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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-20791
AMARILLO BIOSCIENCES, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
TEXAS 75-1974352
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 WEST 9TH AVENUE, AMARILLO, TEXAS 79101
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (806) 376-1741
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $.01
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B in this form, and no disclosure will 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-KSB or any
amendment to this Form 10-KSB. [X]
Revenues for its most recent fiscal year were $222,289
As of March 9, 1999, there were outstanding 5,414,232 shares of the
registrant's common stock, par value $.01, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by nonaffiliates of the registrant (based on the
closing price for the common stock on the NASDAQ SmallCap Market) was
approximately $6,458,412.
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PART I
The following contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed in the forward-looking statements as a result of certain
factors, including those set forth in "Management's 1999 Plan of Operations" as
well as those discussed elsewhere in this Form 10-KSB. The following discussion
should be read in conjunction with the Financial Statements and the Notes
thereto included elsewhere in this Form 10-KSB.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Amarillo Biosciences, Inc. (the "Company" or "ABI"), a
development-stage company incorporated in 1984, is engaged in developing
biologics for the treatment of human and animal diseases. The Company is
currently focusing its research on human health indications for the use of low
dose oral natural interferon alpha (IFN[alpha]), particularly for the treatment
of Sjogren's syndrome, fibromyalgia, hepatitis B, hepatitis C and oral warts in
HIV+ patients. The Company believes that significant worldwide opportunities
exist for the development of low dose oral natural IFN[alpha] as a cost
effective, non-toxic, efficacious alternative to the treatment of disease by
injection of high doses of IFN[alpha]. In addition, the Company believes that
low dose oral natural IFN[alpha] will be an effective treatment for diseases or
conditions for which current therapies are inadequate.
The Company owns or licenses 19 United States patents relating to low
dose oral natural IFN[alpha]. Since 1992, the Company has filed with the U.S.
Food and Drug Administration ("FDA"), and there now are in effect, eight
Investigational New Drug ("IND") Applications covering indicated uses for low
dose oral IFN[alpha], including treatment of Sjogren's syndrome and
fibromyalgia. The Company is seeking regulatory approvals in certain foreign
countries to test low dose oral IFN[alpha] in the treatment of hepatitis B and
C.
The Company's objective is to exploit its proprietary technology to
become a leader in the field of low dose oral IFN[alpha] applications. The
Company's business strategy is to pursue those indications for low dose oral
IFN[alpha] treatment for which initial clinical research has indicated the
treatment is efficacious and which, in the opinion of the Company, have the
greatest commercial potential and are most likely to be approved by the FDA. To
the extent possible, the Company will attempt to minimize the cost to the
Company of obtaining FDA approval by utilizing forms of IFN[alpha] already
approved (in other dosage forms and for different indications) by the Japanese
Ministry of Health and Welfare for human use. The Company believes that cost
savings will result. The Company will attempt to gain market share for approved
products by forming alliances with strong marketing partners.
The Company has 10 full-time employees and three part-time employees.
The Company makes extensive use of consultants in business and research and
development.
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HUMAN HEALTH APPLICATIONS
Sjogren's Syndrome. Sjogren's syndrome is a chronic autoimmune disorder
characterized by dryness of the eyes and mouth. It can exist as a primary
disorder or in association with other autoimmune diseases such as rheumatoid
arthritis, systemic lupus erythematosus and scleroderma. Patients with primary
Sjogren's syndrome may have clinical signs such as rash, arthritis, pneumonitis
and nephritis. Typical symptoms include the sensation of burning in the eyes,
dryness of the mouth, skin, nose and vagina, difficulty swallowing, painful
throat and fatigue. Oral candidiasis (a fungus infection of the mouth) may also
arise as a result of reduced saliva flow. Although Sjogren's syndrome is not
life threatening, it can cause extreme discomfort and seriously impair quality
of life.
The Sjogren's Syndrome Foundation, Inc. estimates that there are
approximately two to four million people in the United States who suffer from
Sjogren's syndrome. The Company believes that the incidence of Sjogren's
syndrome worldwide is similar to its incidence in the United States. Women
constitute 90% of Sjogren's patients.
Topical use of artificial tears is the prevailing treatment for the dry
eye symptom of the disease. Artificial tears must be used on a regular basis.
Intensive oral hygiene is prescribed to prevent progressive oral problems that
may develop as a result of the disease. Topical and systemic means of increasing
salivary flow may provide transient relief of symptoms.
The Company believes that oral IFN[alpha] therapy helps to relieve the
dryness associated with Sjogren's syndrome, improves secretory function, and may
effectively supplement, or be used in lieu of, existing treatments. In a study
conducted by the Company from October 1994 to January 1996 at two universities,
the Company found that oral IFN[alpha] therapy administered to Sjogren's
syndrome patients led to increased saliva production in six of 14 patients. The
Company has filed, and there is now in effect, an IND for the use of oral
IFN[alpha] to treat Sjogren's syndrome.
A Phase II trial was completed in late 1997. At the end of 12 weeks,
ninety patients who took placebo or interferon were evaluable. Patients given
150 IU three times per day had a significant (p<0.014) increase in stimulated
saliva production. Subjective measures of relief of dryness also favored the
same interferon group. A Phase III pivotal trial was approved and launched in
November 1998. A total of 500 patients will be given either 150 IU oral
IFN[alpha] or placebo for a 24 week period. Endpoints will be significant relief
of oral dryness and increased saliva output.
Hepatitis C. The Company is conducting a clinical trial in Canada to evaluate
oral IFN[alpha] pre-treatment as a means of increasing the effectiveness of
parenteral IFN[alpha] therapy in hepatitis C patients. An estimated 40 million
worldwide chronic cases of HCV are believed by the Company to be candidates for
this treatment.
HIV. ABI is continuing an open label trial in California of HIV+ patients with
persistent oral warts. A number of patients have shown marked improvement, with
regression of the warts and without relapse. Further studies are planned to
confirm and extend these encouraging results.
Fibromyalgia. A second Phase II trial in fibromyalgia patients is ongoing. A
total of 120 patients will be enrolled to receive interferon or placebo in an
effort to reproduce the positive effects noted in our previous study and to
define further the most effective dose schedule.
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STRATEGIC ALLIANCE WITH HBL
Hayashibara Biochemical Laboratories, Inc. ("HBL") was established in
1970 to engage in biotechnical research and development. It is a subsidiary of
Hayashibara Company, Ltd., a privately-owned Japanese holding corporation with
diversified subsidiaries. For more than 100 years the Hayashibara Company, Ltd.
and its predecessors have been applying microbiological technology in the starch
industry for the production of maltose and other sugars.
In 1981, HBL established the Fujisaki Institute to accelerate
development of industrial methods for the production of biologics and to sponsor
clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center
to support basic research. In 1987, HBL successfully accomplished the mass
production of human cells in an animal host by producing human cells in
hamsters. This made it possible to economically produce a natural form of human
IFN[alpha] and other biologics. HBL also has developed and obtained patents for
technology relating to the production of IFN[alpha]-containing lozenges by which
the stability of the IFN[alpha] activity can be maintained for up to 18 months
at room temperature and up to three years if the product is refrigerated. The
Company believes that the use of such lozenges gives it advantages over
competitive technologies in terms of cost, taste and ease of handling.
In September 1997, HBL and ABI entered license agreements granting
exclusive rights to ABI to develop interferon gamma for oral use in humans and
for all routes of administration in animals, and tumor necrosis factor alpha for
oral and topical uses in humans and for all routes of administration in animals;
the rights were granted worldwide, except Japan. The Company is dependent on HBL
as the sole supplier of products in human health.
AGREEMENTS
In October 1989, the Company entered into a Manufacturing and Supply
Agreement with Interferon Sciences, Inc. ("ISI"), under which ISI granted to the
Company an exclusive worldwide license to market ISI IFN[alpha] for oral use in
animals and agreed to supply ISI IFN[alpha] for such use exclusively to the
Company. Pursuant to the agreement, ISI receives a specified price for ISI
IFN[alpha] sold to the Company. ISI is also entitled to receive royalties on net
sales as well as a percentage of any license fee, option fee or other payment,
except royalty or specific research or patent expense reimbursements, which the
Company receives for the assignment or sublicense of the Company's rights under
the license agreement.
Since 1994, the Company has been required to expend a minimum of
$50,000 per year toward development of products under the Manufacturing and
Supply Agreement in order to keep it in force. The Company has done so, and
currently intends to continue to make such expenditures. The Manufacturing and
Supply Agreement will continue for seven years after the Company's first
purchase order for Manufactured Products under the Agreement, and will be
automatically renewed for successive three-year terms thereafter, subject to
termination by the Company, with or without cause, and subject to termination by
ISI at any time after the first renewal term if net sales for a calendar year do
not exceed $100,000. The seven-year term has not yet commenced, since the
Company has not yet placed an order with ISI for Manufactured Products.
"Manufactured Products" is defined in the
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agreement as ISI IFN[alpha], packaged in accordance with FDA approved dosage
forms. The FDA has not yet approved any dosage form within the meaning of the
agreement.
In October 1989, the Company and ISI entered into a license agreement
pursuant to which the Company granted to ISI a license (co-exclusive with the
Company) of the Company's patented technology for the use and sale of
IFN[alpha]-containing products for use in humans worldwide, except for Japan
(where the Company has granted to HBL an exclusive license), for a royalty on
net sales of licensed products made during the term of the agreement. The
original term of the license agreement was to expire on October 20, 1994, but
ISI extended its term as therein permitted. As amended in April 1995, the
agreement will continue in force for the life of the licensed patents, subject
only to ISI's right to terminate the agreement with or without cause (in which
case ISI must cease any use or sale of the licensed products), and the Company's
right to terminate for breach of the agreement by ISI, or upon certain other
events.
In April 1995, in connection with the settlement of certain patent and
infringement litigation brought by the Company in New Zealand against Fernz
Corporation Limited, Pharma Pacific Management Pty. Ltd. ("PPM") and certain
other companies and certain opposition proceedings brought by PPM against the
Company and certain of the Company's licensors in Australia and Europe, the
Company entered into a non-exclusive license agreement with PPM. Pursuant to
such agreement, the Company licenses to PPM worldwide, except in Japan, the
right to use the Company's patented technology for the use and sale of
IFN[alpha]-containing products in humans and PPM is obligated to pay the Company
a royalty based on sales of the product in countries where any of the licensed
patents has issued. To the Company's knowledge, PPM is not selling products
covered by the license in any such country. PPM also paid to the Company
$500,000 as a reimbursement of a portion of the Company's research and expenses
related to the licensed technology and a $50,000 license fee to be credited
against future royalties. In connection with the settlement, ISI and the Company
agreed to an amendment of ISI's license from the Company pursuant to which ISI
granted back to the Company any right to sublicense the licensed technology
(except that ISI retained the right to sublicense such technology in connection
with the use and sale of ISI IFN[alpha] products) and the Company purchased
312,500 shares of the common stock of ISI, a public company, for $625,000.
Following a 4:1 reverse split in March 1997, the Company sold 65,000 shares of
ISI stock, leaving a balance of 13,125 shares at December 31, 1998.
On October 13, 1998, the Company engaged Trust Company of the South
(TCOS) to act as its Executive Advisor. TCOS's services in connection with this
engagement will include assisting the Company, in (1) Preparation of a corporate
profile suitable for use with brokers and investors (research, write, design,
print and distribute), (2) Designing and implementation of a plan for both the
short and long term promotion of investor interest in the Company, (3)
Interfacing with the investment community on behalf of the Company and publicly
promoting investor interest in the Company, (4) Preparation of press releases,
upon request, and introduction of the Company to appropriate financial writers
and media persons, (5) Enlistment of additional market makers for the Company's
stock, (6) Development of a list of key brokers that can be cultivated on behalf
of the Company and its stock, and seek to enhance the interest of these brokers
in the Company, (7) Assistance, when requested, in the preparation of
presentations to broker and investor groups, (8) Development, with Company's
officers of an ongoing in-house program for investor relations, (9) Coordination
with management and other board members in the selection of additional outside
board members, (10) Evaluation of the benefits of listing the Company's
securities on the American Stock
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Exchange when and if appropriate, (11) Evaluation and recommendations regarding
utilizing personal and corporate trust services provided by TCOS.
The Company agrees to promptly reimburse TCOS for all expenses incurred
by TCOS pursuant to this engagement. Such expenses shall include but not be
limited to, transportation, lodging, mileage, meals, parking, tips, copying,
printing, telephone, overnight delivery, computer research, postage, telecopy
and other miscellaneous items. The Company shall have the right to pre-approve
expense charges which would exceed $7,500 in one calendar month.
The term of this Engagement will be through October 12, 2003; however,
the Company may terminate the Engagement prior to the expiration of said term by
giving written notice of termination to TCOS at least ten days prior to any six
months anniversary of the letter agreement. At the inception of the Engagement
TCOS received 112,000 options at $1 3/4 and will be paid $6,000 per month in
fees each month thereafter.
PATENTS AND PROPRIETARY RIGHTS
In July 1997, ABI and Hoffmann-La Roche (HLR) entered a license
agreement whereby ABI was granted patent rights to make, have made, use and sell
natural interferon alpha in the USA, under US Patent No. 4,503,035, owned by
HLR. This license will require ABI to pay a royalty to HLR on sales in the USA
until March 2002.
Three patents issued in October and December, 1998 with claims valid
until the year 2015. Those patents are "Treatment of Bacterial Infection with
Oral Interferon-Alpha" (US Patent No. 5,817,307), "Treatment of Neoplastic
Disease with Oral Interferon" (US Patent No. 5,824,300) and "Treatment of
Autoimmune Disorders with Oral Interferon" (US Patent No. 5,846,526). Another
patent (US Patent No. 5,830,056) issued November 3, 1998 entitled "Treatment of
Viral Disease with Oral Interferon-Alpha"; because of a terminal disclaimer,
this patent has claims valid until May 28, 2008.
A Notice of Allowance of Claims was received in November 1998 on US
Patent Application Serial No. 07/875/630 filed April 28, 1992; claims were
granted with a terminal disclaimer such that claims will be valid until December
13, 2002.
COMPETITION
The pharmaceutical industry is an expanding and rapidly changing
industry characterized by intense competition. The Company believes that its
ability to compete will be dependent in large part upon its ability to
continually enhance and improve its products and technologies. In order to do
so, the Company must effectively utilize and expand its research and development
capabilities and, once developed, expeditiously convert new technology into
products and processes which can be commercialized. Competition is based
primarily on scientific and technological superiority, technical support,
availability of patent protection, access to adequate capital, the ability to
develop, acquire and market products and processes successfully, the ability to
obtain governmental approvals and the ability to serve the particular needs of
commercial customers. Corporations and institutions with greater resources than
the Company may, therefore, have a significant competitive advantage. The
Company's potential competitors include entities that develop and produce
therapeutic agents for
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treatment of human and animal disease. These include numerous public and private
academic and research organizations and pharmaceutical and biotechnology
companies pursuing production of, among other things, biologics from cell
cultures, genetically engineered drugs and natural and chemically synthesized
drugs. Almost all of these potential competitors have substantially greater
capital resources, research and development capabilities, manufacturing and
marketing resources and experience than the Company. The Company's competitors
may succeed in developing products or processes that are more effective or less
costly than any that may be developed by the Company, or that gain regulatory
approval prior to the Company's products. The Company also expects that the
number of its competitors and potential competitors will increase as more
IFN[alpha] products receive commercial marketing approvals from the FDA or
analogous foreign regulatory agencies. Any of these competitors may be more
successful than the Company in manufacturing, marketing and distributing its
products. There can be no assurance that the Company will be able to compete
successfully.
GOVERNMENT REGULATION
The Company's research and development activities are subject to
comprehensive regulation by numerous governmental authorities in the United
States and other countries. If the Company is able to produce and market
products, such production and marketing will place the Company under continued
regulation. Among the applicable regulations in the United States,
pharmaceutical products are subject to the Federal Food, Drug and Cosmetic Act,
the Public Health Service Act, other federal statutes and regulations, and
certain state and local regulations. These statutes and regulations govern the
development, testing, formulation, manufacture, labeling, storage, record
keeping, quality control, advertising, promotion, sale, distribution and
approval of pharmaceutical products. Failure to comply with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, refusal by the government to approve marketing
of the product and criminal prosecution.
A new drug may not be legally marketed for commercial use in the United
States without FDA approval. In addition, upon approval, a drug may only be
marketed for the indications, in the formulations and at the dosage levels
approved by the FDA. The FDA also has the authority to withdraw approval of
drugs in accordance with applicable statutes and regulations. Analogous foreign
regulators impose similar approval requirements relating to commercial marketing
of a drug in their respective countries and may impose similar restrictions and
limitations after approval.
In order to obtain FDA approval of a new product, the Company and its
strategic partners, if any, must submit proof of safety, efficacy, purity, and
stability, and the Company must demonstrate validation of its manufacturing
process. The testing and application process is expensive and time consuming,
often taking years to complete. There is no assurance that the FDA will act
favorably or quickly in reviewing applications. With respect to patented
products, processes or technologies, delays imposed or caused by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit them. Delays could also affect
the commercial advantages derived from proprietary processes. There is no
assurance that the regulatory agencies will find present or future submissions
of the Company to be adequate.
The FDA approval process for a pharmaceutical product such as oral
IFN[alpha] includes review of (i) preclinical laboratory and animal studies to
enable FDA review of an Investigational New Drug
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("IND") or Investigational New Animal Drug ("INAD") applications, (ii) initial
clinical studies to define safety and dose parameters and (iii) well-controlled
clinical trials to demonstrate product efficacy and safety, followed by
submission and FDA approval of a Product License Application ("PLA") concerning
biologics and a New Drug Application ("NDA") with respect to drugs. FDA approval
of the NDA and/or PLA is required prior to any commercial sale or shipment of
the product, except as to certain exports.
Preclinical studies involve laboratory evaluation of product
characteristics and animal studies to assess the safety of the product. The
results of the preclinical tests are submitted to the FDA as part of the IND or
INAD application and are reviewed by the FDA. Unless the FDA objects to an IND,
the application will become effective 30 days following its receipt by the FDA.
INADs need only be filed prior to the shipment of the drug or biologic for
testing. There can be no certainty that the FDA will not object to the
commencement of clinical studies concerning any drug or biologic.
Human clinical trials are typically conducted in three sequential
phases with some amount of overlap allowed. Phase I trials normally consist of
testing the product in a small number of patient volunteers for establishing
safety (adverse effects), dosage tolerance, metabolism, distribution, excretion
and clinical pharmacology. In Phase II, the continued safety and initial
efficacy of the product are evaluated in a somewhat larger patient population,
and appropriate dosage amounts and treatment intervals are determined. Phase III
trials typically involve more definitive testing of the appropriate dose for
safety and clinical efficacy in an expanded patient population at multiple
clinical testing centers. A clinical plan, or "protocol," accompanied by the
approval of the institution participating in the trials, must be submitted to
the FDA prior to commencement of each clinical trial. Each clinical study must
be conducted under the auspices of an Institutional Review Board ("IRB") at the
institution performing the clinical study. An IRB may require changes in a
protocol, and there can be no assurance that an IRB will permit any given study
to be initiated or completed. In addition, the FDA may order the temporary or
permanent discontinuation of clinical trials at any time. In light of this
process, the Company must necessarily rely on other persons and institutions to
conduct studies. The Company cannot guarantee that such persons and institutions
will conduct studies properly. There also can be no assurance that Phase I,
Phase II and Phase III testing of the Company's products will be completed
successfully within any specified time period, if at all.
All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of a PLA or NDA, for
approval to commence commercial distribution. Submission of a PLA or NDA does
not assure FDA approval for marketing. The application review process takes more
than two years on average to complete. However, the process may take
substantially longer if the FDA has questions or concerns about a product or
studies regarding the product. In general, the FDA requires at least two
adequate and well-controlled clinical studies demonstrating efficacy with
sufficient levels of statistical assurance. However, additional support may be
required. The FDA also may request additional information relating to safety or
efficacy, such as long-term toxicity studies. In responding to a PLA or NDA, the
FDA may grant marketing approval, require additional testing and/or information
or deny the application. Accordingly, there can be no assurance about any
specific time frame for approval, if any, of products by the FDA. The FDA also
may require post-marketing testing and surveillance to monitor the safety record
of a product and its continued compliance with regulatory requirements.
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The facilities of each pharmaceutical manufacturer must be registered
with and approved by the FDA as compliant with the agency's good manufacturing
practice regulations ("GMP"). For biologics, except certain well-characterized
ones, this requires the filing of an establishment license application ("ELA")
that must be approved by the FDA for the facility in which the product is
maintained. While the ELA and PLA are separate documents, they must be submitted
at the same time and both documents must be approved before the sale of the
biologic. Continued registration also requires compliance with the FDA's GMP
regulations. Products must be formulated in accordance with the FDA's GMP
requirements and preclinical tests must be conducted by laboratories that comply
with FDA regulations governing the testing of drugs in humans and animals. In
order to comply with GMP, manufacturers must continue to expend time, money and
effort in production, record keeping and quality control. In addition,
manufacturers must comply with regulations promulgated by the United States Drug
Enforcement Administration and similar state and local regulatory authorities if
they handle controlled substances, and they must be registered with the United
States Environmental Protection Agency and similar state and local regulatory
authorities if they generate toxic or dangerous waste streams. The Company
asserts that the manufacture or use of IFN[alpha] does not pose an environmental
hazard. Other regulatory agencies, such as the Occupational Safety and Health
Administration, also monitor manufacturing facilities for compliance with
workplace safety regulations. Each of these organizations conducts periodic
establishment inspections to confirm continued compliance with its regulations.
Failure to comply with any of these regulations could mean fines, interruption
of production and even criminal prosecution.
For foreign markets, a pharmaceutical company is subject to regulatory
requirements, review procedures and product approvals which, generally, may be
as extensive, if not more extensive, as those in the United States. Although the
technical descriptions of the clinical trials are different, the trials
themselves are often substantially the same as those in the United States.
Approval of a product by regulatory authorities of foreign countries must be
obtained prior to commencing commercial product marketing in those countries,
regardless of whether FDA approval has been obtained. The time and cost required
to obtain market approvals in foreign countries may be greater than required for
FDA approval and may be subject to delay. There can be no assurance that
regulatory authorities of foreign countries will grant approval.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1998 and 1997, the Company incurred
expenses of $1,372,850 and $1,650,415, respectively, resulting from
Company-sponsored research and development activities. Research and development
is expected to remain a significant component of the Company's business. The
Company has arranged for others to perform substantially all of its clinical
research and intends to continue to do so while utilizing its staff for
monitoring such research. See also ITEM 6, "MANAGEMENT'S 1999 PLAN OF OPERATIONS
- - Research and Development".
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ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive and administrative offices are located at 800
West 9th Avenue, Amarillo, Texas in a 5,200 square foot facility owned by the
Company. The building contains offices, meeting rooms and a biologic storage
area. The Company believes that the facility is adequate for its present and
anticipated use. The facility is insured against hazards in the amount of its
market value.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Since August 8, 1996, the Company's common stock has traded on the
NASDAQ SmallCap Market under the symbol AMAR. The range of high and low sales
prices as quoted on the NASDAQ SmallCap Market for each quarter of 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
Quarter High Low High Low
------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
First 5.500 3.000 9.875 3.750
Second 5.375 2.750 4.500 3.375
Third 4.000 1.000 4.250 3.500
Fourth 2.250 .313 6.500 3.250
</TABLE>
As of March 5, 1999, the Company had 310 shareholders of record and
approximately 594 beneficial shareholders.
ITEM 6. MANAGEMENT'S 1999 PLAN OF OPERATIONS
The Company's Management has developed a Plan of Operations for 1999.
As a development stage company, the Company continues to engage in research and
development activities focused on developing biologics for the treatment of
human and animal diseases. The Company has not commenced any significant product
commercialization and, until such time as it does, will not generate significant
product revenues. The Company's accumulated deficit has continued to grow, from
$9,045,000 at December 31, 1997, to $11,378,000 at December 31, 1998. Operating
losses are expected to continue for the foreseeable future and until such time
as the Company is able to attain sales levels sufficient to support its
operations.
In 1999 the Company will continue its research and development
activities, as well as the activities necessary to develop commercial
partnerships and licenses. The Company's expenditure of financial resources in
1999 will fall principally into six broad categories, as follows: Research and
Development; Personnel; Consulting and Professional (other than legal and
accounting); Legal; Public Relations, Investor Relations, and Shareholder
Relations; and Liquidity Needs. The Company's expectations and goals with
respect to these categories are addressed separately below, by category:
RESEARCH AND DEVELOPMENT
Until it achieves commercial product sales, the Company's business is
research and development, and this is the area where the Company's principal
efforts will be expended in 1999. The Company has budgeted approximately $5.2
million for expenditure in 1999 on research and development, inclusive of
amounts to be expended on the Company's Phase III Sjogren's syndrome clinical
trial, which commenced at the end of 1998. A contract research organization is
managing the study.
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The budgeted amount for Research and Development in 1999 includes
approximately $250,000 for fibromyalgia studies, and approximately $100,000 for
other human clinical trials, which includes some final costs relating to
completed studies. Other indications which will receive attention by the Company
in 1999 are hepatitis B and the treatment of oral warts in HIV-infected
patients.
PERSONNEL
In addition to its intellectual property, the Company's principal
assets are its personnel. The Company has been successful in controlling its
personnel costs, both by maintaining its principal location in Amarillo, Texas,
and by ensuring maximum efficiency and utilization of existing personnel.
Important new management team members have been hired to complete the
progression from a research and development organization to a company with
commercially viable products. The Company has budgeted approximately $1 million
for personnel expenses in 1999, including salaries, payroll taxes, worker's
compensation insurance, directors and officers general liability insurance, and
group life, health, dental, and liability insurance.
At the present time, the President and CEO of the Company, Joseph M.
Cummins, is also serving as the Company's Chief Financial Officer. Management
foresees a need to recruit a qualified individual to serve the company in the
finance and accounting areas. The Company's 1999 personnel budget therefore
includes salary and fringe benefits for such a person.
CONSULTING AND PROFESSIONAL (EXCEPT LEGAL AND ACCOUNTING)
The Company has budgeted approximately $150,000 for expenditure on
professional consultants in 1999. Consulting fees are expected to be paid to the
Company's scientific advisory board; to certain directors who perform specific
consulting tasks at the Company's request; and to a number of independent
consultants, in connection with the operation of the Company. The Company will
continue to use the services of consultants to complement the Company's small
full-time staff, where such is a more efficient utilization of the Company's
resources.
LEGAL AND ACCOUNTING
Although the Company is not involved in litigation, it has budgeted
legal expenses of approximately $180,000 in 1999. Almost 40% of the Company's
legal expenditures will be for preparation and filing of patents and for
maintenance of existing patents in a number of countries. Other legal expenses
will be related to compliance with laws and regulations affecting public
companies, licensing and contracting, and general corporate matters. The Company
does not presently have an in-house legal staff, nor does it intend to put such
a staff in place in 1999. The Company will maintain Ernst & Young as its
auditors.
PUBLIC RELATIONS, INVESTOR RELATIONS AND SHAREHOLDER RELATIONS
The Company recognizes that its ability to raise capital will depend,
to some extent, upon its relations with both potential future investors and its
existing shareholders. In turn, such relationships are built upon the foundation
of adequate, timely, and comprehensible communications. Accordingly, the Company
has budgeted approximately $125,000 for expenditure on these items in 1999. The
expenditures will include payments to the Company's public relations
consultants, as well as the
12
<PAGE> 13
Company's expenses in attending a number of meetings with analysts and
institutional investors. The Company has also budgeted sufficient amounts to
maintain its comprehensive web site (www.amarbio.com).
LIQUIDITY NEEDS
The principal budget items discussed above, along with other
miscellaneous costs and expenses, will cause the Company to expend approximately
$6.8 million in 1999, including the substantial expense of the Company's Phase
III Sjogren's syndrome trial, and the additional personnel costs referred to
under "Personnel", above. At December 31, 1998, the Company had available cash
of $4,776,000. The Company will need to raise additional funds in order to
completely execute its 1999 Plan. Should a commitment for additional funds not
be obtained during the second quarter of 1999, the Company will take steps to
curtail clinical trial expenditures and to reduce staff and administrative
expenses. Management believes that based on the Company's ability to curtail
clinical trial expense and to reduce staff and administration expenses,
available funds are sufficient to meet its anticipated cash requirements for at
least the next twelve months.
THE YEAR 2000 ISSUE
ABI'S STATE OF READINESS
IT Systems. The Company owns relatively few information technology ("IT")
systems, consisting of approximately twelve (12) computers. The basic
input/output system ("BIOS") of each computer has been checked using publicly
available utilities designed for that purpose. With one exception, the BIOS of
each computer was found to be Year 2000 compliant. The non-compliant computer
was brought into compliance with software, and in a subsequent test, proved to
be Year 2000 compliant.
The software used on the computers owned by ABI is all commercially
available, off-the-shelf software; ABI does not own any custom-made software.
The Year 2000 compliance of each of the programs has been verified with the
vendors of those programs, and all software used by the Company is either Year
2000 compliant or compliant with minor issues.
Non-IT Systems. The Company does not own any machines (other than the computers
mentioned above) that contain microprocessors or microcontrollers. Therefore,
the Company does not need to assess or plan for Year 2000 issues pertaining to
non-IT systems.
Third Parties. The Company is investigating the Year 2000 preparedness of those
third parties with which it has a material relationship. As the principal
business of the Company is testing the effectiveness of new drugs, the Company
sees two categories of third-party Year 2000 issues.
First, the Company is investigating those third parties who are
essential in the production, packaging, and delivery of the test drugs
("clinical supplies") to the clinical trial sites. If any steps along the chain
of production of the drugs were interrupted by a Year 2000 issue, then the
supply of the clinical supplies to the clinical trial sites could be
interrupted. This would delay the clinical trials, and consequently delay
ultimate FDA approval for the drugs. The Company is in the
13
<PAGE> 14
process of investigating the Year 2000 preparedness of each of the companies
that plays a key role in the production, packaging, and distribution of the
drug.
Second, the Company is taking steps to insure that clinical trial data
is not lost due to a Year 2000 issue. This requires an investigation of the
company that is managing the clinical trial, as well as the procedures used at
the various clinical trial sites, and the process by which the clinical data is
stored and transmitted back to the Company. We have already had initial contact
with PPD Pharmaco, the clinical trial manager, and they assure us that they
expect full Year 2000 compliance by the end of the first quarter of 1999.
The Company has employed a consultant, Mr. James Corti, who is
responsible for assessing the Year 2000 preparedness of those third parties with
which the Company has a material relationship. While the responsiveness of those
third parties to our inquires is beyond the Company's control, we estimate that
Mr. Corti will conclude his Year 2000 assessment by the end of April, 1999.
The Company has not yet encountered any actual Year 2000 problems,
except for one computer BIOS (see "IT Systems", above), which was corrected with
publicly available shareware at no cost to the Company. The Company therefore
has not spent any money on remediation. All of the costs incurred to date have
been related to the investigation of potential Year 2000 issues. All of the Year
2000 related costs should be incurred before the end of April, 1999. We
anticipate that these costs will not exceed $10,000.
THE RISK OF THE COMPANY'S YEAR 2000 ISSUES
There are two ways in which the Company would be adversely affected by
a worst-case Year 2000 scenario.
First, Year 2000 problems could interrupt the supply of clinical
supplies to clinical testing sites. If clinical supplies became corrupted and
had to be replaced, or if the supplies otherwise became temporarily unavailable,
this would cause a 3-6 month delay in the clinical trial. Such a delay would
delay the ultimate profits to the Company from sales of the drug by the same
amount of time.
Second, a Year 2000 problem could result in damage to the clinical
trial data. Because the data is originally entered on hardcopy, that is, actual
pieces of paper, and because that hardcopy data is not destroyed, clinical trial
data can never by completely lost due to a Year 2000 problem. At most, the
computer data could be lost due to a Year 2000 problem, and the Company would
incur additional expense and delay to have the data re-entered from the original
hardcopies. The same is true for the study codes that reveal which trial
subjects used placebo: if a code were lost due to a computer error, then the
clinical trial data could be reconstructed from the hardcopies of the code kept
at the Company.
CONTINGENCY PLANS
Drug Supply. The Company has only one supplier for the drug itself, but does
have a second source for the processing and packaging of the drug into a usable
clinical trial form. The Company
14
<PAGE> 15
plans to establish a stockpile of each drug before beginning clinical trials.
This will provide a buffer against any possible interruption of supply due to a
Year 2000 problem. But stockpiling alone is not enough to guarantee a supply of
the drug during the clinical trials. In order to afford the greatest amount of
stability, clinical study supplies are refrigerated. Conceivably, a Year 2000
problem could cause the failure of the refrigeration system and ruin the supply
of the drug. Central storage of clinical supplies will be temporary only,
pending distribution to study sites, and will be at a location with adequate
backup systems, meaning those with the capability to generate electrical power
with fossil fuel fired generators, though the individual clinical trial sites
may not have these precautions. In the event of loss of trial supplies at one or
more trial sites, the Company will have the capability to replace such supplies,
within certain limits. Specifically, the Company orders 10% more of all clinical
supplies than will be required for conduct of the study, assays, and other
requirements. By way of example, the Company's Phase III Sjogren's syndrome
trial will involve 50 separate trial sites. Accordingly, the Company will have
sufficient clinical supplies to replace lost clinical supplies at five of those
trial sites. If the losses of clinical supplies exceeded that amount, the
Company would then be dependent upon its suppliers to replace such trial
supplies. If such suppliers had also experienced interruptions in their
manufacturing capability, the commencement of the trials at certain sites could
be delayed.
Data Integrity. Clinical trial data and the study codes used in the study will
be stored both in hardcopy form and on diskette. While the hardcopies should
provide the ultimate in data safety, the diskettes should also be safe from any
Year 2000 harm. The diskettes will provide a less expensive way of restoring
lost clinical trial data and study codes in the event of a Year 2000 problem.
FORWARD-LOOKING STATEMENTS
Certain statements made in this Plan of Operations and elsewhere in
this report are "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate
or imply future results, performance, achievements, costs or expenses and may
contain words such as "believe", "anticipate", "expect", "estimate", "project",
"budget", or words or phrases of similar meaning. Forward-looking statements
involve risks and uncertainties which may cause actual results to differ
materially from those projected in the forward-looking statements. Such risks
and uncertainties are detailed from time to time in reports filed by the Company
with the SEC, including Forms 8-K, 10-QSB and 10-KSB, and include among others
the following: promulgation and implementation of regulations by the U.S. Food
and Drug Administration ("USFDA"); promulgation and implementation of
regulations by foreign governmental instrumentalities with functions similar to
those of the USFDA; costs of research and development and clinical trials,
including without limitation, costs of clinical supplies, packaging and inserts,
patient recruitment, trial monitoring, trial evaluation, and publication; and
possible difficulties in enrolling a sufficient number of qualified patients for
certain clinical trials. The Company is also dependent upon a broad range of
general economic and financial risks, such as possible increases in the costs of
employing and/or retaining qualified personnel and consultants, possible Year
2000 issues, and possible inflation which might affect the Company's ability to
remain within its budget forecasts. The principal uncertainties to which the
Company is presently subject are its inability to ensure that the results of the
Sjogren's syndrome Phase III trial, or any other trials performed by the
Company, will be sufficiently favorable to ensure eventual regulatory approval
for commercial sales, and its inability to accurately budget at
15
<PAGE> 16
this time the possible costs associated with hiring and retaining of additional
personnel to assist the Company both with its finance and accounting functions.
The risks cited here are not exhaustive. Other sections of this report
may include additional factors which could adversely impact the Company's
business and future prospects. Moreover, the Company is engaged in a very
competitive and rapidly changing industry. New risk factors emerge from time to
time and it is not possible for management to predict all such risk factors, nor
can it assess the impact of all such risk factors on the Company's business, or
the extent to which any factor or combination of factors may cause actual
results to differ materially from those projected in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual future
events.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements of the Company are set forth beginning on page
F-1 immediately following the signature page of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
As of March 8, 1999, the directors and executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- ----- ---------------------------------
<S> <C> <C>
Joseph Cummins, DVM, PhD (1)(3).................... 56 Chairman of the Board, President,
Chief Executive Officer, Chief
Financial Officer and Director
Stephen Chen, PhD (2)(4)........................... 49 Director
James Cook (1)(3)(5)............................... 64 Director
Thomas D'Alonzo (1)(2)............................. 55 Director
Katsuaki Hayashibara (3)(4)(5)..................... 55 Director
Brian McLean, MD (3)(5)............................ 39 Director
Dennis Moore, DVM (1)(4)(5)........................ 52 Director
James Page, MD (1)(2)(5)........................... 72 Director
Kathleen L. Kelleher............................... 51 Chief Operating Officer, Vice
President Business Development
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
NAME Age Position
- --------------------------------------------------- ---- ----------------------------------
<S> <C> <C>
The following are not executive officers, but are expected by the Company to make a
significant contribution to the business:
Philip C. Fox, DDS................................. 51 Director Research and Development
John M. Smith...................................... 62 Director of Marketing and
International Business Development
Martin J. Cummins.................................. 32 Clinical Projects Director
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Finance Committee.
(4) Member of the Audit Committee.
(5) Member of the Stock Option Plans Administration Committee.
Joseph Cummins has been the Chairman of the Board of the Company since
he founded it in June 1984. Dr. Cummins has also served as President of the
Company since December 1994, and as Chief Financial Officer since October 1998.
He received a PhD degree in microbiology from the University of Missouri in 1978
and a doctor of veterinary medicine degree from Ohio State University in 1966.
Dr. Cummins has been conducting research concerning IFN since 1969.
Stephen Chen has been a director of the Company since February 1996. He
has been President and Chief Executive Officer of STC International, Inc., a
health care investment firm, since May 1992. From August 1989 to May 1992 he was
Director of Pharmaceutical Research and Development for the Ciba Consumer
Pharmaceuticals Division of Ciba-Geigy.
James Cook has been a director of the Company since 1988. He has been
President and Chief Executive Officer of the First National Bank of Arvada since
January 1992 and from April 1987 to December 1991 he was Executive Vice
President of First National Bank of Amarillo.
Thomas D'Alonzo has been a director of the Company since 1997. He has
been President of Pharmaceutical Product Development, Inc., a global clinical
research organization, since 1996, was President of GENVEC, Inc., from 1993 to
1996, and was President of Glaxo, Inc. from 1983 to 1993.
Katsuaki Hayashibara has been a director of the Company since 1994.
Mr. Hayashibara was named Director of the Overseas Business Development Division
of Hayashibara Company, Ltd. in January 1997. Prior to 1997, Mr. Hayashibara
served as Director of Research and Development for HBL.
Brian McLean has been a director of the Company since September 1996.
Dr. McLean is an M.D. and received an MBA degree from UCLA in 1992. He is a
partner in a venture capital firm in New York City.
Dennis Moore has been a director of the Company since 1986. Dr. Moore
has been a doctor of veterinary medicine since 1972 and was in private practice
from 1972 to 1995. Since 1995, Dr. Moore has been involved in managing his
personal investments.
17
<PAGE> 18
James Page has been a director of the Company since February 1996.
Prior to retiring in 1991 as a Vice President with Adria Laboratories, Inc., a
pharmaceutical company specializing in therapy given to cancer and AIDS
patients, Dr. Page held various upper management level positions with Carter
Wallace, Inc., Merck Sharpe & Dohme Research Laboratories and Wyeth
Laboratories.
Kathleen Kelleher has been an officer of the Company since January
1999. Ms. Kelleher holds a Bachelor's Degree and a Master's Degree in Biology.
In addition, she holds a MBA from the University of Chicago. Ms. Kelleher has
spent the last twenty years working in the pharmaceutical and biopharmaceutical
industry. She has held senior management positions in marketing, business
development, licensing, product planning, strategic marketing, strategic
planning and operations. Most recently, Ms. Kelleher was employed as senior
director of licensing at G.D. Searle, the pharmaceutical division of Monsanto.
Philip Fox joined Amarillo Biosciences as Director, Research and
Development in January 1999. Prior to that, he was at the National Institutes of
Health, National Institute of Dental and Craniofacial Research since 1976.
During his NIH tenure, he served as Clinical Director of the Intramural Research
Program, and Chief of the Clinical Investigations Section, Gene Therapy and
Therapeutics Branch. Dr. Fox is an oral/maxillofacial surgeon and a diplomate of
the American Board of Oral Medicine.
John Smith has been an officer of the Company since December 1998.
During a long career in pharmaceutical marketing, he has held senior
marketing/business development positions with Pfizer and Bristol-Myers Squibb as
well as small companies in the U.S., Europe, Indonesia, China and Hong Kong.
Martin Cummins has held several positions within Amarillo Biosciences
since joining the Company full-time in June 1992. Mr. Cummins currently oversees
all research studies involving human participants as Clinical Project Director.
The Company's directors are elected at the annual meeting of
shareholders to hold office until the annual meeting of shareholders for the
ensuing year or until their successors have been duly elected and qualified. The
Company pays directors who are not employees of the Company a fee of $1,000 per
regularly scheduled Board meeting attended, or $250 for participation in a
regularly scheduled Board meeting by conference telephone. The Company
reimburses all directors for their expenses in connection with their attendance
at such meetings.
Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
COMPLIANCE WITH SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires directors and officers of the Company and persons who
own more than 10 percent of the Company's common stock to file with the
Securities and Exchange Commission (the "Commission") initial reports of
ownership and reports of changes in ownership of the common stock. Directors,
officers and more than 10 percent shareholders are required by the Exchange Act
to furnish the Company with copies of all Section 16(a) forms they file.
18
<PAGE> 19
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the year ended December 31, 1998, all filings
applicable to its directors, officers and more than 10 percent beneficial owners
were timely filed.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth for the three years ended December 31,
1998 compensation paid by the Company to its Chairman of the Board, President
and Chief Executive Officer; to its former Executive Vice-President and Chief
Financial Officer and to its Director of Marketing and International Business
Development. None of the Company's other executive officers had annual salary
and bonus in excess of $100,000 for services rendered during any of the three
years ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
------------------------------------------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER COMPENSATION
- ------------------------------------------ ---- ----------------- ------------ --------------------
<S> <C> <C> <C> <C>
Dr. Joseph Cummins, Chairman --
of the Board, President and
Chief Executive Officer.............. 1998 $ 120,000 $ -- $
1997 120,000 20,000 12,000(3)
1996 120,000 -- 252,000(4)
Charles Hughes, Executive Vice-
President and Chief Financial
Officer (1).......................... 1998 -- -- --
1997 147,435 (2) -- 10,333(3)
1996 75,000 10,000 157,575(5)
John Smith, Director of Marketing
and International Business
Development.......................... 1998 100,000 - --
</TABLE>
(1) Mr. Hughes terminated his employment with the Company on September 8, 1997.
(2) Includes both 1997 salary and severance payments.
(3) Represents a Company contribution to the Simplified Employee Pension Plan.
(4) Represents the value of 30,000 shares of common stock issued at $5.00 per
share and payment of withholding tax requirements in settlement of
restricted stock grants and a Company contribution of $12,000 to the
Simplified Employee Pension Plan.
(5) Represents the value of 19,000 shares of common stock issued at $5.00 per
share and payment of withholding tax requirements in settlement of
restricted stock grants and a Company contribution of $7,500 to the
Simplified Employee Pension Plan.
19
<PAGE> 20
OPTION GRANTS IN 1998
The following table sets forth certain information relating to options
granted in 1998 to the executive officers named above, to purchase shares of
common stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON STOCK % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED(#) IN 1997 ($/SH) DATE
- ----------------------------------------- ------------ --------------- ----------- ----------
<S> <C> <C> <C> <C>
John Smith............................... 40,000 67.8% $1.75 (1) 09/13/2008
</TABLE>
(1) The fair market value of the common stock on the date of the grant.
AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1998
AND YEAR-END OPTION VALUES
The following table sets forth information for the executive officers
named above, regarding the exercise of options during 1998 and unexercised
options held at the end of 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF VALUE OF UNEXERCISED
COMMON STOCK UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS AT OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1998(#) DECEMBER 31, 1998($)(1)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------- ------------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Joseph Cummins -- -- 5,500 / 9,000 None / None
John Smith - - - / 40,000 None / None
</TABLE>
(1) Calculated based on the closing price of the common stock ($1.25) as
reported by NASDAQ on December 30, 1998.
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
<TABLE>
<CAPTION>
Cash Compensation Security Grants
------------------------------------ ---------------
NUMBER OF
SECURITIES
MEETING CONSULTING UNDERLYING
NAME FEES(1) FEES(2) OPTIONS
- ----------------------------------------------------- ----------- ------------ -------------
<S> <C> <C> <C>
Stephen Chen, PhD $ 2,000 $ 45,950 5,000
James Cook 2,000 3,000 5,000
Thomas D'Alonzo 2,000 - 5,000
Katsuaki Hayashibara 2,000 -- 5,000
Brian McLean, MD 2,000 -- 5,000
Dennis Moore, DVM 2,000 4,500 5,000
James Page, MD 1,000 1,200 5,000
</TABLE>
(1) Each director receives a fee of $1,000 for in-person attendance at each
regular directors' meeting.
(2) Each director receives $1,200 per day for employment on special projects or
assignments.
20
<PAGE> 21
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
As of December 31, 1998, there were 5,414,232 shares of the Company's
common stock outstanding. The following table sets forth as of December 31,
1998, the beneficial ownership of each person who owns more than 5% of such
outstanding common stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF TOTAL
- ----------------------------------------------- ---------------- ----------------
<S> <C> <C>
Hayashibara Biochemical Laboratories, Inc.
2-3 Shimoishii 1-chome
Okayama 700, Japan 1,232,856 22.8
Dr. Joseph Cummins
800 West 9th Avenue
Amarillo, Texas 79101 676,814(1) 12.5
Mesa Operating Limited Partnership
P.O. Box 2009
Amarillo, Texas 79189-2009 315,120 5.8
Mochida Pharmaceutical Co., Ltd.
7, Yotsuya 1-chome
Shinjuku-Ku
Tokyo 160, Japan 300,000 5.5
</TABLE>
(1) Includes an aggregate of 337,668 shares of common stock held by Joseph
Cummins as trustee under certain trusts for the benefit of his children
and 10,590 shares owned by Dr. Cummins' wife.
The following table sets forth the beneficial ownership of the Company's
stock as of December 31, 1998 by each director, and by all executive officers
and directors as a group:
<TABLE>
<CAPTION>
DIRECTORS NUMBER OF SHARES PERCENT OF TOTAL
- --------------------------------------------- ---------------- ----------------
<S> <C> <C>
Joseph Cummins 676,814(1) 12.5
Dennis Moore 149,616 2.8
James Cook 66,600(2) 1.2
Katsuaki Hayashibara 48,240 1.0
Stephen Chen 7,900 *
Thomas D'Alonzo 3,000 *
Brian McLean -- --
James Page -- --
Total Group (all directors and 952,170 17.5
executive officers - 8 persons)
</TABLE>
* Less than 1%
(1) Includes an aggregate of 337,668 shares of common stock held by Joseph
Cummins as trustee under certain trusts for the benefit of his children and
10,590 shares owned by Dr. Cummins' wife.
(2) All of such shares are owned jointly with Mr. Cook's wife.
21
<PAGE> 22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has relied significantly on HBL, the largest shareholder of
the Company, for a substantial portion of its capital requirements. From 1989 to
1996, HBL has provided an aggregate of $9,000,000 of funding pursuant to the
Development Agreement, purchased from the Company an aggregate of 661,620 shares
of common stock for a total purchase price of $2,444,300 and made loans to the
Company aggregating $3,600,000, of which $1,000,000 loaned after March 31, 1996
was repaid simultaneously with the consummation of the IPO. As of December 31,
1998, the outstanding amount of the Company's indebtedness to HBL (including
accrued interest) was $2,808,356. HBL owns 1,232,856 shares, approximately 23%
of the Company's common stock. In addition to the Development Agreement, HBL and
the Company are parties to various license and manufacturing and supply
agreements pursuant to which the Company licenses certain technology to or from
HBL and HBL supplies formulations of its IFN[alpha] to the Company.
Pursuant to a Stock Purchase Agreement entered into in September 1987
between the Company and Mesa, Inc. ("Mesa"), which owns 315,120 shares of common
stock, the Company has agreed that for as long as Mesa is a shareholder of the
Company, the Company shall not without the prior written approval of Mesa engage
in any repurchase or redemption of its issued and outstanding shares of common
stock, unless such repurchase or redemption is offered, pro rata, to all then
existing shareholders.
During the years ended December 31, 1998 and 1997, the Company paid
$74,000 and $88,000, respectively, for legal services rendered by Morris, Moore,
Moss and Douglass, P.C. Edward Morris, the Secretary of the Company, is a member
of such firm.
Although the Company believes that the foregoing transactions were on
terms no less favorable to the Company than would have been available from
unaffiliated third parties in arm's length transactions, there can be no
assurance that this is the case. All future transactions and loans between the
Company and its officers, directors and 5% shareholders will be on terms no less
favorable to the Company than could be obtained from independent third parties.
There can be no assurance, however, that future transactions or arrangements
between the Company and its affiliates will be advantageous, that conflicts of
interest will not arise with respect thereto or that if conflicts do arise, that
they will be resolved in favor of the Company.
22
<PAGE> 23
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------------- ---------------------------------------------------------------------------
<S> <C>
3.1* Restated Articles of Incorporation of the Company.
3.2* Articles of Amendment of Restated Articles of Incorporation of the Company.
3.3* Bylaws of the Company.
4.1* Specimen Common Stock Certificate.
4.2* Form of Underwriter's Warrant.
10.1* Agreement dated as of April 1, 1984 between University Patents, Inc. and the
Company.
10.2* License Agreement dated as of March 22, 1988 between the Company and The Texas
A&M University System.
10.3* License Agreement dated October 20, 1989 between the Company and ISI.
10.4* Manufacturing and Supply Agreement dated October 20, 1989 between the Company
and ISI.
10.5* Joint Development and Manufacturing/Supply Agreement dated March 13, 1992
between the Company and HBL, as amended.
10.6* Amended and Restated Agreement dated as of November 24, 1992 between Mitsubishi
and the Company.
10.7* Japan Animal Health License Agreement dated January 20, 1993 between the
Company and HBL.
10.9* Employment Agreement dated as of March 4, 1994 between the Company and Dr.
Joseph M. Cummins, as amended.
10.11* Manufacturing/Supply Agreement dated June 1, 1994 between the Company and
HBL.
10.12* Settlement Agreement dated April 27, 1995 among the Company, ISI,
Pharma Pacific
Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and
Fernz Corporation Limited.
10.13* Amendment of ACC/ISI License Agreement dated April 27, 1995 between the
Company and ISI.
10.14* PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the
Company.
10.15* License and Supply Agreement dated July 10, 1995 between Veldona Africa, Inc.
("VAF") and Innovative Therapeutics, Ltd. ("ITL").
10.16* Pricing Amendment, dated December 5, 1995 between VAF and ITL.
10.18* Form of Consulting Agreement between the Company and the Underwriter.
10.19* Research Agreement dated March 25, 1996 between the Company and Ajinomoto Co.,
Inc.
10.20 1996 Employee Stock Option Plan, Amended and Restated as of September 12, 1998.
10.21 Outside Director and Advisor Stock Option Plan, Amended and Restated as of
September 12, 1998.
</TABLE>
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<PAGE> 24
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- -------------- ---------------------------------------------------------------------------
<S> <C>
10.22* Form of Indemnification Agreement between the Company and officers and directors
of the Company.
10.23* Indemnification Agreement between HBL and the Company.
10.24* Stock Purchase Agreement dated as of September 21, 1987 between Mesa Operating
Limited Partnership and the Company.
10.26** License Agreement dated July 22, 1997, between Hoffmann-La Roche Inc., and the
Company.
10.27** Distribution Agreement dated January 12, 1998, between Global Damon
Pharmaceutical and the Company.
10.28** Distribution Agreement dated September 17, 1997, between HBL and the Company
(TNF-A).
10.29** Distribution Agreement dated September 17, 1997, between HBL and the Company
(IFN-G).
10.30 Amendment No. 1 dated September 28, 1998 to License Agreement of March 22,
1988, between The Texas A&M University System and the Company.
10.31 Employment Agreement dated as of November 29, 1998 between the Company and
Kathleen L. Kelleher.
10.32 Employment Agreement dated as of September 14, 1998 between the Company and
Dr. Philip C. Fox.
10.33 Employment Agreement dated as of September 14, 1998 between the Company and
John Smith.
10.34 Engagement Agreement dated as of October 15, 1998 between Trust Company of the
South and the Company.
21. Subsidiaries of the Company. The following sets forth the name
and jurisdiction of incorporation of each subsidiary of the
Company. All of such subsidiaries are wholly-owned by the
Company.
</TABLE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
----------------------------- -----------------------------
<S> <C>
VANGUARD BIOSCIENCES, INC. TEXAS
VELDONA USA, INC. TEXAS
VELDONA AFRICA, INC. TEXAS
VELDONA POLAND, INC. TEXAS
ABI TAIWAN, INC. TEXAS
AMARILLO CELL OF CANADA, INC. TEXAS
27. Financial Data Schedule
</TABLE>
*The Exhibit is incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form SB-2 filed with and declared
effective by the Commission (File No. 333-4413) on August 8, 1996.
**The Exhibit is incorporated by reference to the Company's 1997 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1998.
24
<PAGE> 25
REPORTS ON FORM 8-K
No reports on Form 8-K have been filed for the quarter ended December
31, 1998.
25
<PAGE> 26
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.
AMARILLO BIOSCIENCES, INC.
By: /s/ JOSEPH M. CUMMINS
--------------------------------------------
Joseph M. Cummins, Chairman of the Board,
President, Chief Financial Officer and Chief
Executive Officer
Date: March 26, 1999
-------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ JOSEPH M. CUMMINS March 26, 1999
- --------------------------------------- Chairman of the Board, ------------------------------
Joseph M. Cummins President, Chief Financial
Officer, Director and
Chief Executive Officer
/s/ JAMES COOK March 26, 1999
- --------------------------------------- Director ------------------------------
James Cook
/s/ DENNIS MOORE March 26, 1999
- --------------------------------------- Director ------------------------------
Dennis Moore
/s/ JAMES PAGE March 26, 1999
- --------------------------------------- Director ------------------------------
James Page
/s/ BRIAN MCLEAN March 26, 1999
- --------------------------------------- Director ------------------------------
Brian McLean
</TABLE>
<PAGE> 27
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Financial Statements
Year ended December 31, 1998
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors ...................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets ......................................F-2
Consolidated Statements of Operations.............................F-3
Consolidated Statements of Stockholders' Equity (Deficit).........F-4
Consolidated Statements of Cash Flows ............................F-7
Notes to Consolidated Financial Statements........................F-9
</TABLE>
<PAGE> 28
Report of Independent Auditors
The Board of Directors
Amarillo Biosciences, Inc.
We have audited the accompanying consolidated balance sheets of Amarillo
Biosciences, Inc. and subsidiaries (companies in the development stage) as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended. 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. The financial statements for the period June 25,
1984, (inception) through December 31, 1991, were audited by other auditors
whose report dated July 12, 1992, which has been furnished to us, expressed an
unqualified opinion on those statements. The financial statements for the period
June 25, 1984, (inception) through December 31, 1991, include total revenues and
net loss of $643,566 and $3,901,236, respectively. Our opinion on the statements
of operations, stockholders' equity (deficit), and cash flows for the period
June 25, 1984, (inception) through December 31, 1998, insofar as it relates to
amounts for prior periods through December 31, 1991, is based solely on the
report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Amarillo Biosciences, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for the years then ended, and the period
from June 25, 1984 (inception) through December 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Dallas, Texas
February 11, 1999
F-1
<PAGE> 29
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,776,328 $ 879,170
Marketable securities -- 6,007,182
Other current assets 43,415 70,779
------------ ------------
Total current assets 4,819,743 6,957,131
Property and equipment, net 116,761 125,179
Patent license, net of accumulated amortization of $81,177
and $73,824 in 1998 and 1997, respectively 43,823 51,176
Organizational costs, net of accumulated amortization of
$6,084 and $4,962 in 1998 and 1997, respectively -- 1,122
Investment in ISI common stock 5,735 114,023
------------ ------------
Total assets $ 4,986,062 $ 7,248,631
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 88,920 $ 74,754
Accrued interest expense 208,356 91,356
Accrued legal expense 1,609 28,341
Accrued vacation 19,000 19,000
Other accrued expense 113 617
------------ ------------
Total current liabilities 317,998 214,068
Notes payable 2,600,000 2,600,000
------------ ------------
Total liabilities 2,917,998 2,814,068
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value:
Authorized shares -10,000,000
Issued shares- 5,414,232 in 1998 and 1997 54,142 54,142
Additional paid-in capital 13,392,138 13,392,138
Deficit accumulated during the development stage (11,378,216) (9,045,415)
Accumulated other comprehensive income -- 33,698
------------ ------------
Total stockholders' equity 2,068,064 4,434,563
------------ ------------
Total liabilities and stockholders' equity $ 4,986,062 $ 7,248,631
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE> 30
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
CUMULATIVE
FROM JUNE 25,
1984
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Contract revenues $ -- $ -- $ 9,000,000
Interferon sales -- 396 420,974
Interest income 296,819 411,700 1,414,637
Sublicense fees -- -- 113,334
Royalty income -- -- 31,544
Gain (loss) on sale of ISI stock (74,590) 188,562 113,972
Other 60 52,000 604,431
------------ ------------ ------------
222,289 652,658 11,698,892
Expenses:
Research and development expenses 1,372,850 1,650,415 11,352,444
Selling, general, and administrative
expenses 1,065,240 1,355,435 10,872,720
Interest expense 117,000 118,060 816,944
------------ ------------ ------------
2,555,090 3,123,910 23,042,108
------------ ------------ ------------
Loss before income taxes (2,332,801) (2,471,252) (11,343,216)
Income tax expense -- -- 35,000
------------ ------------ ------------
Net loss $ (2,332,801) $ (2,471,252) $(11,378,216)
============ ============ ============
Basic and diluted net loss per share $ (0.43) $ (0.46)
============ ============
Weighted average shares outstanding 5,414,232 5,414,232
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 31
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Statements of Stockholders' Equity (Deficit)
Cumulative from June 25, 1984 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
ISSUANCE ------------------------- PAID IN DEVELOPMENT
PRICE SHARES AMOUNT CAPITAL STAGE
---------- ---------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C>
1984
Initial issuance for cash $ 0.29 84,000 $ 840 $ 23,660 $ --
Initial issuance in exchange for legal fees 0.29 30,000 300 8,450 --
Initial issuance in exchange for services
research and development costs and 0.01 1,086,000 10,860 (9,955) --
1985
Issuance for cash 0.83 102,000 1,020 83,980 --
Issuance in exchange for professional fees
salaries and research services 0.83 10,800 108 8,892 --
1986
Issuance in exchange for professional fees
salaries and services 0.83 22,800 228 18,772 --
Treasury stock purchase; 11,040 shares at cost -- -- -- --
Issuance for cash 0.83-1.25 182,352 1,824 154,626 --
Issuance in exchange for professional fees
salaries and research services 0.83 19,020 190 15,660 --
1987
Issuance for cash 1.25-2.08 309,648 3,096 445,974 --
Treasury stock purchase; 2,400 shares at cost -- -- -- --
1988
Issuance for cash 1.88 120,972 1,210 225,613 --
1989
Issuance for cash 2.08 2,568 26 5,324 --
Issuance for cash 2.50 227,748 2,277 567,093 --
1990
Issuance for cash 1.72-2.50 592,584 5,926 1,108,634 --
Issuance for cash 4.17 174,000 1,740 723,260 --
Issuance in exchange for note receivable from
stockholder 2.50 54,540 545 135,805 --
1991
Repayment of note receivable from stockholder -- -- -- --
Net loss and total comprehensive loss cumulative
from June 25, 1984 (inception) through
December 31, 1991 -- -- -- (3,901,236)
<CAPTION>
NOTE
UNREALIZED RECEIVABLE TOTAL
GAIN (LOSS) FROM TREASURY STOCKHOLDERS'
ON INVESTMENT STOCKHOLDER STOCK EQUITY
------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
1984
Initial issuance for cash $ -- $ -- $ -- $ 24,500
Initial issuance in exchange for legal fees -- -- -- 8,750
Initial issuance in exchange for services
research and development costs and -- -- -- 905
1985
Issuance for cash -- -- -- 85,000
Issuance in exchange for professional fees
salaries and research services -- -- -- 9,000
1986
Issuance in exchange for professional fees
salaries and services -- -- -- 19,000
Treasury stock purchase; 11,040 shares at cost -- -- (22,500) (22,500)
Issuance for cash -- -- -- 156,450
Issuance in exchange for professional fees
salaries and research services -- -- -- 15,850
1987
Issuance for cash -- -- -- 449,070
Treasury stock purchase; 2,400 shares at cost -- -- (3,500) (3,500)
1988
Issuance for cash -- -- -- 226,823
1989
Issuance for cash -- -- -- 5,350
Issuance for cash -- -- -- 569,370
1990
Issuance for cash -- -- -- 1,114,560
Issuance for cash -- -- -- 725,000
Issuance in exchange for note receivable from
stockholder -- (136,350) -- --
1991
Repayment of note receivable from stockholder -- 136,350 -- 136,350
Net loss and total comprehensive loss cumulative
from June 25, 1984 (inception) through
December 31, 1991 -- -- -- (3,901,236)
</TABLE>
F-4
<PAGE> 32
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Statements of Stockholders' Equity (Deficit)
Cumulative from June 25, 1984 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
ISSUANCE -------------------------- PAID IN DEVELOPMENT
PRICE SHARES AMOUNT CAPITAL STAGE
---------- ---------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1992
Net loss and total comprehensive loss for year
ended December 31, 1992 -- $ -- $ -- $ (505,558)
--------- --------- ------------- ------------
Balance at December 31, 1992 3,019,032 30,190 3,515,788 (4,406,794)
1993
Net loss and total comprehensive loss for year
ended December 31, 1993 -- -- -- (108,363)
--------- --------- ------------- ------------
Balance at December 31, 1993 3,019,032 30,190 3,515,788 (4,515,157)
1994
Net loss and total comprehensive loss for year
ended December 31, 1994 -- -- -- (129,239)
Adjustment to unrealized loss on investments -- -- -- --
Total comprehensive loss
--------- --------- ------------- ------------
Balance at December 31, 1994 3,019,032 30,190 3,515,788 (4,644,396)
1995
Issuance for stock grant 2.50 29,640 297 73,803 --
Net loss for year ended December 31, 1995 -- -- -- (311,579)
Adjustment to unrealized loss on investments -- -- -- --
Total comprehensive loss
--------- --------- ------------- ------------
Balance at December 31, 1995 3,048,672 30,487 3,589,591 (4,955,975)
1996
Issuance for cash 5.00 2,300,000 23,000 9,354,502 --
Issuance for stock grant 5.00 79,000 790 394,210 --
Warrants issued for cash -- -- 200 --
Cancellation of treasury stock (13,440) (135) (25,865) --
Net loss for year ended December 31, 1996 -- -- -- (1,618,188)
Adjustment to unrealized loss on investments -- -- -- --
Total comprehensive loss
--------- --------- ------------- ------------
Balance at December 31, 1996 5,414,232 54,142 13,312,638 (6,574,163)
1997
Net loss for year ended December 31, 1997 -- -- -- (2,471,252)
Adjustment to unrealized gain (loss) on investment -- -- -- --
Total comprehensive loss
Options issued for professional services -- -- 79,500 --
--------- --------- ------------- ------------
Balance at December 31, 1997 5,414,232 $ 54,142 $ 13,392,138 $ (9,045,415)
========= ========= ============= ============
<CAPTION>
NOTE
UNREALIZED RECEIVABLE TOTAL
GAIN (LOSS) FROM TREASURY STOCKHOLDERS'
ON INVESTMENT STOCKHOLDER STOCK EQUITY
------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
1992
Net loss and total comprehensive loss for year
ended December 31, 1992 $ -- $ -- $ -- $ (505,558)
--------- --------- --------- ---------------
Balance at December 31, 1992 -- -- (26,000) (886,816)
1993
Net loss and total comprehensive loss for year
ended December 31, 1993 -- -- -- (108,363)
--------- --------- --------- ---------------
Balance at December 31, 1993 -- -- (26,000) (995,179)
1994
Net loss and total comprehensive loss for year
ended December 31, 1994 -- -- -- (129,239)
Adjustment to unrealized loss on investments (57,316) -- -- (57,316)
---------------
Total comprehensive loss (186,555)
--------- --------- --------- ---------------
Balance at December 31, 1994 (57,316) -- (26,000) (1,181,734)
1995
Issuance for stock grant -- -- -- 74,100
Net loss for year ended December 31, 1995 -- -- -- (311,579)
Adjustment to unrealized loss on investments 57,316 -- -- 57,316
---------------
Total comprehensive loss (254,263)
--------- --------- --------- ---------------
Balance at December 31, 1995 -- -- (26,000) (1,361,897)
1996
Issuance for cash -- -- -- 9,377,502
Issuance for stock grant -- -- -- 395,000
Warrants issued for cash -- -- -- 200
Cancellation of treasury stock -- -- 26,000 --
Net loss for year ended December 31, 1996 -- -- -- (1,618,188)
Adjustment to unrealized loss on investments (3,500) -- -- (3,500)
---------------
Total comprehensive loss (1,621,688)
--------- --------- --------- ---------------
Balance at December 31, 1996 (3,500) -- -- 6,789,117
1997
Net loss for year ended December 31, 1997 -- -- -- (2,471,252)
Adjustment to unrealized gain (loss) on investment 37,198 -- -- 37,198
---------------
Total comprehensive loss (2,434,054)
---------------
Options issued for professional services -- -- -- 79,500
--------- --------- --------- ---------------
Balance at December 31, 1997 $ 33,698 $ -- $ -- $ 4,434,563
========= ========= ========= ===============
</TABLE>
F-5
<PAGE> 33
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Statements of Stockholders' Equity (Deficit)
Cumulative from June 25, 1984 (Inception) through December 31, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE
ISSUANCE ----------------------- PAID IN DEVELOPMENT
PRICE SHARES AMOUNT CAPITAL STAGE
---------- ---------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net loss for year ended December 31, 1998 -- $ $ -- $ -- $ (2,332,801)
Adjustment to unrealized gain (loss) on investment -- -- -- --
Total comprehensive loss --------- ---------- -------------- --------------
Balance at December 31, 1998 5,414,232 $ 54,142 $ 13,392,138 $ (11,378,216)
========= ========== ============== ==============
<CAPTION>
NOTE
UNREALIZED RECEIVABLE TOTAL
GAIN (LOSS) FROM TREASURY STOCKHOLDERS'
ON INVESTMENT STOCKHOLDER STOCK EQUITY
------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
Net loss for year ended December 31, 1998 $ -- $ -- $ -- $ (2,332,801)
Adjustment to unrealized gain (loss) on investment (33,698) -- -- (33,698)
---------------
Total comprehensive loss (2,366,499)
------------- ----------- ---------- ---------------
Balance at December 31, 1998 $ -- $ -- $ -- $ 2,068,064
============= =========== ========== ===============
</TABLE>
See accompanying notes.
F-6
<PAGE> 34
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE
FROM JUNE 25,
1984
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (2,332,801) $ (2,471,252) $ (11,378,216)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss on impairment of ISI stock 74,590 -- 74,590
Depreciation 19,486 21,388 190,466
Amortization 8,475 7,648 92,217
Discount on investment in ISI -- (125,325) 24,675
Recognition of deferred sub-license
fees -- -- (32,844)
Organization costs -- (1,087) (11,040)
Gain (loss) on sale of assets -- 1,002 (7,373)
Common stock issued for stock grant -- -- 469,100
Common stock issued for services -- -- 53,505
Options issued for services -- 79,500 79,500
Changes in operating assets and liabilities:
Other current assets 27,364 36,756 (43,415)
Accounts payable 14,166 (63,544) 88,920
Accrued expenses 89,764 (199,339) 229,078
------------- ------------- -------------
Net cash used in operating activities (2,098,956) (2,714,253) (10,170,837)
INVESTING ACTIVITIES
Sale (purchase) of marketable
securities 6,007,182 (22,812) --
Capital expenditures (11,068) (12,688) (322,925)
Proceeds from sale of equipment -- 9,626 23,071
Purchase of patent license -- -- (125,000)
Sale of (investment in) ISI common
stock -- 520,000 (105,000)
------------- ------------- -------------
Net cash used in investing activities $ 5,996,114 $ 494,126 $ (529,854)
</TABLE>
F-7
<PAGE> 35
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
CUMULATIVE
FROM JUNE 25,
1984
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Receipt of sub-license fees $ -- $ -- $ 32,844
Proceeds from notes payable -- 300,000 2,600,000
Repayment of note receivable from
stockholder for purchase of common
stock -- -- 136,350
Issuance of common stock -- -- 12,733,825
Acquisition of treasury stock -- -- (26,000)
------------- ------------- -------------
Net cash provided by financing
activities -- 300,000 15,477,019
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents 3,897,158 (1,920,127) 4,776,328
Cash and cash equivalents at
beginning of period 879,170 2,799,297 --
------------- ------------- -------------
Cash and cash equivalents at end of
period $ 4,776,328 $ 879,170 $ 4,776,328
============= ============= =============
SUPPLEMENTAL INFORMATION
Cash paid for income taxes $ -- $ -- $ 37,084
============= ============= =============
Cash paid for interest $ -- $ -- $ 6,466
============= ============= =============
</TABLE>
See accompanying notes.
F-8
<PAGE> 36
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES
ORGANIZATION
Amarillo Biosciences, Inc. (the Company), is a development stage company,
developing and marketing within the United States and internationally
applications of low dose oral IFN[alpha] in both humans and animals. The Company
is currently conducting clinical studies as part of the process of obtaining
regulatory approval from the United States Food and Drug Administration (FDA),
so that commercial marketing can begin in the United States.
The Company's viability is dependent upon successful commercialization of
products resulting from its research and product development activities. All of
the Company's products will require significant additional development,
laboratory and clinical testing and investment prior to obtaining regulatory
approval to commercially market its product(s). Accordingly, for at least the
next few years, the Company will continue to incur research and development and
general and administrative expenses and likely will not generate sufficient
revenues from product sales to support its operations.
The Company has been dependent upon financing from its stockholders. The
Company's development-stage-through-1991 activities were financed primarily
through the issuance of common stock. From 1991 to August 1996, such activities
were financed under an agreement (described in Note 4) with a major stockholder.
In August 1996, the Company completed its initial public offering receiving net
proceeds of approximately $9,378,000.
The Company's 1999 Plan of Operations calls for the Company to expend
approximately $6.8 million in 1999, including the substantial expense of the
Company's Phase III Sjogren's syndrome trial (see "Management's 1999 Plan of
Operations" elsewhere herein). At December 31, 1998, the Company had available
cash of $4,776,000. The Company will need to raise additional funds in order to
completely execute its 1999 Plan. The Company is presently negotiating with a
major investor in an attempt to raise additional funds. Should a commitment for
additional funds not be obtained during the second quarter of 1999, the Company
will take steps to curtail clinical trial expenditures and to reduce staff and
administrative expenses. Management believes that based on the Company's ability
to curtail clinical trial expense and to reduce staff and administration
expenses, available funds are sufficient to meet its anticipated cash
requirements for at least the next twelve months.
The Company has no current arrangements with respect to further sources of
financing and there can be no assurance that any of its officers, directors or
stockholders (including the major stockholder) will provide any portion of the
Company's future financing requirements.
F-9
<PAGE> 37
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED)
The possible inability to obtain further financing would have a material adverse
effect on the Company, including possibly requiring the Company to cease
operations.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Amarillo Cell of Canada, Inc.,
Veldona Africa, Inc., Veldona Poland, Inc., Veldona USA, Inc., Vanguard
Biosciences, Inc. and ABI Taiwan, Inc. (all Texas corporations). All significant
intercompany balances and transactions have been eliminated in consolidation.
The effect of translation of foreign currencies is not material.
MARKETABLE SECURITIES AND INVESTMENT IN ISI COMMON STOCK
Marketable securities and the investment in ISI common stock are classified as
held-to-maturity and available-for-sale, respectively. Held-to-maturity
securities are carried at amortized cost and matured in September 1998.
Available-for-sale securities are carried at fair value, with any unrealized
gain or loss reported as a separate component of stockholders' equity.
CONCENTRATION OF CREDIT RISK
At December 31, 1998, the Company's cash equivalents were invested principally
in money market accounts, a substantial portion of which are uninsured.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
methods that approximate the declining balance method over the estimated useful
lives of the assets.
PATENT LICENSE
The patent license represents payments made under one of the license agreements
described in Note 5. The agreement remains in effect over the life of the
underlying patents. Accordingly, the patent license fee is being amortized over
17 years using the straight-line method.
F-10
<PAGE> 38
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED)
INCOME TAXES
The Company files a consolidated income tax return with its domestic
subsidiaries, Amarillo Cell of Canada, Inc., Veldona Africa, Inc., Veldona
Poland, Inc., Veldona USA, Inc., Vanguard Biosciences, Inc. and ABI Taiwan, Inc.
On January 1, 1993, the Company changed its method of accounting for income
taxes from the deferred method to the liability method required by Statement of
Financial Accounts Standards No. 109, Accounting for Income Taxes (Statement No.
109). As permitted by the new rules, prior years' financial statements have not
been restated. The effect of adopting Statement No. 109 was not material.
REVENUE RECOGNITION
Contract revenue for research and development performed under the manufacturing
and supply agreement with Hayashibara Biochemical Laboratories, Inc. (HBL) (see
Note 4) was recorded as earned based on research and administrative costs
incurred. Amounts received in advance of services to be performed were recorded
as deferred revenue until expenses were incurred. The remaining balance of all
contract revenue received from HBL was recorded as earned in 1996.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
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.
STOCK SPLIT
In May 1993, the Company approved a ten-for-one stock split for all issued and
outstanding shares. As described in Note 7, during 1996 a six-for-five stock
split was effected. All references to common stock and per share data have been
restated to give effect to these splits.
F-11
<PAGE> 39
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation utilizing Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). In October 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 123, Accounting for Stock Based
Compensation (SFAS 123). Under the provisions of SFAS 123, the Company has
elected to continue to apply the provisions of APB 25 to its stock-based
compensation arrangements and provide supplementary financial statement
disclosures as required under SFAS 123.
BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is based on the number of weighted average shares
outstanding. The effect of warrants and options outstanding (see Note 7) is
anti-dilutive.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130 (Statement 130), Reporting Comprehensive Income. Statement 130
establishes new rules for the display of comprehensive income and its
components; however, the adoption of this Statement had no impact on the
Company's results of operations or shareholders' equity. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale securities, which
prior to adoption were reported separately in shareholders' equity, to be
included in other comprehensive income. Prior year financial statements have
been reclassified to conform to the requirements of Statement 130.
2. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
<S> <C> <C>
Land $ 8,000 $ 8,000
Building 94,532 94,532
Furniture and equipment 128,157 117,943
Automobile 13,688 13,688
-------- --------
244,377 234,163
Less accumulated depreciation 127,616 108,984
-------- --------
$116,761 $125,179
======== ========
</TABLE>
F-12
<PAGE> 40
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
3. NOTES PAYABLE
In September 1991 the Company borrowed $1,000,000 under a note payable agreement
with HBL. In September 1992, the Company borrowed an additional $1,000,000 under
a similar note agreement with HBL. The $1,000,000 note plus accrued interest of
$300,000 due September 25, 1996 was renewed in a new note to HBL for $1,300,000
due September 25, 2001 which accrues interest at the rate of 4 1/2%. The
$1,000,000 note plus accrued interest of $300,000 due September 16, 1997 was
renewed in a new note to HBL for $1,300,000 due September 16, 2002 which accrues
interest at the rate of 4 1/2%. Each of the notes provide that the principal and
accrued interest be paid only from 10% of the Company's gross revenues from
sales of interferon. All payments are to be applied first to accrued interest.
As repayment of the notes is dependent on future sales, management is unable to
estimate the fair value of the notes at December 31, 1998. Because material
amounts of sales are not expected in the next twelve months, the notes continue
to be classified as non-current liabilities.
4. MANUFACTURING AND SUPPLY AGREEMENTS
The Company was a party to the following manufacturing and supply agreements at
December 31, 1998:
On March 13, 1992, the Company entered into a Joint Development and
Manufacturing/Supply Agreement with HBL (the Development Agreement), a major
stockholder (see Note 7) under which HBL will formulate, manufacture, and supply
HBL interferon for the Company or any sub-licensee. In exchange, HBL is entitled
to receive a transfer fee, specified royalties and a portion of any payment
received by the Company for sub-license of rights under this agreement. The
agreement further provides that the Company sub-license to HBL the right to
market HBL interferon for oral use in humans and in non-human, warm-blooded
species in Japan, in exchange for the Company receiving a royalty fee based on
net sales. On June 1, 1994, the Company entered into an additional agreement
with HBL to make the Company HBL's exclusive agent for the development of HBL
interferon for non-oral use in humans and in non-human, warm-blooded species in
North America. In exchange, HBL is entitled to receive a transfer fee based on
units of interferon supplied.
Under the Development Agreement, HBL provided $9,000,000 in research funding to
the Company. The agreement also provides that a royalty fee be paid to HBL. The
initial term of the agreement is for seven years, but it will be renewed
automatically for successive three-year terms subject to prior written
agreement. HBL can terminate the agreement at any time after the end of the
first renewal term if certain conditions are not met.
F-13
<PAGE> 41
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
4. MANUFACTURING AND SUPPLY AGREEMENTS (CONTINUED)
On October 20, 1989, the Company entered into a manufacturing and supply
agreement with Interferon Sciences, Inc. (ISI), then a 1% stockholder of the
Company under which ISI will manufacture and utilize ISI interferon to formulate
and supply interferon-containing compositions to the Company for use in
non-human species. Under the Agreement, ISI is entitled to receive certain
transfer fees, manufacturing and supply fees, and a portion of any payments
received by the Company related to the use of ISI interferon. The agreement will
be in force for seven years after ISI's receipt of the first purchase order from
the Company and thereafter as long as net sales of such products by the Company
meet certain levels. As of December 31, 1998, the Company has not submitted a
purchase order to ISI.
5. LICENSE AND SUBLICENSE AGREEMENTS
The Company holds patent rights for which the Company has paid certain license
fees under three license agreements. Under these agreements, the Company will
pay the licensor a portion of any sub-license fee received by the Company with
respect to the manufacturing, use or sale of a licensed product, as well as a
royalty fee based on the net selling price of licensed products, subject to a
minimum annual royalty. The Company has also entered into various sub-license
agreements under which the Company is entitled to receive royalties based on the
net sales value of licensed products.
6. RESEARCH AGREEMENTS
The Company contracts with third parties throughout the world to conduct
research including studies and clinical trials. These agreements are generally
less than one year in duration. At December 31, 1998, the Company had
commitments to provide additional funding of approximately $192,000 under these
agreements.
7. COMMON STOCK
In May 1993, the stockholders of the Company approved an amendment to the
Articles of Incorporation to increase the total number of authorized shares of
common stock of the Company from one million shares to ten million shares. The
stockholders also approved a ten-for-one stock split for the currently issued
and outstanding shares of the Company. Since 1984, the Company has issued common
stock in exchange for various professional, research, and consulting services.
The stock issued for non-cash consideration was assigned a value based on the
fair value of the services received.
F-14
<PAGE> 42
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
7. COMMON STOCK (CONTINUED)
In December 1989, the Company issued 218,400 shares of stock to HBL for $2.50
per share. In February 1990, an additional 174,000 shares were issued to HBL for
$4.17 per share, and in November 1990, an additional 69,120 shares were issued
to HBL for $2.50 per share. These shares, combined with purchases from various
other stockholders and the 200,100 shares purchased by HBL in the public
offering, give HBL control of 23% of the outstanding common stock, or 1,232,856
shares at December 31, 1998.
In July 1992, the Board of Directors approved restricted stock grants to three
employees which allowed the Company to issue, under certain conditions, up to
180,000 shares of its authorized but unissued shares of common stock. In May
1994 the Board of Directors approved restricted stock grants to an additional
employee which allowed the Company to issue, under certain conditions, up to
30,000 shares of its authorized but unissued shares of common stock. In January
1995, 29,640 shares of common stock (net of required federal withholdings of
12,360 shares) were issued to a former employee under a Contract Termination and
Severance Agreement. The issuance and withholding were in full satisfaction of
the employee's original 84,000 shares in stock grants. In August 1996, 79,000
shares of common stock (net of required federal withholdings of 47,000 shares)
were issued to the other three employees. The issuance and withholding were in
full satisfaction of the three employees original 126,000 shares in stock
grants. Total charges to compensation expense recognized by the Company
cumulative from June 25, 1984 (inception) through December 31, 1998 was
$735,000.
In August 1996, the Company completed its initial public offering and issued
5,300,000 shares of common stock resulting in net proceeds of approximately
$9,377,702.
In addition to stock options discussed in Note 8, the Company has 200,000 shares
of Common Stock reserved for issuance upon exercise of warrants granted to the
Company's Underwriter (exercisable through August 2000 at $8.10 per share).
During 1997, the Company granted 30,000 options to outside professionals for
services which vested immediately at an exercise price of $4.25 (fair market
value of the common stock at the date of the grant). The Company recognized
$79,500 (representing the fair value of the options) in expense relating to
these grants.
Under a stock purchase agreement with a stockholder. Mesa. Inc. (Mesa), the
Company is prohibited from repurchasing or redeeming any of its issued and
outstanding shares without the prior written approval of Mesa unless such
redemption or repurchase is offered pro rata to all stockholders.
F-15
<PAGE> 43
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTION PLAN
The Company has elected to follow APB 25 and related interpretations in
accounting for its stock-based compensation. Under APB 25, because the exercise
price of the Company's stock options has been equal to or greater than the
market price of the underlying stock on the date of grant, no compensation
expense has been recognized.
During 1996, the Company introduced two stock option plans: the 1996 Employee
Stock Option Plan (Employee Plan) and the Outside Director and Advisor Stock
Option Plan (Director Plan). The Employee Plan has authorized the grant of
options to employees for up to a maximum of 390,000 shares of the Company's
common stock. All options granted have five to ten year terms and become
exercisable over a four to five year period. The option price is equal to 100%
to 110% of the fair value of the common stock on the date of grant depending on
the percentage of common stock owned by the optionee on the grant date. The
Director Plan allows options to purchase a maximum of 210,000 shares of the
Company's common stock to be granted to outside directors and scientific
advisors to the Company at an exercise price equivalent to 100% of the fair
market value of the common stock on the date of grant. The ten year options
become exercisable over a period of five years.
Supplemental information regarding net loss and net loss per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions for 1998 and 1997,
respectively: risk-free interest rate of 5.55% and 6.61%; dividend yield of 0%
and 0%; volatility factors of the expected market price of the Company's common
stock of .822 and .692; and a weighted-average expected life of the option of
3.2 and 4.9 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period and the expense for
1998 and 1997 are not necessarily indicative of the effects on reported net
income (loss) for future years. The Company's pro forma information as of
December 31, is as follows:
F-16
<PAGE> 44
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
8. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Pro forma net loss $ (2,358,342) $ (2,544,335)
Pro forma basic and diluted net loss per share $ (0.44) $ (0.47)
</TABLE>
Based on the Black-Scholes method, the fair value of the options granted as of
December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Number of options issued at fair market value of stock 104,000 66,000
Weighted-average fair value of options $ 1.12 $ 2.48
Weighted-average exercise price of options $ 1.92 $ 3.94
Number of options issued in excess of fair -- 7,000
market value of stock
Weighted average fair value of options -- $ 2.11
Weighted average exercise price of options -- $ 4.27
</TABLE>
A summary of the Company's stock option activity, and related information for
the year ended December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 188,500 $ 4.64 135,500 $ 5.10
Granted 104,000 1.92 73,000 3.97
Expired, unexercised -- -- (20,000) 5.25
Exercised -- -- -- --
------- -------
Outstanding, end of year 292,500 $ 3.68 188,500 $ 4.64
======= =======
Exercisable at end of year 62,900 $ 4.80 23,875 $ 5.08
======= =======
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 ranged from
$1.75 to $5.50. The weighted-average remaining contractual life of those options
is 8.75 years.
F-17
<PAGE> 45
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements (continued)
9. EMPLOYEE BENEFIT PLAN
The Company has a Simplified Employee Pension Plan (the Plan) which is a
contributory plan that covers all employees of the Company. Contributions to the
Plan are at the discretion of the Company. The plan expense for the years ended
December 31, 1998 and 1997, and cumulative from June 25, 1984 (inception)
through December 31, 1998 was $0, $49,131 and $200,857, respectively.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes. Significant
components of the Company's deferred tax liabilities and assets are as follows
at December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax liability:
Prepaid expenses $ 14,287 $ 24,065
Deferred tax assets:
Net operating loss and AMT carryforward 3,332,332 2,599,564
Accrued interest and note payable 256,683 235,061
Depreciation and amortization 159,410 116,520
Other 72,572 67,509
----------- -----------
3,820,997 3,018,654
Valuation allowance for deferred tax assets (3,806,710) (2,994,589)
----------- -----------
Total deferred tax assets, net of valuation allowance 14,287 24,065
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
</TABLE>
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $9,695,000 for federal income tax purposes expiring in 2006. The
ability of the Company to utilize these carryforwards may be limited should
changes in stockholder ownership occur in the future.
At December 31, 1998, the Company had approximately $36,000 of alternative
minimum tax credits which may be carried forward indefinitely.
The difference between the reported income tax provision and the benefit
normally expected by applying the statutory rate to the loss before income taxes
results primarily from the inability of the Company to recognize its tax losses.
F-18
<PAGE> 46
11. CONTINGENCIES
The Company is not a party to any litigation and is not aware of any pending
litigation or unasserted claims or assessments as of December 31, 1998.
12. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has and expects to have
transactions with related parties, including stockholders. In addition to the
transactions disclosed elsewhere in these financial statements, such related
party transactions included legal fees of approximately $74,000 and $88,000 paid
to Morris, Moore, Moss and Douglass, P.C., a member of which is an officer and
stockholder of the Company, in 1998 and 1997, respectively. The Company also
employs various stockholders as researchers and consultants and pays fees based
on contractual agreements.
13. SETTLEMENT OF LITIGATION
Commencing in 1993, the Company was the plaintiff in litigation involving a
patent infringement action in New Zealand. In May 1996, a settlement was reached
whereby the Company: (1) amended its manufacturing and supply agreement with ISI
to allow the sub-license of certain products previously exclusively licensed to
ISI and purchased 312,500 shares of ISI common stock for $625,000, or $2 per
share, representing the quoted market price of ISI stock at that time; and (2)
received $550,000 cash from the defendant in the lawsuit, comprising $50,000 in
exchange for a sub-license of the technology that was the subject of the lawsuit
and $500,000 as a payment toward research and development costs incurred by the
Company.
As a result of restrictions on the sale by the Company of its ISI stock until
August 1997, the Company discounted the ISI stock (quoted price $1.66 per share
at December 31, 1996) to a carrying value of $471,500 at December 31, 1996 and
during 1995 charged $150,000 to selling, general and administrative expenses and
charged $3,500 to unrealized loss on marketable securities in 1996.
During 1997, after a four for one reverse stock split, the Company sold 65,000
shares of ISI stock for $580,850 and realized a gain on the sale of $188,562.
At December 31, 1998, the Company determined that its investment in ISI common
stock had permanently declined in value and accordingly recognized a loss on the
ISI stock of $74,590, representing the difference between the Company's cost
basis in the ISI common stock and its quoted market price at December 31, 1998.
F-19
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- ---------------------------------------------------------------------------
<S> <C>
3.1* Restated Articles of Incorporation of the Company.
3.2* Articles of Amendment of Restated Articles of Incorporation of the Company.
3.3* Bylaws of the Company.
4.1* Specimen Common Stock Certificate.
4.2* Form of Underwriter's Warrant.
10.1* Agreement dated as of April 1, 1984 between University Patents, Inc. and the
Company.
10.2* License Agreement dated as of March 22, 1988 between the Company and The Texas
A&M University System.
10.3* License Agreement dated October 20, 1989 between the Company and ISI.
10.4* Manufacturing and Supply Agreement dated October 20, 1989 between the Company
and ISI.
10.5* Joint Development and Manufacturing/Supply Agreement dated March 13, 1992
between the Company and HBL, as amended.
10.6* Amended and Restated Agreement dated as of November 24, 1992 between Mitsubishi
and the Company.
10.7* Japan Animal Health License Agreement dated January 20, 1993 between the
Company and HBL.
10.9* Employment Agreement dated as of March 4, 1994 between the Company and Dr.
Joseph M. Cummins, as amended.
10.11* Manufacturing/Supply Agreement dated June 1, 1994 between the Company and
HBL.
10.12* Settlement Agreement dated April 27, 1995 among the Company, ISI,
Pharma Pacific
Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd., and
Fernz Corporation Limited.
10.13* Amendment of ACC/ISI License Agreement dated April 27, 1995 between the
Company and ISI.
10.14* PPM/ACC Sub-license Agreement dated April 27, 1995 between PPM and the
Company.
10.15* License and Supply Agreement dated July 10, 1995 between Veldona Africa, Inc.
("VAF") and Innovative Therapeutics, Ltd. ("ITL").
10.16* Pricing Amendment, dated December 5, 1995 between VAF and ITL.
10.18* Form of Consulting Agreement between the Company and the Underwriter.
10.19* Research Agreement dated March 25, 1996 between the Company and Ajinomoto Co.,
Inc.
10.20 1996 Employee Stock Option Plan, Amended and Restated as of September 12, 1998.
10.21 Outside Director and Advisor Stock Option Plan, Amended and Restated as of
September 12, 1998.
</TABLE>
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- --------------------------------------------------------------------------------
<S> <C>
10.22* Form of Indemnification Agreement between the Company and officers and directors
of the Company.
10.23* Indemnification Agreement between HBL and the Company.
10.24* Stock Purchase Agreement dated as of September 21, 1987 between Mesa Operating
Limited Partnership and the Company.
10.26** License Agreement dated July 22, 1997, between Hoffmann-La Roche Inc., and the
Company.
10.27** Distribution Agreement dated January 12, 1998, between Global Damon
Pharmaceutical and the Company.
10.28** Distribution Agreement dated September 17, 1997, between HBL and the Company
(TNF-A).
10.29** Distribution Agreement dated September 17, 1997, between HBL and the Company
(IFN-G).
10.30 Amendment No. 1 dated September 28, 1998 to License Agreement of March 22,
1988, between The Texas A&M University System and the Company.
10.31 Employment Agreement dated as of November 29, 1998 between the Company and
Kathleen L. Kelleher.
10.32 Employment Agreement dated as of September 14, 1998 between the Company and
Dr. Philip C. Fox.
10.33 Employment Agreement dated as of September 14, 1998 between the Company and
John Smith.
10.34 Engagement Agreement dated as of October 15, 1998 between Trust Company of the
South and the Company.
21. Subsidiaries of the Company. The following sets forth the name
and jurisdiction of incorporation of each subsidiary of the
Company. All of such subsidiaries are wholly-owned by the
Company.
</TABLE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
----------------------------- -----------------------------
<S> <C>
VANGUARD BIOSCIENCES, INC. TEXAS
VELDONA USA, INC. TEXAS
VELDONA AFRICA, INC. TEXAS
VELDONA POLAND, INC. TEXAS
ABI TAIWAN, INC. TEXAS
AMARILLO CELL OF CANADA, INC. TEXAS
27. Financial Data Schedule
</TABLE>
*The Exhibit is incorporated by reference to the exhibit of the same number to
the Company's Registration Statement on Form SB-2 filed with and declared
effective by the Commission (File No. 333-4413) on August 8, 1996.
**The Exhibit is incorporated by reference to the Company's 1997 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1998.
<PAGE> 1
EXHIBIT 10.20
AMARILLO BIOSCIENCES, INC.
1996 EMPLOYEE STOCK OPTION PLAN
AMENDED AND RESTATED AS OF
SEPTEMBER 12, 1998
ARTICLE I -- GENERAL
1.01. PURPOSES.
The purposes of this 1996 Employee Stock Option Plan (the
"Plan") are to: (1) closely associate the interests of the management of
AMARILLO BIOSCIENCES, INC. ("ABI") and its Subsidiaries and Affiliates
(collectively referred to as the "Company") with the shareholders by reinforcing
the relationship between participants' rewards and shareholder gains; (2)
provide management with an equity ownership in the Company commensurate with
Company performance, as reflected in increased shareholder value; (3) maintain
competitive compensation levels; and (4) provide an incentive to management for
continuous employment with the Company.
1.02. ADMINISTRATION.
(a) The Plan shall be administered by a committee of
directors appointed by the Board of Directors of ABI (the "Committee"), as
constituted from time to time. The Committee shall consist of at least two
members of the Board. Notwithstanding anything in this Section 1.02 to the
contrary, so long as any equity security of the Company is registered under
Section 12 of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
or any successor statute, all authority to exercise discretion with respect to
participation in the Plan by persons who are (i) "officers" within the meaning
of the applicable Securities and Exchange Commission rules and regulations
relating to Section 16 of the 1934 Act, or any successor statute, (ii) directors
of the Company and/or (iii) beneficial owners of more than ten percent (10%) of
any class of equity securities of the Company who are otherwise eligible to
participate in the Plan, and the timing, pricing, amounts and other terms and
conditions of awards granted under the Plan to such officers, directors and
beneficial owners, shall be vested in the Committee, if all of the members of
the Committee are disinterested persons within the meaning ascribed to such term
in Rule 16b-3 promulgated under the 1934 Act, or within any successor definition
or under any successor rule ("disinterested persons").
(b) The Committee shall have the authority, in its sole
discretion and from time to time to:
(i) designate the employees or classes of employees
eligible to participate in the Plan;
(ii) grant awards provided in the Plan in such form and
amount, and subject to such vesting, as the
Committee shall determine, provided that in no event
shall the period for vesting be longer than that set
forth in Section 2.04, below.
-1-
<PAGE> 2
(iii) impose such limitations, restrictions and conditions
upon any such awards as the Committee shall deem
appropriate; and
(iv) interpret the Plan, adopt, amend and rescind rules
and regulations relating to the Plan, and make all
other determinations and take all other action
necessary or advisable for the implementation and
administration of the Plan.
(c) Decisions and determinations of the Committee on all
matters relating to the Plan shall be in its sole discretion and shall be
conclusive. No member of the Committee shall be liable for any action taken or
decision made in good faith relating to the Plan or any award thereunder.
(d) With respect to persons subject to Section 16 of the
Securities Exchange act of 1934 (the "1934 Act"), transactions under the Plan
are intended to comply with all applicable conditions of Rule 16b-3 or its
successor under the 1934 Act. To the extent any provision of the Plan or action
by the Board of Directors or the Committee fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by the
Board of Directors or the Committee, as applicable.
(e) All usual and reasonable expenses of the Committee
shall be paid by the Company, and no member shall receive compensation with
respect to his services for the Committee except as may be authorized by the
Board of Directors. The Board of Directors and the Committee may employ
attorneys, consultants, accountants or other persons, and the Board of
Directors, the Committee, the Company and its officers and directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the Board
of Directors or the Committee in good faith shall be final and binding upon all
Employees who have received awards, and upon the Company and all other
interested persons. No member of Board of Directors or the Committee shall be
personally liable for any action, determination, or interpretation taken or made
in good faith with respect to the Plan or awards made thereunder, and the
Company shall indemnify and hold harmless each member of the Board of Directors
or the Committee against all loss, cost, expenses or damages, occasioned by any
act or omission to act in connection with any such action, determination or
interpretation under or of the Plan, consistent with the Company's certificate
of incorporation and bylaws.
-2-
<PAGE> 3
1.03. ELIGIBILITY FOR PARTICIPATION.
Participants in the Plan shall be selected by the Committee
from among the employees of the Company. In making this selection and in
determining the form and amount of awards, the Committee shall consider any
factors deemed relevant, including the individual's functions, responsibilities,
value of services to the Company and past and potential contributions to the
Company's profitability and sound growth.
1.04. TYPES OF AWARDS UNDER PLAN.
Awards under the Plan will be in the form of Incentive Stock
Options, as described in Article II; provided, however, that Limited Rights, as
described in Article III, may be awarded with respect to Options concurrently or
previously awarded.
1.05. AGGREGATE LIMITATION ON AWARDS.
(a) Shares of stock which may be issued under the Plan
shall be authorized and unissued or treasury shares of Common Stock of ABI
("Common Stock"). The maximum number of shares of Common Stock which may be
issued under the Plan shall be three hundred ninety thousand (390,000) shares.
The maximum number of shares of Common Stock with respect to which Incentive
Stock Options may be granted in any one year to any employee shall not exceed
one hundred fifty thousand (150,000).
(b) In addition to shares of Common Stock actually
issued pursuant to the exercise of Incentive Stock Options, there shall be
deemed to have been issued a number of shares equal to the number of shares of
Common Stock in respect of which Limited Rights (as described in Article III)
shall have been exercised.
(c) Any shares of Common Stock subject to an Incentive
Stock Option which for any reason is terminated unexercised or expires shall
again be available for issuance under the Plan, but shares subject to an
Incentive Stock Option which are not issued as a result of the exercise of
Limited Rights shall not again be available for issuance under the Plan.
1.06. EFFECTIVE DATE AND TERM OF PLAN.
(a) The Plan shall become effective on the date approved
by the holders of a majority of the shares of Common Stock present in person or
by proxy and entitled to vote at the 1996 Annual Meeting of Shareholders of ABI.
(b) No awards shall be made under the Plan after the
last day of the Company's 2001 fiscal year provided, however, that the Plan and
all awards made under the Plan prior to such date shall remain in effect until
such awards have been satisfied or terminated in accordance with the Plan and
the terms of such awards.
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ARTICLE II -- INCENTIVE STOCK OPTIONS
2.01. AWARD OF INCENTIVE STOCK OPTIONS.
The Committee may, from time to time and subject to the
provisions of the Plan and such other terms and conditions as the Committee may
prescribe, grant to any participant in the Plan one or more "Incentive Stock
Options," intended to qualify as such under the provisions of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") ("Incentive Stock
Options") to purchase for cash the number of shares of Common Stock allotted by
the Committee. The date an Incentive Stock Option is granted shall mean the date
selected by the Committee as of which the Committee allots a specific number of
shares to a participant pursuant to the Plan.
2.02. INCENTIVE STOCK OPTION AGREEMENTS.
The grant of an Incentive Stock Option shall be evidenced by a
written Incentive Stock Option Agreement, executed by the Company and the holder
of an Incentive Stock Option (the "Optionee"), stating the number of shares of
Common Stock subject to the Incentive Stock Option evidenced thereby, and in
such form as the Committee may from time to time determine.
2.03. INCENTIVE STOCK OPTION PRICE.
The Option Price per share of Common Stock deliverable upon
the exercise of an Incentive Stock Option shall be 100% of the Fair Market Value
of a share of Common Stock on the date the Incentive Stock Option is granted;
provided, however, that with respect to any Optionee who owns stock possessing
more than 10% of the total combined voting power of all classes of stock of ABI
or of its parent or Subsidiary corporation (with such ownership determined in
view of the attribution provisions of Section 424(d) of the Code), the Option
Price per share of Common Stock deliverable upon the exercise of an Incentive
Stock Option shall be 110% of the Fair Market Value of a share of Common Stock
on the date the Incentive Stock Option is granted. The Committee shall determine
the date on which an option is granted, provided that such date is consistent
with the Code and any applicable rules or regulations thereunder; in the absence
of such determination, the date on which the Committee adopts a resolution
granting an option shall be considered the date on which such option is granted,
provided the Employee to whom the option is granted is promptly notified of the
grant and a written option agreement is duly executed as of the date of the
resolution.
2.04. TERM AND EXERCISE.
Each Incentive Stock Option for employees who are not 10%
owners is exercisable during a period of ten years from the date of grant
thereof (the "Option Term"), subject to the Vesting Schedule for Employees who
are not 10% Owners, set forth below. With respect to any Optionee who at the
time the Option is granted owns stock possessing more than 10% of the total
combined voting power of all classes of stock of ABI or of its parent or
Subsidiary corporation (with such ownership determined pursuant to the
attribution rules set forth in Section 424(d) of the Code), each Incentive Stock
Option is exercisable during a period of five years from the date of grant
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thereof, subject to the Vesting Schedule for Employees who are 10% Owners, set
forth below. No Incentive Stock Option shall be exercisable after the expiration
of its Option Term. The Committee may also in its sole discretion accelerate the
exerciseability or vesting of any option or installment thereof at any time.
VESTING SCHEDULE FOR EMPLOYEES WHO ARE NOT 10% OWNERS. Options
awarded shall be exercisable, subject to the other terms and conditions of the
Plan, only upon the expiration of the designated number of years of active
employment with the Company from date of award, as provided below:
20% of Options awarded - 1 year
40% of Options awarded - 2 years
60% of Options awarded - 3 years
80% of Options awarded - 4 years
100% of Options awarded - 5 years
VESTING SCHEDULE FOR EMPLOYEES WHO ARE 10% OWNERS.
25% of Options awarded - 1 year
50% of Options awarded - 2 years
75% of Options awarded - 3 years
100% of Options awarded - 4 years
Except as provided in Sections 2.06, 2.07 and 2.08 hereof, no
Incentive Stock Option shall be exercised at any time unless the holder thereof
is then a regular full-time employee of the Company or one of its subsidiaries.
2.05. MAXIMUM AMOUNT OF INCENTIVE STOCK OPTION GRANT.
In no event shall the aggregate Fair Market Value of all
Common Stock (determined at the time the option is granted) with respect to
which Incentive Stock Options are exercisable for the first time by an
individual during any calendar year (under all plans of the Company and its
subsidiaries) exceed $100,000.
2.06. DEATH OF OPTIONEE.
(a) Upon the death of the Optionee, any Incentive Stock Option
exercisable on the date of death may be exercised by the Optionee's estate or by
a person who acquires the right to exercise such Incentive Stock Option by
bequest or inheritance or by reason of the death of the Optionee, provided that
such exercise occurs within both the remaining Option Term of the Incentive
Stock Option and one year after the Optionee's death.
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(b) The provisions of this Section shall apply notwithstanding
the fact that the Optionee's employment may have terminated prior to death, but
only to the extent of any Incentive Stock Options exercisable on the date of
death.
2.07. RETIREMENT OR DISABILITY.
Upon the termination of the Optionee's employment by reason of
permanent disability (as defined herein) or retirement (as determined by the
Committee), the Optionee may, within 36 months from the date of such termination
of employment, exercise any Incentive Stock Options to the extent such Incentive
Stock Options were exercisable at the date of such termination of employment.
Notwithstanding the foregoing, the tax treatment available pursuant to Section
422 of the Code upon the exercise of an Incentive Stock Option will not be
available to an Optionee who exercises any Incentive Stock Options more than (i)
12 months after the date of termination of employment due to permanent
disability or (ii) three months after the date of termination of employment due
to retirement. For purposes hereof, "permanent disability" shall have the
meaning set forth in Section 22(e)(3) of the Code or any successor provision
thereto.
2.08. TERMINATION FOR OTHER REASONS.
Except as provided in Sections 2.06 and 2.07 or except as
otherwise determined by the Committee, all Incentive Stock Options shall
terminate upon the termination of the Optionee's employment; provided, however,
that if the Optionee's employment was involuntarily terminated (with or without
cause), Optionee may exercise, during a 90-day period commencing with date of
termination, all Options theretofore vested, or which vest during said 90-day
period, under the Vesting Schedules set forth in Paragraph 2.04, above. At the
end of the 90-day period, all rights of such Optionee under any then outstanding
option or right shall terminate and shall be forfeited immediately as to any
unexercised portion thereof.
2.09. MANNER OF PAYMENT.
Each Stock Option Agreement shall set forth the procedure
governing the exercise of the Stock Option granted thereunder, and shall provide
that, upon such exercise in respect of any shares of Common Stock subject
thereto, the Optionee shall pay to the Company, in full, the Option Price for
such shares with cash or in shares of the Common Stock, valued at the Fair
Market Value per Share on the date of exercise.
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2.10. ISSUANCE OF SHARES.
As soon as practicable after receipt of payment, the Company
shall deliver to the Optionee a certificate or certificates for such shares of
Common Stock. The Optionee shall become a shareholder of the Company with
respect to Common Stock represented by share certificates so issued and as such
shall be fully entitled to receive dividends, to vote and to exercise all other
rights of a shareholder.
2.11. EFFECT OF EXERCISE.
The exercise of any Stock Option shall cancel that number of
related Limited Rights, if any, which is equal to the number of shares of Common
Stock purchased pursuant to said Option.
2.12. RULE 16b-3 EXEMPTION.
Options granted under the Plan shall comply with the
applicable provisions of Rule 16b-3 promulgated under the 1934 Act, or any
successor, and shall contain such additional conditions or restrictions as may
be required thereunder to qualify for the maximum exemption from Section 16 of
the 1934 Act with respect to Plan transactions.
ARTICLE III -- LIMITED RIGHTS
3.01. AWARD OF LIMITED RIGHTS.
Concurrently with or subsequent to the award of any Incentive
Stock Option, the Committee may, subject to the provisions of the Plan and such
other terms and conditions as the Committee may prescribe, award to the Optionee
with respect to each Option, a related limited right permitting the Optionee,
during a specified limited time period, to be paid the appreciation on the
Common Stock in lieu of exercising the Option ("Limited Right").
3.02. LIMITED RIGHTS AGREEMENT.
Limited Rights granted under the Plan shall be evidenced by
written agreements in such form as the Committee may from time to time
determine.
3.03. EXERCISE PERIOD.
Limited Rights shall (and must) be exercised immediately
preceding or simultaneous with the date of a Change in Control of ABI (the
"Exercise Period"), and all Limited Rights held by the Optionee shall be
exercised during such Exercise Period, without regard to the Vesting Schedules
set forth in Paragraph 2.04; provided, however, that if a Change in Control
shall have occurred without notice or opportunity for exercise of Limited
Rights, then the Limited Rights shall be exercised as soon as practicable after
a determination has been made that a "Change in Control" has occurred, or has
been deemed to have occurred.
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As used in the Plan, a "Change in Control" shall be deemed to
have occurred if
(a) individuals who were directors of ABI, immediately
prior to a Control Transaction shall cease, within one year of such Control
Transaction, to constitute a majority of the Board of Directors of ABI (or of
the Board of Directors of any successor to ABI or to all or substantially all
of its assets), or
(b) any entity, person or Group other than ABI or a
Subsidiary of ABI or Hayashibara Biochemical Laboratories, Inc. or an Affiliate
thereof acquires shares of ABI in a transaction or series of transactions that
result in such entity, person or Group directly or indirectly owning
beneficially fifty-one percent (51%) or more of the outstanding shares.
As used herein, "Control Transaction" shall be
(i) any tender offer for or acquisition of capital
stock of ABI,
(ii) any merger, consolidation, or sale of all or
substantially all of the assets of ABI which has
been approved by the shareholders,
(iii) any contested election of directors of ABI, or
(iv) any combination of the foregoing;
which results in a change in voting power sufficient to elect a majority of the
Board of Directors of ABI. As used herein, "Group" shall mean persons who act in
concert as described in Sections 13(d)(3) and/or 14(d)(2) of the Securities
Exchange Act of 1934, as amended.
3.04. AMOUNT OF PAYMENT.
The amount of payment to which an Optionee shall be entitled
upon the exercise of each Limited Right shall be equal to 100% of the amount, if
any, which is equal to the difference between the Fair Market Value per share of
Common Stock covered by the related Option on the date the Option was granted
and the Market Price of a share of such Common Stock. Market Price is defined to
be the greater of (i) the highest price per share of the Company's Common Stock
paid in connection with any Change in Control and (ii) the highest price per
share of the Company's Common Stock paid pursuant to an unsolicited brokerage
transaction during the 60-day period prior to the Change in Control.
3.05. FORM OF PAYMENT.
Payment of the amount to which an Optionee is entitled upon
the exercise of Limited Rights, as determined pursuant to Section 3.04, shall be
made solely in cash.
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3.06. EFFECT OF EXERCISE.
If Limited Rights are exercised, the Stock Options related to
such Limited Rights cease to be exercisable to the extent of the number of
shares with respect to which the Limited Rights were exercised. Upon the
exercise or termination of the Options related to such Limited Rights, the
Limited Rights granted with respect thereto terminate to the extent of the
number of shares as to which the related Options were exercised or terminated.
3.07. RETIREMENT OR DISABILITY.
Upon termination of the Optionee's employment with the Company
by reason of permanent disability or retirement (as each is determined by the
Committee), the Optionee may, within 36 months from the date of termination,
exercise any Limited Right to the extent such Limited Right is otherwise
exercisable during such 36-month period.
3.08. DEATH OF OPTIONEE OR TERMINATION FOR OTHER REASONS.
Except as provided in Section 3.07, or except as otherwise
determined by the Committee, all Limited Rights granted under the Plan shall
terminate upon the termination of the Optionee's employment with the Company, or
upon the death of the Optionee.
ARTICLE IV -- MISCELLANEOUS
4.01. GENERAL RESTRICTION.
Each award under the Plan shall be subject to the requirement
that, if at any time the Committee shall determine that (i) the listing,
registration or qualification of the shares of Common Stock subject or related
thereto upon any securities exchange or under any state or federal law, or (ii)
the consent or approval of any government regulatory body, or (iii) an agreement
by the grantee of an award with respect to the disposition of shares of Common
Stock, is necessary or desirable as a condition of, or in connection with, the
granting of such award or the issue or purchase of shares of Common Stock
thereunder, such award may not be consummated in whole or in part unless such
listing, registration, qualification, consent, approval or agreement shall have
been effected or obtained free of any conditions not acceptable to the
Committee.
4.02. NON-ASSIGNABILITY.
No award under the Plan shall be assignable or transferable by
the recipient thereof, except by will or by the laws of descent and
distribution. During the life of the recipient, such award shall be exercisable
only by such person or by such person's guardian or legal representative.
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4.03. RIGHT TO TERMINATE EMPLOYMENT.
Nothing in the Plan or in any agreement entered into pursuant
to the Plan shall confer upon any participant the right to continue in the
employment of the Company or affect any right which the Company may have to
terminate the employment of such participant.
4.04. NON-UNIFORM DETERMINATIONS.
The Committee's determinations under the Plan (including
without limitation determinations of the persons to receive awards, the form,
amount and timing of such awards, the terms and provisions of such awards and
the agreements evidencing same) need not be uniform and may be made by it
selectively among persons who receive, or are eligible to receive, awards under
the Plan, whether or not such persons are similarly situated.
4.05. RIGHTS AS A SHAREHOLDER.
The recipient of any award under the Plan shall have no rights
as a shareholder with respect thereto unless and until certificates for shares
of Common Stock are issued to him.
4.06. DEFINITIONS.
In this Plan the following definitions (along with other
definitions set forth elsewhere in the Plan) shall apply:
(a) "Affiliate" means any person or entity which
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with ABI.
(b) "Fair Market Value" means, as of any date, the value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national
market system, including without limitation
the National Market System of the National
Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, the
Fair Market Value of a Share of Common
Stock shall be the closing sales price
for such stock (or the closing bid, if no
sales were reported) as quoted on such
system or exchange (or the exchange with
the greatest volume of trading in Common
Stock) on the date of grant, as reported in
The Wall Street Journal or such other
source as the Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ
System (but not on the National Market
System thereof) or regularly quoted by a
recognized securities dealer but selling
prices are not reported, the Fair Market
Value of a Share of Common Stock shall be
the mean
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between the bid and asked prices for the
Common Stock on the last market trading day
prior to the day of determination, as
reported in The Wall Street Journal or such
other source as the Board deems reliable; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value
thereof shall be determined in good faith by
the Committee.
(c) "Option" means Incentive Stock Option.
(d) "Option Price" means the purchase price per share of
Common Stock deliverable upon the exercise of an Incentive Stock Option.
(e) "Subsidiary" means any corporation of which, at the
time more than 50% of the shares entitled to vote generally in an election of
directors are owned directly or indirectly by ABI or any Subsidiary thereof.
4.07. LEAVES OF ABSENCE.
The Committee shall be entitled to make such rules,
regulations and determinations as it deems appropriate under the Plan in respect
of any leave of absence taken by the recipient of any award. Without limiting
the generality of the foregoing, the Committee shall be entitled to determine
(i) whether or not any such leave of absence shall constitute a termination of
employment within the meaning of the Plan and (ii) the impact, if any, of any
such leave of absence on awards under the Plan theretofore made to any recipient
who takes such leave of absence.
4.08. NEWLY ELIGIBLE EMPLOYEES.
The Committee shall be entitled to make such rules,
regulations, determinations and awards as it deems appropriate in respect of any
employee who becomes eligible to participate in the Plan or any portion thereof
after the commencement of an award or incentive period.
4.09. ADJUSTMENTS.
In the event of any change in the outstanding Common Stock by
reason of a stock dividend or distribution, recapitalization, merger,
consolidation, split-up, combination, exchange of shares or the like, the
Committee shall appropriately adjust the number of shares of Common Stock which
may be issued under the Plan, the number of shares of Common Stock subject to
Options theretofore granted under the Plan, the Option Price of Options
theretofore granted under the Plan, the amount and terms of any Limited Rights
theretofore awarded under the Plan, and any and all other matters deemed
appropriate by the Committee.
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4.10. AMENDMENT OF THE PLAN.
(a) The Committee may, without further action by the
shareholders and without receiving further consideration from the participants,
amend this Plan or condition or modify awards under this Plan in response to
changes in securities or other laws or rules, regulations or regulatory
interpretations thereof applicable to this Plan or to comply with stock exchange
rules or requirements.
(b) The Committee may at any time and from time to time
terminate or modify or amend the Plan in any respect, except that without
shareholder approval the Committee may not (i) increase the maximum number of
shares of Common Stock which may be issued under the Plan (other than increases
pursuant to Section 4.10), (ii) extend the period during which any award may be
granted or exercised, or (iii) extend the term of the Plan. The termination or
any modification or amendment of the Plan, except as provided in subsection (a),
shall not without the consent of a participant, affect his or her rights under
an award previously granted to him or her.
4.11. DISPOSITION OF OPTION SHARES; WITHHOLDING TAXES.
Upon the disposition (within the meaning of Code Section
424(c)) of shares of Common Stock acquired pursuant to the exercise of an
Incentive Stock Option prior to the expiration of the holding period
requirements of Code Section 422(a)(1), the Optionee shall be required to give
notice to the Company of such disposition and the Company shall have the right
to require the Optionee to pay to the Company the amount of any taxes that are
required by law to be withheld with respect to such disposition.
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EXHIBIT 10.21
AMARILLO BIOSCIENCES, INC.
OUTSIDE DIRECTOR AND ADVISOR STOCK OPTION PLAN
AMENDED AND RESTATED AS OF
SEPTEMBER 12, 1998
ARTICLE I -- GENERAL
1.01. PURPOSES.
The purposes of this Outside Director and Advisor Stock Option
Plan (the "Plan") are to: (1) closely associate the interests of the Outside
Directors and Scientific Advisors of AMARILLO BIOSCIENCES, INC. ("ABI") and its
Subsidiaries and Affiliates (collectively referred to as the "Company") with the
shareholders by reinforcing the relationship between participants' rewards and
shareholder gains; (2) provide ABI's Outside Directors and Scientific Advisors
with an equity ownership in the Company commensurate with Company performance,
as reflected in increased shareholder value; and (3) provide an incentive to
Outside Directors and Scientific Advisors for continuous association with the
Company. The Plan is not an incentive stock option plan within the meaning of
Section 422 of the Internal Revenue Code of 1986 (the "Code").
1.02. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by a Committee of
persons appointed by the Board of Directors of ABI (the "Committee"), as
constituted from time to time. The Committee shall consist of at least two
members of the Board.
(b) The Committee shall have the authority, in its sole
discretion and from time to time, to:
(i) designate the Directors and Advisors
eligible to participate in the Plan;
(ii) grant awards provided in the Plan in such
form and amount, and subject to such
vesting, as the Committee shall determine,
provided that in no event shall the period
for vesting be longer than that set forth in
Section 2.04, below.
(iii) impose such limitations, restrictions and
conditions upon any such awards as the
Committee shall deem appropriate; and
(iv) interpret the Plan, adopt, amend and rescind
rules and regulations relating to the Plan,
and make all other determinations and take
all other action necessary or advisable for
the implementation and administration of the
Plan.
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(c) Decisions and determinations of the Committee on all
matters relating to the Plan shall be conclusive. No member of the Committee
shall be liable for any action taken or decision made in good faith relating to
the Plan or any award thereunder.
(d) With respect to persons subject to Section 16 of the
1934 Act, transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successor under the 1934 Act. To the extent any
provision of the Plan or action by the Board of Directors or the Committee fails
to so comply, it shall be deemed null and void, to the extent permitted by law
and deemed advisable by the Board of Directors or the Committee, as applicable.
(e) All usual and reasonable expenses of the Committee
shall be paid by the Company, and no member shall receive compensation with
respect to his services for the Committee except as may be authorized by the
Board of Directors. The Board of Directors and the Committee may employ
attorneys, consultants, accountants or other persons, and the Board of
Directors, the Committee, the Company and its officers and directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the Board
of Directors or the Committee in good faith shall be final and binding upon all
person who have received awards, and upon the Company and all other interested
persons. No member of Board of Directors or the Committee shall be personally
liable for any action, determination, or interpretation taken or made in good
faith with respect to the Plan or awards made thereunder, and the Company shall
indemnify and hold harmless each member of the Board of Directors or the
Committee against all loss, cost, expenses or damages, occasioned by any act or
omission to act in connection with any such action, determination or
interpretation under or of the Plan, consistent with the Company's certificate
of incorporation and bylaws.
1.03. AWARDS UNDER PLAN.
Each award under the Plan will include both:
(i) Stock Options, as described in Article II;
and
(ii) Limited Rights, as described in Article III.
1.04. AGGREGATE LIMITATION ON AWARDS.
(a) Shares of stock which may be issued under the Plan
shall be authorized and unissued or treasury shares of Common Stock of ABI
("Common Stock"). The maximum number of shares of Common Stock which may be
issued under the Plan shall be two hundred ten thousand (210,000) shares.
(b) In addition to shares of Common Stock actually
issued pursuant to the exercise of Stock Options, there shall be deemed to have
been issued a number of shares equal to the number of shares of Common Stock in
respect of which Limited Rights (as described in Article III) shall have been
exercised.
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(c) Any shares of Common Stock subject to a Stock Option
which for any reason is terminated unexercised or expires shall again be
available for issuance under the Plan, but shares subject to a Stock Option
which are not issued as a result of the exercise of Limited Rights shall not
again be available for issuance under the Plan.
1.05. EFFECTIVE DATE AND TERM OF PLAN.
(a) The Plan shall become effective on the date approved
by the holders of a majority of the shares of Common Stock present in person or
by proxy and entitled to vote at the 1996 Annual Meeting of Shareholders of ABI.
(b) No awards shall be made under the Plan after the
last day of the Company's 2001 fiscal year provided, however, that the Plan and
all awards made under the Plan prior to such date shall remain in effect until
such awards have been satisfied or terminated in accordance with the Plan and
the terms of such awards.
ARTICLE II -- STOCK OPTIONS
2.01. AWARD OF STOCK OPTIONS.
(a) The Committee may, from time to time and subject to
the provisions of the Plan and such other terms and conditions as the Committee
may prescribe, grant to any participant in the Plan one or more non-qualified
stock options ("Options") to purchase for cash the number of shares of Common
Stock allotted by the Committee.
(b) Each Outside Director shall be automatically granted
an Option to purchase ten thousand (10,000) shares on the date on which such
person first becomes an Outside Director, whether through election by the
shareholders of the Company or appointment by the Board to fill a vacancy. The
foregoing notwithstanding, any Outside Director who has previously received an
Option award as a Scientific Advisor under Section 2.01(c), below, shall be
automatically awarded, in his capacity as an Outside Director, an option to
purchase only five thousand (5,000) shares, instead of ten thousand (10,000)
shares, although additional Options may be awarded by the Committee.
(c) Each Scientific Advisor who is not also serving as
an Outside Director shall be automatically granted an Option to purchase five
thousand (5,000) shares on the date on which such person first becomes a
Scientific Advisor. The foregoing notwithstanding, any Scientific Advisor who
has previously received an Option award as an Outside Director shall not
automatically be awarded any additional Options as a Scientific Advisor,
although additional Options may be awarded by the Committee.
(d) In the event any Option granted under the Plan would
cause the number of shares subject to outstanding Options plus the number of
shares previously purchased under Options to exceed the total number of shares
available for issuance under the Plan, then the remaining Options shall be
granted to persons qualifying for same, on a pro rata basis, and no further
grants shall be
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made until such time, if any, as additional shares become available for grant
under the Plan through action of the shareholders to increase the number of
shares which may be issued under the Plan or through cancellation or expiration
of Options previously granted hereunder.
(e) Options may be granted only to Outside Directors
and/or Scientific Advisors.
(f) Options granted under the Plan shall comply with the
applicable provisions of Rule 16b-3 promulgated under the 1934 Act, or any
successor provisions thereto, and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the 1934 Act with respect to Plan transactions.
2.02. STOCK OPTION AGREEMENTS.
The grant of a Stock Option shall be evidenced by a written
Stock Option Agreement, executed by the Company and the holder of a Stock Option
(the "Optionee"), stating the number of shares of Common Stock subject to the
Stock Option evidenced thereby, and in such form as the Committee may from time
to time determine.
2.03. STOCK OPTION PRICE.
The Option Price per share of Common Stock deliverable upon
the exercise of a Stock Option shall be 100% of the Fair Market Value of a share
of Common Stock on the date the Stock Option is granted.
2.04. TERM AND EXERCISE.
Each Stock Option may be exercised during a period of ten
years from the date of grant thereof (the "Option Term"), subject to the vesting
schedule set forth below. The Committee may also in its sole discretion
accelerate the exerciseability or vesting of any option or installment thereof
at any time. No Stock Option shall be exercisable after the expiration of its
Option Term.
VESTING SCHEDULE. Options awarded shall be exercisable,
subject to the other terms and conditions of the Plan, only upon the expiration
of the designated number of years of active association with the Company as an
Outside Director or Scientific Advisor, from date of award, as provided below:
20% of Options awarded - 1 year
40% of Options awarded - 2 years
60% of Options awarded - 3 years
80% of Options awarded - 4 years
100% of Options awarded - 5 years
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2.05. MANNER OF PAYMENT.
Each Stock Option Agreement shall set forth the procedure
governing the exercise of the Stock Option granted thereunder, and shall provide
that, upon such exercise in respect of any shares of Common Stock subject
thereto, the Optionee shall pay to the Company, in full, the Option Price for
such shares with cash or in shares of the Common Stock, valued at the Fair
Market Value per Share on the date of exercise.
2.06. ISSUANCE OF SHARES.
As soon as practicable after receipt of payment, the Company
shall deliver to the Optionee a certificate or certificates for such shares of
Common Stock. The Optionee shall become a shareholder of the Company with
respect to Common Stock represented by share certificates so issued and as such
shall be fully entitled to receive dividends, to vote and to exercise all other
rights of a shareholder.
2.07. DEATH OF OPTIONEE.
(a) Upon the death of the Optionee, any rights to the
extent exercisable on the date of death may be exercised by the Optionee's
estate, or by a person who acquires the right to exercise such Stock Option by
bequest or inheritance or by reason of the death of the Optionee, provided that
such exercise occurs within both the remaining effective term of the Stock
Option and one year after the Optionee's death.
(b) The provisions of this Section shall apply
notwithstanding the fact that the Optionee's association may have terminated
prior to death, but only to the extent of any rights exercisable on the date of
death.
2.08. DISABILITY.
Upon termination of the Optionee's association by reason of
permanent disability (as defined herein), the Optionee may, within 36 months
from the date of termination, exercise any Stock Options to the extent such
Options are exercisable during such 36-month period. Notwithstanding the
foregoing, the tax treatment available pursuant to Section 422 of the Code upon
the exercise of an Incentive Stock Option will not be available to an Optionee
who exercises any Incentive Stock Options more than (i) 12 months after the date
of termination of employment due to permanent disability or (ii) three months
after the date of termination of employment due to retirement. For purposes
hereof, "permanent disability" shall have the meaning set forth in Section
22(e)(3) of the Code or any successor provision thereto.
2.09. TERMINATION FOR OTHER REASONS.
Except as provided in Sections 2.07 and 2.08, or except as
otherwise determined by the Committee, all Stock Options shall terminate upon
the termination of the Optionee's association with the Company as an Outside
Director or Scientific Advisor; provided, however, that if the
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Optionee's association was involuntarily terminated (with or without cause),
Optionee may exercise, during a 90-day period commencing with date of
termination, all Options theretofore vested, or which vest during said 90-day
period, under the Vesting Schedule set forth in Paragraph 2.04, above. At the
end of the 90-day period, all rights of such Optionee under any then outstanding
option or right shall terminate and shall be forfeited immediately as to any
unexercised portion thereof.
2.10. EFFECT OF EXERCISE.
The exercise of any Stock Option shall cancel that number of
related Limited Rights, if any, which is equal to the number of shares of Common
Stock purchased pursuant to said Option.
2.11. RULE 16b-3 EXEMPTION.
Options granted under the Plan shall comply with the
applicable provisions of Rule 16b-3 promulgated under the 1934 Act, or any
successor provisions thereto, and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the 1934 Act with respect to Plan transactions.
ARTICLE III -- LIMITED RIGHTS
3.01. AWARD OF LIMITED RIGHTS.
Concurrently with the award of each Stock Option, there shall
automatically be awarded to the Optionee, with respect to each Option, a related
limited right permitting the Optionee, during a specified limited time period,
to be paid the appreciation on the Common Stock in lieu of exercising the Option
("Limited Right").
3.02. LIMITED RIGHTS AGREEMENT.
Limited Rights granted under the Plan shall be evidenced by
written agreements in such form as the Committee may from time to time
determine.
3.03. EXERCISE PERIOD.
Limited Rights shall (and must) be exercised immediately
preceding or simultaneous with the date of a Change in Control of ABI (the
"Exercise Period"), and all Limited Rights held by the Optionee shall be
exercised during such Exercise Period, without regard to the Vesting Schedule
set forth in Paragraph 2.04; provided, however, that if a Change in Control
shall have occurred without notice or opportunity for exercise of Limited
Rights, then the Limited Rights shall be exercised as soon as practicable after
a determination has been made that a "Change in Control" has occurred, or has
been deemed to have occurred.
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As used in the Plan, a "Change in Control" shall be deemed to
have occurred if
(a) individuals who were directors of ABI immediately
prior to a Control Transaction shall cease, within one year of such Control
Transaction, to constitute a majority of the Board of Directors of ABI (or of
the Board of Directors of any successor to ABI or to all or substantially all
of its assets), or
(b) any entity, person or Group other than ABI or a
Subsidiary of ABI or Hayashibara Biochemical Laboratories, Inc. or an Affiliate
thereof acquires shares of ABI in a transaction or series of transactions that
result in such entity, person or Group directly or indirectly owning
beneficially fifty-one percent (51%) or more of the outstanding shares.
As used herein, "Control Transaction" shall be
(i) any tender offer for or acquisition of
capital stock of ABI,
(ii) any merger, consolidation, or sale of all or
substantially all of the assets of ABI which
has been approved by the shareholders,
(iii) any contested election of directors of ABI,
or
(iv) any combination of the foregoing;
which results in a change in voting power sufficient to elect a majority of the
Board of Directors of ABI. As used herein, "Group" shall mean persons who act in
concert as described in Sections 13(d)(3) and/or 14(d)(2) of the 1934 Act, as
amended.
3.04. AMOUNT OF PAYMENT.
The amount of payment to which an Optionee shall be entitled
upon the exercise of each Limited Right shall be equal to 100% of the amount, if
any, which is equal to the difference between the Fair Market Value per share of
Common Stock covered by the related Option on the date the Option was granted
and the Market Price of a share of such Common Stock. Market Price is defined to
be the greater of (i) the highest price per share of the Company's Common Stock
paid in connection with any Change in Control and (ii) the highest price per
share of the Company's Common Stock paid pursuant to an unsolicited brokerage
transaction during the 60-day period prior to the Change in Control.
3.05. FORM OF PAYMENT.
Payment of the amount to which an Optionee is entitled upon
the exercise of Limited Rights, as determined pursuant to Section 3.04, shall be
made solely in cash.
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3.06. EFFECT OF EXERCISE.
If Limited Rights are exercised, the Stock Options related to
such Limited Rights cease to be exercisable to the extent of the number of
shares with respect to which the Limited Rights were exercised. Upon the
exercise or termination of the Options related to such Limited Rights, the
Limited Rights granted with respect thereto terminate to the extent of the
number of shares as to which the related Options were exercised or terminated.
3.07. DISABILITY.
Upon termination of the Optionee's association with the
Company as either an Outside Director or Scientific Advisor by reason of
permanent disability (as determined by the Committee), the Optionee may, within
36 months from the date of termination, exercise any Limited Right to the extent
such Limited Right is otherwise exercisable during such 36-month period.
3.08. DEATH OF OPTIONEE OR TERMINATION FOR OTHER REASONS.
Except as provided in Section 3.07, or except as otherwise
determined by the Committee, all Limited Rights granted under the Plan shall
terminate upon the termination of the Optionee's association with the Company as
either an Outside Director or Scientific Advisor or upon the death of the
Optionee.
ARTICLE IV -- MISCELLANEOUS
4.01. GENERAL RESTRICTION.
Each award under the Plan shall be subject to the requirement
that, if at any time the Committee shall determine that (i) the listing,
registration or qualification of the shares of Common Stock subject or related
thereto upon any securities exchange or under any state or federal law, or (ii)
the consent or approval of any government regulatory body, or (iii) an agreement
by the grantee of an award with respect to the disposition of shares of Common
Stock, is necessary or desirable as a condition of, or in connection with, the
granting of such award or the issue or purchase of shares of Common Stock
thereunder, such award may not be consummated in whole or in part unless such
listing, registration, qualification, consent, approval or agreement shall have
been effected or obtained free of any conditions not acceptable to the
Committee.
4.02. NON-ASSIGNABILITY.
Unless otherwise provided in the agreement with the Optionee,
Options shall not be assignable or transferable by the recipient thereof, except
by will or by the laws of descent and distribution, and during the life of the
recipient, such award shall be exercisable only by such person or by such
person's guardian or legal representative. If provided in the agreement with the
Optionee, Options and rights may be transferred by the holder to Permitted
Transferees, provided that there cannot be any consideration for the transfer.
"Permitted Transferee" means a member of a holder's immediate family, trusts for
the benefit of such immediate family members, and partnerships in which
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the holder and such immediate family members are the only partners. An immediate
family member shall include a holder's descendants, spouse, and spouses of
descendants.
4.03. RIGHT TO TERMINATE ASSOCIATION.
Nothing in the Plan or in any agreement entered into pursuant
to the Plan shall confer upon any participant the right to continue in
association with the Company or affect any right which the Company or the
shareholders of the Company may have to terminate the association of such
participant.
4.04. RIGHTS AS A SHAREHOLDER.
The recipient of any award under the Plan shall have no rights
as a shareholder with respect thereto unless and until certificates for shares
of Common Stock are issued to him.
4.05. DEFINITIONS.
In this Plan the following definitions (along with other
definitions elsewhere set forth in the Plan) shall apply:
(a) "Affiliate" means any person or entity which
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with ABI.
(b) "Board" means the Board of Directors of ABI.
(c) "Fair Market Value" means, as of any date, the value
of Common Stock determined as follows:
(i) If the Common Stock is listed on any
established stock exchange or a national
market system, including without limitation
the National Market System of the National
Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, the
Fair Market Value of a Share of Common
Stock shall be the closing sales price for
such stock (or the closing bid, if no sales
were reported) as quoted on such system or
exchange (or the exchange with the greatest
volume of trading in Common Stock) on the
date of grant, as reported in The Wall
Street Journal or such other source as the
Board deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ
System (but not on the National Market
System thereof) or regularly quoted by a
recognized securities dealer but selling
prices are not reported, the Fair Market
Value of a Share of Common Stock shall be
the mean between the bid and asked prices
for the Common Stock on the last market
trading day prior to the day of
determination, as reported in
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The Wall Street Journal or such other
source as the Board deems reliable; or
(iii) In the absence of an established market for
the Common Stock, the Fair Market Value
thereof shall be determined in good faith by
the Committee.
(d) "Option" or "Stock Option" means all or any Options
granted under the Plan.
(e) "Option Price" means the purchase price per share of
Common Stock deliverable upon the exercise of a Stock Option.
(f) "Outside Director" means a director of ABI, who is
not an employee of the Company.
(g) "Scientific Advisor" means a person named by the
Board of Directors of ABI to serve on the Company's Board of Scientific
Advisors.
(h) "Shares" or "shares," unless otherwise specified,
shall mean shares of Common Stock.
(i) "Subsidiary" means any corporation of which, at the
time, more than 50% of the shares entitled to vote generally in an election of
directors are owned directly or indirectly by ABI or any Subsidiary thereof.
4.06. ADJUSTMENTS.
In the event of any change in the outstanding Common Stock by
reason of a stock dividend or distribution, recapitalization, merger,
consolidation, split-up, combination, exchange of shares or the like, the
Committee shall appropriately adjust the number of shares of Common Stock which
may be issued under the Plan, the number of shares of Common Stock subject to
Options theretofore granted under the Plan, the Option Price of Options
theretofore granted under the Plan, the amount and terms of any Limited Rights
theretofore awarded under the Plan, and any and all other matters deemed
appropriate by the Committee.
4.07. AMENDMENT OF THE PLAN.
(a) Subject to subsection (b), the Committee may,
without further action by the shareholders and without receiving further
consideration from the participants, amend this Plan or condition or modify
awards under this Plan in response to changes in securities or other laws or
rules, regulations or regulatory interpretations thereof applicable to this Plan
or to comply with stock exchange rules or requirements.
(b) The Committee may at any time and from time to time
terminate or modify or amend the Plan in any respect, except that without
shareholder approval the Committee may not
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extend the term of the Plan. ABI shall seek and obtain shareholder approval of
any amendment to increase the number of shares of Common Stock which may be
issued under the Plan or for any other amendment to the Plan to the extent that
such increase or other amendment requires shareholder approval under the
requirements of the stock exchange or market system under which shares of Common
Stock of the Company are then listed or the Internal Revenue Code of 1986 or
other laws then in effect and applicable to the Company and the Plan. The
termination or any modification or amendment of the Plan, except as provided in
subsection (a), shall not without the consent of a participant affect his rights
under an award previously granted to him.
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EXHIBIT 10.30
AMENDMENT NO. 1 TO LICENSE AGREEMENT
OF MARCH 22, 1988 BETWEEN
AMARILLO BIOSCIENCES, INC. AND
THE TEXAS A&M UNIVERSITY SYSTEM
THIS AMENDMENT NO. 1 ("Amendment") is entered into as of this
the ____ day of __________________, 1998, by and between AMARILLO BIOSCIENCES,
INC. (formerly Amarillo Cell Culture Company, Incorporated), a Texas corporation
having its principal office at 800 West 9th Avenue, Amarillo, Texas 79101
(hereinafter referred to as "ABI"); and THE TEXAS A&M UNIVERSITY SYSTEM, having
its principal offices at College Station, Texas 77843 (hereinafter referred to
as "TAMUS").
WHEREAS, TAMUS and ABI have heretofore entered into that
certain License Agreement dated March 22, 1988 (hereinafter, the "License
Agreement"); and further
WHEREAS, the parties desire to amend the License Agreement
with respect to the matters hereinafter set forth;
THEREFORE, in consideration of these presents and for other
good and valuable consideration the receipt and sufficiency of which are
evidenced by the execution hereof, the parties hereby agree as follows:
1. All references in the License Agreement to "ACC"
shall be deemed to be references to "ABI".
2. The first sentence of Article 3.2 is amended by
deleting the words "or any licensee".
3. The following shall be inserted following the
existing Article 3.2:
"3.2-A. In the event ABI enters into a sublicense
arrangement (as defined below), then in lieu of the
royalty provided in Article 3.2
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above, ABI shall pay to TAMUS an earned royalty of
five percent (5%) of all amounts actually received by
ABI or its AFFILIATES with respect to the sale by any
sublicensee of ABI of LICENSED PRODUCTS in a country
where PATENT RIGHTS exist. The earned royalty
percentage shall be applied only once to the NET
SELLING PRICE regardless of the possibility that
manufacture, use, or sale of a LICENSED PRODUCT may
be covered by more than one LICENSED PATENT. For
purposes of this Article 3.2-A, "sublicense
arrangement" shall mean an arrangement under which
ABI and its AFFILIATES do not market LICENSED PRODUCT
directly, or indirectly through an agent, but rather
license rights to market LICENSED PRODUCT to an
unaffiliated entity, which entity is responsible for
obtaining regulatory approval in the subject market,
and for promotion and pricing."
4. The following shall be added at the end of the
existing Article 3.3: ", and the royalties payable
under Article 3.2-A above shall be reduced to two and
one-half percent (2.5%) of all amounts actually
received by ABI or its AFFILIATES."
5. The following shall be added at the end of the
existing Article 6.4: "; provided, however, that for
the license year beginning April 1, 1998, and for all
subsequent license years, the application of such
credit shall never cause the royalty provided for
under Article 3.4(b) to be reduced below $7,500.00
per year."
6. Except as herein amended, all terms and provisions of
the License
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment has been executed by the
undersigned as of the date first above written.
AMARILLO BIOSCIENCES, INC. THE TEXAS A&M UNIVERSITY SYSTEM
By: By:
----------------------- ----------------------------
Joseph M. Cummins,
President
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EXHIBIT 10.31
EMPLOYMENT CONTRACT
This Employment Contract ("Contract") is entered into by and
between AMARILLO BIOSCIENCES, INC., a Texas corporation ("Employer"), and
KATHLEEN L. KELLEHER ("Employee"). ABI and its controlled subsidiaries shall be
hereinafter collectively referred to as "ABI Companies". Employer hereby employs
Employee, and Employee accepts employment, on the following terms and
conditions.
ARTICLE I
TERM OF EMPLOYMENT
1.01. By this Contract, Employer employs Employee and Employee
accepts employment with Employer and with such ABI Companies as Employer shall
designate, for a period of one (1) year, commencing January 4, 1999; however,
this Contract may be terminated earlier by Employer for cause, at its option,
by giving written notice of termination to Employee, without prejudice to any
other remedy to which Employer may be entitled either at law, in equity or under
this Contract. "For cause," as used in this Section 1.01, shall mean and include
any of the following events:
(a) Misappropriation or embezzlement by Employee
involving Employer or an ABI Company;
(b) The conviction in any jurisdiction of Employee
for any crime involving an ABI Company which constitutes a felony;
(c) Employee's material violation of any of the
material provisions of this Contract; provided, however, that Employer shall
give written notice of Employee's
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violation of such provisions and Employee shall have a period of twenty (20)
business days to cure such violation; or
(d) Employee shall have become Disabled (as
defined in Section 2.01, below), and said Disability shall have continued for a
period of six (6) consecutive months, or a period of six (6) months in any
twelve (12) month period. All determinations regarding the existence and
continuation of a Disability shall be made as provided in Section 2.01, below.
Termination of this Contract for cause shall be effective upon
written notice thereof to Employee. Employee shall thereupon be entitled to
compensation earned prior to the date of termination, computed pro rata up to
and including the date of termination, shall be entitled to no further
compensation, and will be relieved of all duties and obligations under this
Contract as of the date of termination; provided, however, that the provisions
of Articles VII, IX and X shall survive both the expiration of this Contract, or
any earlier termination.
1.02. Employer may terminate this Contract at any time upon
two (2) weeks prior written notice to Employee; however, in the event of such
termination by Employer without cause, Employer shall continue to pay to
Employee the monthly base salary set forth in Section 2.01, below, for a period
of one (1) year from the date Employee receives notice of termination. Employee
must seek alternative employment and show reasonable proof of this to Employer.
Compensation earned by Employee during this period will be deducted from
Employer's obligation under this Section 1.02. In the case of termination of the
Contract by Employer, Employer can at the time of termination release Employee
in writing
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from the non-competition provisions contained in Section 7.06, below. In such
event, the salary continuation provided for in this Section shall terminate.
In the event of termination of the Employment Contract by
Employee, Employee shall restate to Employer in written and explicit form the
applicability of the non-competition provisions contained in Section 7.06,
below. The Employer shall thereupon have a period of three (3) weeks to
discharge itself from the obligation of salary continuation payment as
heretofore described in this Section 1.02 by releasing Employee in writing from
the non-competition provisions of said Section 7.06. In such event, such
compensation will terminate upon the date employment terminates.
ARTICLE II
COMPENSATION
2.01. As compensation for all services rendered under this
Contract, Employee shall be paid by Employer a salary of TWELVE THOUSAND FIVE
HUNDRED AND NO/100 DOLLARS ($12,500.00) per month, payable at least monthly
during the term of this Contract. The amount paid is to be prorated for any
partial employment period. In the event Employee becomes Disabled (as
hereinafter defined), Employee shall continue to receive compensation from
employer as follows (but only until the expiration of one (1) year from date of
execution of this Contract):
(i) during the first two (2) months following a
determination of Disability, Employee shall
receive compensation at the rate of one
hundred percent (100%) of salary;
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(ii) during the third and fourth months following
a determination of Disability, Employee
shall receive compensation at the rate of
seventy-five percent (75%) of salary; and
(iii) during the fifth and sixth months following
a determination of Disability, Employee
shall receive compensation at the rate of
fifty percent (50%) of salary; and
(iv) after six (6) months following a
determination of disability, Employee's
compensation and all fringe benefits shall
terminate, but this Contract shall remain
in force, and Employee shall remain an
employee of Employer, until Employer shall
have given notice of termination as provided
in Section 1.01, above.
For purposes of determining the percentage of salary and the
duration of payment thereof to which Employee is entitled following a
determination of Disability, if Employee resumes full-time employment hereunder
after such determination and thereafter becomes Disabled again, such succeeding
period of Disability shall be deemed a continuation of the prior period of
Disability unless a period of at least six continuous months of active full-time
employment has elapsed since the conclusion of the prior period of Disability.
Notwithstanding anything to the contrary contained in this
Section 2.01:
(i) any and all amounts payable to Employee
hereunder during any period of Disability
shall be reduced by any disability income
insurance proceeds paid to Employee under
any policies owned by and paid for by the
Employer; and
(ii) Employee shall be conclusively deemed to be
Disabled for purposes of this Agreement
during any period in which she receives
disability insurance proceeds from an
insurance carrier pursuant to clause (i).
For all purposes of this Contract, "Disability" (including the
adjective "Disabled") shall mean Employee's inability by reason of physical or
mental incapacity to
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perform the customary duties of her employment for a period of thirty (30)
consecutive days or a period of thirty (30) days in any consecutive three (3)
month period. If any dispute arises as to the existence of Employee's
Disability, such dispute shall be resolved by two licensed physicians, one
selected by the Board of Directors of Employer (other than Employee) and one
selected by Employee. If the two physicians so selected cannot agree as to
whether or not Employee is Disabled, the two physicians so selected shall
designate a third physician and the determination of two of the three physicians
so selected as to whether or not Employee is Disabled shall be final and binding
on the parties for all purposes.
2.02. Employer shall perform an annual performance review of
Employee's performance for the purpose of determining whether Employee's salary
and benefits should be adjusted.
2.03. Employee will be eligible for a bonus plan, said bonus
plan to be submitted to and approved by the Board of Directors of Employer
during the first six (6) months of 1999.
ARTICLE III
DUTIES OF EMPLOYEE
3.01. Employee is employed as Chief Operating Officer and Vice
President of Business Development and shall work at 800 9th Street, Amarillo,
the principal offices of Employer, and at such other place(s) in the City of
Amarillo as Employer may direct. Employee shall be named to said positions as an
officer of Employer by the Board of Directors of Employer, and shall perform the
duties of Chief Operating Officer and Vice
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President of Business Development, as such duties may be further set forth by
resolution of the Board of Directors of Employer. The expected duties are
delineated in Appendix "A" to this Employment Contract; however, Employee
understands and agrees that Employer shall have the right to modify such duties
from time to time, consistent with the legitimate business needs of Employer.
Employee shall devote her entire productive time, ability, attention and
energies to the business of Employer during the term of this Contract and during
such time, Employee shall not directly or indirectly render any services of a
business, commercial or professional nature to any other person or organization,
whether or not for compensation, without the prior consent of the Board of
Directors of Employer.
ARTICLE IV
EMPLOYEE'S OBLIGATIONS AS TO INSURANCE
4.01. Employee agrees to submit to physical examination as may
be required for the obtaining by Employer of insurance on Employee's life, and
agrees to consent to the issuance of a policy or policies of insurance on her
life, such policies to be owned by Employer, and naming Employer as beneficiary.
Upon termination of Employee's employment for any reason, and if requested by
Employee, Employer shall assign any such policy to Employee, so that Employee
shall have the option of keeping the policy in force at Employee's expense. The
foregoing notwithstanding, Employer shall be entitled to retain the accumulated
cash value of any such policy.
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ARTICLE V
EMPLOYEE BENEFITS
5.01. If Employer provides hospital, surgical, medical,
dental, group life insurance, or other fringe benefits to its employees, or any
of them, at any time during the term of this Contract, Employee shall be
entitled to participate in such benefits, on terms and conditions at least as
favorable as those accorded to other employees of Employer, subject to
insurability.
ARTICLE VI
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE
6.01. Employee is authorized to incur reasonable business
expenses for promoting the business of Employer, including expenditures for
entertainment and travel. Employer will reimburse Employee for all such expenses
upon Employee's presentation of written expense vouchers, itemizing such
expenditures.
ARTICLE VII
PROPERTY RIGHTS OF PARTIES
7.01. Employee will have access to and become familiar with,
during the course of employment, various trade secrets, consisting of formulas,
devices, secret inventions, processes, compilations of information, records,
and specifications owned by ABI Companies and regularly used in the operation of
ABI Companies. Employee shall not disclose any such trade secrets directly or
indirectly nor use them in any way either during the term of this Contract or at
any time thereafter except as required in the course of her employment. All
files, records, documents, drawings, specifications, equipment and similar items
relating to the business of ABI Companies, whether or not prepared by Employee,
shall
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remain the exclusive property of ABI Companies and shall not be removed from the
premises of Employer under any circumstances, except in pursuit of the trade and
business of ABI Companies.
7.02. On the termination of employment or whenever requested
by Employer, Employee shall immediately deliver to Employer all property in
Employee's possession or under Employee's control belonging to ABI Companies,
including but not limited to all accounting records, computer terminals and
tapes, disks, or other data storage mechanisms, accounting machines, and all
office furniture and fixtures, supplies and other personal property in the
possession or under the control of Employee, in good condition, ordinary wear
and tear excepted, and including without limitation all correspondence files,
research data, and patent information or data, of every sort.
7.03. Employee does not claim any rights or interests in and
to trade secrets, formulas, devices, inventions, processes, patents,
applications, continuations, copyrights, trademarks, compilations of
information, records, specifications, rights, interests and data of any other
sort, affecting or pertaining directly or indirectly to the business of ABI
Companies as now conducted, or to the patents, trade secrets, and other rights
now owned by ABI Companies.
7.04. Employee agrees that she will promptly and fully inform
and disclose to Employer all inventions, designs, improvements and discoveries
that Employee may have during the term of this Contract that pertain or relate
to the business of ABI Companies or to any experimental work carried on by ABI
Companies, whether conceived by Employee
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alone or with others and whether or not conceived during regular working hours.
All such inventions, designs, improvements and discoveries shall be the
exclusive property of Employer. Employee shall assist ABI Companies in obtaining
patents on all such inventions, designs, improvements and discoveries deemed
patentable by ABI Companies, and shall execute all documents and do all things
necessary to obtain such patents for Employer or ABI Companies.
7.05. It is contemplated that Employee in the course of her
employment will be engaged in work involving various patents and secret
processes owned by ABI Companies. All experiments, developments, formulas,
patterns, devices, secret inventions and compilations of information, records,
and specifications regarding such matters are trade secrets, which Employee
shall not disclose directly or indirectly to anyone other than ABI Companies or
their agents, or use in any way, either during the term of this Contract or at
any time after the termination of this Contract, except as required in the
course and scope of her employment.
7.06. During the term of this Contract, Employee shall not
directly or indirectly either as an employee, employer, consultant, agent,
principal, partner, stock holder, corporate officer, director, or in any other
individual or representative capacity engage or participate in any business that
is in competition in any manner whatsoever with the business of ABI Companies;
provided, however, that Employee may without restriction invest in
professionally managed mutual funds, where the investment decision regarding
specific securities is made by the fund manager, and not by Employee; and
Employee may purchase,
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own and sell stock or other securities of pharmaceutical companies, as long as
Employee is not directly or indirectly through one or more intermediaries in
control of or controlled by or under common control with any such company.
Furthermore, upon the termination of this Contract, Employee expressly agrees
not to engage or participate directly or indirectly in any business that is in
competition with the business of ABI Companies, for a period of one (1) year;
and further provided, that no business will be considered to be in competition
with ABI Companies unless its business relates to the manufacture, sale, testing
or development of products containing interferon alpha, interferon gamma, tumor
necrosis factor alpha, lactosucrose, interleukin 18, or some other bioactive
substance hereafter developed, or brought under development, by an ABI Company.
Employer and Employee recognize and agree that ABI Companies may obtain or
develop additional technologies from time to time, and if that is the case,
Employer may expand the terms of this non-competition provision by giving
written notice to Employee of the additional technologies that are to be
protected.
7.07. In the event of a breach by Employee of any provisions
of this Article VII, the parties hereto agree that Employer, in addition to any
other remedies to which Employer may be entitled at law, shall be entitled to
the remedy of specific performance, it being understood and agreed by the
parties hereto that damages may be difficult to ascertain, and that an award of
damages would in all probability not sufficiently compensate Employer for any
breach by Employee of such provisions. ABI Companies are intended third-party
beneficiaries of the provisions of this Article VII.
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ARTICLE VIII
STOCK OPTIONS
8.01. Upon commencement of employment on January 4, 1999,
Employee shall be awarded options to purchase one hundred thousand (100,000)
shares of common stock of ABI pursuant to the Company's 1996 Employee Stock
Option Plan, as amended and restated as of September 12, 1998 (the "Plan"). The
option price per share under such options shall be one hundred percent (100%) of
the Fair Market Value of Employer's common stock as of January 4, 1999, as
defined and set forth in Section 4.06 of the Plan. A copy of said Plan is
attached to this Employment Contract at Appendix "B", and is hereby incorporated
by reference, as if fully herein set forth in its entirety. Reference is made to
such Plan for a full explanation of the terms and conditions of the Plan, and
options granted to Employee pursuant to this Section 8.01 shall be fully subject
to all of the terms, conditions and provisions of the Plan. Options granted
under this Section 8.01 to Employee shall also be subject to any future
amendments of the Plan, made pursuant to Section 4.10 of the Plan. The options
are "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986. The 100,000 options to be granted to Employee on January
4, 1999, pursuant to this Section 8.01 shall vest one-third (1/3) at January 3,
2000, one-third (1/3) at January 3, 2001, and one-third (1/3) at January 3,
2002.
8.02. The grant of options described in Section 8.01 above
shall include the award of "Limited Rights" within the meaning of Article III of
the Plan, relating to each
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option granted. Said Limited Rights shall be exercisable subject to all of the
terms and conditions of the Plan.
8.03. Employee agrees to execute and deliver to Employer an
appropriate incentive stock option agreement, as required by the Internal
Revenue Code of 1986 and regulations promulgated thereunder, evidencing the
grant of options provided for in this Article VIII.
ARTICLE IX
COMPULSORY ARBITRATION
Employer and Employee desire to avoid and settle without
litigation future disputes which may arise between them relative to this
Contract. Accordingly, the parties agree to engage in good faith negotiations to
resolve any such dispute. In the event they are unable to resolve any such
dispute by negotiation, such dispute shall be submitted to arbitration to take
place in Dallas County in the State of Texas in compliance with the Commercial
Arbitration Rules of the American Arbitration Association. The arbitration award
shall be final and binding upon the parties hereto and may be filed with and
enforced by any court of competent jurisdiction.
ARTICLE X
ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL
10.01. This Contract supersedes all other agreements, either
oral or in writing, between the parties to this Contract with respect to the
employment of Employee by
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Employer, and this Contract contains the entire understanding of the parties and
all of the covenants and agreements between the parties with respect to such
employment.
10.02. This Contract may be amended only by an instrument
signed in writing by both parties; and provided further, that no amendment may
be executed on behalf of Employer, except pursuant to a resolution of the Board
of Directors of Employer.
10.03. The following provisions shall survive the expiration
of this Agreement: ARTICLES VII, VIII, IX and X.
IN WITNESS WHEREOF, this Contract is executed by the
undersigned as of this ____ day of _______________, 1998.
EMPLOYEE: EMPLOYER:
AMARILLO BIOSCIENCES, INC.
By:
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KATHLEEN L. KELLEHER JOSEPH M. CUMMINS, President
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EXHIBIT 10.32
EMPLOYMENT CONTRACT
This Employment Contract ("Contract") is entered into by and between
AMARILLO BIOSCIENCES, INC., a Texas corporation ("Employer"), and DR. PHILIP C.
FOX, 6509 Seven Locks Rd., Cabin John, Maryland ("Employee"). ABI and its
controlled subsidiaries shall be hereinafter collectively referred to as "ABI
Companies". Employer hereby employs Employee, and Employee accepts employment,
on the following terms and conditions.
ARTICLE I
TERM OF EMPLOYMENT
1.01. By this Contract, Employer employs Employee and Employee
accepts employment with Employer and with such ABI Companies as Employer shall
designate for a period of two (2) years from January 1, 1999; however, this
Contract may be terminated earlier by Employer for cause, at its option, by
giving written notice of termination to Employee, without prejudice to any other
remedy to which Employer may be entitled either at law, in equity or under this
Contract. "For cause," as used in this Section 1.01, shall mean and include any
of the following events:
(a) Misappropriation or embezzlement by Employee involving
Employer or an ABI Company;
(b) The conviction in any jurisdiction of Employee for any
crime involving an ABI Company which constitutes a felony;
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(c) Employee's material violation of any of the material
provisions of this Contract; provided, however, that Employer shall give written
notice of Employee's violation of such provisions and Employee shall have a
period of twenty (20) business days to cure such violation; or
(d) Employee shall have become Disabled (as defined in
Section 2.01, below), and said Disability shall have continued for a period of
six (6) consecutive months, or a period of six (6) months in any twelve (12)
month period. All determinations regarding the existence and continuation of a
Disability shall be made as provided in Section 2.01, below.
Termination of this Contract for cause shall be effective upon written
notice thereof to Employee. Employee shall thereupon be entitled to compensation
earned prior to the date of termination, computed pro rata up to and including
the date of termination, shall be entitled to no further compensation, and will
be relieved of all duties and obligations under this Contract as of the date of
termination; provided, however, that the provisions of Articles VII, VIII, IX,
and X shall survive both the expiration of this Contract, or any earlier
termination.
1.02. Employer may terminate this Contract at any time upon two (2)
weeks prior written notice to Employee; however, in the event of such
termination by Employer without cause, Employer shall continue to pay to
Employee the monthly base salary set forth in Section 2.01, below, and all
benefits provided herein shall continue, for a period of six (6) months from the
date Employee receives notice of termination. In the event Employee
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obtains other employment, compensation earned by Employee during this period
will be deducted from Employer's obligation under this Section 1.02.
1.03. Employee may terminate this Contract solely for cause at his
option, by giving written notice of termination to Employer, without prejudice
to any other remedy to which Employee may be entitled either at law, or equity
or under this Contract. "For cause" as used in this Section 1.03 shall mean and
include any of the following events:
(a) Employer's material violation of any material provisions
of this Contract; provided, however, that Employee shall give written notice of
Employer's violation of such provisions and Employer shall have twenty (20)
business days to cure any non-monetary violation and three (3) business days to
cure any monetary violation; or
(b) Bankruptcy, receivership or dissolution of the Employer.
Termination of this Contract by the Employee for cause shall be effective, after
the expiration of any cure period, upon written notice thereof to Employer. In
the event of such termination by Employee for cause, Employer shall continue to
pay Employee the monthly base salary as set forth in Section 2.01 through
December 31, 2000.
ARTICLE II
COMPENSATION
2.01. As compensation for all services rendered under this
Contract, Employee shall be paid by Employer a salary of Twelve Thousand Five
Hundred and No/100 Dollars ($12,500.00) per month, payable at least monthly
during the term of this Contract. The amount paid is to be prorated for any
partial employment period.
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2.02. In the event Employee becomes Disabled (as hereinafter
defined), Employee shall continue to receive compensation from employer as
follows (but only until the expiration of this Contract):
(i) during the first two (2) months following a
determination of Disability, Employee shall
receive compensation at the rate of one hundred
percent (100%) of salary;
(ii) during the third and fourth months following a
determination of Disability, Employee shall receive
compensation at the rate of seventy-five percent
(75%) of salary; and
(iii) during the fifth and sixth months following a
determination of Disability, Employee shall receive
compensation at the rate of fifty percent (50%) of
salary; and
(iv) after six (6) months following a determination of
disability, Employee's compensation and all fringe
benefits shall terminate, but this Contract shall
remain in force, and Employee shall remain an
employee of Employer, until Employer shall have given
notice of termination as provided in Section 1.01,
above.
For purposes of determining the percentage of salary and the duration
of payment thereof to which Employee is entitled following a determination of
Disability, if Employee resumes full-time employment hereunder after such
determination and thereafter becomes Disabled again, such succeeding period of
Disability shall be deemed a continuation of the prior period of Disability
unless a period of at least six continuous months of active full-time employment
has elapsed since the conclusion of the prior period of Disability.
Notwithstanding anything to the contrary contained in this Section
2.02:
(i) During any period of Disability, if Employee receives
more than his base monthly salary as provided in
Section 2.01 from a combination of (a) disability
income insurance proceeds paid
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to Employee under any policies owned by and paid for
by the Employer and (b) compensation paid by Employer
pursuant to this Section 2.02, then any such excess
shall be promptly returned by Employee to Employer.
For example, if Employee is disabled during the first
year of this Agreement such that his compensation
under Section 2.01 is $12,500.00 a month
($150,000.00 / 12) and such disability has continued
for five (5) months such that Employee is receiving
fifty percent (50%) of his salary being $6,250.00 a
month, and if Employee receives $7,500.00 from
disability income insurance proceeds paid under a
policy owned by and paid for by the Employer, then
the Employee shall return to Employer the sum of
$1,250.00 being the excess of the amount Employee
would otherwise receive, over the base monthly
salary under Section 2.01 ($6,250.00 + $7,500.00 -
$12,500.00); and
(ii) Employee shall be conclusively deemed to be Disabled
for purposes of this Agreement during any period in
which he receives disability insurance proceeds from
an insurance carrier pursuant to clause (i)(a).
For all purposes of this Contract, "Disability" (including the
adjective "Disabled") shall mean Employee's inability by reason of physical or
mental incapacity to perform the customary duties of his employment for a period
of thirty (30) consecutive days or a period of thirty (30) days in any
consecutive three (3) month period. If any dispute arises as to the existence of
Employee's Disability, such dispute shall be resolved by two licensed
physicians, one selected by the Board of Directors of Employer (other than
Employee) and one selected by Employee. If the two physicians so selected cannot
agree as to whether or not Employee is Disabled, the two physicians so selected
shall designate a third physician and the determination of two of the three
physicians so selected as to whether or not Employee is Disabled shall be final
and binding on the parties for all purposes.
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2.03. Employer shall perform an annual performance review of
Employee's performance for the purpose of determining whether Employee's salary
and benefits should be increased.
ARTICLE III
DUTIES OF EMPLOYEE
3.01. Employee is employed as Director of Research and Development.
Employee shall perform the duties of Director of Research and Development, as
such duties may be further set forth by resolution of the Board of Directors of
Employer. The expected duties are delineated in Appendix "A" to this Employment
Contract; however, Employee understands and agrees that Employer shall have the
right to modify such duties from time to time, in consultation with Employee,
consistent with the legitimate business needs of Employer. Employee shall devote
his entire productive time, ability, attention and energies to the business of
Employer during the term of this Contract and during such time, Employee shall
not directly or indirectly render any services of a business, commercial or
professional nature to any other person or organization, whether or not for
compensation, without the prior consent of the Board of Directors of Employer.
The Employer hereby acknowledges that the Board of Directors of Employer
approves of the following services by Employee:
(a) Continuation of Employee's current professional
activities being (i) President of International Society for Oral Oncology; (ii)
Member of Advisory Board Sjogren's Syndrome Foundation; (iii) Member of
Editorial Boards of Oral Surgery, Oral Medicine and Oral Pathology and Special
Care in Dentistry; and
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(b) Review manuscripts for various medical journals.
(c) To honor previously accepted speaking engagements.
3.02. The principal location of the Employee's employment shall be
Montgomery County, Maryland or the immediate vicinity. Employee shall not be
required to relocate to Employer's offices in Amarillo, Texas or elsewhere.
Until such time as Employer establishes a business office in Montgomery County,
Maryland, Employee may perform his duties from his home in Montgomery County,
Maryland. In the event Employee, for any reason, is unable to perform his duties
from his home, Employer shall, within sixty (60) days notice from Employee to
Employer of such inability, rent, purchase or otherwise obtain space in
Montgomery County, Maryland sufficient for Employee to perform his duties.
3.03. The Employer will provide Employee, at Employer's expense,
with all computer equipment, telecommunication lines, etc., required in
Employer's opinion for Employee's performance of his duties. Ownership of such
equipment will remain with the Employer.
ARTICLE IV
EMPLOYEE'S OBLIGATIONS AS TO INSURANCE
4.01. Employee agrees to submit to physical examination as may be
required for the obtaining by Employer of insurance on Employee's life, and
agrees to consent to the issuance of a policy or policies of insurance on his
life, such policies to be owned by Employer, and naming Employer as beneficiary.
Upon termination of Employee's employment for any reason, and if requested by
Employee, Employer shall assign any such
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policy to Employee, so that Employee shall have the option of keeping the policy
in force at Employee's expense. The foregoing notwithstanding, Employer shall be
entitled to retain the accumulated cash value of any such policy.
ARTICLE V
EMPLOYEE BENEFITS
5.01. If Employer provides hospital, surgical, medical, dental,
group life insurance, performance bonus, or other fringe benefits to its
employees, or any of them, at any time during the term of this Contract,
Employee shall be entitled to participate in such benefits, on terms and
conditions at least as favorable as those accorded to other employees of
Employer, subject to insurability. As of the date of execution of this Contract,
Employer maintains for its employees $250,000.00 per employee, group accidental
death, and $50,000 per employee, group term life.
5.02. Employee and his immediate family will participate in
Employer's health care plan which the Employer shall put in place for Employee
in Montgomery County, Maryland in the near future and which shall be with the
Preferred Provider Network plan of Blue Cross Blue Shield or an equivalent
insurer and plan. In the interim, Employee may obtain health insurance for
himself and his immediate family and Employer will reimburse Employee for
premiums on said health insurance upon Employee providing written documentation
of such premium.
5.03. During the period of his employment, the Employee shall be
entitled to four (4) weeks (twenty (20) business days) of vacation annually and
shall receive full
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compensation and benefits during his vacation periods. Vacations shall be taken
at such time or times as the Employee and Employer shall mutually agree. One (1)
week unused vacation time may be carried forward each year. In addition to
vacation time, Employee shall be entitled to such paid sick leave and holidays
as are provided to other full-time employees of Employer.
ARTICLE VI
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE
6.01. Employee is authorized to incur reasonable business expenses
for promoting the business of Employer, including expenditures for entertainment
and travel. Further, Employer shall pay for or reimburse to Employee: (i)
Employee's dues to professional organizations and professional journals which
are approximately $2,000.00 per year; and (ii) for his professional activities
including attendance at meetings and conferences, including travel,
registration, lodging and related expenses, and also including preparation of
presentations and manuscripts which Employee estimates will cost approximately
$7,000.00 per year. Employer will reimburse Employee for all such expenses upon
Employee's presentation of written expense vouchers, itemizing such
expenditures.
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ARTICLE VII
PROPERTY RIGHTS OF PARTIES
7.01. Employee will have access to and become familiar with, during
the course of employment, various trade secrets, consisting of formulas,
devices, secret inventions, processes, compilations of information, records,
and specifications owned by ABI Companies and regularly used in the operation of
ABI Companies. Employee shall not disclose any such trade secrets directly or
indirectly nor use them in any way either during the term of this Contract or at
any time thereafter except as required in the course of his employment with ABI
Companies; provided, however, that this Section 7.01 shall not restrict Employee
in any manner with respect to any such information or property which is now or
which hereafter through no improper act or failure to act on the part of
Employee becomes generally known or available to the public without breach of
this Contract. All files, records, documents, drawings, specifications,
equipment and similar items relating to the business of ABI Companies, whether
or not prepared by Employee, shall remain the exclusive property of ABI
Companies and shall not be removed from the premises of Employer under any
circumstances, except in pursuit of the trade and business of ABI Companies.
7.02. On the termination of employment or whenever requested by
Employer, Employee shall immediately deliver to Employer all property in
Employee's possession or under Employee's control belonging to ABI Companies,
including but not limited to all accounting records, computer terminals and
tapes, disks, or other data storage mechanisms, accounting machines, and all
office furniture and fixtures, supplies and other personal
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property in the possession or under the control of Employee, in good condition,
ordinary wear and tear excepted, and including without limitation all
correspondence files, research data, and patent information or data, of every
sort.
7.03. Employee does not claim any rights or interests in and to
trade secrets, formulas, devices, inventions, processes, patents, applications,
continuations, copyrights, trademarks, compilations of information, records,
specifications, rights, interests and data of any other sort, affecting or
pertaining directly or indirectly to the business of ABI Companies as now
conducted, or to the patents, trade secrets, and other rights now owned by ABI
Companies.
7.04. Employee agrees that he will promptly and fully inform and
disclose to Employer all inventions, designs, improvements and discoveries that
Employee may have during the term of this Contract that pertain or relate to the
business of ABI Companies or to any experimental work carried on by ABI
Companies, whether conceived by Employee alone or with others and whether or not
conceived during regular working hours. All such inventions, designs,
improvements and discoveries shall be the exclusive property of Employer.
Employee shall assist ABI Companies in obtaining patents on all such inventions,
designs, improvements and discoveries deemed patentable by ABI Companies, and
shall execute all documents and do all things necessary to obtain such patents
for Employer or ABI Companies.
7.05. It is contemplated that Employee in the course of his
employment will be engaged in work involving various patents and secret
processes owned by ABI Companies.
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All experiments, developments, formulas, patterns, devices, secret inventions
and compilations of information, records, and specifications regarding such
matters are trade secrets, which Employee shall not disclose directly or
indirectly to anyone other than ABI Companies or their agents, or use in any
way, either during the term of this Contract or at any time after the
termination of this Contract, except as required in the course and scope of his
employment with ABI.
7.06. During the term of this Contract, Employee shall not directly
or indirectly either as an employee, employer, consultant, agent, principal,
partner, stock holder, corporate officer, director, or in any other individual
or representative capacity engage or participate in any business that is in
competition in any manner whatsoever with the business of ABI Companies;
provided, however, that Employee may without restriction purchase, own and sell
stock or other securities of any company which is neither in the pharmaceutical
business, nor engaged in the manufacture, sale, testing or development of
products containing interferon alpha, interferon gamma, tumor necrosis factor
alpha, lactosucrose, interleukin 18, or some other bioactive substance hereafter
developed, or brought under development, by an ABI Company, and with which
Employee has been actively involved in his employment with ABI; and further,
Employee may without restriction invest in professionally managed mutual funds,
where the investment decision regarding specific securities is made by the fund
manager, and not by Employee; and Employee may purchase, own and sell stock or
other securities of pharmaceutical companies, and companies engaged in the
manufacture, sale, testing or development of products containing interferon
alpha, interferon gamma, tumor
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necrosis factor alpha, lactosucrose, interleukin 18, or some other bioactive
substance hereafter developed, or brought under development, by an ABI Company,
and with which Employee had been actively involved in his employment with ABI,
as long as Employee is not directly or indirectly through one or more
intermediaries in control of or controlled by or under common control with any
such company. Furthermore, upon the termination of this Contract, Employee
expressly agrees not to engage or participate directly or indirectly in any
business that is in competition with the business of ABI Companies, for a period
of one (1) year; and further provided, that no business will be considered to be
in competition with ABI Companies unless its business relates to the
manufacture, sale, testing or development of products containing interferon
alpha, interferon gamma, tumor necrosis factor alpha, lactosucrose, interleukin
18, or some other bioactive substance hereafter developed, or brought under
development, by an ABI Company, and with which Employee had been actively
involved in his employment with ABI. Employer and Employee recognize and agree
that ABI Companies may obtain or develop additional technologies from time to
time, and if that is the case, and if Employee was actively involved during his
employment with such additional technologies, Employer may expand the terms of
this non-competition provision by giving written notice to Employee of the
additional technologies that are to be protected. Except as specifically limited
herein, Employee may purchase, own and sell stock, securities and other
investments.
7.07. In the event of a breach by Employee of any provisions of
this Article VII, the parties hereto agree that Employer, in addition to any
other remedies to which
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Employer may be entitled at law, shall be entitled to the remedy of specific
performance, it being understood and agreed by the parties hereto that damages
may be difficult to ascertain, and that an award of damages would in all
probability not sufficiently compensate Employer for any breach by Employee of
such provisions. ABI Companies are intended third-party beneficiaries of the
provisions of this Article VII.
ARTICLE VIII
STOCK OPTIONS
8.01. Upon commencement of employment on January 1, 1999, Employee
shall be awarded options to purchase one hundred thousand (100,000) shares of
common stock of ABI pursuant to the Company's 1996 Employee Stock Option Plan,
as amended and restated as of May 12, 1998 (the "Plan"). The option price per
share under such options shall be one hundred percent (100%) of the Fair Market
Value of Employer's common stock as of January 1, 1999, as defined and set forth
in Section 4.06 of the Plan. A copy of said Plan is attached to this Employment
Contract at Appendix "B", and is hereby incorporated by reference, as if fully
herein set forth in its entirety. Reference is made to such Plan for a full
explanation of the terms and conditions of the Plan, and options granted to
Employee pursuant to this Section 8.01 shall be fully subject to all of the
terms, conditions and provisions of the Plan. Options granted under this Section
8.01 to Employee shall also be subject to any future amendments of the Plan,
made pursuant to Section 4.10 of the Plan. The options are "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986.
It is understood and acknowledged that previously the Plan
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contained provisions for five-year vesting, and limited options that may be
granted in any one year to any one employee to 50,000 options. The Committee
administering the Plan has made the necessary amendments to the Plan, to allow
vesting to occur over a three-year period, one-third (1/3) of the options to
vest at December 31, 1999, one-third (1/3) at December 31, 2000, and one-third
(1/3) at December 31, 2001; and to increase the limit on options granted to one
employee in any one year to at least 100,000 options. Said amendments were made
by the Committee effective September 12, 1999. The 100,000 options granted to
Employee on January 1, 1999 pursuant to this Section 8.01 shall vest one-third
(1/3) at December 31, 1999, one-third (1/3) at December 31, 2000, and one-third
(1/3) at December 31, 2001.
8.02. The grant of options described in Section 8.01 above shall
include the award of "Limited Rights" within the meaning of Article III of the
Plan, relating to each option granted. Said Limited Rights shall be exercisable
subject to all of the terms and conditions of the Plan.
8.03. Employee agrees to execute and deliver to Employer an
appropriate incentive stock option agreement, as required by the Internal
Revenue Code of 1986 and regulations promulgated thereunder, evidencing the
grant of options provided for in this Article VIII.
ARTICLE IX
COMPULSORY ARBITRATION
Employer and Employee desire to avoid and settle without litigation
future disputes which may arise between them relative to this Contract.
Accordingly, the parties
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agree to engage in good faith negotiations to resolve any such dispute. In the
event they are unable to resolve any such dispute by negotiation, such dispute
shall be submitted to arbitration to take place in Dallas County in the State of
Texas in compliance with the Commercial Arbitration Rules of the American
Arbitration Association. The arbitration award shall be final and binding upon
the parties hereto and may be filed with and enforced by any court of competent
jurisdiction.
ARTICLE X
ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL
10.01. This Contract supersedes all other agreements, either oral
or in writing, between the parties to this Contract with respect to the
employment of Employee by Employer, and this Contract contains the entire
understanding of the parties and all of the covenants and agreements between the
parties with respect to such employment.
10.02. This Contract may be amended only by an instrument signed in
writing by both parties; and provided further, that no amendment may be executed
on behalf of Employer, except pursuant to a resolution of the Board of Directors
of Employer.
10.03. This Agreement shall be binding upon the Employer, its
successors and assigns. This Agreement shall inure to the benefit of and be
enforceable by the Employee and his personal or legal representatives,
executors, administrators, successors, heirs and assigns.
10.04. The following provisions shall survive the expiration of this
Agreement: ARTICLES VII, VIII, IX and X.
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IN WITNESS WHEREOF, this Contract is executed by the undersigned as of
this ____ day of _______________, 1998.
EMPLOYEE: EMPLOYER:
AMARILLO BIOSCIENCES, INC.
By:
- --------------------------- ---------------------------
PHILIP C. FOX JOSEPH M. CUMMINS, President
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EXHIBIT 10.33
EMPLOYMENT CONTRACT
This Employment Contract ("Contract") is entered into by and between
AMARILLO BIOSCIENCES, INC., a Texas corporation ("Employer"), and JOHN SMITH
("Employee"). ABI and its controlled subsidiaries shall be hereinafter
collectively referred to as "ABI Companies". Employer hereby employs Employee,
and Employee accepts employment, on the following terms and conditions.
ARTICLE I
TERM OF EMPLOYMENT
1.01. By this Contract, Employer employs Employee and Employee
accepts employment with Employer and with such ABI Companies as Employer shall
designate for a period of one (1) year from date of execution of this Contract;
however, this Contract may be terminated earlier by Employer for cause, at its
option, by giving written notice of termination to Employee, without prejudice
to any other remedy to which Employer may be entitled either at law, in equity
or under this Contract. "For cause," as used in this Section 1.01, shall mean
and include any of the following events:
(a) Misappropriation or embezzlement by Employee involving
Employer or an ABI Company;
(b) The conviction in any jurisdiction of Employee for any
crime involving an ABI Company which constitutes a felony;
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(c) Employee's material violation of any of the material
provisions of this Contract; provided, however, that Employer shall give written
notice of Employee's violation of such provisions and Employee shall have a
period of twenty (20) business days to cure such violation; or
(d) Employee shall have become Disabled (as defined in
Section 2.01, below), and said Disability shall have continued for a period of
six (6) consecutive months, or a period of six (6) months in any twelve (12)
month period. All determinations regarding the existence and continuation of a
Disability shall be made as provided in Section 2.01, below.
Termination of this Contract for cause shall be effective upon written
notice thereof to Employee. Employee shall thereupon be entitled to compensation
earned prior to the date of termination, computed pro rata up to and including
the date of termination, shall be entitled to no further compensation, and will
be relieved of all duties and obligations under this Contract as of the date of
termination; provided, however, that the provisions of Articles VII, VIII, IX,
and X shall survive both the expiration of this Contract, or any earlier
termination.
1.02. Employer may terminate this Contract at any time upon two (2)
weeks prior written notice to Employee; however, in the event of such
termination by Employer without cause, Employer shall continue to pay to
Employee the monthly base salary set forth in Section 2.01, below, for a period
of one (1) year from the date Employee receives notice of termination. Employee
must seek alternative employment and show reasonable proof of this to Employer.
Compensation earned by Employee during this period will be deducted from
Employer's obligation under this Section 1.02. In the case of termination of the
Contract by Employer, Employer can at the time of termination
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<PAGE> 3
release Employee in writing from the non-competition provisions contained in
Section 7.06, below. In such event, the salary continuation provided for in this
Section shall terminate.
1.03. Employee is not a U.S. citizen, but will apply for an
immigration work visa so that he may lawfully reside in the United States during
the term of this Contract. If Employee should be required to terminate his
residence in the U. S. at any time during the term of this Contract due to
inability to obtain or extend a work visa, or for any other reason relating to
the immigration and naturalization laws of the United States, this Contract
shall thereupon immediately terminate, Employee shall be entitled to
compensation for any completed but uncompensated period of employment, and
Employer and Employee shall thereafter have no obligation one to the other
arising from this Contract, except that Articles VII, VIII, IX and X shall
survive such termination.
ARTICLE II
COMPENSATION
2.01. As compensation for all services rendered under this
Contract, Employee shall be paid by Employer a salary of Eight Thousand Three
Hundred Thirty-Three and No/100 Dollars ($8,333.00) per month, payable at least
monthly during the term of this Contract. The amount paid is to be prorated for
any partial employment period. In the event Employee becomes Disabled (as
hereinafter defined), Employee shall continue to receive compensation from
employer as follows (but only until the expiration of one (1) year from date of
execution of this Contract):
(i) during the first two (2) months following a
determination of Disability, Employee shall
receive compensation at the rate of one
hundred percent (100%) of salary;
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<PAGE> 4
(ii) during the third and fourth months following
a determination of Disability, Employee
shall receive compensation at the rate of
seventy-five percent (75%) of salary; and
(iii) during the fifth and sixth months following
a determination of Disability, Employee
shall receive compensation at the rate of
fifty percent (50%) of salary; and
(iv) after six (6) months following a
determination of disability, Employee's
compensation and all fringe benefits shall
terminate, but this Contract shall remain in
force, and Employee shall remain an employee
of Employer, until Employer shall
have given notice of termination as provided
in Section 1.01, above.
For purposes of determining the percentage of salary and the duration
of payment thereof to which Employee is entitled following a determination of
Disability, if Employee resumes full-time employment hereunder after such
determination and thereafter becomes Disabled again, such succeeding period of
Disability shall be deemed a continuation of the prior period of Disability
unless a period of at least six continuous months of active full-time employment
has elapsed since the conclusion of the prior period of Disability.
Notwithstanding anything to the contrary contained in this Section
2.01:
(i) any and all amounts payable to Employee
hereunder during any period
of Disability shall be reduced by any
disability income insurance proceeds paid to
Employee under any policies owned by and
paid for by the Employer; and
(ii) Employee shall be conclusively deemed to be
Disabled for purposes of this Agreement
during any period in which he receives
disability insurance proceeds from an
insurance carrier pursuant to clause (i).
For all purposes of this Contract, "Disability" (including the
adjective "Disabled") shall mean Employee's inability by reason of physical or
mental incapacity to perform the customary duties of his employment for a period
of thirty (30) consecutive days or a period of thirty (30) days in any
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<PAGE> 5
consecutive three (3) month period. If any dispute arises as to the existence of
Employee's Disability, such dispute shall be resolved by two licensed
physicians, one selected by the Board of Directors of Employer (other than
Employee) and one selected by Employee. If the two physicians so selected cannot
agree as to whether or not Employee is Disabled, the two physicians so selected
shall designate a third physician and the determination of two of the three
physicians so selected as to whether or not Employee is Disabled shall be final
and binding on the parties for all purposes.
2.02. Employer shall pay the cost of moving Employee's household
goods, including furniture, furnishings and personal effects, from Pomona, New
York to Amarillo, Texas.
ARTICLE III
DUTIES OF EMPLOYEE
3.01. Employee is employed as Director of Marketing and shall work
at 800 9th Street, Amarillo, the principal offices of Employer, and at such
other place(s) in the City of Amarillo as Employer may direct. Employee shall
perform the duties of Director of Marketing, as such duties may be further set
forth by resolution of the Board of Directors of Employer. The expected duties
are delineated in Appendix "A" to this Employment Contract; however, Employee
understands and agrees that Employer shall have the right to modify such duties
from time to time, consistent with the legitimate business needs of Employer.
Employee shall devote his entire productive time, ability, attention and
energies to the business of Employer during the term of this Contract and during
such time, Employee shall not directly or indirectly render any services of a
business, commercial or professional nature to any other person or organization,
whether or not for compensation, without the prior consent of the Board of
Directors of Employer.
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<PAGE> 6
ARTICLE IV
EMPLOYEE'S OBLIGATIONS AS TO INSURANCE
4.01. Employee agrees to submit to physical examination as may be
required for the obtaining by Employer of insurance on Employee's life, and
agrees to consent to the issuance of a policy or policies of insurance on his
life, such policies to be owned by Employer, and naming Employer as beneficiary.
Upon termination of Employee's employment for any reason, and if requested by
Employee, Employer shall assign any such policy to Employee, so that Employee
shall have the option of keeping the policy in force at Employee's expense. The
foregoing notwithstanding, Employer shall be entitled to retain the accumulated
cash value of any such policy.
ARTICLE V
EMPLOYEE BENEFITS
5.01. If Employer provides hospital, surgical, medical, dental,
group life insurance, or other fringe benefits to its employees, or any of them,
at any time during the term of this Contract, Employee shall be entitled to
participate in such benefits, on terms and conditions at least as favorable as
those accorded to other employees of Employer, subject to insurability;
provided, however, that Employee shall be entitled to four (4) weeks (20 work
days) paid vacation per year, irrespective of vacation benefits of other
employees. A maximum of one (1) week unused vacation may be carried forward to
the next year.
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<PAGE> 7
ARTICLE VI
REIMBURSEMENT OF EXPENSES INCURRED BY EMPLOYEE
6.01. Employee is authorized to incur reasonable business expenses
for promoting the business of Employer, including expenditures for entertainment
and travel. Employer will reimburse Employee for all such expenses upon
Employee's presentation of written expense vouchers, itemizing such
expenditures.
ARTICLE VII
PROPERTY RIGHTS OF PARTIES
7.01. Employee will have access to and become familiar with, during
the course of employment, various trade secrets, consisting of formulas,
devices, secret inventions, processes, compilations of information, records, and
specifications owned by ABI Companies and regularly used in the operation of ABI
Companies. Employee shall not disclose any such trade secrets directly or
indirectly nor use them in any way either during the term of this Contract or at
any time thereafter except as required in the course of his employment. All
files, records, documents, drawings, specifications, equipment and similar items
relating to the business of ABI Companies, whether or not prepared by Employee,
shall remain the exclusive property of ABI Companies and shall not be removed
from the premises of Employer under any circumstances, except in pursuit of the
trade and business of ABI Companies.
7.02. On the termination of employment or whenever requested by
Employer, Employee shall immediately deliver to Employer all property in
Employee's possession or under Employee's control belonging to ABI Companies,
including but not limited to all accounting records,
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<PAGE> 8
computer terminals and tapes, disks, or other data storage mechanisms,
accounting machines, and all office furniture and fixtures, supplies and other
personal property in the possession or under the control of Employee, in good
condition, ordinary wear and tear excepted, and including without limitation all
correspondence files, research data, and patent information or data, of every
sort.
7.03. Employee does not claim any rights or interests in and to
trade secrets, formulas, devices, inventions, processes, patents, applications,
continuations, copyrights, trademarks, compilations of information, records,
specifications, rights, interests and data of any other sort, affecting or
pertaining directly or indirectly to the business of ABI Companies as now
conducted, or to the patents, trade secrets, and other rights now owned by ABI
Companies.
7.04. Employee agrees that he will promptly and fully inform and
disclose to Employer all inventions, designs, improvements and discoveries that
Employee may have during the term of this Contract that pertain or relate to the
business of ABI Companies or to any experimental work carried on by ABI
Companies, whether conceived by Employee alone or with others and whether or not
conceived during regular working hours. All such inventions, designs,
improvements and discoveries shall be the exclusive property of Employer.
Employee shall assist ABI Companies in obtaining patents on all such inventions,
designs, improvements and discoveries deemed patentable by ABI Companies, and
shall execute all documents and do all things necessary to obtain such patents
for Employer or ABI Companies.
7.05. It is contemplated that Employee in the course of his
employment will be engaged in work involving various patents and secret
processes owned by ABI Companies. All experiments, developments, formulas,
patterns, devices, secret inventions and compilations of
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<PAGE> 9
information, records, and specifications regarding such matters are trade
secrets, which Employee shall not disclose directly or indirectly to anyone
other than ABI Companies or their agents, or use in any way, either during the
term of this Contract or at any time after the termination of this Contract,
except as required in the course and scope of his employment.
7.06. During the term of this Contract, Employee shall not directly
or indirectly either as an employee, employer, consultant, agent, principal,
partner, stock holder, corporate officer, director, or in any other individual
or representative capacity engage or participate in any business that is in
competition in any manner whatsoever with the business of ABI Companies;
provided, however, that Employee may without restriction invest in
professionally managed mutual funds, where the investment decision regarding
specific securities is made by the fund manager, and not by Employee; and
Employee may purchase, own and sell stock or other securities of pharmaceutical
companies, as long as Employee is not directly or indirectly through one or more
intermediaries in control of or controlled by or under common control with any
such company. Furthermore, upon the termination of this Contract, Employee
expressly agrees not to engage or participate directly or indirectly in any
business that is in competition with the business of ABI Companies, for a period
of one (1) year; and further provided, that no business will be considered to be
in competition with ABI Companies unless its business relates to the
manufacture, sale, testing or development of products containing interferon
alpha, interferon gamma, tumor necrosis factor alpha, lactosucrose, interleukin
18, or some other bioactive substance hereafter developed, or brought under
development, by an ABI Company. Employer and Employee recognize and agree that
ABI Companies may obtain or develop additional technologies from time to time,
and if that is the case, Employer may expand the terms of
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<PAGE> 10
this non-competition provision by giving written notice to Employee of the
additional technologies that are to be protected.
7.07. In the event of a breach by Employee of any provisions of
this Article VII, the parties hereto agree that Employer, in addition to any
other remedies to which Employer may be entitled at law, shall be entitled to
the remedy of specific performance, it being understood and agreed by the
parties hereto that damages may be difficult to ascertain, and that an award of
damages would in all probability not sufficiently compensate Employer for any
breach by Employee of such provisions. ABI Companies are intended third-party
beneficiaries of the provisions of this Article VII.
ARTICLE VIII
STOCK OPTIONS
8.01. Upon commencement of employment, Employee shall be awarded
options to purchase forty thousand (40,000) shares of common stock of ABI
pursuant to the Company's 1996 Employee Stock Option Plan, as amended and
restated as of May 13, 1997 (the "Plan"). A copy of said Plan is attached to
this Employment Contract at Appendix "B", and is hereby incorporated by
reference, as if fully herein set forth in its entirety. Reference is made to
such Plan for a full explanation of the terms and conditions of the Plan, and
options granted to Employee pursuant to this Section 8.01 shall be fully subject
to all of the terms, conditions and provisions of the Plan. Options granted
under this Section 8.01 to Employee shall also be subject to any future
amendments of the Plan, made pursuant to Section 4.10 of the Plan. The options
are "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986.
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<PAGE> 11
8.02. The grant of options described in Section 8.01 above shall
include the award of "Limited Rights" within the meaning of Article III of the
Plan, relating to each option granted. Said Limited Rights shall be exercisable
subject to all of the terms and conditions of the Plan.
8.03. Employee agrees to execute and deliver to Employer an
appropriate incentive stock option agreement, as required by the Internal
Revenue Code of 1986 and regulations promulgated thereunder, evidencing the
grant of options provided for in this Article VIII.
ARTICLE IX
COMPULSORY ARBITRATION
Employer and Employee desire to avoid and settle without litigation
future disputes which may arise between them relative to this Contract.
Accordingly, the parties agree to engage in good faith negotiations to resolve
any such dispute. In the event they are unable to resolve any such dispute by
negotiation, such dispute shall be submitted to arbitration to take place in
Dallas County in the State of Texas in compliance with the Commercial
Arbitration Rules of the American Arbitration Association. The arbitration award
shall be final and binding upon the parties hereto and may be filed with and
enforced by any court of competent jurisdiction.
ARTICLE X
ENTIRETY OF AGREEMENT; AMENDMENTS; SURVIVAL
10.01. This Contract supersedes all other agreements, either oral or
in writing, between the parties to this Contract with respect to the employment
of Employee by Employer, and this Contract contains the entire understanding of
the parties and all of the covenants and agreements between the parties with
respect to such employment.
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<PAGE> 12
10.02. This Contract may be amended only by an instrument signed in
writing by both parties; and provided further, that no amendment may be executed
on behalf of Employer, except pursuant to a resolution of the Board of Directors
of Employer.
10.03. The following provisions shall survive the expiration of this
Agreement: ARTICLES VII, VIII, IX and X.
IN WITNESS WHEREOF, this Contract is executed by the
undersigned as of this 14th day of September, 1998.
EMPLOYEE: EMPLOYER:
AMARILLO BIOSCIENCES, INC.
By:
- ----------------------------- ----------------------------
JOHN SMITH JOSEPH M. CUMMINS, President
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<PAGE> 1
EXHIBIT 10.34
[TRUST COMPANY OF THE SOUTH LETTERHEAD]
October 13, 1998
Mr. Joseph M. Cummins, DVM, PhD
President and Chief Executive Officer
Amarillo Biosciences, Inc.
800 West Ninth Avenue
Amarillo TX 79101-3206
Re: Engagement
Dear Dr. Cummins:
This letter is to confirm our understanding that Amarillo Biosciences, Inc. (the
"Company") has engaged Trust Company of the South ("TCOS") to act as its
Executive Advisor.
TCOS's services in connection with this engagement will include assisting the
Company, in (1) Preparation of a corporate profile suitable for use with brokers
and investors (research, write, design, print and distribute). All content is
subject to the Company's approval, (2) Designing and implementation of a plan
for both the short and long term promotion of investor interest in the Company,
(3) Interfacing with the investment community on behalf of the Company and
publicly promoting investor interest in the Company, (4) Preparation of press
releases, upon request, and introduction of the Company to appropriate financial
writers and media persons, (5) Enlistment of additional market makers for the
Company's stock, (6) Development of a list of key brokers that can be cultivated
on behalf of the Company and its stock, and seek to enhance the interest of
these brokers in the Company, (7) Assistance, when requested, in the preparation
of presentations to broker and investor groups, (8) Development, with Company's
officers of an ongoing in-house program for investor relations, (9) Coordination
with management and other board members in the selection of additional outside
board members, (10) Evaluation of the benefits of listing the Company's
securities on the American Stock Exchange when and if appropriate, (11)
Evaluation and recommendations regarding utilizing personal and corporate trust
services provided by TCOS.
The Company agrees to promptly reimburse TCOS for all expenses incurred by TCOS
pursuant to this engagement. Such expenses shall include but not be limited to,
transportation, lodging, mileage, meals, parking, tips, copying, printing,
telephone, overnight delivery, computer research, postage, telecopy and other
miscellaneous items. The Company shall have the right to pre-approve expense
charges which would exceed $7,500.00 in one calendar month.
The term of this Engagement will be for a period of five years from the
effective date of this letter agreement provided, however, that the Company may
terminate the Engagement prior to the expiration of said term by giving written
notice of termination to TCOS at least ten days prior to any six months
anniversary of this letter agreement.
Notwithstanding the termination of this agreement, the expense reimbursement
provisions contained herein, the indemnification and contribution provisions set
forth on Schedule I attached hereto and incorporated herein, and the
Non-Disclosure Agreement set forth on Schedule II and incorporated herein shall
survive and will remain in full force and effect.
<PAGE> 2
Mr. Joseph M. Cummins, DVM, PhD.
Amarillo Biosciences, Inc.
Engagement
October 13, 1998
Page 2
As remuneration for the aforementioned services, the Company agrees to
pay TCOS a fee of $6,000 per month. Additionally, TCOS is to receive a
Warrant to purchase up to 112,000 shares of the Company's common
stock at a price of $1.75 per share.
If, at any time from the date hereof through September 29, 2003, the Company
proposes to register its securities under the Securities Act of 1933 ("the Act")
or any such securities of the Company held by its stockholders (in any such
case, other than in connection with a merger, acquisition or pursuant to Form
S-8 or successor form), it will give written notice of its intention to do so by
registered mail ("Notice"), at least thirty (30 business days prior to the
filing of each such registration statement), to the Warrant Holder. Upon the
written request of the Warrant Holder, made within fifteen (15) business days
after receipt of the Notice, that the Company include any of the Warrant
Holder's shares of common stock of the Company in the proposed registration
statement (such request to specify the number of shares to be so included), the
Company shall use its best efforts to effect the registration under the Act of
the securities which it has been so requested to register, at the Company's sole
cost and expense and at no cost or expense to the Warrant Holder. Nothing herein
contained shall prohibit the Company from granting so-called "piggyback" rights
superior to or equal to the rights granted herein to any person or entity not
affiliated with the Company. Notwithstanding the provisions of this paragraph,
the Company shall have the right at any time after it shall have given Notice
(irrespective of whether any written request for inclusion of such securities
shall have already been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof. The Warrant will be exercisable beginning on the
effective date of this letter agreement and will expire if not exercised the
later of: (i) five years from the effective date of this letter agreement, or
(ii) eight years from the effective date of this letter agreement if the
holder(s) of the Warrant has not been afforded the opportunity to register the
underlying securities in a public offering of the Company's securities during
the initial five year period. The expense of registration will be paid by the
Company. In accordance with applicable securities laws, the Warrant will be
transferable at the written instruction of TCOS. The Warrant and underlying
common shares are subject to adjustment, proratably, in price and number in the
case of certain transactions such as mergers, recapitalization, stock splits and
stock dividends. The Warrant holder will have the right of co-sale. The Warrant
holder will also have "cheap stock" dilution protection, so that such holder
receives the right to additional shares and/or a lesser share price in the event
shares are issued at a below market price. The Company and TCOS shall undertake
to have a formal Warrant Agreement finalized on or before October 31, 1998 and
both parties understand the aforementioned is only a brief summary of certain
material provisions of the Warrant.
In connection with TCOS's services, the Company will furnish or cause
to be furnished to TCOS such information and data (hereinafter
referred to as the "Information") relating to the Company and such
access to the Company's officers, directors and employees and
independent contractors, as TCOS reasonably deems necessary or as TCOS
reasonably requests. The Company will be solely responsible for the
contents of any and all written or oral communications provided. The
Company represents and warrants that any such communications and all
information including, but not limited to, financial information, will
not contain any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in light of the circumstance under which such statements are
or will be made. The Company recognizes and confirms that in TCOS's
performance of its services hereunder, (a) TCOS may rely upon the
accuracy and completeness of the information without independent
verification and (b) TCOS does not assume responsibility for the
accuracy or completeness thereof whether or not it makes an independent
verification. TCOS shall provide the Company for its review, comment
and
<PAGE> 3
Mr. Joseph M. Cummins, DVM, PhD.
Amarillo Biosciences, Inc.
Engagement
October 13, 1998
Page 3
approval copies of any tangible communications whether written or
recorded on audio, video or film media, which TCOS may give to any
person in providing services under this Engagement. TCOS shall provide
such copies to the Company a minimum of three business days prior to
TCOS's first proposed use of such materials.
Any information obtained by TCOS pursuant to the Engagement shall be
governed by a Non-Disclosure Agreement between TCOS and the Company in
the form attached hereto as Schedule 11.
TCOS shall retain the legal status of an independent contractor. In no
event shall TCOS be or be deemed to be an employee or agent of the
Company, or to qualify for benefits afforded such persons as Company
employees. TCOS has no power to act for, represent or bind the Company.
The Company hereby irrevocably agrees to provide the indemnification as
set forth in Schedule I to TCOS and other parties specified therein.
This letter agreement shall be governed by, and construed in accordance
with, the laws of the State of South Carolina without regard to
principles of conflict of laws.
This letter agreement has been and is made solely for the benefit of
the Company and TCOS and its agents, employees, officers, directors,
stockholders and controlling persons and their respective successor and
assigns and heirs, and no other person shall acquire or have any right
under or by virtue of this letter agreement.
Please confirm that the foregoing accurately reflects our understanding
by signing, dating and returning to us the attached copy of this letter
agreement, along with your check for $8,500 representing the initial
monthly fee and an expense advance of $2,500, whereupon when accepted
and approved by the TCOS's Trust Committee this will become a binding
and effective agreement between us.
Very truly yours,
TRUST COMPANY OF THE SOUTH
/s/ ANDY M. CRANE, SR.
--------------------------
Andy M. Crane
President & CEO
Agreed and Accepted
AMARILLO BIOSCIENCES, INC.
By: /s/ JOSEPH M. CUMMINS
------------------------------------
Joseph M. Cummins, DVM, PhD.
President & Chief Executive Officer
Date: 15th October, 1998
---------------------------------
AMC:ctjk
Enclosures
<PAGE> 4
SCHEDULE I
TO ENGAGEMENT LETTER DATED OCTOBER 13,1998
BETWEEN TRUST COMPANY OF THE SOUTH
AND AMARILLO BIOSCIENCES, INC.
a) The Company agrees to indemnify and hold TCOS, its affiliates and
any affiliated entities of TCOS and their respective officers, directors,
partners, employees, agents and controlling persons within the meaning of
Section 15 of the Securities Act of 1933 or Section 20 of the Securities
Exchange Act of 1934 (TCOS and each such entity and person being hereinafter
called an "Indemnified Person") harmless from and against any and all claims,
liabilities, losses, damages, costs and expenses incurred (including fees and
disbursements of counsel) by them which are (A) caused by, related to or arise
out of (i) actions taken or omitted to be taken (including any untrue statements
made or any statements omitted to be made) by the Company or (ii) actions taken
or omitted to be taken (including any untrue statements omitted to be made) by
an Indemnified Person with the Company's consent or in conformity with actions
taken or omitted to be taken by the Company pursuant to the accompanying letter
(B) otherwise related to or "arising out of TCOS's activities performed pursuant
to the accompanying letter agreement (including, without limitation, its role as
Executive Advisor and agent), the services contemplated by the accompanying
letter agreement or TCOS's role in connection therewith. The Company will not,
however, be responsible for any such claims, liabilities, losses, damages, costs
or expenses pursuant to clause (B) of the preceding sentence which have been
finally determined by a court of competent jurisdiction to have primarily and
directly resulted from willful misconduct or negligence on the part of the
Indemnified Person seeking indemnification hereunder.
b) Notwithstanding anything expressed or implied herein to the
contrary, the indemnity provided for herein shall cover the amount of any
settlements entered into by an Indemnified Person in connection with any claim
for which an Indemnified Person may be indemnified hereunder; provided,
however, that an Indemnified Person shall not enter into any such settlement
unless the Company has consented thereto (which consent shall not be
unreasonably withheld). No settlement binding on an Indemnified Person may be
made without the consent of such Indemnified Person (which consent shall not be
unreasonably withheld).
c) The Company and TCOS agree that if any indemnification sought by an
Indemnified person pursuant to this paragraph is held by a court to be
unavailable for any reason other than that specified in the second sentence of
paragraph (a) above, then (whether or not TCOS is the Indemnified Person), in
order to provide just and equitable contribution, the Company and TCOS shall
contribute to the claims, liabilities, losses, damages, costs and expenses for
which such indemnification is held unavailable in such proportion as is
appropriate to reflect the relative benefits of the Company, on the one hand,
and TCOS on the other hand, in connection with the services or services
contemplated by the accompanying letter agreement, and also relative fault of
the Company, on the one hand, and TCOS on the other hand, in connection with the
services or services contemplated by the accompanying letter agreement, and also
relative fault of the Company, on the one hand, and TCOS, on the other hand,
subject to the limitation that in any
<PAGE> 5
SCHEDULE I
TO ENGAGEMENT LETTER DATES OCTOBER 13,1998
BETWEEN TRUST COMPANY OF THE SOUTH
AND AMARILLO BIOSCIENCES, INC.
PAGE TWO.
event TCOS's aggregate contribution to all claims, liabilities, losses, damages,
costs and expenses with respect to which contribution is available hereunder
shall not exceed the amount of fees (but not expenses) actually received by TCOS
pursuant to the accompanying letter agreement. No person found liable for a
fraudulent misrepresentation shall be entitled to contribution from any person
who is not also found liable for such fraudulent misrepresentation.
You also agree that no Indemnified Person shall have any liability (whether
direct or indirect in contract or tort or otherwise) to the Company for or in
connection with the accompanying letter agreement, the services contemplated
hereby or TCOS's role in connection therewith, except for any such liability for
losses, claims, damages, liabilities or expenses incurred by the Company that
are determined by final judgment or a court of competent jurisdiction to have
resulted directly from willful misconduct or negligence of such Indemnified
Person.
The provisions in this is Schedule I shall remain operative and in full force
and effect regardless of the termination or expiration of the Engagement
pursuant to the accompanying letter agreement.
<PAGE> 6
SCHEDULE II
NON-DISCLOSURE AGREEMENT
TO ENGAGEMENT LETTER DATED OCTOBER 13,1998
BETWEEN TRUST COMPANY OF THE SOUTH
AND AMARILLO BIOSCIENCES, INC.
RECITALS
The parties are exploring areas of common business interest. In the
course of these discussion, the parties have delivered or will deliver to each
other certain information which the parties desire to remain confidential,
including descriptive memoranda, appraisals, financial statements or summaries,
correspondence records or other specific financial, technical, commercial or
other information regarding their businesses and affairs, whether or not such
material is specifically marked or designated as confidential (the "Confidential
Information"). The parties desire to assure each other that all Confidential
Information exchanged will be treated with utmost confidence and will not be
used by either party to the detriment of the other. The party who receives
Confidential Information in any instance is referred to as "Recipient" and the
part who discloses Confidential Information is referred to as "Discloser".
AGREEMENTS
In consideration of the recitals and the mutual agreements which
follow, the parties agree:
1. Any Confidential Information exchanged is provided only for the
purposes of assisting each party in exploring their common interests. Recipient
acknowledges that Confidential Information is proprietary and confidential and
that Discloser would suffer great loss and irreparable harm if Recipient, its
affiliates, agents or employees would improperly use the Confidential
Information or disclose it to Discloser's customers, employees, competitors,
potential competitors or other parties. Recipient agrees to use Confidential
Information solely for the purpose of evaluating the parties' common interests
and to prevent the use of Confidential Information for any commercial purpose.
2. Recipient acknowledges that the restrictions of this Agreement are
reasonable and the consideration provided is sufficient to fully and adequately
compensate Recipient for agreeing to these restrictions. Recipient shall not
improperly use or disclose to others or permit the improper use or disclosure of
any of the Confidential Information or any analysis, modifications or
improvements derived from Confidential Information. Recipient shall protect
Confidential Information by using the same degree of care, but no less than a
reasonable degree of care, to prevent the unauthorized use, dissemination or
publication of the Confidential Information as Recipient uses to protect its own
confidential information of a like nature.
<PAGE> 7
SCHEDULE II
NON-DISCLOSURE AGREEMENT
TO ENGAGEMENT LETTER DATED OCTOBER 13,1998
BETWEEN TRUST COMPANY OF THE SOUTH
AND AMARILLO BIOSCIENCES, INC.
PAGE TWO.
3. Recipient agrees upon written request of Discloser, to return all
materials containing Confidential Information, including all existing copies,
extracts, photographs and summaries thereof, within two business days of such
request.
4. Nothing contained herein shall be construed as restricting or
creating any liability for the disclosure, communication or use of the following
types of information:
(a) information which, at the time of disclosure hereunder, was
published or know publicly or was otherwise in the public domain:
(b) information which after disclosure hereunder, is published or
becomes publicly know or otherwise in the public domain other than as a result
of a breach of this Agreement, or
(c) information which was disclosed to the recipient in good faith
by a third part who was not, and is not, under any obligation of confidence or
secrecy to the other party hereto at the time of such disclosure.
5. Recipient shall be responsible to Discloser for any breach of the
provisions of this agreement by persons who are within Recipient's reasonable
control. Recipient shall be entitled to an injunction or injunctions to prevent
breaches of any provisions of this Agreement and may specifically enforce such
provisions in any action instituted in any court having appropriate
jurisdiction. Recipient agrees to indemnify and hold Discloser harmless from and
against all loss, damage, cost or expense (including reasonable attorneys' fees)
resulting from or arising out of any breach of this Agreement by Recipient.
These specific remedies are in addition to any other remedy to which Discloser
may be entitled at law or in equity. Nothing contained in this Agreement shall
be deemed to prevent the disclosure of any Confidential Information if such
disclosure is legally required, in the opinion of counsel to Recipient, to be
made in a judicial, administrative or governmental proceeding to disclose any
Confidential Information and to allow Discloser a reasonable time to oppose such
process.
6. Recipient shall not be permitted to disregard its obligations under
this Agreement by using Confidential Information to guide a search of
publications or other publicly available materials or be selecting a series of
items of knowledge from unconnected sources in the public domain and fitting
them together through use of Confidential Information.
7. Without the other party's consent, neither party nor its principals,
agents, employees or representatives, will disclose to any person the fact that
discussions or negotiations are taking
<PAGE> 8
SCHEDULE II
NON-DISCLOSURE AGREEMENT
TO ENGAGEMENT LETTER DATED OCTOBER 13, 1998
BETWEEN TRUST COMPANY OF THE SOUTH
AND AMARILLO BIOSCIENCES, INC.
PAGE THREE.
place unless required by law; provided, however, each party will consult
concerning the content of any such disclosure with the other prior to making the
disclosure.
8. Neither party acquires any intellectual property rights under this
Agreement except the limited right to use the Confidential Information for the
purpose described in section 1.
9. Except for the terms of this Agreement, none of the parties shall
be committed in any way with respect to the matters discussed by them, unless
and until a definitive agreement with respect thereto is executed.
10. This Agreement is the parties' complete understanding with respect
to the subject matter hereof and may only be amended in writing signed by both
parties. The parties' respective obligations shall survive the execution of this
Agreement. This Agreement may not be assigned in whole or in part. The
provisions of this Agreement shall be governed by and construed in accordance
with the laws of the State of South Carolina.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,776,328
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,819,743
<PP&E> 244,377
<DEPRECIATION> 127,616
<TOTAL-ASSETS> 4,986,062
<CURRENT-LIABILITIES> 317,998
<BONDS> 2,600,000
0
0
<COMMON> 54,142
<OTHER-SE> 2,013,992
<TOTAL-LIABILITY-AND-EQUITY> 4,986,062
<SALES> 0
<TOTAL-REVENUES> 222,289
<CGS> 0
<TOTAL-COSTS> 1,372,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 117,000
<INCOME-PRETAX> (2,332,801)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,332,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,332,801)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
