Ltd. ("Hoffmann-La Roche") for the co-development and marketing of the Company's TpP test for the detection of active thrombosis (blood clot formation). The agreement grants Hoffmann-La Roche a worldwide license to market the TpP test in a latex based particle agglutination format. Under the agreement, the Company received a $60,000 non-refundable development payment, to adapt the TpP test in the latex based particle agglutination format to Hoffmann-La Roche's automated diagnostic systems. The Company is also to receive milestone payments upon achievement of certain commercialization goals. The TpP test is to be manufactured by the Company for use on Hoffmann-La Roche's instruments. ABS is to receive a percentage of Hoffmann-La Roche's net selling price for the Company's manufacturing of the TpP test plus a 5% royalty on net sales made by Hoffmann-La Roche. Under the agreement, the TpP test is also to be sold by ABS and Hoffmann-La Roche to other diagnostic companies using similar particle agglutination technology. On these sales, gross profit is to be shared equally between the Company and Hoffmann-La Roche. To date, ABS has not received any milestone or royalty payments. In December 1995, ABS entered into a license agreement with Abbott Laboratories ("Abbott") for the marketing of the Company's TpP assay. The license agreement grants Abbott a worldwide license to market the TpP test for Abbott's immunoassay formats. The Company received a $100,000 non-refundable up-front payment and is to receive milestone payments upon achievement of certain development and commercialization goals. The Company is to receive a 5% royalty on net sales made by Abbott. In addition, the reagent for the TpP test is to be manufactured by the Company for use by Abbott. To date, ABS has not received any milestone or royalty payments. On January 27, 2000, the Company entered into an Exclusive License Agreement with Abbott under which the Company granted to Abbott an exclusive worldwide license to its ABS-103 compound, related technology and patent rights. The Company also entered into a Registration Rights Agreement with Abbott. (See Note 8 for details regarding this agreement.) F-27 40 11. COMMITMENTS AND CONTINGENCIES LEASES ABS leases 6,000 square feet of office space in New York under a lease expiring July 2001 (with an annual base rent of $41,000), which it intends to renew. ABS' subsidiary, Stellar, has a lease covering 16,000 square feet in Maryland, with an annual base rent of $184,000 and a term ending March 31, 2006. LITIGATION From time to time we are a party to certain claims and legal proceedings in the ordinary course of business, none of which, in our opinion, would have a material adverse effect on our financial position or results of operations. F-28