<PAGE> 1
CONFIDENTIAL -- FOR USE OF THE COMMISSION ONLY
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[X] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c)or Section 240.14a-12
Alpha 1 Biomedicals, Inc.
(Name of Registrant as Specified In Its Charter)
-------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state now it was determined): $1,930,000
(based on the fair market value of the consideration to be received from
sale of substantial part of assets)
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
$1,930,000
------------------------------------------------------------------------
5) Total fee paid:
$386.00
------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing:
1) Amount previously paid:
-----------------------------
2) Form, Schedule or Registration Statement No:
-----------------------------
3) Filing party:
-----------------------------
4) Date filed:
-----------------------------
<PAGE> 2
[LOGO]
6707 Democracy Boulevard, Suite 111
Bethesda, MD 20817
301/564-4400 - Fax 301/564-4424
February ___, 1998
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of
Shareholders of Alpha 1 Biomedicals, Inc. (the "Company") to be held at
[____________________________] commencing at _____, on ________, March ___,
1998.
At this important meeting, the stockholders will be asked to approve
the sale by the Company to SciClone Pharmaceuticals, Inc. ("SciClone") of the
Company's rights to receive royalty payments from the future sale by SciClone
and its licenses of Thymosin alpha 1. In exchange the Company will receive
payments in cash totaling $130,000 and shares of SciClone Common Stock having a
value as of the date of this letter of $_____.
The Company's Board of Directors believes that the transaction with
SciClone is the only transaction currently available to the Company that will
allow the Company to continue as a going concern. On this basis, the Board of
Directors has concluded that the transaction is in the best interests of the
Company and its stockholders.
Approval of the SciClone transaction requires the approval of the
holder of a majority of the outstanding shares of Common Stock. Accordingly,
your vote is important no matter how many shares you own.
The Secretary's formal notice of the meeting and the Proxy Statement
appear on the following pages and describe the other matters that will be
submitted to a vote of stockholders at the meeting. During the meeting, time
will be provided for a review of the Company's activities over the past year and
for stockholders' questions.
We hope that you will be able to attend this important meeting in
person, and we look forward to seeing you. If you cannot attend, please mark,
date, and sign the enclosed proxy card and return it in the accompanying
envelope at your earliest convenience to assure your shares will be represented
and voted at the Annual Meeting. If you attend, you may revoke your proxy and
vote in person if you so desire.
Sincerely,
Michael L. Berman
President and Chief Executive Officer
<PAGE> 3
ALPHA 1 BIOMEDICALS, INC.
6707 DEMOCRACY BOULEVARD, SUITE 111
BETHESDA, MD 20817
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON ________ ___, 1998
Notice is hereby given that the Annual Meeting of Stockholders of
Alpha 1 Biomedicals, Inc. will be held at _______________________, commencing at
_____, on ________, March ___, 1998. At the Annual Meeting, the following
matters will be submitted to a vote of the stockholders:
1. To elect a Board of Directors consisting of four
directors;
2. To consider and vote upon a proposal to approve the sale
to SciClone Pharmaceuticals, Inc. of the Company's
rights to receive royalties from the sale of Thymosin
alpha 1;
3. To consider and vote upon a proposal to approve an
amendment to the Company's Restated Certificate of
Incorporation to increase the authorized shares of
Common Stock from 20,000,000 to 75,000,000;
4. To consider and vote upon a proposal to ratify the
appointment of Price Waterhouse LLP as independent
auditors for the fiscal year ending December 31, 1998;
and
5. To transact such other business as may properly be
brought before the meeting.
The Board of Directors has fixed ________________, as the record
date for the meeting. Only stockholders of record at the close of business on
that date are entitled to receive notice of and vote at the meeting.
YOUR PROXY IS IMPORTANT TO ENSURE A QUORUM AT THE MEETING. EVEN IF
YOU OWN ONLY A FEW SHARES, AND WHETHER OR NOT YOU EXPECT TO BE PRESENT, YOU ARE
URGED TO MARK, DATE, AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE
POSTAGE-PAID ENVELOPE PROVIDED. YOU MAY REVOKE YOUR PROXY PRIOR TO THE TIME THAT
VOTES ARE CAST AT THE MEETING. THE GIVING OF YOUR PROXY WILL NOT PREVENT YOU
FROM VOTING IN PERSON AT THE MEETING IF YOU CHOOSE TO DO SO.
By Order of the Board of Directors,
Robert J. Lanham
Secretary
Bethesda, Maryland
February ___, 1998
<PAGE> 4
PROXY STATEMENT
GENERAL INFORMATION
The enclosed proxy is being solicited by the Board of Directors of
Alpha 1 Biomedicals, Inc., a Delaware corporation (the "Company"), for use at
the Annual Meeting of Stockholders to be held at ______________________, at
_________, on ____________ __, 1998. Only stockholders of record at the close of
business on _____, 1998 (the "Record Date"), will be entitled to vote at the
meeting. On the Record Date, there were issued and outstanding 11,977,429 shares
of common stock, par value $.001 per share ("Common Stock"). A majority of the
outstanding shares of Common Stock, present in person or represented by proxy,
will constitute a quorum for the transaction of business at the meeting.
MATTERS SUBJECT TO VOTE.
At the Annual Meeting, the Company intends to submit the following
matters to a vote of the stockholders:
(1) The election of four directors to serve until the next annual
meeting and until his successor is elected and qualified. See "Election of
Directors."
(2) Approval of the sale by the Company to SciClone Pharmaceuticals,
Inc. ("SciClone") of the Company's rights to receive royalty payments from the
future sale by SciClone and its sublicensees of Thymosin alpha 1 (the "SciClone
Transaction"). Pursuant to the terms and conditions of the Alpha Rights
Acquisition Agreement, dated as of December 17, 1997, (the "Acquisition
Agreement"), between the Company and SciClone, the Company will receive in
exchange for its royalty rights $130,000 in cash and shares of common stock, no
par value per share ("SciClone Common Stock"), having an initial value of $1.8
million. The Company expects to sell the shares of SciClone Common Stock in
order to fund current operations. See "Sale of Thymosin Alpha 1 Royalty Rights."
The following factors should be taken into account by stockholders
in connection with their consideration of the SciClone Transaction:
- After the transaction, the Company will have no revenue
generating assets other than the SciClone Common Stock.
-1-
<PAGE> 5
- The ability of the Company to resell the SciClone Common
Stock without restriction will depend upon the
registration by SciClone of the shares for resale with
the Securities and Exchange Commission.
- The Company has not sought or obtained either an
independent determination of the potential value of the
Company's Thymosin alpha 1 royalty rights or an opinion
as to the fairness of the SciClone Transaction to the
Company and its stockholders.
- The Company's stockholders will not have appraisal
rights with respect to the transaction.
(3) Approval of an amendment to the Company's Restated Certificate
of Incorporation, as amended (the "Certificate of Incorporation"), to increase
the number of authorized shares of Common Stock from 20,000,000 to 75,000,000.
See "Amendment to Certificate of Incorporation."
(4) Ratification of the appointment of Price Waterhouse LLP to
serve as the Company's independent auditors for the year ending December 31,
1998. See "Ratification of Appointment of Independent Auditors."
VOTING OF PROXIES.
Proxies in the accompanying form that are properly executed and
returned to the Company, and that are not subsequently revoked, will be voted in
the manner specified by the stockholder on the proxy card. If a proxy is
properly executed, but does not specify how the shares represented thereby are
to be voted on any matter being submitted to a vote of stockholders, the proxy
will be voted on the matter or matters for which instructions are not received
as follows: (i) FOR the election as directors of each of the nominees identified
in this Proxy Statement; (ii) FOR the SciClone Transaction; (iii) FOR the
amendment to the Certificate of Incorporation to increase the number of
authorized shares of Common Stock; (iv) FOR the ratification of Price Waterhouse
LLP as independent auditors of the Company for the year ending December 31,
1998; and (v) in the discretion of the persons named as proxies as to any other
matter that may properly come before the meeting. A proxy may be revoked by a
stockholder at any time before its exercise by delivery to the Secretary of the
Company of either a written revocation or a subsequently dated proxy and will be
deemed revoked if the stockholder votes in person at the Annual Meeting.
Adoption of the proposals to approve the SciClone Transaction and to
approve the amendment of the Certificate of Incorporation each requires the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Common Stock. For each of these votes, both abstentions and shares
held in "street name" that are not voted by a broker or other nominee because of
the absence of discretionary voting authority, so-called "broker non-votes,"
will constitute "no" votes. For purposes of each vote that requires for adoption
the
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<PAGE> 6
affirmative vote of a majority of the shares present and entitled to vote, (i)
shares as to which a holder abstains from voting effectively constitute "no"
votes because such shares are considered present and entitled to vote at the
meeting and (ii) shares held in "street name" by a broker or nominee who does
not have discretionary authority to vote such shares on the particular matter
are not counted as shares entitled to vote on such matter.
GENERAL MATTERS.
The cost of this proxy solicitation is being borne by the Company.
In addition to solicitation by mail, the Company will request banks, brokers and
other custodial nominees and fiduciaries to supply proxy material to the
beneficial owners of the Common Stock of whom they have knowledge, and will
reimburse them for their expenses in so doing. Officers and other employees of
the Company may solicit proxies personally, by telephone or by mail, without
receiving any additional compensation for such activities.
The address of the Company is 6707 Democracy Boulevard,
Suite 111, Bethesda, Maryland 20817. The Company's telephone number at that
address is (301) 564-4400.
The mailing of this Proxy Statement and the form of proxy will
commence on or about ________________, 1998.
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<PAGE> 7
ELECTION OF DIRECTORS
The four individuals listed below each have been nominated for
election as a director at the 1998 Annual Meeting, to hold office until the next
annual meeting of stockholders and until his successor is elected and qualified.
Unless authority to vote for directors is withheld in the accompanying proxy,
the persons named therein as proxies will vote FOR the election of each of the
four nominees listed below. Directors will be elected by a plurality of the
votes cast. All nominees for election have indicated a willingness to serve, but
if any of them should decline or be unable to serve as a director, the persons
named as proxies intend to vote all shares in favor of the election of such
other person nominated as a replacement by the Board of Directors. If no such
other person is designated as a replacement, the Board of Directors will reduce
the number of directors to be elected.
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
- ---- --- --------------------------
<S> <C> <C>
Allan L. Goldstein . . . . . . . . 60 Chairman of the Board of Directors
Michael L. Berman, Ph.D . . . . . 48 President and Chief Executive Officer
Joseph C. McNay. . . . . . . . . . 64 Director
Albert Rosenfeld . . . . . . . . . 77 Director
</TABLE>
Set forth below, as to each nominee, is information concerning the
period of service as a director of the Company, a brief description of his
principal occupation and business experience during the past five years, and
certain other directorships held.
ALLAN L. GOLDSTEIN, PH.D. Dr. Goldstein has been the Chairman of the
Board of the Company since its founding in May 1982. He is the Chairman of the
Department of Biochemistry and Molecular Biology at The George Washington
University School of Medicine and Health Sciences, a position he has held since
1978. Prior to July 1986, Dr. Goldstein served as Chief Executive Officer and
Treasurer of the Company.
MICHAEL L. BERMAN, PH.D. Dr. Berman was elected as President and
Chief Executive Officer of the Company in November 1994. He has been a director
of the Company since April 1995. Dr. Berman joined the Company in early 1994 as
Vice President for new commercial programs. From 1988 to 1993, Dr. Berman was
Vice President and Scientific Director and then Director of Business Development
with Oncologix, Inc. He is a director of Prototek, Inc. and Peptomers, Inc.
JOSEPH C. MCNAY Mr. McNay has served as a member of the Board of
Directors since 1987. Mr. McNay has been the Chairman and director of Essex
Investment Management
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<PAGE> 8
Company, Inc., a registered investment adviser, since 1976. He is a director
of Softech, Inc. and MPSI Systems, Inc.
ALBERT ROSENFELD Mr. Rosenfeld has served as a member of the Board
of Directors since 1982. Mr. Rosenfeld has been a consultant on Future Programs
for the March of Dimes Birth Defects Foundation since 1973 and Adjunct Professor
in the Department of Human Biological Chemistry and Genetics at the University
of Texas Medical Branch, Galveston, Texas since 1974. He is a frequent author
and lecturer on scientific matters.
THE BOARD OF DIRECTORS RECOMMENDS THE ELECTION AS DIRECTORS OF EACH OF THE
NOMINEES.
MEETING ATTENDANCE.
The Board of Directors met five times during 1997. Each of the
directors, with the exception of Mr. McNay, was present for 75% or more of the
total number of meetings held during the year by the Board of Directors and by
each committee of the Board on which such director served. Mr. McNay attended
three of the five Board meetings.
COMMITTEES OF THE BOARD.
The Audit Committee and the Stock Option Committee are the only
standing committees of the Board of Directors. The Company does not have a
compensation committee or a nominating committee.
The function of the Audit Committee is to assure that appropriate
audits of the Company's affairs are conducted. In carrying out this
responsibility, the Audit Committee meets periodically with management and
representatives of the Company's independent auditors and reviews the scope of
internal and external audit activities and the results of the annual audit. The
independent auditors have direct access to the Audit Committee to discuss the
results of their examination, the adequacy of the internal accounting controls
and the integrity of financial reporting. The members of the Audit Committee are
Mr. McNay and Mr. Rosenfeld. The Audit Committee did not meet during 1997.
The Stock Option Committee is responsible for administering the
Company's employee stock option plans and in this capacity approves all stock
option grants to executive officers of the Company. The members of the Stock
Option Committee are Mr. McNay and Mr. Rosenfeld. The Stock Option Committee did
not meet in 1997, but on one occasion acted by unanimous written consent.
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<PAGE> 9
DIRECTOR COMPENSATION.
Each nonemployee director is paid an annual fee of $5,000, plus
$1,250 per meeting for each meeting attended in person and is reimbursed for
expenses incurred in attending Board meetings. Each current nonemployee director
(and any new nonemployee director) is a participant in the Company's Directors
Stock Option Plan pursuant to which (i) each nonemployee director at the time of
his or her initial election or appointment is granted an option to purchase
10,000 shares of Common Stock and (ii) each nonemployee director receives
annually an option to purchase 5,000 shares of Common Stock at the time of his
or her reelection as a director. All such options have an exercise price equal
to the fair market value of the Common Stock on the date of the grant and vest
in annual increments of 20% beginning on the date of the grant.
EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE. The following table sets forth certain
information concerning the compensation for each of the last three fiscal years
of the individual who in 1997 served as the Company's President and Chief
Executive Officer and each other executive officer of the Company whose combined
1997 salary and bonus exceeded $100,000 (the "named executive officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION(1)
NAME AND --------------------- AWARDS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ------------------ ---- ------ ----- ------- ------------
<S> <C> <C> <C> <C> <C>
Michael L. Berman... 1997 $149,820 $ 0 682,682 $2,960(3)
President and 1996 $149,820 $ 0 0 $2,591
Chief Executive Officer 1995 $150,109 $ 5,000 580,000(2) $8,241
Robert J. Lanham... 1997 $114,821 $ 0 227,561 $5,040(4)
Vice President, Finance 1996 $105,968 $ 0 0 $4,738
& Chief Financial Officer 1995 $113,211 $ 0 215,000(2) $8,255
</TABLE>
(1) None of the above-named executive officers received in any of the identified
years perquisites or other personal benefits in excess of the lesser of $50,000
or 10% of such individual's combined salary and bonus for that year.
(2) Includes options issued to Dr. Berman and Mr. Lanham to purchase 500,000 and
200,000 shares of Common Stock, respectively, that were granted subject to
stockholder approval of a proposed merger of the Company. The proposed merger
transaction was terminated in 1996 by mutual agreement of the parties, and as a
result the options were canceled.
(3) Consists of $2,960 of premiums paid by the Company for long-term disability
and life insurance.
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<PAGE> 10
(4) Consists of $5,040 of premiums paid by the Company for long-term disability
and life insurance.
STOCK OPTION GRANTS. The following table sets forth certain
information concerning grants of stock options to the named executive officers
during the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
OPTION GRANTS IN 1997
POTENTIAL REALIZABLE VALUE
NUMBER PERCENT OF AT ASSUMED RATES OF
OF SHARES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- ------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Michael L. Berman 682,682(1) 49.2% $.13 1/6/07 $55,814 $141,443
Robert J. Lanham 227,561(1) 16.4% $.13 1/6/07 $18,605 $ 47,147
</TABLE>
(1) Consists of options to purchase shares of Common Stock that vested in equal
monthly installments of 1/12th of the total grant beginning on the grant date.
(2) Amounts represent hypothetical gains that could be achieved if the option
were to be exercised at the end of the option term. The gains are based on
assumed rates of stock appreciation of 5% and 10%, compounded annually from the
date the option was granted to the expiration date. Actual gains, if any, on
stock option exercises will depend on the future performance of the Common Stock
and the date on which the option, or any portion thereof, is exercised.
YEAR-END STOCK OPTION VALUES. The following table sets forth certain
information concerning stock option exercises and year-end stock option values
for each of the named executive officers for the fiscal year ended December 31,
1997.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END STOCK OPTION VALUES
NUMBER OF SHARES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
ACQUIRED OPTIONS AT YEAR-END MONEY OPTIONS AT YEAR-END(1)
ON VALUE ------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael L. Berman 0 - 782,682 0 0 0
Robert J. Lanham 0 - 314,234 0 0 0
</TABLE>
(1) All options have an exercise price that exceeds the market price.
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<PAGE> 11
EMPLOYMENT AGREEMENTS
Neither of the named executive officers currently have employment
agreements with the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The Board of Directors as a whole is responsible for determining the
compensation payable to the chief executive officer and to other executive
officers of the Company. When the Board gives consideration to the compensation
of an executive officer who also is a director, that director does not
participate in the Board's deliberations.
During 1997, Dr. Goldstein was employed by the Company as its chief
science advisor at an annual rate of $36,000. In May 1994, the Company extended
a loan in the amount of $149,000 to Dr. Goldstein, the Company's Chairman of the
Board, for the purpose of enabling Dr. Goldstein to meet a margin call on a
brokerage account collateralized by the Common Stock of the Company at a time
when the Board of Directors concluded that it would be contrary to the best
interests of the Company for Dr. Goldstein to effect a sale of the shares. The
loan was unsecured and had an interest rate equal to the prime rate, with all
principal and interest due on the December 31, 1994 maturity date. The loan was
repaid on January 1, 1995, in part with the proceeds of a second loan to Dr.
Goldstein from the Company in the amount of $115,617 that was unsecured. The
second loan has an interest rate of 11.5% and was to be repaid in 36 equal
monthly installments. In February 1996, the terms of the loan were amended to
provide for the suspension of installment payments for 12 months, but with
interest continuing to accrue. In March 1997 and December 1997, the terms of the
loan were further amended to suspend installment payments an additional nine and
twelve months, respectively, with interest continuing to accrue. Currently,
installment payments are suspended until December 1998, at which time the loan
will be repayable in 12 equal monthly installments. The highest outstanding
balance on the loan during 1997 was on December 31, 1997, when a balance
consisting of aggregate principal and accrued interest totalled $102,143.
During the period March through June 1997, the Company completed a
private placement of Units in which it sold a total of five Units to seven
purchasers, at a sale price of $50,000 per Unit. Each Unit consisted of (i)
500,000 shares of Common Stock and (ii) 165,000 Class D Warrants, each of which
is exercisable to purchase one share of Common Stock at an exercise price of
$0.10 per share. Mr. McNay purchased one Unit; Dr. Berman purchased .065 of a
Unit; and Mr. Lanham purchased .05 of a Unit, in each case on the same terms as
the purchasers who were not affiliated with the Company.
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<PAGE> 12
REPORT ON EXECUTIVE COMPENSATION.
The objective of the Board of Directors is to provide compensation
arrangements for the Company's executive officers that generally are competitive
within the industry and that promote the Company's goal of enhancing shareholder
value. The components of the Company's compensation arrangements for its
executive officers consist of base salary, bonuses and stock options.
BASE SALARY. The base salaries of executive officers are established
by contract or otherwise at levels that the Board (based on the advice of the
chief executive officer as to officers other than the chief executive officer)
believes are necessary to attract and retain executives of a caliber essential
to the Company's success. Because of the few number of persons employed by the
Company, salary levels of executive officers currently are set based on
individual circumstances and not on the basis of an objective formula. While the
Board is aware of the salaries paid to executives at comparable levels of
responsibility by companies of a similar size, including some of the companies
that are included in the NASDAQ Pharmaceutical Stocks Index shown on the Stock
Performance Graph, its executive compensation decisions in 1997 were not
significantly influenced by the competitive environment. Adjustments to salary
levels are made from time to time based upon the foregoing factors and after
giving consideration to the individual performance factors.
BONUS. Although the Company does not have an established bonus plan,
individual bonuses are paid to executive officers as provided for under the
terms of individual employment agreements or are awarded from time to time in
recognition of a particular contribution or achievement of an executive officer.
The principal factors taken into consideration in determining bonus awards are
the contributions made by the individual to the achievement of the Company's
product development and financial goals. Bonuses paid to executive officers
other than the chief executive officer usually are determined by the chief
executive officer in consultation with the Board of Directors. No bonuses were
paid to executive officers in 1997.
STOCK OPTIONS. Because the Company to date has realized only limited
revenues from operations and seeks to maximize the resources available to devote
to product development, the Board has placed significant emphasis on stock
option awards as a non-cash means of executive compensation. Under the Company's
stock option plans, options are awarded at an exercise price equal to the fair
market value of the Common Stock on the date of the grant and generally become
exercisable over a period of years, thereby aligning the compensation realizable
by executives with increases in shareholder value. The size of individual awards
is based on a combination of factors, with a principal emphasis on salary
levels, but with consideration also given to the number of vested and unvested
stock options previously awarded to the executive officer and individual
performance criteria. In 1997, in order to retain and motivate the present
staff, stock options were awarded to Dr. Berman and Mr. Lanham. See "Executive
Compensation -- Stock Option Grants."
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<PAGE> 13
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. In 1997, a
salary of $149,820 was paid to Dr. Michael Berman, the Company's President and
Chief Executive Officer.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m). Internal
Revenue Code section 162(m), enacted in 1993, prohibits a public company from
taking a deduction for compensation in excess of $1 million paid to its chief
executive officer and any of its other named executive officers. Certain
performance-based compensation, however, is specifically exempted from the
deduction limit. No formal policy has been adopted by the Company with respect
to qualifying compensation paid to its executive officers from the deduction
limit. The Company does not anticipate that any compensation paid to its
executive officers in 1998 will exceed the dollar limit.
Allan L. Goldstein, Chairman
Michael Berman
Joseph C. McNay
Albert Rosenfeld
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<PAGE> 14
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return
on the Common Stock (consisting solely of stock price performance, there having
been no dividends paid during the period) for the last five years with the
cumulative total return (including the reinvestment of all dividends) of (i) the
Standard & Poor's 500 Stock Index and (ii) the NASDAQ Pharmaceutical Stocks
Index. The NASDAQ Pharmaceutical Stocks Index is an industry index of
approximately 276 companies that trade on NASDAQ. The Index is prepared for
NASDAQ by the Center for Research in Security Prices at the University of
Chicago. A list of the companies comprising the Index is available from the
Company upon request. There can be no assurance that the performance of the
Common Stock will continue into the future with the same or similar trends
depicted in the graph below.
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Alpha 1 100.00 93.55 5.04 1.01 .68 .42
S&P 500 Index 100.00 110.08 111.53 153.45 188.68 251.63
Nasdaq Pharmaceutical 100.00 89.10 67.10 122.70 123.10 127.20
Index
</TABLE>
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<PAGE> 15
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that each of the Company's directors and executive officers, and any
beneficial owner of more than 10% of the Common Stock, file with the Securities
and Exchange Commission (the "SEC") initial reports of beneficial ownership of
the Common Stock and reports of changes in beneficial ownership of the Common
Stock. Such persons also are required by SEC regulations to furnish the Company
with copies of all such reports. Based solely on its review of the copies of
such reports furnished to the Company for the year ended December 31, 1997, and
on the written representations made by such persons that no other reports were
required, the Company is not aware of any instances of noncompliance with
Section 16(a) during 1997.
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1997, unless
otherwise indicated, certain information concerning the beneficial ownership of
Common Stock (i) by each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock, (ii) by each nominee for election as a
director, (iii) by each executive officer of the Company named in the Summary
Compensation Table set forth under the caption "Executive Compensation" and (iv)
by all directors and executive officers of the Company as a group, in each case
as reported to the Company by such persons.
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<PAGE> 16
<TABLE>
<CAPTION>
PERCENTAGE OF
NAME AND ADDRESS OF OUTSTANDING
BENEFICIAL OWNER (1) NUMBER OF SHARES (2) SHARES (3)
- -------------------- -------------------- ----------
<S> <C> <C>
Allan L. Goldstein 536,124(4) 4.4%
Joseph C. McNay 800,000(5) 6.6%
Albert Rosenfeld 23,100(6) *
Michael L. Berman 473,901(7) 3.8%
Robert J. Lanham 252,720(8) 2.1%
Roger Samet 1,172,050(9) 9.6%
254 East 68th Street
New York, NY 10021
All directors and executive officers
as a group (five persons) 2,085,845(10) 15.9%
</TABLE>
- ---------------------
* Constitutes less than 1% of the outstanding shares of Common Stock.
(1) Unless otherwise indicated, the address of the beneficial owner is c/o Alpha
1 Biomedicals, Inc., 6707 Democracy Boulevard, Suite 111, Bethesda, Maryland
20817.
(2) A beneficial owner of a security includes a person who directly or
indirectly has or shares voting or investment power with respect to such
security. Voting power is the power to vote or direct the voting of the security
and investment power is the power to dispose or direct the disposition of the
security. Each person listed has advised the Company that, except as otherwise
indicted below, such person has, or upon the exercise of the stock options or
Class D Warrants indicated as beneficially owned will have, sole voting power
and sole investment power with respect to the shares indicated.
(3) The percentages represent the total number of shares of Common Stock shown
in the adjacent column divided by the sum of (i) the issued and outstanding
shares of Common Stock as of December 31, 1997, and (ii) all shares of Common
Stock, if any, issuable upon the exercise of stock options or Class D Warrants
held by such person or group that were exercisable on December 31, 1997, or will
become exercisable within 60 days thereafter.
(4) Consists of (i) 90,285 shares of Common Stock owned directly by Dr.
Goldstein and 339,633 shares of Common Stock which he has a right to acquire
pursuant to the exercise of immediately exercisable options granted under the
Company's 1986 Incentive Stock Option Plan
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<PAGE> 17
and 1987 Non-Qualified Stock Option Plan over which Dr. Goldstein has, or upon
exercise of such options will have, sole voting and sole investment power and
(ii) 11,000 shares held in trust for the benefit of Dr. Goldstein's daughter, as
to which he serves as a co-trustee, 51,103 shares held by Dr. Goldstein's wife,
and 44,103 shares held by Dr. Goldstein's wife as custodian for their minor
child, all with respect to which Dr. Goldstein shares voting and investment
power.
(5) Consists of 612,000 shares of Common Stock owned directly by Mr. McNay and
23,000 shares of Common Stock issuable upon the exercise of the immediately
exercisable portion of options granted under the Company's Directors Stock
Option Plan and Class D Warrants exercisable to purchase 165,000 shares of
Common Stock.
(6) Consists of 10,100 shares of Common Stock owned directly by Mr. Rosenfeld
and 13,000 shares of Common Stock issuable upon the exercise of the immediately
exercisable portion of options granted under the Company's Directors Stock
Option Plan.
(7) Consists of 68,000 shares of Common Stock owned directly by Dr. Berman and
384,451 shares issuable upon exercise of immediately exercisable stock options
granted under the Company's 1986 Incentive Stock Option Plan and Non-Qualified
Stock Option Plan, and Class D Warrants exercisable to purchase 21,450 shares of
Common Stock.
(8) Consists of 54,727 shares of Common Stock owned directly by Mr. Lanham and
181,493 shares issuable upon exercise of immediately exercisable stock options
granted under the Company's 1986 Incentive Stock Option Plan and 1987
Non-qualified Stock Option Plan and Class D Warrants exercisable to purchase
16,500 shares of Common Stock.
(9) Consists of 880,000 shares of Common Stock and Class D Warrants exercisable
to purchase 292,050 shares of Common Stock.
(10) Consists of 835,112 shares of Common Stock owned directly by all directors
and executive officers of the Company as a group, the right to acquire through
the exercise of stock options 941,577 shares of Common Stock that were
exercisable on December 31, 1997, or that will become exercisable within 60 days
thereafter, 106,206 shares of Common Stock owned by wives and children of
directors and executive officers, and Class D Warrants exercisable to purchase
202,950 shares of Common Stock.
-14-
<PAGE> 18
SALE OF THYMOSIN ALPHA 1 ROYALTY RIGHTS
GENERAL
On December 3, 1997, the Company's Board of Directors unanimously
approved the sale of the Company's royalty rights with respect Thymosin alpha 1
to SciClone Pharmaceuticals, Inc. in exchange for (i) $130,000 in cash and (ii)
shares of SciClone Common Stock that were valued at $1.8 million as of the date
the companies entered into the agreement to effect the transaction. The sale is
conditioned on the approval of the transaction by the Company's stockholders at
the Annual Meeting.
The Company is entering into the SciClone Transaction in order to
generate the cash needed to continue operating as a going concern. If the
SciClone Transaction is approved, it is the Company's current intention to use
the cash proceeds and proceeds from the sale of the SciClone Common Stock to
pay existing indebtedness and to fund current operations while it continues its
efforts to secure additional financing or to effect a business combination.
In evaluating the SciClone Transaction, stockholders should take
into consideration the fact that the Board of Directors did not obtain from an
outside source either an appraisal of the value of the Thymosin alpha 1 royalty
rights or an opinion as to the fairness of the transaction to the Company and
its stockholders. While the Company did attempt to solicit third-party proposals
to purchase the Thymosin alpha 1 royalty rights, it did not obtain any offers
other than from SciClone.
The Board's recommendation of the SciClone Transaction to the
stockholders is based on its conclusion that the transaction is superior to any
other alternative available to the Company because it satisfies the Company's
immediate need for cash and should provide the Company with sufficient cash to
continue its operations into the fourth quarter of 1998. See "Recommendation of
the Board of Directors."
The sale of the Company's Thymosin alpha 1 royalty rights to
SciClone does not involve an exchange of, or a change in the terms of the
outstanding Common Stock, nor does it require the Company to issue additional
shares of the Common Stock or any other securities. Accordingly, the transaction
will not change the legal rights and preferences of any of the stockholders,
each of whom will continue to hold the same number and percentage of shares that
such stockholder held prior to the transaction. Stockholders do not have
appraisal rights with respect to the transaction.
BACKGROUND OF THE TRANSACTION
RELATIONSHIP WITH SCICLONE. From the Company's inception in 1982
through 1994, the Company was primarily engaged in research and development
activities and in the conduct of
-15-
<PAGE> 19
clinical trials involving Thymosin alpha 1, a 28-amino acid peptide, for the
purpose of evaluating its efficacy in the treatment of various diseases and
immune disorders. In 1990, the Company entered into a license agreement with
SciClone, pursuant to which the Company granted to SciClone an exclusive license
to all of the Company's patent and other proprietary rights with respect to
Thymosin alpha 1 to develop, test, make, use and sell Thymosin alpha 1 and
products containing Thymosin alpha 1 for all human and animal therapeutic and
diagnostic uses (collectively, "Licensed Products"). The original scope of the
license covered all countries of the world, with the exception of the United
States, Canada, Israel, Europe and Korea (the "Original Territory").
In 1994, as part of the settlement of an arbitration proceeding
between the two companies, the Company entered into a new license agreement with
SciClone (the "SciClone License Agreement") under which the territory covered by
SciClone's exclusive license was expanded to cover the entire world, including
the United States, Canada and Europe, with the exception of Italy, Spain,
Portugal and Korea (the "New Territory"). Through subsequent agreements with
other licensees of the Company, the New Territory later was expanded to include
the four excluded countries, so that currently the territorial scope of
SciClone's exclusive license is worldwide.
Under the terms of the Company's SciClone License Agreement,
SciClone is solely responsible for the commercial development of Thymosin alpha
1, including the conduct of all necessary clinical testing and the securing of
all required regulatory approvals. The Company is entitled to receive a royalty
on net sales revenues from Licensed Product sales in the Original Territory by
SciClone and its sublicensees of (i) 3.5%, if Sciclone has patent protection in
the country in which the Licensed Product is sold, and (ii) 3.0%, if SciClone
does not have patent protection. The Company is entitled to receive a royalty on
net sales revenues from Licensed Product sales in the New Territory by SciClone
and its sublicensees of (i) 7.0%, if SciClone has patent protection in the
country in which the Licensed Product is sold, and (ii) 6.0%, if SciClone does
not have patent protection. The Company's right to receive royalties on sales of
Licensed Products continues until September 30, 2002, unless by that date the
Company has not earned royalties of at least $35 million, in which case
SciClone's royalty obligations will continue until the earlier of (i) the
receipt by the Company of royalties totalling $35 millon and (ii) September 30,
2009. Under the SciClone License Agreement, SciClone is responsible for the
payment on behalf of the Company of all royalties due licensors of Thymosin
alpha 1 rights to the Company.
SciClone has advised the Company that it is currently pursuing the
commercial development of Thymosin alpha 1, under the trademark of Zadaxin(R),
as a treatment of chronic hepatitis B and chronic hepatitis C. According to
SciClone, Zadaxin(R) currently is approved and is being marketed for chronic
hepatitis B in the People's Republic of China, the Philippines and Singapore,
and SciClone has filed for approval to market Zadaxin(R) for this indication in
18 additional countries in Asia, Latin America and the Middle East. In Japan,
SciClone has licensed exclusive rights with respect to Thymosin alpha 1 to the
Japanese subsidiary of Schering-Plough Corporation ("SPKK") which currently is
conducting clinical studies.
-16-
<PAGE> 20
Recently, SciClone announced that SPKK has been authorized by the Japanese
Ministry of Health and Welfare to initiate a pivotal Phase III hepatitis B
study. In Taiwan, SciClone currently is completing various regulatory filings
that will allow SciClone to file for registration. With respect to use of
Zadaxin(R) as a therapy for chronic hepatitis C, SciClone currently is
performing clinical studies in Japan, the United States and Europe. In the
United States and Europe, SciClone is developing Zadaxin(R) in combination with
interferon for the treatment of chronic hepatitis C and is currently exploring
collaborative arrangements for the development and marketing of Zadaxin(R).
The following table sets forth the royalties paid to the Company as
the result of sales by SciClone and its sublicensees of Licensed Products.
<TABLE>
<CAPTION>
Year Royalties
---- ---------
<S> <C>
1995 $ 4,902
1996 $17,243
1997 $69,103*
</TABLE>
* $48,835 had been received through September 30, 1997
In August 1996, the Company entered into an agreement with SciClone
under which the Company received advance royalty payments totaling $500,000. In
exchange, the Company agreed that after receiving royalty payments of $1.75
million, it will forego future royalties, if and when earned, in an amount equal
to $2.5 million (the "First Royalty Prepayment"). In September 1997, the Company
entered into a second agreement with SciClone under which it received an advance
royalty payment of $70,000. In exchange, the Company agreed that after receiving
royalty payments of $1.75 million, it will forego future royalties, if and when
earned, in an amount equal to $700,000 (the "Second Royalty Prepayment"). As a
consequence of these two agreements, after the Company has been paid $1.75
million in royalties, royalties payments will not resume until SciClone effects
sales of Licensed Products sufficient to generate royalties of $4.95 million.
Under the SciClone License Agreement, the decision whether to
continue the commercial development of Thymosin alpha 1 is within the sole
discretion of SciClone. While the Company understands that SciClone is
continuing with its efforts to commercialize Thymosin alpha 1 and has announced
receipt of licenses to market Thymosin alpha 1 in several countries, there is no
assurance as to the extent that the product will be successfully commercialized
or as to the amount of the royalty payments that the Company would receive based
on the commercial sales of Licensed Products of SciClone and its sublicensees.
EFFORTS TO SELL THYMOSIN ALPHA 1 ROYALTY RIGHTS. Due to the
financial condition of the Company and the status of its product development
efforts, the Company, over its history, has continually required infusions of
additional cash in order to remain a going concern. See "Reasons for the
Transaction." One source of potential revenue has been its right to receive
-17-
<PAGE> 21
royalty payments on the commercial sale by SciClone and its sublicensees of
Licensed Products. Through December 31, 1997, the Company has received royalty
payments totalling $91,248, excluding advance royalty payments. In addition, the
Company has utilized these assets as a source of cash in the form of advance
royalty payments. As of May 1997, the Company had received cash in the amount of
$500,000, in exchange for foregoing future royalties totalling $2.5 million
(which may or may not have been earned by the Company, depending on SciClone's
degree of success in commercializing and marketing Licensed Products).
In April 1997, Dr. Michael Berman, President and CEO of the Company,
contacted Aurora Capital, a financial advisory company, to discuss possible
means by which the Company could realize immediate value from its Thymosin alpha
1 royalty rights. Following discussions with Aurora, Dr. Berman contacted Don
Sellers, President and CEO of SciClone, to explore the possibility of a sale of
the Thymosin alpha 1 royalty rights to SciClone. This discussion led to a
meeting on May 7, 1997, between Dr. Berman and Mr. Shawn Singh, Vice President
for Business Development of SciClone. Mr. Singh indicated that SciClone was
interested in a transaction that would involve an assignment to SciClone of all
of the Company's patents and licenses for Thymosin alpha 1 in exchange for cash
and shares of SciClone Common Stock.
On May 15, 1997, Dr. Berman met with Mr. Singh to discuss further
details of a possible transaction. The parties discussed a net present value
analysis prepared by the Company. See "Recommendation of the Board of
Directors." Mr. Singh indicated that the SciClone offer, which was less than the
value of the Thymosin alpha 1 royalty rights suggested by the Company's
analysis, was justified because of the potential appreciation of value of
SciClone Common Stock. Mr. Singh also indicated that, as an added value,
SciClone might be able to provide cash payments to the Company in advance of
stockholder approval, as well as bridge financing to the Company until the
registration statement for the resale of the SciClone Common Stock became
effective.
On May 23, 1997, Dr. Berman reported to the Company's Board of
Directors on the status of the negotiations with SciClone. Dr. Berman advised
the Board that the parties were still discussing the transaction price, and that
he believed the final price would be between $2 and $3 million. The Board
directed Dr. Berman to continue his negotiations with SciClone and to continue
to investigate any other possible transactions involving the sale of the royalty
stream. On June 6, 1997, Dr. Berman met again with Mr. Singh to continue the
negotiations.
On June 25, 1997, in accordance with the Board's direction, the
Company contracted with The Ulysses Group, a financial advisory company, to
conduct a separate search for potential purchasers of the Thymosin alpha 1
royalty rights. Through November, The Ulysses Group contacted 11 potential
investors about the possibility of purchasing the royalty stream. During this
same period, the Company made direct contacts with five other potential
purchasers. Three of the companies contacted requested further information about
Thymosin alpha 1 and the royalty stream, but none pursued discussions with the
Company beyond this point. On the
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<PAGE> 22
basis of these contacts, the Company concluded that it was unlikely to locate
another bidder for the royalty rights within a timeframe consistent with the
Company's immediate need for cash.
On August 28, 1997, SciClone presented a term sheet to the Company
that outlined SciClone's offer and also made an offer with respect to the Second
Royalty Prepayment. See "Background of the Transaction -- Relationship with
SciClone." On September 4, 1997, the Board met and discussed SciClone proposals.
Due to the Company's need for immediate funding to continue its operations, the
Board approved the Second Royalty Prepayment and instructed Dr. Berman to
continue negotiations with SciClone over the terms of the sale of the Thymosin
alpha 1 royalty rights. Following the Board meeting, SciClone and the Company
continued to exchange drafts of an agreement.
On December 3, 1997, the Board met and was advised of the final
terms of the proposed agreement. The Board also was advised that despite its
efforts, the Company had been unable to attract any other offers for the royalty
stream. The Board voted unanimously in favor of the final terms of the
Agreement, which was signed on December 17, 1997.
DESCRIPTION OF THE ALPHA RIGHTS ACQUISITION AGREEMENT
The following is a summary of the material terms of the Alpha Rights
Acquisition Agreement, dated as of December 17, 1997, between the Company and
SciClone (the "Acquisition Agreement"), under which the Company will exchange
its royalty rights with respect to Thymosin alpha 1 for cash and shares of
SciClone Common Stock. This summary is qualified in its entirety by the text of
the Acquisition Agreement, a copy which has been filed by the Company with the
United States Securities Exchange Commission (the "SEC") as Exhibit 10.1 to a
Form 8-K, dated December 17, 1997. A copy of the Acquisition Agreement,
including exhibits may be obtained upon a written or oral request directed to
Robert J. Lanham, Chief Financial Officer, Alpha 1 Biomedicals, Inc., 6707
Democracy Boulevard, Suite 111, Bethesda, MD 20817-1129, telephone number (301)
564-4400. The Form 8-K is available from the SEC's Electronic Data Gathering and
Retrieval ("EDGAR") database located at the website maintained by the SEC at
http://www.sec.gov.
ASSETS CONVEYED AND LIABILITIES ASSUMED. Under the terms of the
Acquisition Agreement, Alpha will release SciClone, effective as of December 17,
1997 (the "Effective Date"), from all future royalty obligations to the Company
arising from the sale by SciClone and its sublicensees of Licensed Products. In
addition, the Company will transfer and assign to SciClone (i) all of the
Company's right, title and interest in and to all of the Company's patents and
patent applications (both domestic and foreign) with respect to Thymosin alpha 1
(the "Alpha Owned Patent Rights") and (ii) all of the Company's rights under
licenses with third parties pursuant to which the Company has acquired rights to
Thymosin alpha 1 (the "Alpha Licensed Patent Rights" and, together with the
Alpha Owned Patent Rights, the "Thymosin Alpha 1 Rights"). SciClone will assume
all of the Company's obligations, including royalty obligations, to such
third-party licensors of Alpha Licensed Patent Rights.
-19-
<PAGE> 23
CONSIDERATION RECEIVED BY THE COMPANY. In consideration for
relinquishing its right to future royalties and for conveying the Thymosin Alpha
1 Rights to SciClone, the Company will receive a combination of cash and shares
of SciClone Common Stock as follows:
Cash. In anticipation of the consummation of the transaction,
SciClone has made cash payments to the Company totalling $130,000. If the
transaction does not close for any reason (including the failure to obtain
stockholder approval), SciClone will be credited with a prepayment of future
royalties in an amount equal to (i) $130,000, minus the amount royalties
foregone by the Company on and after the Effective Date, multiplied by (ii) a
factor of ten, with such credit to take effect after SciClone has made royalty
payments to the Company totalling $1.75 million.
SciClone Common Stock. On the Closing Date (as hereinafter defined)
of the transaction, the Company will receive 444,115 shares of SciClone Common
Stock (the "Initial Shares"). This number of Shares was calculated by dividing
(i) $1.8 million by (ii) a price per share of SciClone Common Stock of $4.053
(the "Initial Average Price"), representing the average of the closing sale
prices per share of SciClone Common Stock for the 20 trading days immediately
preceding the date that was three trading days prior to the Effective Date.
The Initial Shares will be subject to resale restrictions, as
provided for in a Stock Rights Agreement between the Company and SciClone to be
entered into at the closing, the form of which attached as Exhibit D to the
Acquisition Agreement (the "Stock Rights Agreement"). Under the Stock Rights
Agreement, (i) SciClone will agree to file a registration statement (the
"Registration Statement") under the Securities Act of 1933, as amended, that
will register both the Initial Shares and the Additional Shares (as hereinafter
described) for resale by the Company and (ii) the Company will agree that,
commencing with the 30-day period beginning on the effective date of the
Registration Statement and during each of the next eleven 30-day periods
thereafter (each a "Lock-Up Period", and the first day of each such Lock-Up
Period being referred to as a "Lock-Up Release Date"), it will limit its resale
(i) of Initial Shares to a number that is equal to 1/12 of the total number
Initial Shares and (ii) of Additional Shares to a number that is equal to
50,000, minus the number of Initial Shares sold during the Lock-Up Period.
To compensate the Company if the market price of the SciClone Common
Stock declines below the Initial Average Price over the course of the successive
Lock-Up Periods, SciClone has agreed to issue additional shares of SciClone
Common Stock to the Company under certain circumstances. Specifically, if the
average of the closing sale prices per share of SciClone Common Stock (the
"Average Price") for a particular Lock-Up Release Date and each preceding
Lock-Up Release Date (the closing sale price per share for each such Lock-Up
Release Date being the average of the closing sale prices per share for the 20
trading days immediately preceding the date that is three trading days prior to
the applicable Lock-Up Release Date) is less than the Initial Average Price,
SciClone will issue to the Company a number of additional shares (the
"Additional Shares"), which, when added to the number of
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<PAGE> 24
Initial Shares and any Additional Shares issued on prior Lock-Up Release Dates,
will have a value (calculated based on the Average Price) equal to (i) $150,000
multiplied by (ii) the number of Lock-Up Release Dates that have elapsed
(including the then current Lock-Up Release Date); provided that the total
number of Initial Shares and Additional Shares issued to the Company cannot
exceed 600,000.
Because the future price of SciClone Common Stock cannot be known,
neither the number of Additional Shares, if any, that the Company would receive,
nor the proceeds that the Company would be able to realize from the sale of the
Initial Shares and the Additional Shares, if any, is determinable.
The following table sets forth certain historical information
concerning the market price of the SciClone Common Stock:
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
1st Quarter 16 1/8 4 3/4
2nd Quarter 15 1/8 11 1/4
3rd Quarter 14 3/4 6 7/8
4th Quarter 13 7 5/8
1997 HIGH LOW
---- ---- ---
1st Quarter 10 5 1/8
2nd Quarter 7 1/2 4 3/8
3rd Quarter 6 1/2 3 7/16
4th Quarter 7 3/8 2 15/16
1998 HIGH LOW
---- ---- ---
1st Quarter (through
February __, 1998)
</TABLE>
On February __, 1998, the closing sale price of the SciClone Common
Stock was $_____.
BRIDGE LOAN. To assist the Company in funding its operations pending
the closing of the SciClone Transaction and prior to the effectiveness of the
Registration Statement, SciClone has agreed in the Acquisition Agreement to loan
to the Company up to $280,000 as follows: (i) $70,000 on the sixty-first
calendar day following the Effective Date, (ii) $70,000 on the later of (A) the
ninety-first calendar day following the Effective Date and (B) the first
business day following the closing, and (iii) $70,000 on the business day in
each of the next two months
-21-
<PAGE> 25
corresponding to the business day of the loan referred to in clause (ii), if
such corresponding business day precedes the effective date of the Registration
Statement (collectively, the "Advances"). The obligation of the Company to repay
the Advances will be evidenced by a Promissory Note and Security Agreement, the
form of which is attached as Exhibit E to the Acquisition Agreement. Advances
are non-interest bearing (except to the extent that the Company fails to repay
any principal installment when due, in which case the overdue installment will
bear interest at the rate of 10% per annum). The Advances will be secured by
Initial Shares having a market value equal to the principal amount of the
Advances. The Company will be required to repay the Advances in monthly
installments of $70,000, commencing on the earlier of (i) the ninth Lock-Up
Release Date and (ii) the Lock-Up Release Date following any date on which the
Company receives new equity financing of at least $500,000, and in any event the
Advances will be due and payable in full on May 31, 1999. If the transaction
does not close for any reason, SciClone will be credited with a prepayment of
$700,000 in future royalties (effective after SciClone has made royalty payments
to the Company totalling $1.75 million) with respect to the $70,000 Advance made
in anticipation of the closing, in lieu of the obligation of the Company to
repay the Advance.
CONDITIONS TO THE CLOSING. In addition to approval by the
stockholders of the Company, the SciClone Transaction is conditioned on (i) the
consent by each of F. Hoffmann-LaRoche Ltd. and Hoffmann-LaRoche, Inc. to the
assignment to SciClone of certain Thymosin alpha 1 rights currently licensed to
the Company by the respective companies, (ii) the receipt by the Company of a
"no-action commitment", in a form agreed upon by the Company and SciClone, from
the Company's creditors holding at least 90% of the aggregate dollar amount of
the Company's financial obligations, (iii) the absence of a material adverse
event affecting the rights being conveyed to SciClone that is outside of the
control of SciClone, (iv) the continued accuracy in all material respects of the
representations and warranties of the Company and SciClone contained in the
Acquisition Agreement, (v) the compliance by the Company and SciClone with the
covenants that each is required to perform or comply under the Acquisition
Agreement, and (vi) other customary conditions. Any one or more of the
conditions to the closing can be waived by the party for whose benefit the
condition or conditions is intended.
CLOSING. The closing of the transaction (the "Closing") will occur
on a date (the "Closing Date") that is within five business days after all of
the conditions to the Closing have been satisfied or waived or on such later
date as the Company and SciClone shall agree.
ASSUMED AND RETAINED LIABILITIES. From and after the Closing,
SciClone will assume all of the liabilities of the Company, and will agree to
perform all of the covenants and agreements of the Company, with respect to the
Thymosin Alpha 1 Rights that accrue as of and after the Closing (the "Assumed
Liabilities"). From and after the Closing, the Company will continue to be
responsible for all of the liabilities of the Company, and will be obligated to
perform all of the covenants and agreements of the Company, with respect to
Thymosin alpha 1 accrued as of the Closing, but excluding all of the liabilities
that SciClone agreed to perform under the SciClone License Agreement (the
"Retained Liabilities"). Those obligations of
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<PAGE> 26
SciClone that are excluded from Retained Liabilities include SciClone's
obligations under the SciClone License Agreement to pay on behalf of the Company
all royalties due licensors to the Company based on SciClone's sales of Licensed
Products.
REPRESENTATIONS AND WARRANTIES. The Acquisition Agreement contains
customary representations and warranties made by the Company and by SciClone.
Among the representations and warranties of the Company are those concerning (i)
the absence of any undisclosed legal proceedings against the Company involving
the Thymosin Alpha 1 Rights, (ii) compliance by the Company in all material
respects with all laws and regulations with respect to or affecting the Thymosin
Alpha 1 Rights, (iii) the enforceability and the absence of any breaches of the
agreements pursuant to which the Company holds the Alpha Licensed Patent Rights,
(iv) the absence of any rights granted by the Company to third parties with
respect to the Thymosin Alpha 1 Rights, and (v) the absence of any claims
against the Company with respect to the Thymosin Alpha 1 Rights. All of the
representations and warranties of both parties will survive the Closing.
INDEMNIFICATION. The Company is obligated to indemnify SciClone for:
(i) losses, expenses and liabilities incurred by SciClone as the result of any
breach by the Company of its representations and warranties or the failure of
the Company to perform any of its obligations under the Acquisition Agreement
and related agreements, and (ii) all liabilities, obligations and claims arising
prior to the Closing Date with respect to the Retained Liabilities. SciClone is
obligated to indemnify the Company for: (i) losses, expenses and liabilities
incurred by SciClone as the result of any breach by SciClone of its
representations and warranties or the failure of SciClone to perform any of its
obligations under the Acquisition Agreement and related agreements, and (ii)
liabilities, obligations and claims arising from and after the Closing Date with
respect to the Assumed Liabilities. The indemnification obligations for breaches
of representation and warranty and for breaches of covenant apply only to claims
asserted within a three-year period following the Closing Date.
COVENANT NOT TO COMPETE. In the Acquisition Agreement, the Company
agrees that it will not, directly or indirectly, make, have made, use or sell
Thymosin alpha 1 anywhere in the world. This restriction remains in effect for
so long as SciClone has patent rights with respect to Thymosin alpha 1 in any
country.
TERMINATION. The Acquisition Agreement may be terminated by either
party if such party is not in default of its obligations under the Agreement and
either (i) the Closing has not occurred by April 30, 1998 (whether or not the
stockholders of the Company have approved the transaction) or (ii) the
stockholders of the Company fail to approve the transaction.
TERMINATION OF SCICLONE LICENSE AGREEMENT. At the time of the
Closing, the SciClone License Agreement will terminate, except for certain
provisions, including provisions relating to the following matters, that will
remain in full force and effect: (i) SciClone's royalty and reporting
obligations prior to the Closing to the licensors to the Company of the Thymosin
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<PAGE> 27
alpha 1 rights sublicensed by the Company to SciClone, (ii) the restrictions on
the purchase by SciClone of shares of Alpha Common Stock, and (iii) the
indemnification obligations of both the Company and SciClone.
REASONS FOR THE TRANSACTION
At the current time, the Company has no technology that appears to
offer a reasonable prospect for commercial success within the near term. After
the licensing of Thymosin alpha 1 to SciClone, the Company's remaining
technology has been limited to Thymosin beta 4, a 43-amino acid peptide.
However, the commercial development of Thymosin beta 4 for the treatment of
cystic fibrosis, the most promising indication for which Thymosin beta 4 has
been identified as a possible treatment, cannot be pursued without the risk of
infringing an issued U.S. patent held by another company. Very limited
preclinical testing of Thymosin beta 4 in animals for other indications has
produced only mixed results. Even if Thymosin beta 4 were to show indications of
efficacy in the treatment of a particular disease or condition,
commercialization would require many years of testing and significant financial
resources. In view of this situation, the Board of Directors has concluded that
absent the acquisition of new technology, coupled with substantial financing,
the Company will be unable to survive as an independent entity.
The Company is proposing to enter into the SciClone Transaction in
order to generate the cash needed to continue operating as a going concern,
including the payment of existing indebtedness. In approving the transaction,
the Board of Directors determined there was no other transaction available to
the Company that would satisfy the Company's immediate cash needs while the
Company continues its efforts to secure additional financing to fund the
acquisition of new technology or to effect a business combination with a company
having cash resources or a financeable technology.
PRODUCT DEVELOPMENT EFFORTS. Since its inception in 1982, the
Company's primary activities have consisted of research and development and the
conduct of clinical trials involving several peptides to which the Company has
held proprietary rights. These efforts have met with only limited success.
Through mid-1994, the primary focus of the Company was on efforts to
commercialize Thymosin alpha 1 as a treatment for various disease indications or
as a vaccine adjuvant. The Company's resources were devoted primarily to an
evaluation of Thymosin alpha 1 as a treatment for chronic hepatitis B. In April
1994, the results of a Phase III multicenter clinical trial sponsored by the
Company to test Thymosin alpha 1 as a treatment for this indication were
analyzed. The results did not show a statistically significant difference
between the response of the treatment group and the placebo group. This led the
Company to conclude that, without further testing, the results of the Phase III
trial would not support the submission of a New Drug Application (an "NDA") to
the U.S. Food and Drug Administration for approval of Thymosin alpha 1 as a sole
treatment for chronic hepatitis B. The further testing needed to support an NDA
would have required a commitment of resources beyond the Company's financial
capacity.
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<PAGE> 28
As a result, in August 1994, the Company, as part of the settlement of
an arbitration proceeding between the Company and SciClone, entered into the
SciClone License Agreement under which it licensed to SciClone the worldwide
rights to Thymosin alpha 1. See "Background of the Transaction -- Relationship
with SciClone." Shortly thereafter, the Company's research facilities in
California were closed and the total number of employees was reduced from 29 to
5.
After licensing of Thymosin alpha 1 to SciClone, the Company
refocused its research and development efforts on an evaluation of the prospects
for commercialization of Thymosin beta 4. However, initial efforts to develop
Thymosin beta 4 as a treatment for cystic fibrosis were discontinued in February
1996 when the Company learned of an issued United States patent on which the
sale of Thymosin beta 4 as a treatment for cystic fibrosis would probably
infringe. Efforts to obtain a license to this patent have been unsuccessful. In
1997, an animal study conducted by an investigator at Vanderbilt University to
evaluate the potential of Thymosin beta 4 to treat septic shock did not produce
a positive result. More recently, the Company in a collaboration with
investigators at the National Institutes of Health has obtained encouraging, but
very preliminary results, using Thymosin beta 4 in the areas of angiogenesis and
skin growth.
In February 1996, the Board of Directors of the Company, due to the
financial circumstances of the Company, approved a plan which provided for the
reduction or termination of all ongoing research and development activities, a
reduction in leased space, a reduction in certain salaries and the severance of
administrative staff. Pursuant to this plan, the Company relocated its
headquarters to a smaller space and currently has 3 full-time employees. Since
that time, no further development and only limited research has been conducted
by the Company.
In connection with its Thymosin beta 4 research and development
activities, the Company entered into contracts with several vendors to provide
various products and services. When the Company substantially discontinued its
research and development activities in 1996, these contracts were terminated,
leaving the Company with payments due four vendors (the "Vendors") totalling
$1.3 million. In 1996, the Company entered into agreements with each of the
Vendors under which these obligations would be paid with the proceeds of royalty
payments received by the Company under the SciClone License Agreement.
CURRENT FINANCIAL SITUATION. Since its inception, the Company's
operations have been funded by the proceeds from the issuance of equity
securities (and interest earned on such funds), the licensing of technology
developed or acquired by the Company, and limited product sales. Through
September 30, 1997, the Company had an accumulated deficit of $37.7 million.
At September 30, 1997, the Company had total liabilities of $1.9
million, including the $1.3 million due the Vendors, and current assets of
$25,000, of which $5,000 consisted of cash and cash equivalents. As of
mid-November 1997, the Company's management estimated that the Company's cash
was sufficient to allow the Company to remain in business, at its current
reduced level of operations, only through November 1997. Since that time, the
Company has
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<PAGE> 29
received from SciClone, under the terms of the Acquisition Agreement, cash
payments totalling $130,000 and a loan (the "Initial Loan") in the amount of
$70,000. These proceeds are being used to fund current operations and to pay
legal, accounting and other expenses associated with the SciClone Transaction.
The funds will be sufficient to sustain the Company's operations only through
mid-March 1998.
Because the Company is required to make the payment due the Vendors
from the proceeds of royalties payments received by SciClone, the SciClone
Transaction will have the effect of accelerating the payments due the Vendors.
In consideration for the acceleration of payments, the Vendors have agreed to
reduce the Company's aggregate obligation to $902,000 which the Company has
committed to pay from the proceeds of the sale of the shares of SciClone Common
Stock received in the SciClone Transaction.
If the SciClone Transaction is approved by stockholders and the
transaction closes, the Company will receive, as of the closing, the 444,115
Initial Shares as provided for under the Acquisition Agreement. Under the terms
of the Stock Rights Agreement, these shares may be sold by the Company over a
period of 12 months following the effectiveness of the Registration Statement.
After the closing and prior to the effectiveness of the Registration Statement,
SciClone is obligated to loan the Company $70,000 per month up to a total of
$210,000 (the "Additional Loans"). If the transaction closes, the Initial Loan
and the Additional Loans are subject to repayment by the Company under the terms
of the Promissory Note and Security Agreement. See "Description of the Alpha
Rights Acquisition Agreement -- Bridge Loan."
As long as the market price of the SciClone Common Stock remains at
or above $3.00 per share, the number of Initial Shares and any Additional Shares
that the Company is eligible to sell each month will generate gross proceeds
(before brokerage commissions) of at least $150,000 per month. From these
proceeds, the Company will be obligated to make payments of approximately
$100,000 per month to discharge preexisting financial obligations, including the
payments due the Vendors and will be obligated to repay the Initial Loan and any
Additional Loans. The remainder will be available to fund ongoing operations.
FUTURE PROSPECTS. The Company has not generated significant revenues
from operations and does not anticipate generating product revenues for the
foreseeable future. The Company will require substantial funding in order to
acquire new technology, to resume and conduct its research and development
activities, and to manufacture and market any product that might be developed.
If the SciClone Transaction is completed, the Company's sole source
of cash, absent a new financing, will be the sale of the SciClone Common Stock.
Based on its current cash flow projections, the Company believes that the
proceeds from the SciClone Transaction will provide it with sufficient funds to
continue as a going concern into the fourth quarter of 1998. This projection is
dependent upon the price of the SciClone Common Stock remaining above $3.00 per
share. Should the price of SciClone Common Stock decline below $3.00 per share
or should
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<PAGE> 30
unforeseen financial needs arise, the period for which the Company should be
able to continue in operation using the proceeds of the SciClone Transaction
would be shortened.
During this future period, the Company has no plan to engage in any
product development activities. It expects that its efforts will be directed
exclusively to pursuing (i) a financing the proceeds of which would be used to
acquire one or more new technologies and resume research and development
activities or (ii) a business combination with a company that has existing cash
resources or a financeable technology. The Company expects to pursue each of
these objectives; however, there is no assurance that the Company will be
successful in its efforts.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors believes that the proposed transaction with
SciClone is in the best interests of the Company's stockholders. Accordingly, by
a unanimous vote, the Board of Directors has approved the Acquisition Agreement
and recommends that the Company's stockholders vote to approve the SciClone
Transaction.
In its deliberations concerning the Acquisition Agreement, the Board
of Directors focused on the following factors: (i) the financial condition of
the Company, (ii) the limited commercial prospects of the Company's existing
technology, and (iii) the inability of the Company to locate any other entity
willing to purchase the remaining Thymosin alpha 1 royalty rights. The Board of
Directors did not assign particular weight to any one of the factors, nor did it
assign relative weights or ranking to the factors. Rather, the Board concluded
that in view of the Company's financial condition and its prospects, the
transaction with SciClone is superior to any other option available to the
Company.
In order to evaluate the SciClone offer, the Company prepared an
estimate of the net present value of a projected future royalty stream from
SciClone's sales of Thymosin alpha 1. Neither in its negotiations with SciClone
over the sale of the Thymosin alpha 1 royalty rights nor at any other time has
the Company received from SciClone any nonpublic projections of future sales of
Licensed Products. However, the Company was aware of a research report on
SciClone published by Everen Securities in May 1997 (the "Everen Report"). From
the projections set forth in the Everen Report, the Company estimated the
revenues of SciClone from the sale of Zadaxin in the Original Territory and the
New Territory would be as follows:
<TABLE>
<CAPTION>
ORIGINAL TERRITORY NEW TERRITORY
------------------ -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C>
1997 $ 4.0 $ 0
1998 9.8 0
1999 15.9 0
2000 22.0 0
2001 37.7 55.2
2002 65.0 110.4
</TABLE>
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<PAGE> 31
Beyond 2002, the Company's analysis assumed that SciClone's revenues
in both the Original Territory and the New Territory would remain at the 2002
levels. The Company also assumed an average royalty rate of 3.25% in the
Original Territory and 6.25% in the New Territory. See "Background of the
Transaction -- Relationship with SciClone." To calculate a net present value of
the estimated royalty stream in the Original Territory, the Company applied a
discount rate of 35%. In the New Territory, the Company alternatively computed
the net present value of the royalty stream using both a 35% discount rate and a
70% discount rate. The choice of these discount rates reflect the relative
uncertainty of future market conditions, regulatory approvals and other
unforeseen circumstances. Applying this analysis, the Company concluded that the
net present value of the Company's future royalties from projected Zadaxin sales
(after taking account of the $2.5 million effect of the First Royalty
Prepayment, but not the $700,000 effect of the Second Royalty Prepayment) was
(i) $6.3 million using the discount rate of 35% in the New Territory and (ii)
$3.4 million using the discount rate of 70% in the New Territory.
Notwithstanding this valuation analysis, the Company was unable either to
improve the SciClone proposal over the terms provided for in the Acquisition
Agreement or to attract an alternative bidder.
The Board of Directors did not obtain an independent valuation of
the Thymosin alpha 1 royalty rights nor did it engage an investment banking firm
or other professional entity to render an opinion as to the fairness of the
transaction to the Company and its stockholders. In the view of the Board, the
costs of such a valuation or fairness opinion would have been prohibitive and,
given the absence of any competing bidders, may not, in any event, have secured
more favorable terms.
In its deliberations, the Board of Directors also recognized that,
although the provisions of the Acquisition Agreement are designed to compensate
the Company for a possible decline in the market price of the SciClone Common
Stock through the issuance of Additional Shares, because of the 600,000 share
limitation on the total number of Initial Shares and Additional Shares issuable,
the share value actually realized by the Company from the sale of the SciClone
Common Stock may be less than $1.8 million. However, efforts to remove the share
limitation through negotiation were unsuccessful.
Among the alternatives to the SciClone Transaction that were
considered by the Board of Directors was a business combination with a better
capitalized company or a company with a financeable technology. Although the
Company has been aggressive in its efforts to identify such a company and has
engaged in discussions with several such companies, its efforts to date have
been unsuccessful. Although such discussions with a privately-held company that
would be merged into the Company are ongoing, there is no assurance that any
agreement satisfactory to the parties will be achieved in the near future. The
Board has concluded that the financial condition of the Company would not permit
it to delay the SciClone Transaction while the
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<PAGE> 32
search for a business combination candidate continues. The Board does not
believe that the SciClone transaction will impair the prospects for a successful
business combination if a suitable candidate can be located.
The Board of Directors also considered a possible liquidation of the
Company in which the proceeds of the SciClone Transaction would be distributed
to stockholders, rather than used to fund the Company's continuing operations.
However, the Board concluded that, after discharging the Company's liabilities
and the payment of the administrative expenses associated with a liquidation,
there would be little or no funds available for distribution to the
stockholders. On this basis, the Board concluded that a liquidation would not be
in the best interests of the stockholders.
FEDERAL INCOME TAX CONSEQUENCES
The following is a description of the material federal income
consequences of the SciClone Transaction. This discussion is a general and
abbreviated summary, based on interpretations of existing sources of law. This
discussion does not address any state, local, or foreign tax consequences or any
federal tax consequences other than those relating to the income tax.
The Company has not obtained an opinion of tax counsel regarding the
tax treatment of the SciClone Transaction. The Company is not requesting a
ruling from the Internal Revenue Service regarding the tax consequences of the
SciClone Transaction, and there is no assurance that the Internal Revenue
Service will follow the interpretations set out below.
The SciClone Transaction should be treated for U.S. federal income
tax purposes as a cancellation of the SciClone License Agreement and a sale by
the Company to SciClone of the Alpha Owned Patent Rights, the Alpha Licensed
Patent Rights (in conjunction with SciClone's assumption of the future
liabilities thereunder), and the covenant not to compete (the "Assets") in
exchange for $130,000 in cash, the Initial Shares, any Additional Shares, and
possibly an amount representing imputed interest on the (up to) $280,000 of
Advances (the "Proceeds"). As a result, the Company would recognize gain (or
loss) on each of the Assets measured by the difference between the Company's
basis in each Asset and the portion of the fair market value of the Proceeds
allocable to that Asset. The Proceeds should be allocable among the Assets in
proportion to the fair market values of the Assets. The Company generally has no
more than a nominal basis in any of the Assets.
To the extent that the Assets constitute capital assets, the Company
would recognize capital gain (or loss) on the sale, subject to the recapture
rules of Section 1245 of the Internal Revenue Code (the "Code"). Under Section
1245 of the Code, a portion of the gain from the sale of capital assets may be
treated as ordinary income. To the extent that the Assets are other than capital
assets, the Company would recognize ordinary income (or loss), subject to the
provisions of Section 1231 of the Code. Section 1231 of the Code, in certain
circumstances and
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<PAGE> 33
subject to a number of restrictions, treats as capital gain certain gain that
otherwise would be taxed as ordinary income.
The Company may offset gain recognized on the sale of the Assets by
other losses, including net operating loss carryforwards that the Company
currently has available. The Company currently has sufficient net operating loss
carryforwards to offset any gains, capital or ordinary, that the Company would
realize on the sale of the Assets.
The Company's subsequent sale of Initial Shares or Additional Shares
received as part of the Proceeds would give rise to gain or loss measured by the
difference between the amount received for such Shares and the Company's basis
in those shares. The Company's basis in the Initial Shares and Additional Shares
should be the fair market value of the respective shares on the day they are
issued to the Company.
Because the SciClone Transaction does not involve an exchange of, or
change in the terms of, the outstanding shares of Common Stock, it should have
no federal income consequences for the Company's stockholders themselves.
However, stockholders having specific questions regarding the impact of the
SciClone Transaction should consult their own tax advisors.
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<PAGE> 34
ACCOUNTING TREATMENT
The Company plans to record a gain on the SciClone Transaction of
$1.93 million, which reflects the consideration of $130,000 in cash and the fair
value at the date of the Acquisition Agreement of the 444,115 Initial Shares
received. If during the Lock-Up Periods, the market value of SciClone Common
Stock is between $3.00 per share and $4.053 per share, the Company will receive
Additional Shares, subject to a maximum of 155,885 Additional Shares, and will
continue to carry its investment in SciClone Common Stock at $1.8 million,
reflecting the market value of the Initial Shares and the Additional Shares
received or to be received.
To the extent the market value of the SciClone Common Stock is above
$4.053, the Company will record the SciClone Common Stock at market value and
record the unrealized gain, net of tax, as a component of stockholders' equity
until realized. To the extent the market value of the SciClone Common Stock is
below $3.00 per share, the Company will record the SciClone Common Stock at
market value and record unrealized losses, net of tax, as a component of equity
until realized.
PRO FORMA FINANCIAL INFORMATION
The Company has prepared an unaudited pro forma balance sheet which
presents the financial position of the Company as of September 30, 1997,
assuming that the SciClone Transaction and the application of the net proceeds
thereof, occurred as of September 30, 1997. The Company has also prepared
unaudited pro forma statement of operations for the nine months ended September
30, 1997 and the year ended December 31, 1996 assuming the sale and the
application of the net proceeds thereof occurred as of January 1, 1996. This
unaudited pro forma financial information is located at pages F-1 through F-6
of this Proxy Statement.
SELECTED FINANCIAL DATA
The following table presents the selected financial data for, and
as of the end of, each of the years in the five-year period ended December 31,
1996, which have been derived from the audited financial statements of the
Company, and for, and as of the end of, the nine months ended September 30,
1997, which have been derived from the unaudited financial statements of the
Company.
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<PAGE> 35
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
BALANCE SHEET DATA September 30, December 31,
-------------------- ------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Working capital $ (1,830,977) $ (1,733,049) $ (256,612) $ 3,273,945
Total assets 98,269 313,268 1,197,447 4,917,011
Total noncurrent liabilities - - - 371,250
Accumulated deficit (37,734,889) (37,260,497) (35,624,470) (31,532,273)
Stockholders' equity (deficit) (1,757,623) (1,638,231) (37,204) 3,683,743
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA December 31,
---------------------------------
1993 1992
---- ----
<S> <C> <C>
Working capital $ 13,748,345 $ 1,055,928
Total assets 17,310,252 3,476,916
Total noncurrent liabilities 421,151 362,373
Accumulated deficit (20,225,328) (14,582,694)
Stockholders' equity (deficit) 14,953,563 2,082,977
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Year ended December 31,
-------------------------------------------------------
For the Nine
Month Period Ended
September 30, 1997 1996 1995 1994
------------------ ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C>
Revenues $ 168,960 $ 542,243 $ 105,591 $ 720,383
------------ ------------ ------------ --------------
Expenses
Cost of sales - - - 131,875
Research and product development 70,401 1,052,352 2,751,744 2,840,814
General and administrative 468,484 968,568 2,060,891 8,606,641
------------ ------------ ------------ --------------
Total expenses 538,885 2,020,920 4,812,635 11,579,330
------------ ------------ ------------ --------------
Operating loss (369,925) (1,478,677) (4,707,044) (10,858,947)
Equity in loss of VTI - - (181,026) (347,455)
Gain on sale of VTI - - 646,628
Interest expense (105,378) (132,066) - -
Other (expense) income 911 (25,284) 149,245 (100,543)
------------ -------------- ------------- ---------------
Net loss $ (474,392) $ (1,636,027) $ (4,092,197) $ (11,306,945)
============ ============ ============ ==============
Net loss per common share $ (0.05) $ (0.18) $ (0.46) $ (1.26)
============ ============ ============ ==============
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
Year ended December 31,
-----------------------------------
1993 1992
---- ----
<S> <C> <C>
Revenues $ 1,374,751 $ 65,683
------------- ------------
Expenses
Cost of sales 701,561 -
Research and product development 2,074,080 2,017,949
General and administrative 4,227,066 2,145,742
------------- ------------
Total expenses 7,002,707 4,163,691
------------- ------------
Operating loss (5,627,956) (4,098,008)
Equity in loss of VTI (328,750) (221,400)
Gain on sale of VTI
Interest expense - -
Other (expense) income 314,072 156,702
------------- ------------
Net loss $ (5,642,634) $ (4,162,706)
============= =============
Net loss per common share $ (0.68) $ (0.57)
============= =============
</TABLE>
<PAGE> 36
EFFECT OF THE SCICLONE TRANSACTION ON STOCKHOLDERS
The SciClone Transaction does not involve an exchange of, or a
change in the terms of, the outstanding shares of the Common Stock, nor does the
transaction require the Company to issue additional shares of the Common Stock
or any other securities. Accordingly, the transaction will not change the legal
rights and preferences of any of the Company's stockholders, each of whom will
continue to hold after the transaction the same number and percentage of shares
as such stockholder held prior to the transaction. Stockholders do not have
appraisal rights with respect to the transaction.
SCICLONE PHARMACEUTICALS, INC.
SciClone is a pharmaceutical company engaged in the acquisition,
development and commercialization of proprietary drugs for treating chronic and
life-threatening diseases for which there are no adequate treatment modalities,
including chronic hepatitis B, chronic hepatitis C, cancer, immune system
disorders and cystic fibrosis.
SciClone was incorporated in California in 1990. Its address is 901
Mariners Island Boulevard, #315, San Mateo, California 94404, and its telephone
number at that address is (650) 358-3456.
NO REGULATORY APPROVALS
No governmental or regulatory approvals are required in order for
the Company to effect the SciClone Transaction. SciClone has advised the Company
that no governmental or regulatory approvals are required in order for SciClone
to effect the SciClone Transaction.
VOTING REQUIREMENTS
The right of the Company to receive royalty payments from the sale
by SciClone of Licensed Products is the Company's only material source of
revenue. Because of the emphasis that the Company had placed on Thymosin alpha 1
and the amount of resources expended on the research and development of Thymosin
alpha 1 since the Company's inception, the Company has been advised by counsel
that the SciClone Transaction may constitute a sale by the Company of
substantially all of its assets within the meaning of Section 271 of the
Delaware General Corporation Law. Under this statutory provision, approval of
such a transaction requires the affirmative vote of the holders of a majority of
the outstanding shares of the Common Stock.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE SALE OF THE
COMPANY'S THYMOSIN ALPHA 1 ROYALTY RIGHTS TO SCICLONE.
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<PAGE> 37
AMENDMENT TO CERTIFICATE OF INCORPORATION
The Board of Directors has approved and declared advisable an
amendment to Article 4 of the Company's Certificate of Incorporation to increase
the number of authorized shares of Common Stock from 20 million to 75 million.
As of December 31, 1997, there were 11,977,429 shares of Common
Stock outstanding. In addition (i) 945,000 shares were reserved for issuance
upon the upon the exercise of outstanding Class D Warrants and other warrants
and (ii) 1,777,793 shares were reserved for issuance upon the exercise of
outstanding options issued under the Company's stock option plans. This leaves a
total of 5,299,778 shares of Common Stock available for other corporate
purposes. None of the one million shares of Preferred Stock authorized by the
Certificate of Incorporation are outstanding.
The additional 55,000,000 shares of Common Stock would be part of
the existing class of Common Stock and, if and when issued, would have the same
rights and privileges as the shares of Common Stock currently outstanding. If
the proposed amendment to the Certificate of Incorporation is approved, the
Board of Directors will be empowered, without the necessity of further action or
authorization by the stockholders (unless otherwise required by applicable law
or regulations) to cause the Company to issue, from time to time, the 55,000,000
additional shares of Common Stock on such terms as it may determine. The holders
of the Common Stock have no preemptive rights to purchase or otherwise acquire
any shares of Common Stock or Preferred Stock that may be issued in the future.
The increase in the number of shares of Common Stock is intended to
ensure that there will be a sufficient number of authorized but unissued shares
available in the future for general corporate purposes, including for issuance
by the Company in connection with financing transactions. Although the Company
has no present plans to issue (other than pursuant to existing contractual
obligations under outstanding options and warrants) any additional shares of
Common Stock or shares of Preferred Stock, it has from time to time in the past,
and expects from time to time in the future, to review various transactions that
could result in the issuance of such shares.
The issuance of shares of Preferred Stock or shares of Common Stock
under some circumstances could be disadvantageous to current stockholders,
because to do so would dilute their percentage ownership interest in the
Company. In addition, the issuance of the shares of Preferred Stock or Common
Stock could be used by incumbent management to impede, and thereby discourage,
an attempt to acquire control of the Company, even though some or all of the
stockholders of the Company may deem such an acquisition to be desirable. For
example, the shares could be placed with purchasers who might support the Board
of Directors in opposing a hostile takeover bid. The General Corporation Law of
the State of Delaware permits the issuance of classes of shares with voting
rights under which a majority vote of the holders of
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<PAGE> 38
each class, voting separately, is required to approve a merger. Shares of
Preferred Stock could be issued with such rights which could make approval of a
merger more difficult. The issuance of new shares of Common Stock could also be
used to dilute the stock ownership and voting power of a third party seeking to
effect a merger, sale of assets or similar transaction. In the event and to the
extent the proposed amendment facilitates such actions, it could serve to
perpetuate incumbent management.
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock is required to approve the proposed amendment to the
Certificate of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
PROPOSED AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
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<PAGE> 39
RATIFICATION OF
APPOINTMENT OF INDEPENDENT AUDITORS
The firm of Price Waterhouse LLP has been the independent auditors
of the Company since 1982. The Board of Directors has appointed Price Waterhouse
LLP to serve as the Company's independent auditors for the fiscal year ending
December 31, 1998. While not required to do so, the Board of Directors is
submitting the selection of Price Waterhouse LLP for ratification in order to
ascertain the views of the stockholders. If the selection is not ratified, the
Board of Directors will reconsider the selection. Ratification of the selection
requires the affirmative vote of the holders of a majority of the shares of
Common Stock present in person or represented by proxy and entitled to vote at
the Annual Meeting.
A representative of Price Waterhouse LLP will be present at the
Annual Meeting, will be afforded an opportunity to make a statement if he or she
desires to do so and will be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE SELECTION OF
PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
MARKET FOR THE COMMON STOCK AND RELATED MATTERS
The outstanding equity securities of the Company consist of shares
of Common Stock and Class D Warrants. The Common Stock was initially issued to
the public in 1986 and is traded on the OTC Bulletin Board under the symbol
ALBM. There is no public market for the Class D Warrants. On February 28, 1997,
the Company's outstanding Class C Warrants expired.
The following table sets forth the high and low bid prices as
reported by OTC Bulletin Board for the Common Stock for the periods indicated.
OTC Bulletin Board quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
For the year ended
December 31, 1997:
First Quarter $.12 $.08
Second Quarter $.13 $.03
Third Quarter $.125 $.08
Fourth Quarter $.09 $.04
</TABLE>
-36-
<PAGE> 40
<TABLE>
<S> <C> <C>
For the year ended
December 31, 1996:
First Quarter $.625 $.125
Second Quarter $.4325 $.15625
Third Quarter $.25 $.09375
Fourth Quarter $.23 $.0625
</TABLE>
On February __, 1998, the high and low bid prices for the Common
Stock as reported on the OTC Bulletin Board were $_____ and $_____,
respectively. On December 16, 1997, the day before the Company announced its
entry into the Acquisition Agreement, the high and low bid prices for the Common
Stock as reported on the OTC Bulletin Board were $.06 and $.05, respectively.
As of December 31, 1997, there were approximately 1158 holders of
record of the Common Stock.
The Company has not paid a dividend on the Common Stock and does not
anticipate that any cash dividends will be paid in the foreseeable future.
ANNUAL REPORT TO STOCKHOLDERS AND INCORPORATION BY REFERENCE
Accompanying this Proxy Statement is a copy of the Company's 1997
Annual Report to Stockholders (the "Annual Report"), which includes the
Company's audited financial statements for the year ended December 31, 1997.
The following information contained in the Annual Report is
incorporated by reference into this Proxy Statement: (i) the section captioned
"Business (pages _____ to _____), (ii) the section captioned "Properties" (pages
_____ to _____), (iii) the section captioned "Legal Proceedings" (pages _____ to
_____), (iv) the section captioned "Financial Statements and Supplementary Data"
(pages _____ to _____), (v) the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (pages _____ to
_____) and (vi) the section captioned "Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure" (page _____). No other
information contained in the Annual Report is or is deemed incorporated by
reference in this Proxy Statement. Any statement contained in the Annual Report
shall be deemed to be modified or superseded to the extent that it is modified
or superseded by information contained in this Proxy Statement.
DISCRETIONARY VOTING OF PROXIES ON OTHER MATTERS
-37-
<PAGE> 41
The Board of Directors does not now intend to bring before the
Annual Meeting any matters other than those disclosed in the notice of the
meeting, and it does not know of any business that persons other than the
management intend to present at the meeting. Should any other matter requiring a
vote of the stockholders arise, the proxies in the enclosed form confer upon the
person or persons entitled to vote the shares represented by such proxies
discretionary authority to vote such shares in accordance with their best
judgment in respect of any such other matter.
SUBMISSION OF STOCKHOLDER PROPOSALS
Any stockholder proposal intended to be presented at next year's
Annual Meeting must be received by the Company at its executive offices located
at 6707 Democracy Boulevard, Suite 111, Bethesda, Maryland 20817 not later than
________ __, 1998, in order to be considered for inclusion in the Company's
proxy statement and form of proxy for such meeting.
ALL SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY CARD IN THE ENCLOSED ENVELOPE.
By Order of the Board of
Directors
ROBERT J. LANHAM
Secretary
Bethesda, Maryland
February __, 1998
-38-
<PAGE> 42
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma balance sheet presents the financial position
of the Company as of September 30, 1997, assuming that the sale, pursuant to the
Alpha Rights Acquisition Agreement, of the Company's rights to receive royalties
from SciClone on the worldwide sales of Thymosin alpha 1 and the application of
the net proceeds thereof, occurred as of September 30, 1997. Such pro forma
information is based on the historical balance sheet of the Company. The
unaudited pro forma statement of operations for the nine months ended September
30, 1997 and for the year ended December 31, 1996 have been prepared assuming
the above sale and the application of the net proceeds thereof occurred as of
January 1, 1996. The unaudited pro forma statements of operations are based on
the historical statements of operations of the Company.
The unaudited pro forma financial information gives effect to certain pro forma
adjustments which are described in the notes to these statements. Certain
nonrecurring gains that will result from the above sale and the application of
the proceeds thereof, such as the gain from the reduction in liabilities to
certain vendors, are not included in the unaudited pro forma statements of
operations, but will be reflected in the Company's results of operations when
realized.
The unaudited pro forma financial information is presented for informational
purposes only and is not necessarily indicative of the financial position or
results of operations which would have been achieved had the above sale and the
application of the proceeds thereof been completed as of the respective date or
periods presented, nor is it necessarily indicative of the Company's future
financial position or results of operations. The unaudited pro forma financial
information should be read in conjunction with the historical financial
statements of the Company, including the notes thereto.
F-1-
<PAGE> 43
ALPHA 1 BIOMEDICALS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
Pro forma
September 30, SciClone September 30,
1997 Transaction 1997
---- ----------- ----
<S> <C> <C> <C>
ASSETS
- ------
Current assets
Cash and cash equivalents $ 4,916 $ 130,000(1) $ 134,916
Short term investment in SciClone common stock - 450,000(1) 450,000
Prepaid insurance 20,019 - 20,019
------------ ---------- ------------
Total current assets 24,935 580,000 604,935
Fixed assets, net 1,483 - 1,483
Due from related party 71,871 - 71,871
SciClone common stock - 1,350,000(1) 1,350,000
------------ ---------- ------------
Total assets $ 98,289 $1,930,000 $ 2,028,289
============ ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ----------------------------------------------
Current liabilities
Accounts payable $ 210,540 $ - $ 210,540
Accrued expenses 293,468 (232,868)(2) 60,600
Notes payable 50,000 - 50,000
Letter agreements with vendors 1,301,904 (625,404)(2) 676,500
------------ ---------- ------------
Total current liabilities 1,855,912 (858,272) 997,640
------------ ---------- ------------
Letter agreements with vendors - long term - 225,500(2) 225,500
------------ ---------- ------------
Total liabilities 1,855,912 (632,772) 1,223,140
------------ ---------- ------------
Stockholders' equity (deficit)
Preferred stock, $.001 par value per share,
1,000,000 authorized; no shares issued - - -
Common stock, par value $.001 per share,
20,000,000 shares authorized; 11,977,429
issued and outstanding 11,977 - 11,977
Additional paid-in capital 35,965,289 - 35,965,289
Accumulated deficit (37,734,889) 2,562,772(3) (35,172,117)
------------ ---------- ------------
Total stockholders' equity (deficit) (1,757,623) 2,562,772 805,149
------------ ---------- ------------
Total liabilities and stockholders' equity (deficit) $ 98,289 $1,930,000 $ 2,028,289
============ ========== ============
</TABLE>
F-2-
<PAGE> 44
ALPHA 1 BIOMEDICALS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine months ended Pro Forma
September 30, 1997 Adjustments Pro Forma
------------------ ----------- -----------
<S> <C> <C> <C>
Revenues $ 168,960 $ (118,835)(4) $ 50,125
----------- ----------- -----------
Expenses
Research and product
development 70,401 - 70,401
General and administrative 468,484 - 468,484
----------- ----------- -----------
Total expenses 538,885 - 538,885
----------- ----------- -----------
Operating loss (369,925) (118,835) (488,760)
Interest expense (105,378) - (105,378)
Interest income 911 - 911
----------- ----------- -----------
Net loss $ (474,392) $ (118,835) $ (593,227)
=========== =========== ===========
Net loss per common share $ (0.05) $ (0.01) $ (0.06)
=========== =========== ===========
Weighted average number
of common shares outstanding 10,510,030 10,510,030 10,510,030
=========== =========== ===========
</TABLE>
F-3-
<PAGE> 45
ALPHA 1 BIOMEDICALS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Pro Forma
December 31, 1996 Adjustments Pro Forma
----------------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 542,243 $(517,243)(5) $ 25,000
----------- ---------- -----------
Expenses
Research and product
development 1,052,352 - 1,052,352
General and administrative 968,568 - 968,568
----------- ---------- -----------
Total expenses 2,020,920 - 2,020,920
----------- ---------- -----------
Operating loss (1,478,677) (517,243) (1,995,920)
Interest expense (132,066) - (132,066)
Other (expense) income (25,284) - (25,284)
----------- ---------- -----------
Net loss $(1,636,027) $ (517,243) $(2,153,270)
=========== ========== ===========
Net loss per common share $ (0.18) $ (0.06) $ (0.24)
=========== ========== ===========
Weighted average number
of common shares outstanding 9,068,959 9,068,959 9,068,959
=========== ========== ===========
</TABLE>
F-4-
<PAGE> 46
ALPHA 1 BIOMEDICALS, INC.
NOTES TO UNAUDITED PRO FORMA
FINANCIAL INFORMATION
A. Basis of Presentation
The unaudited pro forma balance sheet presents the financial
position of the Company as of September 30, 1997, assuming that the sale,
pursuant to the Alpha Rights Acquisition Agreement, of the Company's rights to
receive royalties from SciClone on the worldwide sales of Thymosin alpha 1 and
the application of net proceeds thereof, occurred as of September 30, 1997. Such
pro forma information is based on the historical balance sheet of the Company.
The unaudited pro forma statement of operations for the nine months
ended September 30, 1997 and for the year ended December 31, 1996 have been
prepared assuming the above sale and the application of the net proceeds thereof
occurred as of January 1, 1996. The unaudited pro forma statements of operations
are based on the historical statements of operations of the Company. Certain
nonrecurring gains that will result from the above sale and the application of
the proceeds thereof, such as the gain from the reduction in liabilities to
certain vendors, are not included in the unaudited pro forma statements of
operations, but will be reflected in the Company's results of operations when
realized.
The Company believes that the assumptions used in preparing the
unaudited pro forma financial data provide a reasonable basis for presenting all
of the significant effects of the above sale and the application of the net
proceeds thereof and that the pro forma adjustments give effect to those
assumptions in the unaudited pro forma financial information.
B. Pro Forma Adjustments
Pro forma adjustments to the unaudited balance sheet are made to
reflect the following:
(1) Reflects proceeds to be realized pursuant to the Alpha Rights
Acquisition Agreement whereby the Company has agreed to sell SciClone its right
to receive from SciClone royalties on the worldwide sale of Thymosin alpha 1.
Such proceeds include cash payments totaling $130,000 and shares of SciClone
Common Stock having an initial valuation of $1,800,000. The investment in
SciClone Common Stock is classified as current and long term investments based
upon the expected dates in which the resale restrictions on the SciClone Common
Stock lapse.
(2) Reflects the effect of Amended Letter Agreements between the
Company and certain vendors. The amended agreements provide for a reduction in
the Company's liabilities, including accrued interest, to the vendors in
consideration for providing accelerated payments to the vendors,
F-5-
<PAGE> 47
through the proceeds to be received by the Company from the sale of the shares
of SciClone common stock. Letter agreements with vendor adjustments are
classified as current and long term liabilities based upon the scheduled
repayment dates. The reduction in accrued expenses reflects the elimination of
accrued interest payable under the initial agreements.
(3) Reflects the total effect of proceeds received from SciClone
under the Alpha Rights Acquisition Agreement and the reduced liabilities under
the Amended Letter Agreements.
Pro forma adjustments to the unaudited statements of operations are
made to reflect the following:
(4) Reflects the elimination of the royalties and advanced royalties
received from SciClone during the nine months ended September 30, 1997.
(5) Reflects the elimination of the royalties and advanced royalties
received from SciClone during the year ended December 31, 1996.
F-6-
<PAGE> 48
PROXY ALPHA 1 BIOMEDICALS, INC. PROXY
6707 Democracy Boulevard, Suite 111, Bethesda, MD 20817
Proxy Solicited on Behalf of the Board of Directors
Annual Meeting of Stockholders
To be Held on _____________ 1998
Please mark, sign and date on the reverse side, and return in the enclosed
envelope.
The undersigned hereby appoints Allan L. Goldstein and Albert
Rosenfeld, and either of them, as Proxies, each with full power of substitution,
and hereby authorizes them to represent and to vote, as designated below, all
the shares of Common Stock of Alpha 1 Biomedicals, Inc. held of record by the
undersigned on ________, 1998, at the Annual Meeting of Stockholders to be held
on __________, 1998, or at any adjournment thereof, as follows:
1. Election of Directors
Allan L. Goldstein, Joseph C. McNay, Albert Rosenfeld,
Michael L. Berman
[ ] FOR all nominees listed above
[ ] FOR all nominees listed above except
- ----------------------------
[ ] WITHHOLD AUTHORITY to vote for all nominees listed above
2. Proposal to approve the sale to SciClone Pharmaceuticals, Inc. of
the Company's rights to receive royalties from the sale of Thymosin alpha 1.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued and to be signed on the other side)
- ------------------------------------------------------------------------------
3. Proposal to approve an amendment to the Company's Restated
Certificate of Incorporation to increase the authorized shares of Common Stock
from 20,000,000 to 75,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. Proposal to ratify the appointment of Price Waterhouse LLP as
independent auditors for the fiscal year ended December 31, 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. In their discretion upon such other business as may properly come
before the meeting.
The Board of Directors recommends a vote "FOR" the director nominees and "FOR"
proposal numbers 1-4.
This proxy, when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is given, a properly executed
proxy will be voted "FOR" the director nominees and "FOR" proposal numbers 2,3
and 4.
Signature:______________________________ Dated_________________________
Signature if jointly held_______________________________________________
<PAGE> 49
Please sign exactly as name appears on this card. If shares are held as a joint
tenancy, both tenants should sign. Person signing as executors, administrators,
trustees, or guardians should so indicate when signing. If a corporation, please
sign in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
