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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 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 $108,033
As of December 31, 1999, there were outstanding 7,472,157 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 $11,208,236.
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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 2000 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 orally administered natural interferon alpha (IFN[alpha]), particularly for
the treatment of Sjogren's syndrome, fibromyalgia, hepatitis B, hepatitis C and
Behcet's disease. The Company believes that significant worldwide opportunities
exist for the development of low dose orally administered 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, 6
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 one part-time employee. 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.
A Phase II trial using low dose orally administered IFN[alpha] 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. The Phase
III pivotal trial program for Sjogren's syndrome was initiated in November 1998.
Protocols will compare treatment with low dose orally-administered IFN[alpha]
(150 IU lozenges) and placebo. The endpoints will be significant improvement in
salivary function and relief of oral dryness. The first of 2 randomized,
double-blinded, placebo-controlled efficacy studies completed enrollment of 241
subjects in August, 1999. Subjects will finish treatment in February, 2000, with
the initial analyses of results available approximately 2 months later. The
second efficacy trial of 250 subjects began active enrollment in September, 1999
and should be completed by September, 2000. Following 24 weeks of treatment in
these controlled trials, subjects who have successfully completed the protocol
will be eligible to enter a 24 week "open-label" trial, where all subjects are
given active treatment with 150 IU IFN[alpha] lozenges.
Hepatitis B and C. Viral hepatitis is a worldwide health problem of enormous
proportions and consequences. It is the most common cause of jaundice, chronic
liver disease, cirrhosis, and hepatocellular carcinoma. It has been estimated by
the World Health Organization that there are 500 million individuals infected
worldwide with one of the six distinct hepatitis viruses. The company has
prepared clinical trial protocols to test the efficacy of low dose
orally-administered IFN[alpha] as a sole treatment in chronic active hepatitis
B, and in combination with other anti-viral agents in treatment
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of hepatitis C. The company is engaged in active discussions to initiate
clinical trials in countries where hepatitis virus infection is endemic.
Fibromyalgia. During 1999, Amarillo Biosciences conducted a Phase II randomized,
placebo- controlled, double-blinded trial in fibromyalgia patients. This
clinical study examined the effects of low dose orally-administered IFN[alpha]
on relief of morning stiffness, a significant aspect of the symptom complex in
this disorder. IFN[alpha] lozenge treatment was combined with a low dose of
amitriptyline, an antidepressant commonly used in this condition.
The Phase II results of the fibromyalgia clinical trial became
available in March, 2000. The three-month study, involving 89 patients at four
clinical sites around the United States, was designed to measure the
effectiveness of low doses of orally administered interferon-alpha (IFN[alpha])
in relieving morning stiffness of joints, a significant problem for fibromyalgia
sufferers. Patients participating in the study were divided into three groups,
and each individual was given three lozenges per day. The three lozenges given
to members of the first group contained 50 international units (IU) of
IFN[alpha] each, while the second group got one 50 IU IFN[alpha] lozenge and two
placebos. Members of the final group received three placebos. All three groups
reported a reduction in morning stiffness, but across the entire study panel the
improvement was most pronounced in those taking one 50 IU lozenge of IFN[alpha]
per day. However, the result did not reach statistical significance relative to
the controls, nor did increasing the dosage to three IFN[alpha] lozenges per day
improve on the results. Prior to commencing further clinical trials in
fibromyalgia, the Company will consult with a group of expert clinicians and
opinion leaders in fibromyalgia syndrome research to review the results of our
studies to date and to assist us in designing any future trials.
HIV. A pilot trial was completed of treatment of persistent, treatment-resistant
oral viral warts in patients infected with HIV. Oral warts have been identified
as an oral complication of HIV infection with a growing incidence. In this
open-label study, significant reductions were seen in wart surface area and
numbers of warts following treatment with low dose orally-administered
IFN[alpha]. The company has filed with the FDA Office of Orphan Drugs for orphan
drug status for low dose IFN[alpha] treatment in this condition. Future clinical
trials will be conducted to confirm and extend these initial encouraging
results.
Behcet's Disease. Behcet's disease is a severe chronic relapsing inflammatory
disorder marked by oral and genital ulcers, eye inflammation (uveitis) and skin
lesions, as well as varying multisystem involvement including the joints, blood
vessels, central nervous system, and gastrointestinal tract. The oral lesions
are an invariable sign, occurring in all patients at some time in the disease.
Behcet's disease is found world-wide, and is a significant cause of partial or
total disability. The US patient population has been estimated as 15,000. The
company has filed with the FDA Office of Orphan Drugs for orphan drug status for
low dose orally-administered IFN[alpha] treatment in this condition. Clinical
protocols will be prepared for controlled studies and the Company also will
support physician-sponsored single patient pilot trials with low dose IFN[alpha]
in Behcet's disease.
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
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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. On March
13, 1992, the Company entered into a Joint Development and Manufacturing/Supply
Agreement with HBL (the "Development Agreement"). Such Development Agreement was
subsequently amended on January 17, 1996, and May 10, 1996. Among other things,
the Development Agreement provides the Company with a source of natural human
interferon alpha for use in the Company's interferon alpha-containing products.
Additional information on the Development Agreement is set forth in footnote 4
to the Consolidated Financial Statements attached to this 10-KSB.
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.
OTHER AGREEMENTS
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 included assisting the Company in fund raising and investor
relations. This Agreement was terminated on September 10, 1999.
Amarillo Biosciences and Mitsubishi Corporation entered into an
agreement in November, 1992, whereby Mitsubishi would provide market
development, licensing, and distribution services for IFN[alpha] in designated
parts of the world. In November, 1999, Amarillo Biosciences notified Mitsubishi
Corporation that it wished to terminate this agreement. The parties intend to
negotiate a new agreement which will redefine the responsibilities and services
to be rendered by Mitsubishi Corporation. It is anticipated that a new agreement
will be finalized during the first half of 2000.
On June 16, 1999, Amarillo Biosciences and North China Pharmaceutical
Corporation (NCPC) entered into an agreement for the development, manufacturing
and marketing of IFN[alpha] for the treatment of hepatitis B in China. Under the
terms of the agreement NCPC was to make a technology access payment to Amarillo
Biosciences and was to fund the hepatitis B clinical trial in China. Upon
registration and approval of the IFN[alpha] in China Amarillo Biosciences would
supply product.
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To date, Amarillo Biosciences has received no payment from NCPC, nor
have clinical trials been initiated. Although the agreement has not been
officially terminated, NCPC has informed Amarillo Biosciences that it is not
possible to import IFN[alpha] into China. ABI therefore assumes that the
contract will not be honored and no revenues nor clinical funding will be
attributable to this agreement.
PATENTS AND PROPRIETARY RIGHTS
Two patents issued in 1999. Those patents are "Treatment of
Hyperallergenic Response" (U.S. Patent No. 5,882,640) issued March 16, 1999,
valid until March 16, 2016. Another patent (US Patent No. 5,910,304) issued June
8, 1999 entitled "Low-Dose Oral Administration of Interferons"; because of a
terminal disclaimer, this patent has claims valid until April 11, 2006.
A Notice of Allowance of Claims was received in November, 1999 on US
Patent Application Serial No. 09/035,290 filed March 25, 1998. Amarillo
Biosciences filed one additional patent application during 1999. The subject of
this application was orally administered interferon gamma.
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 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.
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GOVERNMENT REGULATION
Once a new compound has been identified in the laboratory, medicines
are developed as follows:
Preclinical testing. A pharmaceutical company conducts laboratory and animal
studies to show biological activity of the compound against the targeted
disease, and the compound is evaluated for safety.
Investigational New Drug Application (IND). After completing preclinical
testing, a company files an IND with the US Food and Drug Administration (FDA)
to begin to test the drug in people. The IND becomes effective if FDA does not
disapprove it within 30 days. The IND shows results of previous experiments;
how, where and by whom the new studies will be conducted; the chemical structure
of the compound; how it is thought to work in the body; any toxic effects found
in the animal studies; and how the compound is manufactured. All clinical trials
must be reviewed and approved by the Institutional Review Board (IRB) where the
trials will be conducted. Progress reports on clinical trials must be submitted
at least annually to FDA and the IRB.
Clinical Trials, Phase I. These tests involve about 20 to 80 normal, healthy
volunteers. The tests study a drug's safety profile, including the safe dosage
range. The studies also determine how a drug is absorbed, distributed,
metabolized, and excreted as well as the duration of its action.
Clinical Trials, Phase II. In this phase, controlled trials of approximately 100
to 300 volunteer patients (people with the disease) assess a drug's
effectiveness.
Clinical Trials, Phase III. This phase usually involves 1,000 to 3,000 patients
in clinics and hospitals. Physicians monitor patients closely to confirm
efficacy and identify adverse events. These numbers may be modified based on the
disease prevalence. ABI's Phase III clinical trial as negotiated with the FDA
will require a total of 500 patients.
New Drug Application (NDA)/Biologics License Application (BLA). Following the
completion of all three phases of clinical trials, a company analyzes all of the
data and files with FDA an NDA, in the case of a drug product, or a BLA in the
case of a biologic product, if the data successfully demonstrate both safety and
effectiveness. The NDA/BLA contains all of the scientific information that the
Company has gathered. NDA's typically run 100,000 pages or more. By law, FDA is
allowed twelve months to review a standard NDA/BLA. The average NDA review time
for new molecular entities approved in 1998 was 11.7 months.
Approval. Once FDA approves an NDA, the new medicine becomes available for
physicians to prescribe. A company must continue to submit periodic reports to
FDA, including any cases of adverse reactions and appropriate quality-control
records. For some medicines, FDA requires additional trials (Phase IV) to
evaluate long-term effects.
ABI obtained an IND for oral IFN[alpha] in the treatment of Sjogren's
syndrome in 1994. ABI successfully completed Phase I development in 1996, Phase
II development in 1997, and launched the first of its Phase III trials in
November 1998.
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An IND for oral IFN[alpha] in the treatment of fibromyalgia was
obtained in 1993. Phase I/II studies were completed in 1995. The present
confirmatory Phase II trial was initiated in 1998 and was completed in February,
2000.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1999 and 1998, the Company incurred
expenses of $4,732,365 and $1,372,850, 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 2000 PLAN OF OPERATIONS
- - Research and Development".
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.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Commencing August 8, 1996, the Company's common stock has traded on the
NASDAQ SmallCap Market under the symbol AMAR. On October 13, 1999 the Company
was delisted from the NASDAQ Small Cap Market. This delisting was based on the
Company's inability to meet the net tangible asset requirements of the NASDAQ
Small Cap Market. The Company filed an appeal to this decision and has until
April 13, 2000 to file an appeal with the SEC. The Company is presently traded
on the OTC Bulletin Board under the symbol AMAR. The range of high and low sales
prices as quoted on the NASDAQ SmallCap Market and OTC Bulletin Board for each
quarter of 1999 and 1998 is as follows:
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<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Quarter High Low High Low
------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
First $3.5000 $0.8125 $5.5000 $3.0000
Second 3.1250 1.4062 5.3750 2.7500
Third 1.8750 0.6250 4.0000 1.0000
Fourth 1.8750 0.5000 2.2500 0.3130
</TABLE>
As of December 31, 1999, the Company had 305 shareholders of record.
ITEM 6. MANAGEMENT'S 2000 PLAN OF OPERATIONS
The Company's Management has developed a Plan of Operations for 2000.
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
$11,378,000 at December 31, 1998 to $17,497,000 at December 31, 1999. 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 2000 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
2000 will fall principally into six broad categories, as follows: Research and
Development; Personnel; Consulting and Professional (except legal and
accounting); Legal and Accounting; 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 2000. The Company has budgeted approximately $2.8
million for expenditure in 2000 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.
The budgeted amount for Research and Development in 2000 is almost
exclusively dedicated to the completion of the pivotal Phase III Sjogren's
syndrome clinical trial. The Phase III pivotal trial program for Sjogren's
syndrome was initiated in November 1998. Protocols will compare treatment with
low dose orally-administered IFN[alpha] (150 IU lozenges) and placebo. The
endpoints will be significant improvement in salivary function and relief of
oral dryness. The first of 2 randomized, double-blinded, placebo-controlled
efficacy studies completed enrollment of 241 subjects in August, 1999. Subjects
finished treatment in February, 2000. The results of this trial will be
available in April, 2000. The second efficacy trial of 250 subjects began active
enrollment in September, 1999 and
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should be completed by September, 2000. Following 24 weeks of treatment in these
controlled trials, subjects who have successfully completed the protocol will be
eligible to enter a 24 week "open- label" trial, where all subjects are given
active treatment with 150 IU IFN[alpha] lozenges.
Other Research and Development expenditures include final costs
associated with the fibromyalgia Phase II clinical trial and costs associated
with the initiation of a Behcet's disease clinical trial during the second half
of 2000.
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 $767,000
for personnel expenses in 2000, including salaries, payroll taxes, directors'
and officers' general liability insurance, group health, 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 (CFO).
CONSULTING AND PROFESSIONAL (EXCEPT LEGAL AND ACCOUNTING)
The Company has budgeted approximately $120,000 for expenditure on
professional consultants in 2000. Consulting fees are expected to be paid to a
number of independent consultants, in connection with the operation of the
Company and to certain directors who perform specific consulting tasks at the
Company's request. 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 $135,000 in 2000. Approximately 20% 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 2000. The Company expects to continue Ernst & Young
as its auditors.
PUBLIC RELATIONS, INVESTOR RELATIONS AND SHAREHOLDER RELATIONS
The Company has budgeted approximately $30,000 for public relations,
investor relations and shareholder relations in 2000. The Company has also
budgeted sufficient amounts to maintain its comprehensive web site
(www.amarbio.com).
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LIQUIDITY NEEDS
The principal budget items discussed above, along with other
miscellaneous costs and expenses, will cause the Company to expend approximately
$4.1 million in 2000, including the substantial expense of the Company's Phase
III Sjogren's syndrome trial. At December 31, 1999, the Company had available
cash of $1,302,343. The Company will need to raise additional funds in order to
completely execute its 2000 Plan. The Company is presently negotiating with
human health and animal health commercial development partners in various
regions of the world including the United States, Canada, Europe, and the Middle
East. The Company believes that one or more of these agreements will be executed
during the first half of 2000. These agreements could generally include
provisions for the commercial partner to pay ABI a technology access fee, will
include payments for a portion of the clinical trial expenses, will include
payment obligations to ABI upon the accomplishment of certain defined tasks, and
will provide for payments relating to the future sales of commercial product.
These agreements could be an important source of funds for ABI. The Company is
also negotiating with private investors as a source of additional funding.
Management believes the fact that it is currently conducting an advanced Phase
III clinical trial significantly enhances its ability to successfully raise
additional funds from its commercial partnering activities and from private
investors. However, there can be no assurance that the Company will be
successful in obtaining additional funding from either human health and animal
health commercial development partners or private investors. If the Company is
not successful in raising additional funds, it will need to significantly
curtail clinical trial expenditures and to reduce staff and administrative
expenses and may be forced to cease operations.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company expensed approximately $10,000 during 1999 in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
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
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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, 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, its
inability to accurately budget at this time the possible costs associated with
hiring and retaining of additional personnel, and uncertainties regarding the
terms and timing of one or more commercial partner agreements.
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 December 31, 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).... 57 Chairman of the Board, President,
Chief Executive Officer, Chief
Financial Officer and Director
Edward Amento, MD (3)(5)........... 53 Director
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stephen Chen, PhD (2)(4)........... 50 Director
James Cook (1)(3)(5)............... 65 Director
Richard Franco, RhP (2)(3)(4)...... 58 Director
Thomas D'Alonzo (1)(2)............. 56 Director
Katsuaki Hayashibara (3)(4)(5)..... 55 Director
Brian McLean, MD (3)(5)............ 40 Director
Dennis Moore, DVM (1)(4)(5)........ 53 Director
James Page, MD (1)(2)(5)........... 72 Director
Kathleen L. Kelleher............... 51 Chief Operating Officer, Vice
President Business Development
</TABLE>
The following are not executive officers, but are expected by the Company to
make a significant contribution to the business:
<TABLE>
<S> <C> <C>
Philip C. Fox, DDS................. 51 Director Research and Development
John M. Smith...................... 63 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.
Dr. Cummins has been conducting research on oral cytokines, most particularly
IFN[alpha], in animals and humans for 29 years. Dr. Cummins has more than 40
publications and a dozen patents which reflect his work in the field oral IFN.
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.
Edward Amento has been a Director of the Company since 1999. Dr. Amento
has been Director and Chairman of the Molecular Medicine Research Institute
since 1995. Dr. Amento is also clinical professor of medicine and dermatology at
Stanford University School of Medicine. He was formerly the President and
co-founder of Connective Therapeutics (now Connectics Corp.) of Palo Alto,
California. Dr. Amento held senior positions at Genentech from 1987 to 1993.
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.
13
<PAGE> 14
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. Until
September, 1999 he was President and Chief Operating Officer of PPD and its
Clinical Research Organization subsidiary, PPD Development, Inc., was President
of GENVEC, Inc., from 1993 to 1996, and was President of Glaxo, Inc. from 1983
to 1993.
Richard Franco has been a Director of the Company since 1999. Mr.
Franco is Chairman/CEO and co-founder of LipoMed, Inc. of Raleigh, North
Carolina. He was formerly president of The Richards Groups LTD of Raleigh and
President/CEO of Trimeris, Inc. of Research Triangle Park. Mr. Franco has held
senior management posts at Eli Lilly & Company and Glaxo, Inc. and served as a
director of Entremed, Inc. in Rockville, Maryland.
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 California based merger and acquisitions firm.
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.
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.
14
<PAGE> 15
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.
Until October of 1999, the Company paid directors who were 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. Commencing October 29, 1999, each director receives 1,500 options for
physical attendance, and 375 options for telephone participation, at a maximum
of one (1) meeting per quarter. The options will be granted at December 31 of
the year during which they were earned, and will be exercisable at the fair
market value of the stock on the date of grant. The directors will no longer
receive payment of fees; however, they will be reimbursed for any out-of-pocket
expenses in connection with their attendance at 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.
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, 1999, 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,
1999 compensation paid by the Company to its Chairman of the Board, President
and Chief Executive Officer, to its Chief Operating Officer, and to its former
Executive Vice-President and Chief Financial Officer. 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, 1999.
15
<PAGE> 16
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......... 1999 $150,000 $ -- $ --
1998 150,000 -- --
1997 120,000 20,000 12,000(3)
Kathleen Kelleher, Chief Operating
Officer and Vice-President of
Business Development............ 1999 150,000 -- --
Charles Hughes, Executive Vice-
President and Chief Financial
Officer (1)...................... 1998 -- -- --
1997 147,435(2) -- 10,333(3)
</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.
OPTION GRANTS IN 1999
The following table sets forth certain information relating to options
granted in 1999 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 1999 ($/SH) DATE
- ------------------------ ------------ --------------- ------------ ----------
<S> <C> <C> <C> <C>
Joseph Cummins.......... 20,000 3.2% $1.625 (1) 12/16/2004
300,000 (2) 47.9% $ .875 (1) 12/29/2004
Kathleen Kelleher....... 100,000 16.0% $1.250 (1) 01/03/2009
36,000 (2) 5.8% $ .875 (1) 12/29/2004
</TABLE>
(1) The fair market value of the common stock on the date of the grant.
(2) Granted in consideration of relinquishment of salary during 2000.
16
<PAGE> 17
AGGREGATED OPTION EXERCISES AT DECEMBER 31, 1999
AND YEAR-END OPTION VALUES
The following table sets forth information for the executive officers
named above, regarding the exercise of options during 1999 and unexercised
options held at the end of 1999.
<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, 1999 (#) DECEMBER 31, 1999 ($) (1)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Joseph Cummins -- -- 29,125/305,375 $2,500/187,500 (2)
Kathleen Kelleher -- -- -- /136,000 None/ 47,500 (3)
</TABLE>
(1) Calculated based on the closing price of the common stock ($1.50) as
reported by NASDAQ on December 31, 1999.
(2) The options to which this value relates were granted in consideration
of relinquishment of salary during 2000 in the amount of $150,000.
(3) The options to which this value relates were granted in consideration
of relinquishment of salary during 2000 in the amount of $18,000.
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
<TABLE>
<CAPTION>
Cash Compensation Security Grants
-------------------- ---------------
NUMBER OF
SECURITIES
MEETING CONSULTING UNDERLYING
NAME FEES (1) FEES (2) OPTIONS (3)
---- -------- -------- ---------------
<S> <C> <C> <C>
Edward Amento, MD $ 2,000 $ -- 30,375
Stephen Chen, PhD 3,000 1,200 20,375
James Cook 3,000 -- 20,375
Thomas D'Alonzo 3,000 -- 20,375
Richard Franco 1,000 -- 30,375
Katsuaki Hayashibara 2,000 -- 20,375
Brian McLean, MD 1,000 -- 20,375
Dennis Moore, DVM 3,000 -- 20,375
James Page, MD 3,000 -- 20,375
</TABLE>
(1) Each director received a fee of $1,000 for in-person attendance at each
regular directors' meeting, through October 29, 1999. Commencing
October 29, 1999, each director receives 1,500 options for physical
attendance, and 375 options for telephone participation, at a maximum
of one (1) meeting per quarter. The options will be granted at December
31 of the year during which they were earned, and will be exercisable
at the fair market value of the stock on the date of grant.
(2) Each director receives $1,200 per day for employment on special
projects or assignments.
(3) Includes options granted for participation in meetings; see Note (1),
above.
17
<PAGE> 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of December 31, 1999, there were 7,472,157 shares of the Company's
common stock outstanding. The following table sets forth as of December 31,
1999, 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 3,290,781 44.0%
Dr. Joseph Cummins
800 West 9th Avenue
Amarillo, Texas 79101 642,174(1) 8.6%
</TABLE>
(1) Includes an aggregate of 333,868 shares of common stock held by Joseph
Cummins as trustee under certain trusts for the benefit of his children
and 13,150 shares owned by Dr. Cummins' wife.
The following table sets forth the beneficial ownership of the Company's
stock as of December 31, 1999 by each executive officer and 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 642,174(1) 8.6%
Dennis Moore 149,616 2.0%
James Cook 66,600(2) *
Katsuaki Hayashibara 48,240 *
Kathleen Kelleher 29,390 *
Stephen Chen 13,500 *
Thomas D'Alonzo 3,000 *
Edward Amento -- --
Richard Franco -- --
Brian McLean -- --
James Page -- --
Total Group (all directors and 952,520 12.7%
executive officers - 11 persons)
</TABLE>
* Less than 1%
(1) Includes an aggregate of 333,868 shares of common stock held by Joseph
Cummins as trustee under certain trusts for the benefit of his children
and 13,150 shares owned by Dr. Cummins' wife.
(2) All of such shares are owned jointly with Mr. Cook's wife.
18
<PAGE> 19
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. Pursuant to
the Development Agreement, HBL advanced $9,000,000 for funding of research. In
addition, HBL has purchased substantial amounts of the Company's common stock
from time to time, to the point where it now owns 44% of the issued and
outstanding shares of common stock of the Company. Effective November 30, 1999,
HBL loaned $1,000,000 to the Company, and the principal and accrued and interest
under such loan aggregated $1,003,526 at December 31, 1999. HBL loaned a final
$1,000,000 to the Company on February 29, 2000. In addition to the above, 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. HBL supplies formulations of its interferon alpha and other products 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 1999, the Company has used the law firm Morris, Moore, Moss &
Douglass, P.C. and the firm of Sprouse, Smith & Rowley, P.C. Mr. Edward Morris,
Secretary of the Company, was a partner in the Morris, Moore firm until June 15,
1999 and became a partner with the Sprouse, Smith & Rowley firm at that time.
The Company was invoiced $74,000 for legal services rendered by Morris, Moore,
Moss & Douglass in 1998. In 1999, the Company was invoiced $47,800 for legal
services rendered by Morris, Moore, Moss and Douglass; and $59,100 for legal
services rendered by Sprouse, Smith & Rowley.
On March 25, 1999, ABI signed a contract with PPD Pharmaco, Inc., now
known as PPD Development, Inc. to provide clinical monitoring and data entry
services for ABI's phase III clinical trials in Sjogren's syndrome. During the
year ended December 31, 1999, the Company paid $3,063,255.36, for clinical
research organization services to PPD Development, Inc. At the time that the
contract was signed, Mr. Tom D'Alonzo was President and Chief Operating Officer
of PPD and its Clinical Research Organization subsidiary, PPD Development, Inc.,
and was also a member of the Board of Directors of Amarillo Biosciences, Inc.
Mr. D'Alonzo retired from PPD Development, Inc. in October, 1999. Mr. D'Alonzo
is still a member of the Board of Directors of Amarillo Biosciences, Inc.
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.
19
<PAGE> 20
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, dated June 22, 1999.
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 May 11, 1999.
10.21+ Outside Director and Advisor Stock Option Plan, Amended and Restated as of May
11, 1999.
</TABLE>
20
<PAGE> 21
<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.
10.35+# License Agreement dated June 16, 1999, between North China Pharmaceutical
Group Corporation, 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.
NAME JURISDICTION OF INCORPORATION
-------------------------------- -----------------------------
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.
*** The Exhibit is incorporated by reference to the Company's 1998 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1999.
+ The Exhibit is incorporated by reference to the Company's Report on Form
10-QSB for the quarterly period ended June 30, 1999, filed with the Commission
on August 12, 1999, and subsequently amended on September 13, 1999.
# Portions of this Exhibit have been omitted and filed separately with the
Commission.
21
<PAGE> 22
REPORTS ON FORM 8-K
A report on Form 8-K was filed on October 1, 1999, relating to the
Agreement to Convert Debt between Amarillo Biosciences, Inc. and Hayashibara
Biochemical Laboratories, Inc., to become effective October 15, 1999; and on
December 23, 1999, reporting the October 15, 1999 conversion of debt to stock,
and reporting that the November 30, 1999 conversion would not take place, but
instead, that Hayashibara Biochemical Laboratories would advance $1,000,000 as a
loan to the Company.
22
<PAGE> 23
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 28, 2000
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 Chairman of the Board, March 28, 2000
- --------------------------------------- President, Chief Financial -----------------------
Joseph M. Cummins Officer, Director and
Chief Executive Officer
/s/ EDWARD P. AMENTO Director March 28, 2000
- --------------------------------------- -----------------------
Edward P. Amento
/s/ STEPHEN T. CHEN Director March 28, 2000
- --------------------------------------- -----------------------
Stephen T. Chen
/s/ JAMES COOK Director March 28, 2000
- --------------------------------------- -----------------------
James Cook
/s/ THOMAS W. D'ALONZO Director March 28, 2000
- --------------------------------------- -----------------------
Thomas W. D'Alonzo
/s/ RICHARD A. FRANCO Director March 28, 2000
- --------------------------------------- -----------------------
Richard A. Franco
/s/ KATSUAKI HAYASHIBARA Director March 28, 2000
- --------------------------------------- -----------------------
Katsuaki Hayashibara
Director
- --------------------------------------- -----------------------
Brian McLean
/s/ DENNIS MOORE Director March 28, 2000
- --------------------------------------- -----------------------
Dennis Moore
/s/ JAMES A. PAGE Director March 28, 2000
- --------------------------------------- -----------------------
James A. Page
</TABLE>
<PAGE> 24
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Financial Statements
Year ended December 31, 1999
CONTENTS
<TABLE>
<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> 25
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, 1999 and 1998, 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, 1999, 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits 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, 1999 and 1998, 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, 1999, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and need to raise additional financing in order to
execute its 2000 Plan raise substantial doubt about its ability to continue as a
going concern. (Management's plans as to these matters are also described in
Note 1.) The 1999 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ERNST & YOUNG LLP
Dallas, Texas
March 14, 2000
F-1
<PAGE> 26
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,302,343 $ 4,776,328
Inventory 48,639 --
Other current assets 32,137 43,415
------------ ------------
Total current assets 1,383,119 4,819,743
Property and equipment, net 105,799 116,761
Patents, net of accumulated amortization of $89,807
and $81,177 in 1999 and 1998, respectively 73,495 43,823
Investment in ISI common stock -- 5,735
------------ ------------
Total assets $ 1,562,413 $ 4,986,062
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 521,199 $ 88,920
Accrued interest expense 3,526 208,356
Accrued legal expense 3,025 1,609
Accrued vacation 19,000 19,000
Other accrued expense 63,173 113
------------ ------------
Total current liabilities 609,923 317,998
Notes payable to stockholder 1,000,000 2,600,000
------------ ------------
Total liabilities 1,609,923 2,917,998
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, $.01 par value:
Authorized shares - 10,000,000
Issued shares - none -- --
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 7,472,157 in 1999 and 5,414,232 in 1998 74,722 54,142
Additional paid-in capital 17,374,570 13,392,138
Deficit accumulated during the development stage (17,496,802) (11,378,216)
------------ ------------
Total stockholders' equity (deficit) (47,510) 2,068,064
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 1,562,413 $ 4,986,062
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE> 27
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,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Contract revenues $ -- $ -- $ 9,000,000
Interferon sales -- -- 420,974
Interest income 111,368 296,819 1,526,005
Sublicense fees -- -- 113,334
Royalty income -- -- 31,544
Gain (loss) on ISI stock (5,735) (74,590) 108,237
Other 2,400 60 606,831
------------ ------------ ------------
108,033 222,289 11,806,925
Expenses:
Research and development expenses 4,732,365 1,372,850 16,084,809
Selling, general, and administrative
expenses 1,456,072 1,065,240 12,328,792
Interest expense 38,182 117,000 855,126
------------ ------------ ------------
6,226,619 2,555,090 29,268,727
------------ ------------ ------------
Loss before income taxes (6,118,586) (2,332,801) (17,461,802)
Income tax expense -- -- 35,000
Net loss $ (6,118,586) $ (2,332,801) $(17,496,802)
============ ============ ============
Basic and diluted net loss per share $ (0.96) $ (0.43)
============ ============
Weighted average shares outstanding 6,362,047 5,414,232
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 28
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, 1999
Issuance
PriceAdditional Paid in Capital
<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 and
research and development costs 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)
</TABLE>
<TABLE>
<CAPTION>
NOTE
UNREALIZED RECEIVABLE TOTAL
GAIN (LOSS) FROM TREASURY STOCKHOLDERS'
ON INVESTMENT STOCKHOLDER STOCK EQUITY (DEFICIT)
------------- ------------- ---------- ----------------
<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 and
research and development costs - - - 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 cumulativ
from June 25, 1984 (inception) through
December 31, 1991 - - - (3,901,236)
</TABLE>
F-4
<PAGE> 29
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Statements of Stockholders' Equity (Deficit)(continued)
Cumulative from June 25, 1984 (Inception) through December 31, 1999
<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)
</TABLE>
<TABLE>
<CAPTION>
NOTE
UNREALIZED RECEIVABLE TOTAL
GAIN (LOSS) FROM TREASURY STOCKHOLDERS'
ON INVESTMENT STOCKHOLDER STOCK EQUITY (DEFICIT)
------------- ------------- ---------- ----------------
<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> 30
Amarillo Biosciences, Inc.
and Subsidiaries
(companies in the development stage)
Consolidated Statements of Stockholders' Equity (Deficit)(continued)
Cumulative from June 25, 1984 (Inception) through December 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
COMMON STOCK ADDITIONAL During the
ISSUANCE ------------------------ PAID IN Development
PRICE SHARES AMOUNT CAPITAL Stage
-------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1998
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)
1999
Net loss and total comprehensive loss for year
ended December 31, 1999 - - - (6,118,586)
Issuance in exchange for note payable to
stockholder $ 2.9992 946,094 9,461 2,828,065 -
Issuance in exchange for note payable to
stockholder .9044 1,111,831 11,119 994,367 -
Options issued for professional services - - 160,000 -
--------- --------- ----------- ------------
Balance at December 31, 1999 7,472,157 $ 74,722 $17,374,570 $(17,496,802)
========= ========= =========== ============
</TABLE>
<TABLE>
<CAPTION>
NOTE
UNREALIZED RECEIVABLE TOTAL
GAIN (LOSS) FROM TREASURY STOCKHOLDERS'
ON INVESTMENT STOCKHOLDER STOCK EQUITY (DEFICIT)
------------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
1998
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
1999
Net loss and total comprehensive loss for year
ended December 31, 1999 - - - (6,118,586)
Issuance in exchange for note payable to -
stockholder - - 2,837,526
Issuance in exchange for note payable to
stockholder - - - 1,005,486
Options issued for professional services - - - 160,000
------------- ------------- ---------- ----------------
Balance at December 31, 1999 $ - $ - $ - $ (47,510)
============= ============= =========== ================
</TABLE>
See accompanying notes.
F-6
<PAGE> 31
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,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,118,586) $ (2,332,801) $(17,496,802)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss on impairment of ISI stock 5,735 74,590 80,325
Depreciation 17,092 19,486 207,558
Amortization 8,630 8,475 100,847
Discount on investment in ISI -- -- 24,675
Recognition of deferred sub-license
fees -- -- (32,844)
Organization costs -- -- (11,040)
Gain (loss) on sale of assets -- -- (7,373)
Common stock issued for stock grant -- -- 469,100
Common stock issued for services -- -- 53,505
Options issued for services 160,000 -- 239,500
Changes in operating assets and liabilities:
Inventory (48,639) -- (48,639)
Other current assets 11,278 27,364 (32,137)
Accounts payable 432,279 14,166 521,199
Accrued expenses (140,354) 89,764 88,724
------------ ------------ ------------
Net cash used in operating activities (5,672,565) (2,098,956) (15,843,402)
INVESTING ACTIVITIES
Sale of marketable securities -- 6,007,182 --
Capital expenditures (6,130) (11,068) (329,055)
Proceeds from sale of equipment -- -- 23,071
Patents (38,302) -- (163,302)
Sale of (investment in) ISI common
stock -- -- (105,000)
Net cash provided by (used in)
------------ ------------ ------------
investing activities (44,432) 5,996,114 (574,286)
------------ ------------ ------------
</TABLE>
F-7
<PAGE> 32
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,
1999 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Receipt of sub-license fees $ -- $ -- $ 32,844
Proceeds from notes payable 1,000,000 -- 1,000,000
Issuance of common stock 1,243,012 -- 16,687,187
----------- ----------- -----------
Net cash provided by financing
activities 2,243,012 -- 17,720,031
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (3,473,985) 3,897,158 1,302,343
Cash and cash equivalents at
beginning of period 4,776,328 879,170 --
----------- ----------- -----------
Cash and cash equivalents at end of
period $ 1,302,343 $ 4,776,328 $ 1,302,343
=========== =========== ===========
SUPPLEMENTAL INFORMATION
Cash paid for income taxes $ -- $ -- $ 37,084
=========== =========== ===========
Cash paid for interest $ -- $ -- $ 6,466
=========== =========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE> 33
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES
ORGANIZATION
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 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. Among other activities the Company is presently conducting a
Phase III clinical trial, initiated during November, 1998, using low dose oral
IFN[alpha] for the treatment of Sjogren's syndrome.
The Company's viability is dependent upon successful commercialization of
products resulting from its research and product development activities. The
Company plans on working with commercial development partners in the United
States and in other parts of the World to provide the necessary sales,
marketing, and distribution infrastructure to successfully commercialize the
IFN[alpha] product for both human and animal applications. All of the Company's
products will require significant additional development, laboratory and
clinical testing and investment prior to the Company 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 2000 Plan of Operations calls for the Company to expend
approximately $4.1 million in 2000, including the substantial expense of the
Company's Phase III Sjogren's syndrome trial (see "Management's 2000 Plan of
Operations" elsewhere herein). At December 31, 1999, the Company had available
cash of $1,302,343. The Company will need to raise additional funds in order to
completely execute its 2000 Plan. The Company is presently negotiating with
human health and animal health commercial development partners in various
regions of the world including the United States, Canada, Europe, and the Middle
East . The Company believes that one or more of these agreements will be
executed during the first half of 2000. These agreements will generally include
provisions for the commercial partner to pay ABI a technology access fee, will
include payments for a portion of the clinical
F-9
<PAGE> 34
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED)
trial expenses, will include payment obligations to ABI upon the accomplishment
of certain defined tasks, and will provide for payments relating to the future
sales of commercial product. These agreements will be an important source of
funds for ABI. The Company is also negotiating with private investors as a
source of additional funding. Management believes that the fact it is currently
conducting an advanced Phase III clinical trial significantly enhances its
ability to successfully raise additional funds from its commercial partnering
activities and from private investors. However, there can be no assurance that
the Company will be successful in obtaining additional funding from either human
health and animal health commercial development partners or private investors.
If the Company is not successful in raising additional funds, it will need to
significantly curtail clinical trial expenditures and reduce staff and
administrative expenses and may be forced 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.
CONCENTRATION OF CREDIT RISK
At December 31, 1999, 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.
INVENTORY
The Company's inventory consists of IFN[alpha] lozenges available for sale. The
Company's policy is to state inventory at the lower of cost determined on a lot
basis or market.
F-10
<PAGE> 35
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED)
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.
PATENTS; PATENT EXPENDITURES
ABI holds patent license agreements and also holds patents which are owned by
the Company. All patents license agreements remain 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. Patent fees and legal fees
associated with the issuance of new owned patents are capitalized and amortized
over 17 years.
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.
F-11
<PAGE> 36
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED)
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.
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.
F-12
<PAGE> 37
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTS POLICIES (CONTINUED)
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,
1999 1998
-------- --------
<S> <C> <C>
Land $ 8,000 $ 8,000
Building 94,532 94,532
Furniture and equipment 134,287 128,157
Automobile 13,688 13,688
-------- --------
250,507 244,377
Less accumulated depreciation 144,708 127,616
-------- --------
$105,799 $116,761
======== ========
</TABLE>
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 accrued 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 accrued
interest at the rate of 4 1/2%. Each of the notes provided that the principal
and accrued interest be paid only from 10% of the Company's gross revenues from
sales of interferon.
F-13
<PAGE> 38
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
3. NOTES PAYABLE (CONTINUED)
In April of 1999 HBL agreed to convert $2,837,526 debt and accrued interest owed
to it by the Company to voting common stock of the Company. The total number of
shares issued to HBL in consideration for the cancellation of the indebtedness
was 946,094 shares valued at the then market value of $2.99 per share.
The Company currently has a loan agreement with HBL which calls for HBL to loan
the Company $3 million to be advanced in three installments as follows: $1
million by August 31, 1999; $1 million by November 30, 1999; and $1 million by
February 29, 2000. The annual interest rate on unpaid principal from the date of
each respective advance is 4 1/2%, with accrued interest being payable at the
maturity of the note. The note is payable on or before July 22, 2004, or on or
before the expiration of one (1) year after approval of the Company's product by
the U.S. Food and Drug Administration, whichever occurs first.
On September 30,1999, the Company entered into an Agreement to Convert Debt with
HBL regarding the above described note payable to HBL in the then principal
amount of $1 million, the first loan installment having by then been advanced.
On October 15, 1999, pursuant to the Agreement to Convert, HBL canceled the note
in exchange for 1,111,831 shares of common stock of the Company valued at the
then market value of $.9044 per share. The two additional $1 million advances
were to be likewise converted to equity purchases on or before November 30, 1999
and February 29, 2000, respectively.
However, by subsequent agreement of the parties, the equity purchases planned
for November 30, and February 29, 2000 were reinstated as loans. ABI received a
loan of $1 million on November 30, 1999, evidenced by note dated December 3,
1999 in the original principal amount of $1,000,000 bearing interest at the rate
of 4 1/2% per annum and due and payable on or before December 3, 2004, or on or
before the expiration of one year after approval of the Company's Product by the
US Food and Drug Administration, whichever occurs first. The final installment
was advanced on February 29, 2000, under terms which are identical, except that
the principal and accrued interest under that note will be payable on or before
February 29, 2005, or on or before the expiration of one year after approval of
the Company's Product by the US Food and Drug Administration, whichever occurs
first.
As a result of its related party nature, the Company has concluded it is not
practicable to estimate the fair value of its note payable to stockholder.
F-14
<PAGE> 39
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
4. MANUFACTURING AND SUPPLY AGREEMENTS
The Company was a party to the following manufacturing and supply agreements at
December 31, 1999:
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 was for seven years, has been extended through
March 13, 2002, and will be renewed automatically for successive three-year
terms. However, HBL can terminate the agreement at any time after the end of the
first renewal term if certain conditions are not met.
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, 1999, 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
F-15
<PAGE> 40
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
5. LICENSE AND SUBLICENSE AGREEMENTS (CONTINUED)
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, 1999, the Company had
commitments to provide additional funding of approximately $2.94 million 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.
Pursuant to shareholder approval obtained at the Company's 1999 annual meeting
of shareholders, the Company amended its Articles of Incorporation effective
June 22, 1999, to increase the number of voting common shares authorized for
issuance from 10,000,000 to 20,000,000, and to establish a new class of
preferred stock consisting of 10,000,000 authorized shares, issuable in series.
To date, no preferred stock has been issued.
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.
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
F-16
<PAGE> 41
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
7. COMMON STOCK (CONTINUED)
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
2,300,000 shares of common stock resulting in net proceeds of approximately
$9,377,702.
As described in Note 3, in April of 1999 HBL agreed to convert $2,837,526 debt
and accrued interest owed to it by the Company to 946,094 shares of common stock
of the Company. HBL subsequently entered into a $3,000,000 loan agreement with
ABI, of which $1,005,486.50 in debt and accrued interest was converted to
1,111,831 shares of ABI's voting common stock effective October 15, 1999.
In addition to 200,000 warrants granted to the Company's underwriter
(exercisable through August, 2000 at $8.10 per share) the Company has 585,608
shares of common stock reserved for issuance upon exercise of warrants granted
to outside consultants, 473,608 of which are not vested, and will vest only upon
the occurrence of significant funding events in which the respective warrant
holders are instrumental.
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.
During 1999, the Company charged $160,000 to expense representing the estimated
fair value of options and warrants granted in exchange for services. The
exercise price of 20,000 options was $1.25 and the exercise price of 112,000
warrants was $1.75.
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-17
<PAGE> 42
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
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 590,000 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 410,000 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.
In addition to options issued pursuant to the Company's employee and Director
stock option plans, the Company recently granted 625,932 non-qualified options
to Directors, employees, and one consultant. Two Hundred Thousand (200,000)
options were granted to Directors on December 16, 1999. Such options vested
immediately, and have an exercise price of $1.625 per share which was the fair
market value of the Company's stock as of the date of grant. Twenty Thousand
(20,000) options were granted on the same date and upon the same terms to a
non-affiliated consultant of the Company. Four Hundred Five Thousand Nine
Hundred Thirty-Two (405,932) options were granted to employees of the Company,
including 300,000 granted to Joseph Cummins, President and CEO. Such options are
exercisable at a price of $.875 per share, being the fair market value of the
Company's stock on December 29, 1999, the date of grant. All of such options
granted to employees were granted in consideration of the employees' agreement
to relinquish salary during 2000, on the basis of two options granted for every
$1.00 of salary voluntarily relinquished, with the amount of such relinquished
salary being reflected in the Option Agreement signed with each employee, such
options to vest monthly beginning in January, 2000, and to expire December 29,
2004.
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
F-18
<PAGE> 43
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
8. STOCK OPTION PLAN (CONTINUED)
assumptions for 1999 and 1998, respectively: risk-free interest rate of 5.69%
and 5.55%; dividend yield of 0% and 0%; volatility factors of the expected
market price of the Company's common stock of 1.306 and .822; and a
weighted-average expected life of the option of 3.1 and 3.2 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. The expense amounts
for 1999 and 1998 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:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Pro forma net loss $ (6,549,923) $ (2,358,342)
Pro forma basic and diluted net loss per share $ (1.03) $ (0.44)
</TABLE>
Based on the Black-Scholes method, the fair value of the options granted as of
December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Number of options issued at fair market value of stock 854,307 104,000
Weighted-average fair value of options $ 0.90 $ 1.12
Weighted-average exercise price of options $ 1.18 $ 1.92
</TABLE>
F-19
<PAGE> 44
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
8. STOCK OPTION PLAN (CONTINUED)
A summary of the Company's stock option activity, and related information for
the year ended December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 322,500 $ 3.74 218,500 $ 4.59
Granted 854,307 1.18 104,000 1.94
Expired, unexercised -- -- -- --
Exercised -- -- -- --
--------- ---------
Outstanding, end of year 1,176,807 $ 1.88 322,500 $ 3.74
========= =========
Exercisable at end of year 384,661 $ 2.67 92,900 $ 4.63
========= =========
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 ranged from
$0.875 to $5.50. Of these options, 223,500 have exercise prices ranging from
$3.875 to $5.00 and the remainder range from $0.875 to $1.75. The
weighted-average remaining contractual life of those options is 6.65 years.
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, 1999 and 1998, and cumulative from June 25, 1984 (inception)
through December 31, 1999 was $0, $0 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. The Company's
deferred tax asset of approximately $5,825,000 and $3,807,000 at December 31,
1999 and 1998, respectively, was subject to a valuation allowance of $5,825,000
and $3,807,000 at December 31, 1999 and 1998, respectively, because of
uncertainty regarding the Company's ability to realize future tax
F-20
<PAGE> 45
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
10. INCOME TAXES (CONTINUED)
benefits associated with the deferred tax assets. Deferred tax assets were
comprised primarily of net operating loss carryovers and the cash method of
accounting used by the Company for federal income tax reporting.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $14,960,000 for federal income tax purposes expiring in 2006
through 2019. The ability of the Company to utilize these carryforwards may be
limited should changes in stockholder ownership occur.
At December 31, 1999, 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.
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, 1999.
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, during 1999 the
Company has used the law firm Morris, Moore, Moss & Douglass, P.C. and the firm
of Sprouse, Smith & Rowley, P.C. Mr. Edward Morris, Secretary of the Company,
was a partner in the Morris, Moore firm until June 15, 1999 and became a partner
with Sprouse, Smith & Rowley firm at that time. The Company was invoiced $74,000
for legal services rendered by Morris, Moore, Moss & Douglass in 1998. In 1999,
the Company was invoiced $47,800 for legal services rendered by Morris, Moore,
Moss and Douglass; and $59,100 for legal services rendered by Sprouse, Smith &
Rowley.
On March 25, 1999, ABI signed a contract with PPD Pharmaco, Inc., now known as
PPD Development, Inc. to provide clinical monitoring and data entry services for
ABI's phase III clinical trials in Sjogren's syndrome. During the year ended
December 31, 1999, the Company paid $3,063,000, for clinical research
organization services to PPD Development, Inc. At the
F-21
<PAGE> 46
Amarillo Biosciences, Inc. and Subsidiaries
(companies in the development stage)
Notes to Consolidated Financial Statements
December 31, 1999
12. RELATED PARTY TRANSACTIONS (CONTINUED)
time that the contract was signed, Mr. Tom D'Alonzo was President and Chief
Operating Officer of PPD and its Clinical Research Organization subsidiary, PPD
Development, Inc. Mr. D'Alonzo is also a member of the Board of Directors of
ABI. Mr. D'Alonzo retired from PPD Development, Inc. in October, 1999, but
remains a member of the Board of Directors of ABI.
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.
14. ISI STOCK
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.
In January, 1999 there was a four for one reverse stock split, leaving the
Company with 2,625 shares of ISI stock at December 31, 1999. Due to the low
price and lack of liquidity for ISI stock, the Company has deemed such stock to
be worthless and has written off the $5,735 carrying value of the stock.
F-22
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
3.1+ Restated Articles of Incorporation of the Company, dated June 22, 1999.
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 May 11, 1999.
10.21+ Outside Director and Advisor Stock Option Plan, Amended and Restated as of May
11, 1999.
</TABLE>
<PAGE> 48
<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.
10.35+# License Agreement dated June 16, 1999, between North China Pharmaceutical
Group Corporation, 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.
NAME JURISDICTION OF INCORPORATION
-------------------------------- -----------------------------
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.
*** The Exhibit is incorporated by reference to the Company's 1998 Annual Report
on Form 10-KSB filed with the Commission on or before March 31, 1999.
+ The Exhibit is incorporated by reference to the Company's Report on Form
10-QSB for the quarterly period ended June 30, 1999, filed with the Commission
on August 12, 1999, and subsequently amended on September 13, 1999.
# Portions of this Exhibit have been omitted and filed separately with the
Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,302,343
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 48,639
<CURRENT-ASSETS> 1,383,119
<PP&E> 250,508
<DEPRECIATION> 144,709
<TOTAL-ASSETS> 1,562,413
<CURRENT-LIABILITIES> 1,609,923
<BONDS> 1,000,000
0
0
<COMMON> 74,722
<OTHER-SE> (122,232)
<TOTAL-LIABILITY-AND-EQUITY> 1,562,413
<SALES> 0
<TOTAL-REVENUES> 108,033
<CGS> 0
<TOTAL-COSTS> 4,732,365
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,182
<INCOME-PRETAX> (6,118,586)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,118,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,118,586)
<EPS-BASIC> (.96)
<EPS-DILUTED> (.96)
</TABLE>
