U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
Commission file number: 0-15070
Alpha 1 Biomedicals, Inc.
--------------------------------------------------------------------------------
(Name of small business issuer in its charter)
Delaware 52-1253406
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
3 Bethesda Metro Center, Suite 700, Bethesda, Maryland 20814
--------------------------------------------------------------------------------
(Address of principal executive offices including zip code)
Issuer's telephone number: 301-961-1992
Securities registered under Section 12(b) of the Act:None Securities
registered under Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. YES NO X
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State the issuer's revenues for its most recent fiscal year: $0.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the NASDAQ System on October 23, 2000, was approximately $1.16 million. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
The number of shares of issuer's Common Stock outstanding as of October 23, 2000
was 19,477,429.
Documents Incorporated by Reference
-----------------------------------
None
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
YES NO X
---- ----
<PAGE>
PART I
ITEM 1. BUSINESS
General
Alpha 1 Biomedicals, Inc. (the "Company") was formed in 1982 and is a
pharmaceutical research and development company focusing on the development of
products to treat a variety of human diseases. In September 1998, the Company
suspended its operations due to the insufficiency of funds. In August 1999, the
Company resumed operations, on a limited basis, beginning with the appointment
by its Board of Directors of the Company's Chairman and co-founder, Dr. Allan L.
Goldstein, as the Company's new chief executive officer and the Board's
appointment of four individuals, including Dr. Goldstein, to serve as financial
and business consultants to the Company and to manage the Company's affairs on
an interim basis. The consultants are responsible for general corporate
activities, product development planning and the selection and management of the
various external resources necessary to conduct pre-clinical and clinical
studies. See "Item 12. Certain Relationships and Related
Transactions--Consulting Agreement." Currently, the Company has no products that
have received regulatory approval.
The Company utilizes a virtual company strategy in order to effectively
control costs. The Company will contract out research and development and
manufacturing operations, as well as other functions critical to its mission.
The Company believes this approach enhances its ability to allocate resources
rapidly to different projects. The strategy consists of (i) identifying,
evaluating and licensing pharmaceutical product opportunities that appear to
have significant commercial potential; (ii) designing pre-clinical and/or
clinical protocols to test such products; (iii) utilizing third party contract
manufacturers to supply clinical grade material and third party contract
research organizations to perform pre-clinical and/or clinical studies in
accordance with its designed protocols; and (iv) pursuing sublicense
arrangements with established pharmaceutical companies to support late stage
clinical testing and ultimately marketing if regulatory approval is obtained.
The Company's primary business focus for most of its history was the
commercialization of Thymosin alpha 1 ("T[alpha]1"), a 28 amino acid peptide
shown to regulate the immune system in animal models. T[alpha]1 is now approved
for the treatment of hepatitis b and c and as an immune adjuvant in 20 countries
outside the United States and is in registration for approval in several more.
In 1998, the Company sold all rights and interests it had in T[alpha]1 to
SciClone Pharmaceuticals, Inc. See "-- Previous Commercial Development -
Thymosin Alpha 1" below. The Company's current primary business focus is the
commercialization of Thymosin beta 4, a 43 amino acid peptide ("T(beta)4"). The
Company is concentrating its efforts on the use of T(beta)4 for the treatment of
injured tissue and non- healing wounds to enable more rapid repair and/or tissue
regeneration.
Primary Commercial Development Focus - Thymosin Beta 4
General. Originally isolated from the thymus, T(beta)4 is a chemically
synthesized copy of a natural human peptide that circulates in the blood and
plays a vital role in the regeneration, remodeling and healing of tissues.
Although it is recognized that wound healing is a complex process, most
companies working to develop new drugs in this area have focused primarily on
adding different growth factors to stimulate healing and have, to date, failed
to demonstrate dramatic
1
<PAGE>
improvements in the healing process. T(beta)4 represents a new type of compound
being developed to speed the healing of injured tissues, accelerate the growth
of blood vessels and reduce inflammation. Unlike compounds such as
Platelet-Derived Growth Factor ("PDGF"), Keratinocyte Growth Factor ("KGF-2"),
Epidermal Growth Factor ("EGF"), or basic Fibroblast Growth Factor ("bFGF"),
T(beta)4 is not a growth factor and, unlike Interleukin-1 ("IL-1") or Tumor
Necrosis Factor ("TNF-a"), T(beta)4 is not a cytokine. (Cytokines are proteins
and peptides which act as immune regulators and modulate the functional
activities of individual cells and tissues.) Rather, it regulates the actin
molecule in most mammalian cells and as such plays a vital role in the healing
of injured or damaged tissues. Actin comprises up to 10% of the protein of
non-muscle cells and plays a central role in cell structure (formation of the
cytoskeleton) and in the movement of cells throughout the body. Research studies
from the National Institutes of Health ("NIH") published in 1995, 1997, and 1999
established that T(beta)4 stimulates the migration of human keratinocytes (skin
cells) and the migration of human endothelial cells. Endothelial cells are the
major cell types responsible for the formation of blood vessels and other
tissues. These studies were the first to document the important role of T(beta)4
in wound healing.
Product Development. The Company's first efforts to commercialize T(beta)4
focused on the development of T(beta)4 for the treatment of cystic fibrosis. The
Company suspended this development work in February 1996 upon learning that it
would potentially infringe upon a U.S. patent issued for certain therapeutic
compounds which might be used for the treatment of cystic fibrosis. The Company
attempted but was not able to negotiate a license to this patent. In March 1997,
the Company provided limited funding under a research contract with Vanderbilt
University to determine the effect of T(beta)4 in a sheep model of Adult
Respiratory Distress Syndrome ("ARDS"), a syndrome associated with septic shock.
In animal models of septic shock, T(beta)4 has been shown to reduce
endotoxin-induced death, presumably by modulating pathologic mediators of
inflammation and cell death. Additional pre-clinical research studies would be
required to determine the value of T(beta)4 in the treatment of septic shock and
syndromes associated with septic shock. The Company is considering additional
studies for this use of T(beta)4 and holds two patents related to this
application. See "--Proprietary Rights" below.
The Company's main product development focus is its involvement with and
support of studies using T(beta)4 for the treatment of non-healing wounds and
similar medical problems. The Company entered into a Material Transfer -
Cooperative Research and Development Agreement with the NIH during the second
quarter of 1997. Under this agreement, the Company provided an NIH investigator
with T(beta)4 purchased from a third party vendor for testing in animal models
in a wound healing study. In exchange, the Company received an option to elect
an exclusive or non-exclusive commercialization license from the NIH for any
patent rights that might result from the research study that relate to the use
of T(beta)4 as a tissue growth and repair factor. The agreement provides that
the Company must exercise this option within three months after the NIH notifies
the Company that a patent or other intellectual property application has been
filed. A provisional patent application was filed by NIH in July 1998, with a
Patent Cooperation Treaty (PCT) application filed in July 1999, pertaining to
the work performed on T(beta)4. Due to the suspension of operations by the
Company in 1998, the Company did not exercise its rights to license T(beta)4
from the NIH following notification of the patent application filing. Dr.
Goldstein, however, was named as a co-inventor on the patent application filed
by the NIH, and since he assigned these rights for nominal consideration to the
Company in May 2000, the Company retains a shared right to develop T(beta)4 for
wound healing
2
<PAGE>
based on the patent application filed by the NIH, when and if a patent is
issued. The Company is presently negotiating with the NIH to secure the NIH's
rights under the patent application in order to effectively secure an exclusive
proprietary position with respect to T(beta)4 for wound healing, should the
patent be issued. No assurance can be given as to whether or when a patent will
be issued, or as to any conditions that might be attached to the patent. In
addition, no assurance can be given that the Company will be able to
successfully negotiate from the NIH an exclusive right to the patent issued, if
issued, under conditions acceptable to the Company.
To date, the NIH has performed pre-clinical animal studies using T(beta)4,
supplied by the Company, which have indicated that T(beta)4 is effective in
healing injured tissue and improving wound healing and chemical burns in
steroid-treated rodents and other mammals. Before clinical trials may begin the
Company must file with the U.S. Food and Drug Administration (the "FDA") an
Investigational New Drug Application ("IND"), and the IND must be approved by
the FDA. Product development activities generally required to support the filing
of an IND include (i) manufacturing of pre-clinical supplies; (ii) pharmacology
studies; (iii) toxicology studies; (iv) manufacture of clinical supplies; and
(v) development of a biochemicalassay and immunoassay for T(beta)4. In June
2000, the Company and the NIH met with the FDA to discuss the proposed IND
application which, if approved, would allow Phase I clinical trials on the use
of T(beta)4 as a wound-healing treatment to begin. The Company has received
correspondence from the FDA which specifies the remaining pre- clinical work the
Company must undertake in order to have the IND approved. For additional
information regarding the regulatory approval process for the Company's
products, see "-- Government Regulation." The Company is currently evaluating
the cost of completing the pre- clinical work necessary for approval of the IND
and Phase I clinical trials and may need to enter into a collaborative
relationship with a larger partner or raise additional funds to conduct these
trials. See "Forward-Looking Statements -- Uncertainties Related to Limited
Capital Resources" and "-- Dependence on Collaborative Relationships" contained
in Exhibit 99.1 to this Report.
Other areas the Company may explore with T(beta)4 are the healing of eye
injuries, including chemical burns and inflammatory processes, post surgical
healing, and wound healing in patients undergoing steroidal therapy. The Company
also is reconsidering the possible applications of T(beta)4 for the treatment of
septic shock and cystic fibrosis. All of the Company's efforts to develop
additional applications would likely require substantial additional capital or a
strategic alliance or other partnership arrangement with a firm providing the
capital and/or necessary expertise.
The Company has placed development of T(beta)4 for wound healing as its
highest product development priority. For additional information regarding the
Company's efforts to commercialize T(beta)4, see "--Proprietary Rights."
Previous Commercial Development - Thymosin Alpha 1
The Company's first commercial development project was focused onT[alpha]1,
a 28 amino acid peptide shown to regulate the immune system in animal models.
T[alpha]1 is now approved for the treatment of hepatitis b and c and as an
immune adjuvant in 20 countries outside the United States and is in registration
for approval in several more. The commercial development of this product was
licensed to SciClone Pharmaceuticals, Inc. ("SciClone") in November 1994.
3
<PAGE>
Under the license agreement with SciClone, the Company was entitled to
receive certain royalties on SciClone's net sales revenue from licensed products
that ranged from 3% to 7% depending on SciClone's rights in the country in which
the sales occurred. The Company's right to receive royalties was to continue at
least until September 30, 2002. If, at the end of this eight-year period, the
Company had not realized royalty payments in the amount of $35 million, then
SciClone's royalty obligations were to continue until the earlier of (i) the
payment to the Company of royalties aggregating $35 million or (ii) September
30, 2009.
In 1996, the Company entered into a second agreement with SciClone whereby
the Company received a non-refundable payment of royalties in the amount of
$500,000, which was included in revenues in 1996. In exchange, the Company
agreed that after royalty payments totaling $1.75 million were made, the Company
would forgo future royalties, if and when earned, in an amount equal to $2.5
million.
In August 1997, the Company entered into a third agreement with SciClone
whereby the Company received $70,000 as a non-refundable royalty payment in
exchange for the Company's agreement to forgo an additional $700,000 in future
royalties. This payment was included in revenues in 1997.
In December 1997, the Company entered into an agreement with SciClone
whereby the Company's rights to receive royalty payments from the future sale by
SciClone and its licensees of T[alpha]1 would be sold to SciClone in exchange
for $130,000 in cash and 444,115 shares of SciClone common stock, plus an
additional 155,885 shares if the market value of SciClone common stock was below
$4.053 per share during prescribed trading periods following the closing of the
transaction.
To assist the Company in funding its operations pending the closing of the
transaction, SciClone agreed in 1998 to advance the Company up to $350,000, to
be repaid in several installments following the closing of the transaction.
These advances were secured by shares of SciClone common stock having a market
value equal to the principal amount of the loans.
The royalty sale transaction was approved by the Company's stockholders on
July 15, 1998 and completed on July 28, 1998. In 1998 and 1999, because the
market value of the SciClone common stock was below $4.053 per share during the
prescribed post-closing trading periods, the Company received an additional
155,885 shares of SciClone common stock. As of December 31, 1999, the Company
owed SciClone approximately $301,722 on the outstanding advances and was in
default in its obligations to repay these amounts. On January 25, 2000, the
Company and SciClone entered into an Omnibus and Mutual Release of Claims
Agreement under which SciClone agreed to cancel all amounts payable by the
Company upon the Company's payment to SciClone a sum of $162,500. This amount
was paid by the Company to SciClone in February 2000. SciClone further agreed to
return to the Company the 69,085 shares of stock of SciClone common stock which
were being held by SciClone as collateral for the loans. Each company agreed to
release the other from any and all claims whatsoever which they may have
relating to or arising under the agreement, the loans and the shares of SciClone
common stock. As of October 23, 2000, the Company held 62,673 shares of SciClone
common stock. The closing price per share of the SciClone common stock on that
date, as reported by The Nasdaq Stock Market, was $8.563. The price of the
SciClone common stock is subject to fluctuation and may increase or decrease in
any amount and at any time.
4
<PAGE>
As discussed below under "Item 6. Management's Discussion and Analysis or Plan
of Operation-- Liquidity and Capital Resources," the Company plans to sell its
remaining SciClone shares as needed to fund operations.
Manufacturing
In anticipation of Phase I clinical trials, the Company has contracted with
a manufacturer to produce T(beta)4 for this study, and future studies, of
T(beta)4. The Company has pre-paid $50,000 of the $100,000 cost of an initial
quantity of the material and, under the agreement with the manufacturer, the
remaining $50,000 will become due 30 days after the Company's obtainment of
exclusive rights under the patent application filed by the NIH; however, if the
Company has not negotiated such exclusive rights by March 17, 2002, the
remaining amount will become due at that time. See "Item 6. Management's
Discussion and Analysis or Plan of Operation." For the Phase I clinical trials,
it is expected that the T(beta)4 supplied by the Company will be given to
another manufacturer to produce a topical gel or other material that will be
administered to test subjects. Two manufacturers have been identified to
formulate and test this material. No agreements with these manufacturers have
been entered into, however, and no assurance can be given that such agreements
will be negotiated on terms favorable to the Company, or at all. Contractors
will be selected on the basis of their supply capability, ability to produce a
drug substance in accordance with current Good Manufacturing Practice
requirements of the FDA and to meet Company-established specifications. The
Company does not know at this time what the cost of manufacturing this material
will be, or whether it will have sufficient funds to cover this cost.
Competition
The Company is engaged in a business that is highly competitive. Research
and development activities for the development of drugs to treat patients with
cystic fibrosis, septic shock and non- healing wounds are being sponsored or
conducted by private and public institutions and by major pharmaceutical
companies located in the United States and a number of foreign countries. Most
of these companies and institutions have financial and human resources that are
substantially greater than those of the Company, and that have extensive
experience in conducting research and development activities and clinical
testing and in obtaining the regulatory approvals necessary to market
pharmaceutical products. With respect to wound-healing, Johnson & Johnson has
recently begun marketing of Regranex(TM) for this purpose. Another company,
Human Genome Sciences, Inc., announced on October 17, 2000 that SmithKline
Beecham Corporation had exercised rights to jointly develop with Human Genome
Sciences a wound healing drug based on gene therapy.
Government Regulation
Regulation by governmental authorities in the United States and foreign
countries will be a significant factor in the manufacturing and marketing of the
Company's products and in its ongoing research and product development
activities. Any product developed by the Company will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous pre-clinical and clinical
testing and other approval procedures by the FDA and similar health authorities
in foreign countries. Various federal statutes and regulations also govern or
influence the manufacturing, labeling, storage, record keeping and
5
<PAGE>
marketing of such products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal statutes and regulations require
the expenditure of substantial resources. Any failure by the Company to obtain
regulatory approvals, or any delay in obtaining such approvals, could adversely
affect the marketing of products being developed by the Company, its ability to
receive product or royalty revenues and its liquidity and capital resources.
Pre-clinical testing in the laboratory must be conducted to evaluate the
potential efficacy and the safety of an investigational drug. The results of
these studies are submitted to the FDA as part of an IND, which must be reviewed
and approved before clinical testing can begin. Typically, clinical evaluation
involves a three stage process. In Phase I, trials are conducted with a small
number of subjects to determine the safety profile, the pattern of drug
distribution and metabolism. In Phase II, trials are conducted with groups of
patients afflicted with a specific disease in order to determine preliminary
efficacy, optimal dosages and expanded evidence of safety. In Phase III, large
scale, multi-center, comparative trials are conducted with patients afflicted
with a target disease in order to provide enough data for the statistical proof
of efficacy and safety required by the FDA and other regulatory authorities.
The results of the pre-clinical and clinical testing with detailed
information on manufacturing are submitted to the FDA in the form of a New Drug
Application ("NDA") or a Product License Application ("PLA") accompanied by an
Establishment License Application ("ELA") for approval to commence commercial
sales. In responding to an NDA, PLA or ELA, the FDA may grant marketing
approval, request additional information or deny the application if the FDA
determines that the application does not satisfy its regulatory approval
criteria. Therefore, even if the Company completes Phase III clinical trials for
certain of its products, there can be no assurance that the FDA will grant
marketing approvals, or if granted, that they will be granted on a timely basis.
If the FDA does approve a product, it may require, among other things,
post-marketing testing, including potentially expensive Phase IV studies, and
surveillance to monitor the safety and effectiveness of the drug. In addition,
the FDA may in some circumstances impose restrictions on the use of the drug
that may be difficult and expensive to administer. Product approvals may be
withdrawn if compliance with regulatory requirements are not maintained or if
problems occur after the product reaches the market.
Under the Orphan Drug Act, the FDA may designate a product or products as
having Orphan Drug status to treat "a rare disease or condition" which is a
disease or condition that affects populations of less than 200,000 individuals
in the United States, or, if victims of a disease number more than 200,000, the
sponsor establishes that it does not realistically anticipate its product sales
will be sufficient to recover its costs. If a product is designated as an Orphan
Drug, then the sponsor is entitled to receive certain incentives to undertake
the development and marketing of the product. One such incentive is market
exclusivity. The sponsor that obtains the first marketing for a designated
Orphan Drug for a given indication is eligible to receive marketing exclusivity
for a period of seven years. There may be multiple designations of Orphan Drug
status for a given drug and for different indications. However, only the sponsor
of the first approved NDA (or PLA) for a given drug for its use in treating a
given rare disease may receive marketing exclusivity for such use. Even if a
sponsor of a product for an indication for use with an Orphan Drug designation
is the first to obtain FDA approval of an NDA (or PLA) for that designation and
obtains marketing exclusivity, another sponsor's application for the same drug
product may be approved by the FDA during the
6
<PAGE>
period of exclusivity if the FDA concludes that it is clinically superior. It is
not known whether any indications for which T(beta)4 might be developed would
qualify for Orphan Drug status.
Proprietary Rights
Under a research agreement with The George Washington University ("GWU"),
the Company funded T(beta)4 research at GWU and was granted a sole and exclusive
world-wide license to any patents that resulted from such research. While the
Company no longer funds research under this agreement, the Company remains
obligated under the research agreement to pay GWU a royalty of 4% of the net
sales, if any, of specified products covered by patents issued in connection
with the agreement. Pursuant to the research agreement, the Company has
exclusive rights to patent applications filed in the United States and in Europe
disclosing the use of T(beta)4 for the treatment of septic shock and associated
syndromes, including ARDS. Two U.S. patents have issued. The first patent, No.
5,578,570, entitled "Method of Treating Septic Shock Using T(beta)4," issued on
November 26, 1996 and the second patent, No. 5,593,964, entitled "Method of
Treating Septic Shock By Preventing Actin Polymerization," issued on January 14,
1997. No sales have occurred and as a result, no royalty payments have yet been
incurred or paid to GWU pursuant to the research agreement.
As discussed above under "--Primary Commercial Development Focus - Thymosin
Beta 4 Product Development," the Company has non-exclusive rights under a patent
application filed by the NIH for the use of T(beta)4 in the treatment of
non-healing wounds, and is presently negotiating with the NIH to secure the
NIH's rights under the proposed patent in order to create an exclusive
proprietary position with respect to T(beta)4 for wound healing, should the
patent be issued. There can be no assurance that this, or any other future
patent application under which the Company has rights, will result in the
issuance of a patent or that any patent issued will not be subject to challenge.
In the case of a claim of patent infringement by or against the Company, there
can be no assurance that the Company will be able to afford the expense of any
litigation that may be necessary to enforce its proprietary rights.
Employees
The Company utilizes a product development strategy that involves
contracting out research, development and manufacturing functions to third
parties partially in order to minimize the expense and overhead associated with
the maintenance of permanent employees and laboratory and manufacturing
facilities. Consistent with this strategy, the Company currently utilizes
several consultants, along with various other professional advisors, to advise
its Chief Executive Officer and Board of Directors on all company matters. See
"Item 12. Certain Relationships and Related Transactions -- Consulting
Agreement." As of December 31, 1999, the Company had no employees.
7
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in Bethesda, Maryland
where it leases office space in an executive office suite. The Company entered
into the lease agreement for this property in August 1999. The lease agreement
provides for a three-month term, and for an unlimited number of extensions of
three months per extension. In addition, the Company has an operating lease for
production facility space in Sunnyvale, California. The term of this lease
expires in January 2002. In March 1995, the Company assigned its interest in the
lease to a third party for the remaining term of the lease. The Company remains
liable under the original lease agreement to pay rent and other amounts owed by
the assignee if the assignee defaults in payment of these amounts to the
landlord. For additional information, see Note 11 of the Notes to Consolidated
Financial Statements contained in Item 7 of this Report and "Forward-Looking
Statements-- Obligations Under Prior Laboratory Lease Agreement" contained in
Exhibit 99.1 to this Report.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to stockholders during the fourth quarter of the
fiscal year ended December 31, 1999.
8
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the over-the-counter market in the
"pink sheets." The Company also has outstanding several classes of warrants to
purchase Company common stock for which there is no public market.
The following table sets forth the high and low bid prices for the
Company's common stock for the periods indicated as reported by Profit
Information Services, Inc. These quotations reflect inter-dealer prices, without
retail mark-up, mark-down, or commission, and may not represent actual
transactions.
<TABLE>
High Low
---------------------------------------
<S> <C> <C>
For the year ended December 31, 1999:
First Quarter $.17 $.01
Second Quarter $.125 $.03
Third Quarter $.05 $.01
Fourth Quarter $.02 $.01
For the year ended December 31, 1998:
First Quarter $.0625 $.04
Second Quarter $.07 $.04
Third Quarter $.0625 $.01
Fourth Quarter $.01 $.01
For the year ended December 31, 1997:
First Quarter $.12 $.08
Second Quarter $.13 $.03
Third Quarter $.125 $.08
Fourth Quarter $.08 $.0625
</TABLE>
As of October 23, 2000, there were approximately 1,120 holders of record of
the Company's common stock.
The Company did not pay a cash dividend on its common stock during the past
three fiscal years and does not anticipate that any cash dividends will be paid
on the common stock in the foreseeable future due to the Company's limited funds
for operations.
9
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED
FINANCIAL STATEMENTS AND NOTES THERETO OF THE COMPANY CONTAINED IN ITEM 7 OF
THIS REPORT. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND EVENTS MAY DIFFER
SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. SEE
EXHIBIT 99.1, ATTACHED HERETO.
Financial Condition
The Company's total assets at December 31, 1999 were $932,363, compared
with $449,767 at December 31, 1998. This increase in total assets was primarily
due to increases in the Company's balances of cash and cash equivalents and
investments.
Cash and cash equivalents increased to $43,387 at December 31, 1999 from
$2,698 at December 31, 1998, primarily as a result of sales by the Company of
shares of SciClone common stock it received in its royalty sale transaction with
SciClone. Investments rose to $886,122 at December 31, 1999 from $444,872 at
December 31, 1998. This change resulted from an increase in the market value of
SciClone shares held by the Company.
Accounts payable decreased to $273,385 at December 31, 1999 from $367,768
at December 31, 1998, and accrued expenses fell to $58,861 at December 31, 1999
from $94,763 at December 31, 1998. These decreases resulted from payment of
amounts owed and the Company's not incurring additional expenses while
operations were suspended from September 1998 to August 1999. The Company's
obligations under letter agreements with certain of its vendors were reduced to
$693,394 at December 31, 1999 from $875,106 at December 31, 1998 as a result of
repayment of amounts owed. As noted below under "--Liquidity and Capital
Resources," subsequent to December 31, 1999, the Company's obligations to
certain of its vendors were settled for payments in the aggregate of $168,164.
Notes payable decreased to $301,722 at December 31, 1999 from $392,046 at
December 31, 1998. This reduction stemmed from the repayment during 1999 of
notes payable to two of the Company's creditors, including accrued interest.
Stockholders' deficit decreased to $394,999 at December 31, 1999 from
$1,279,916 at December 31, 1998. This amount was reduced primarily because of an
increase in accumulated and other comprehensive income (loss) to $483,326 from
($962,823), offset by the net loss for 1999 of $711,232.
Comparison of Results of Operations for Years Ended December 31, 1999 and 1998
Net Income (Loss). The Company had a net loss of $711,232, or $0.06 per
basic and diluted share, for the year ended December 31, 1999, compared with net
income of $1,761,568, or $0.15 per basic and diluted share, for the year ended
December 31, 1998. The loss for 1999 stemmed primarily from a $2,202,703
reduction in other income, including a reduction in gain on sale of
10
<PAGE>
royalty rights and an increase in realized losses on sales of investments,
explained below. Net income in 1998 included a $657,756 extraordinary gain
resulting from the negotiation of reductions in amounts owed to certain vendors,
explained below. Excluding this extraordinary gain, the Company would have
earned net income of $1,103,812, or $0.09 per basic and diluted share, for the
year ended December 31, 1998.
Operating Loss. The Company had an operating loss of $202,166 for the year
ended December 31, 1999 compared to an operating loss of $589,825 for the year
ended December 31, 1998. This reduction in operating loss resulted from a
reduction in operating expenses for 1999, discussed below. Revenues for the year
ended December 31, 1999 were zero, compared to $3,265 for the year ended
December 31, 1998. Revenues in 1998 consisted of consulting income. As noted
below, under "--Liquidity and Capital Resources," the Company does not
anticipate it will generate revenues in the foreseeable future.
Operating expenses in 1999 totaled $202,166, compared to $593,090 in 1998.
This decrease was attributable primarily to the Company's suspension of
operations in September 1998, which continued until the resumption of operations
in August 1999. Operating expenses are comprised of research and development
expenses, which were $1,276 for 1999 and $41,339 for 1998, and general and
administrative expenses, which were $200,890 for 1999 and $551,751 for 1998.
Research and development expenses decreased, as no research and development
activities were conducted while operations were suspended. General and
administrative expenses decreased primarily because the Company terminated all
employees, sublet its leased office space and engaged in no operating activities
upon suspension of its operations.
The Company expects that its operating expenses for the year ending
December 31, 2000 will increase substantially as compared to operating expenses
for 1999, as 2000 will represent a full year of operations compared with
approximately four months of operations during 1999. The Company also expects
that its operating losses will increase in 2000, since as with 1999, the Company
does not anticipate it will generate any revenues in 2000.
Other Income (Expense) and Extraordinary Item. Gains on the sale of royalty
rights for 1999 and 1998 were $89,589 and $2,068,637, respectively, representing
the market value of shares of SciClone common stock received by the Company in
1999 and 1998 pursuant to its royalty sale agreement with SciClone. The amount
for 1998 also includes a $130,000 cash payment the Company received from
SciClone under the agreement. Realized losses on sales of investments for 1999
and 1998 were $582,059 and $365,064, respectively, representing losses from the
sale of SciClone shares received in the royalty sale transaction.
Interest income for 1999 and 1998 was $18 and $4,882, respectively.
Interest expense for 1999 and 1998 was $15,925 and $14,521, respectively,
representing amounts owed to certain of the Company's lenders. As explained
below, under "--Liquidity and Capital Resources," four of the Company's vendors
agreed in 1998 to reduce the aggregate amount owed them from $1,559,756 to
$902,000. This $657,756 reduction was recognized in 1998 as an extraordinary
gain.
Income Taxes. At December 31, 1999, the Company had net operating loss and
research and development tax credit carryforwards of approximately $38.3 million
and $600,000, respectively,
11
<PAGE>
for income tax purposes which expire in various years through 2014. Certain
substantial changes in the Company's ownership would result in an annual
limitation on the amount of the net operating loss carryforwards which can be
utilized.
The Company has provided a full valuation allowance for deferred tax assets
since realization of these future benefits cannot be reasonably assured as a
result of recurring operating losses. For years in which the Company is
profitable, these deferred tax assets are available to offset income tax
liabilities and expense, subject to certain limitations.
Comparison of Results of Operations for Years Ended December 31, 1998 and 1997
Net Income (Loss). The Company earned net income of $1,761,568, or $0.15
per basic and diluted share, for the year ended December 31, 1998 compared with
a net loss of $795,430, or $0.07 per basic and diluted share, for the year ended
December 31, 1997. Net income for 1998 stemmed primarily from a $1,834,090
increase in other income, including a realization of gain on sale of royalty
rights offset by a realization of losses on sales of investments, explained
below. Net income for 1998 also included a $657,756 extraordinary gain resulting
from the negotiation of reductions in amounts owed to certain vendors, explained
below. Excluding this extraordinary gain, the Company would have earned net
income of $1,103,812, or $0.09 per basic and diluted share, for the year ended
December 31, 1998.
Operating Loss. The Company had an operating loss of $589,825 for the year
ended December 31, 1998 compared to an operating loss of $654,977 for the year
ended December 31, 1997. This reduction in operating loss resulted from a
reduction in operating expenses for 1998, discussed below, offset by a reduction
in revenues for 1998. Revenues for the year ended December 31, 1998 were $3,265,
compared to $215,034 for the year ended December 31, 1997. Revenues in 1998
consisted of consulting income. Revenues in 1997 consisted of consisted of (i)
royalty payments totaling $69,104 from SciClone; (ii) a $70,000 non-refundable
advanced royalty payment from SciClone in exchange for the Company's agreement
to forego $700,000 in possible future royalty payments; and (iii) payments
totaling $75,930 primarily for consulting services.
Operating expenses in 1998 totaled $593,090, compared to $870,011 in 1997.
This decrease was largely attributable to the Company's suspension of operations
in September 1998, which continued until the resumption of operations in August
1999. Operating expenses are comprised of research and development expenses,
which were $41,339 for 1998 and $85,695 for 1997, and general and administrative
expenses, which were $551,751 for 1998 and $784,316 for 1997. Research and
development expenses decreased because no research and development activities
were conducted while operations were suspended. General and administrative
expenses decreased primarily because the Company terminated all employees,
sublet its leased office space and engaged in no operating activities upon
suspension of its operations.
Other Income (Expense) and Extraordinary Item. In 1998, the Company
realized a gain on the sale of royalty rights of $2,068,637, representing the
market value of shares of SciClone common stock received by the Company in 1998
pursuant to its royalty sale agreement with SciClone and a $130,000 cash payment
to the Company by SciClone under the agreement. This gain was offset by realized
losses on sales of investments in 1998 of $365,064, representing losses from the
sale of
12
<PAGE>
SciClone shares received in the royalty sale transaction. The Company had no
sales of investments in 1997.
Interest income for 1998 and 1997 was $4,882 and $911, respectively.
Interest expense for 1998 and 1997 was $14,521 and $141,364, respectively,
representing amounts owned to certain of the Company's vendors and lenders.
Interest expense decreased from 1997 to 1998 because of the repayment and
elimination of certain of the Company's indebtedness in 1998. As explained
below, under "--Liquidity and Capital Resources," four of the Company's vendors
agreed in 1998 to reduce the aggregate amount owed them from $1,559,756 to
$902,000. This $657,756 reduction was recognized in 1998 as an extraordinary
gain.
Income Taxes. At December 31, 1998, the Company had net operating loss and
research and development tax credit carryforwards of approximately $38.9 million
and $600,000 respectively, for income tax purposes which expire in various years
through 2013. Certain substantial changes in the Company's ownership would
result in an annual limitation on the amount of the net operating loss
carryforwards which can be utilized.
The Company has provided a full valuation allowance for deferred tax assets
since realization of these future benefits cannot be reasonably assured as a
result of recurring operating losses. For years in which the Company is
profitable, these deferred tax assets are available to offset future income tax
liabilities and expense, subject to certain limitations.
Liquidity and Capital Resources
Since its inception in 1982, the Company's activities have consisted of
conducting research and development, sponsoring clinical trials of its
proprietary products, the construction and equipping of laboratory and
production facilities, and the manufacture of products for research, testing and
clinical trials. The Company's accumulated deficit of $37,005,591 through
December 31, 1999 has been funded primarily 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, limited product sales and
royalties, and the sale of royalty rights.
The Company continues its development program for T(beta)4, and has no
products that have received regulatory approval. The Company has not generated
significant revenues from operations and does not anticipate generating product
revenues or other revenues from operations for the foreseeable future. During
1997, revenues consisted of consulting services of $75,930 and royalty income of
$139,104. During 1998, revenues consisted of consulting services of $3,265.
These revenue sources are substantially below the level required to cover fully
the Company's expenses or to provide adequate cash flow. During 1999, the
Company earned no revenues. The Company will require substantial funding in
order to complete its research and development activities and to manufacture and
market any products which the Company intends to develop.
Aside from its existing balance of cash, the only significant readily
available source of funds the Company currently has is its ability to sell the
shares of SciClone common stock that it owns. The Company also expects to
receive approximately $2,000 per month for at least the next two years from the
repayment to the Company of loans outstanding to certain parties, discussed
below under
13
<PAGE>
"Item 12. Certain Relationships and Related Transactions." Throughout 1998 and
1999, the Company sold shares of SciClone common stock to fund operations and
pay outstanding liabilities. Under the acquisition agreement with SciClone,
sales were restricted to a maximum of 50,000 shares monthly; this restriction
lapsed in 1999. During 1998, a total of 131,000 shares were sold, resulting in
cash proceeds of $165,878 and a realized loss on the sales of $365,064. During
1999, prior to the retention of the Company's current management consultants, a
total of 324,327 shares were sold, resulting in cash proceeds of $512,429 and a
realized loss on the sales of $582,059. The Company currently has 62,673 shares
of SciClone common stock remaining, with a current market value, based on the
closing price on October 23, 2000, of $8.563 per share.
In March 1997, the Company concluded a private placement of five units
consisting of common stock and Class D warrants for which the Company received
gross proceeds of $250,000. Each unit consists of 500,000 shares of common stock
and 165,000 Class D warrants each having an exercise price of $0.10 per warrant
and a term of ten years. The proceeds of the offering were used in part to
conduct pre-clinical animal studies at Vanderbilt University using T(beta)4 and
to fund operations. For additional information regarding the Class D and other
outstanding warrants to purchase the Company's common stock, see Note 8 to the
Notes to Financial Statements contained in Part 7 of this Report.
In July 1997, the Company received an unsecured $50,000 loan from an
individual to provide additional operating capital. The terms of the loan
agreement provided for repayment of principal and interest within six months
with interest at the rate of 8% per annum. Additionally, the noteholder received
a five-year warrant to purchase 100,000 shares of the Company's common stock at
$0.13 per share, the fair market value of the Company's common stock on the date
of the grant. During January 1998, the loan term was extended to provide for
payments to be made in five consecutive equal monthly installments, beginning
January 1998. In consideration of the extended payment term, the noteholder
received an additional warrant to purchase 41,666 shares of Company common stock
an exercise price of $0.13 per share. The Company repaid the loan in full in
1998.
In October 1997, the Company received an unsecured loan of $60,000, bearing
interest at a rate of 8% per annum, from ViroPro Pharmaceuticals, Inc.
("ViroPro"). As of December 31, 1998, outstanding principal of $45,100 was due
and accrued interest had been fully paid. The note was paid in full during 1999,
including accrued interest. ViroPro and the Company had discussions in 1997
regarding the possibility of a business combination. There have been no
discussions since that time.
In 1998, in connection with its T[alpha]1 royalty sale agreement with
SciClone, the Company was loaned approximately $350,000 by SciClone, to be
repaid in several installments following the closing of the transaction. These
advances were secured by shares of SciClone common stock having a market value
equal to the principal amount of the loans and were intended to assist the
Company in funding its operations pending the closing of the transaction. As
noted under "Item 1. Description of Business--Previous Commercial
Development-Thymosin Alpha 1," the Company defaulted in its obligation to repay
these loans, and paid SciClone $162,500 in settlement of all amounts owed in
February 2000.
14
<PAGE>
As a result of the termination of research and development activities
during 1996, the Company canceled agreements with certain vendors. The Company
was able to cancel approximately $1,200,000 of work on outstanding orders of
approximately $2,700,000. The Company entered into separate letter agreements
with four vendors, to which the Company's obligations in the aggregate totaled
$1,323,000, to defer payment in exchange for a commitment to pay the vendors a
percentage of the royalties received by the Company under its license agreement
with SciClone. Following execution of its royalty sale agreement with SciClone,
the Company in January and February 1998 entered into amended agreements with
the four vendors, subject to the completion of the royalty sale transaction with
SciClone, which would accelerate payments owed to the vendors. In consideration
for the acceleration of payments, the vendors agreed to reduce the Company's
aggregate obligation, including accrued interest, from $1,559,756 to $902,000,
which the Company agreed to pay from the proceeds of the sale of the shares of
SciClone common stock received in connection with the royalty sale transaction.
As a result of the decrease in value of the SciClone common stock and the
Company's suspension of operations during 1998 and 1999, the Company was unable
to maintain the repayment schedule set forth in the amended agreements with the
four vendors.
Subsequent to December 31, 1999, the Company entered into settlement
agreements with several of its creditors, including two of the four vendors
referred to above. Pursuant to the settlement agreements, liability balances
totaling $759,176 at December 31, 1999 were settled for payments in the
aggregate of $168,164. In connection with the settlement agreement with one
creditor, the Company's supplier of T(beta)4 for wound-healing studies to which
the Company was indebted approximately $543,000 plus interest, the Company paid
a deposit of $50,000 for a commitment to purchase $100,000 of T(beta)4. The
Company must pay the balance of the purchase price within 30 days after it is
granted an exclusive license from the NIH to its rights under the patent
application filed in connection with the wound-healing study. See "Item 1.
Business-- Manufacturing." The Company also paid this creditor $125,000 as
repayment and settlement in full of the $543,000 amount owed.
Currently, there are three other outstanding obligations to vendors which
are under dispute. Amounts owed to these vendors totaled approximately $147,000
at December 31, 1999 and no payments have been made to such vendors since that
date.
Cash balances at December 31, 1998 and 1999 were $2,698 and $43,387,
respectively. Investment balances at December 31, 1998 and 1999 were $444,872
and $886,122, respectively, and consisted solely of shares of SciClone common
stock. Although no assurance can be given, the Company believes that its cash
balances, together with its other readily available sources of funds, will be
sufficient to sustain current operations through December 31, 2001. If
substantial additional funding is not obtained by that point, or if the value of
its SciClone shares declines significantly, the Company will likely be forced to
again suspend or discontinue operations.
The effect of inflation and changing prices on the continuing operations of
the Company is not expected to be significant.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Alpha 1 Biomedicals, Inc.
We have audited the accompanying balances sheets of Alpha 1 Biomedicals, Inc. as
of December 31, 1999 and 1998, and the related statements of operations,
stockholders' deficit and cash flows for the years then ended. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Alpha 1 Biomedicals, Inc. for the year
ended December 31, 1997 were audited by other auditors whose report, dated March
6, 1998, expressed an opinion with an emphasis paragraph concerning the
Company's ability to continue as a going concern.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alpha 1 Biomedicals, Inc. as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Reznick Fedder & Silverman
Bethesda, Maryland
June 2, 2000
16
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
1999 1998
--------------------------------------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 43,387 $ 2,698
Investments 886,122 444,872
----------- ------------
Total current assets 929,509 447,570
Due from related party, net of allowance 965 2,197
Fixed assets, net of accumulated depreciation 1,889 -
------------ -----------
Total assets $ 932,363 $ 449,767
=========== ============
</TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C> <C>
Current liabilities
Accounts payable $ 273,385 $ 367,768
Accrued expenses 58,861 94,763
Letter agreements with vendors 693,394 875,106
Notes payable 301,722 392,046
----------- ------------
Total current liabilities 1,327,362 1,729,683
---------- ------------
Commitments - -
Stockholders' deficit
Preferred stock, $.001 par value per share,
1,000,000 shares authorized; no shares
issued and outstanding - -
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 36,115,289 35,965,289
Accumulated deficit (37,005,591) (36,294,359)
Accumulated other comprehensive income (loss) 483,326 (962,823)
------------ -------------
Total stockholders' deficit (394,999) (1,279,916)
------------ -------------
Total liabilities and stockholders' deficit $ 932,363 $ 449,767
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
17
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
REVENUES
Consulting $ - $ 3,265 $ 75,930
Royalties - - 139,104
----------- ------------ --------------
Total revenue - 3,265 215,034
------------ ------------ --------------
EXPENSES
Research and development 1,276 41,339 85,695
General and administrative 200,890 551,751 784,316
----------- ------------ --------------
Total operating expenses 202,166 593,090 870,011
------------ ------------ --------------
Total operating loss (202,166) (589,825) (654,977)
------------ ----------- -------------
Other income (expense)
Interest income 18 4,882 911
Gain on sale of royalty rights 89,589 2,068,637 -
Realized loss on sale of investments (582,059) (365,064) -
Interest expense (15,925) (14,521) (141,364)
Other expense (689) (297) -
------------- ------------ --------------
Total other income (expense) (509,066) 1,693,637 (140,453)
----------- ------------ -------------
Income (loss) before extraordinary item (711,232) 1,103,812 (795,430)
Extraordinary item - settlement of vendor payables - 657,756 -
--------- ------------ --------------
Net income (loss) $(711,232) $ 1,761,568 $ (795,430)
========= ============ =============
Basic and diluted income (loss) per common
share before extraordinary item $ (0.06) $ 0.09 $ (0.07)
--------- ------------ ------------
Extraordinary item - settlement of vendor payables $ - $ 0.06 $ -
--------- ------------- -----------
Basic and diluted income (loss) per common share $ (0.06) $ 0.15 $ (0.07)
========= ============= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
18
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
1999 1998 1997
------------------------------ ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (711,232) $1,761,568 $ (795,430)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Settlement of vendor payables - (657,756) -
Gain on sale of royalty rights (89,589) (1,938,637) -
Realized loss on sale of investments 582,059 365,064 -
Stock option compensation expense 150,000 - -
Depreciation 305 1,304 5,040
Allowance for related party receivable - - 69,674
Changes in operating assets and liabilities:
Decrease in prepaid insurance - 46,988 14,060
Decrease in other current assets - - 3,677
Decrease in due from related party 1,232 - 772
Decrease in other assets - - 15,831
(Increase) decrease in accounts payable (276,095) 64,658 78,612
(Increase) decrease in accrued expenses (35,902) (44,784) 50,408
Increase (decrease) in deferred revenue - (65,000) 65,000
------------- ---------- --------------
Net cash used in operating activities (379,222) 466,595) (492,356)
------------- ---------- --------------
Cash flows from investing activities:
Purchase of fixed assets (2,194) - -
Cash received on sale of investments 512,429 165,878 -
----------- ------------- --------------
Net cash provided by investing activities 510,235 165,878 -
----------- ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants - - 250,000
Proceeds from notes payable - 350,000 110,000
Principal payments of notes payable (90,324) (67,954) -
------------ ------------- --------------
Net cash provided by (used in) financing activities (90,324) 282,046 360,000
------------ ------------- --------------
Net increase (decrease) in cash and cash equivalents 40,689 (18,671) (132,356)
Cash and cash equivalents at beginning of period 2,698 21,369 153,725
------------ ------------- --------------
Cash and cash equivalents at end of period $ 43,387 $ 2,698 $ 21,369
============ ============= ==============
Supplemental disclosures of cash transactions:
Cash paid for interest $ 400 $ 6,440 $ -
============= ============= ==============
Supplemental disclosure of significant noncash investing
and financing
activities:
Unrealized gain (loss) on sale of investments $ 1,446,149 $ (962,823) $ -
============ ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
19
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
Accumulated
Additional Other Total
Common Stock Paid-in Accumulated Comprehensive Stockholders'
------------------ Capital Deficit income (loss) Deficit
Shares Amount
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 9,102,429 $ 9,102 $35,613,164 $(37,260,497) $ - $(1,638,231)
Issuance of Common Stock 2,875,000 2,875 352,125 - - 355,000
Net Loss - - - (795,430) - (795,430)
---------- ------- ----------- ------------ ------------- -----------
Balance at December 31, 1997 11,977,429 11,977 35,965,289 (38,055,927) - (2,078,661)
---------- ------- ----------- ------------ ------------- -----------
Unrealized loss on investments - - - - (962,823) (962,823)
Net Income - - - 1,761,568 - 1,761,568
---------- ------- ----------- ------------ ------------- -----------
Balance at December 31, 1998 11,977,429 11,977 35,965,289 (36,294,359) (962,823) (1,279,916)
---------- ------- ----------- ------------ ------------- -----------
Unrealized gain on investments - - - - 1,446,149 1,446,149
Stock options issued - - 150,000 - - 150,000
Net Loss - - - (711,232) - (711,232)
---------- ------- ----------- ------------ ------------- -----------
Balance at December 31, 1999 11,977,429 $11,977 $36,115,289 $(37,005,591) $ 483,326 (394,999)
========== ======= =========== ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
20
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
1. ORGANIZATION AND BUSINESS
Organization and Nature of Operations
-------------------------------------
Alpha 1 Biomedicals, Inc. (the "Company"), a Delaware corporation, was
incorporated in 1982. The Company operates predominantly in a single industry
segment, the biotechnology industry, which consists of researching and
developing new pharmaceutical products for the treatment of diseases or
conditions that arise as a result of immune system disorders, including chronic
viral infections, cancer and autoimmune disease.
In early 1996, the Company substantially halted its development program and all
other research and currently has no products that have received regulatory
approval. During 1997, the Company entered into a Material Transfer Agreement -
Cooperative Research and Development Agreement ("MTA-CRADA") with the National
Institutes of Health ("NIH"), whereby an NIH investigator will use Thymosin beta
4, provided by the Company, in several studies including clinical trials, for
the treatment of non-healing wounds. In exchange for providing the product and
other data, the Company received an option to elect to negotiate for an
exclusive or non-exclusive commercialization license from NIH pursuant to a
patent application filed by NIH in 1998. The Company's option expired on
February 11, 1999. The Company's President is a co-inventor on the patent
application filed by the NIH. As a result, he retains an equal, undivided
interest in the intellectual property described in the patent which he
subsequently assigned to the Company on May 1, 2000. The Company, therefore,
shares equally with NIH all rights to the intellectual property which might be
forthcoming under the patent application, resulting in full but non-exclusive
rights. In August 1999, the Company began negotiations with NIH to license NIH's
rights under the patent application in order to effectively secure an exclusive
position with respect to the intellectual property.
On December 17, 1997, the Company entered into the Alpha Rights Acquisition
Agreement (the "Acquisition Agreement") with SciClone Pharmaceuticals, Inc.
(SciClone) to sell its rights to receive from SciClone royalties on the future
sales of Thymosin alpha 1 (see note 4). Prior to the Acquisition Agreement, the
Company licensed to SciClone, on an exclusive basis, all of the Company's patent
and proprietary rights with respect to Thymosin alpha 1. Under the license,
SciClone had the right 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"). In consideration for the
license, the Company was entitled to receive from SciClone royalties on the sale
by SciClone of Licensed Products that ranged from 3% to 7% of SciClone's net
sales revenues, depending upon the date the license in a particular country was
obtained by SciClone and on whether SciClone has patent protection in the
country in which the Licensed Products are sold.
On September 25, 1998, the Company announced that it was suspending operations
due to insufficient funds to continue operations. During 1998, operations were
funded from cash proceeds received from the sale of SciClone stock. The Company
continued to pay debts and other obligations after operations ceased by selling
SciClone Common Stock.
In August 1999, the Company contracted with a group of four consultants,
including the President of the Company, to advise the Company on the most viable
approaches for resuming business operations, including raising capital and
funding research and development. At that time the Company resumed operations.
The consultants each received consideration in the form of 1,875,000 stock
options, exercisable at its fair market value of $.04 per share. In addition,
one consultant will receive a monthly fee of $5,000 for assistance with the
Company's management and operations.
21
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
1. ORGANIZATION AND BUSINESS (Continued)
The Company continues to pursue strategic alliances or other partnership
arrangements with entities interested in and with resources to develop Thymosin
beta 4, or other business transactions which would allow the Company to generate
resources to permit continuation of the Company's operations.
Should the Company obtain substantial additional funding, other factors
including competition, dependence on third parties, uncertainty regarding
patents, protection of proprietary rights, manufacturing of peptides and
technology obsolescence could have a significant impact on the Company and its
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
Fixed Assets
------------
Fixed assets are stated at cost less accumulated depreciation. Expenditures for
maintenance and repairs which do not significantly prolong the useful lives of
the assets are charged to expense. Depreciation is computed using the
straight-line method over estimated useful lives of two to ten years.
Investments
-----------
Investments consist of shares of SciClone Common Stock, which have been
classified as available for sale securities. Available-for-sale securities are
stated at fair value, and unrealized gains and losses are reported as a separate
component of stockholders' equity.
Comprehensive Income
--------------------
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No 130, "Reporting Comprehensive Income," which established
standards for reporting and display of comprehensive income (net income (loss))
plus all other changes in net assets from nonowner sources and its components in
the financial statements.
22
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
-------------------
The Company recognizes royalties as revenue when received from SciClone. Revenue
generated from the Acquisition Agreement was recorded at the time of closing
with SciClone. The transaction recorded revenue based on the cash compensation
received, the average market price of the initial shares of SciClone Common
Stock received, and the closing market price per share of SciClone Common Stock
at the date the additional shares were received. The Company recognizes
consulting revenue as the consulting services are performed.
Research and Development
------------------------
Research and development costs are expensed as incurred. Research and
development performed by third parties is expensed based upon the third party's
stage of product development.
Income Taxes
------------
The Company accounts for income taxes using the asset and liability approach
(SFAS No. 109 "Accounting for Income Taxes"), which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying and tax bases of assets and
liabilities. A valuation allowance is recorded if, based upon the evidence
available, it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
Letter of Agreements with Vendors
---------------------------------
During 1996, the Company entered into four separate letter agreements with
vendors which allowed the Company to defer payments of current obligations. The
four letter agreements were due on demand, but stipulated that a percentage of
future royalties received from SciClone would be used to pay down their
obligation. In January and February 1998, the Company entered into amended
agreements with the four companies, subject to the completion of the royalty
sale transaction with SciClone (see note 4), which would accelerate payments
due. In consideration for the acceleration of payments, the vendors agreed to
reduce the Company's aggregate obligation, including accrued interest, from
$1,559,756 to $902,000, which the Company agreed to pay from the proceeds of the
sale of the shares of SciClone common stock received under the Acquisition
Agreement (see note 1). Due to the decrease in value of the SciClone Common
Stock and discontinuance of operations during 1998 and 1999, the Company was
unable to maintain the payment schedule outlined in the agreements discussed
above. As of December 31, 1999 and 1998, $693,394 and $875,106, respectively,
remain payable to these vendors (see note 11).
Fair Value of Financial Instruments
-----------------------------------
The estimated fair values of the Company's cash and cash equivalents, due from
related party, accounts payable, letter agreements with vendors, accrued
expenses and notes payable approximate their carrying values, due to their
short-term nature.
23
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Impairment of Long-Lived Assets
-------------------------------
The Company complies with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires that long-lived assets and certain identifiable intangibles held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. To determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows will be less
than the carrying amounts of net assets. Impairment, if any, is measured at fair
value.
Financial Risks
---------------
The Company's investment in available for sale securities consist of SciClone
Common Stock which has been used to fund operations during 1998 and 1999. The
Company has 144,673 shares of SciClone Common Stock at December 31, 1999, at a
market price of $6.125 per share, which are subject to market conditions and
price fluctuations.
Earnings (loss) Per Share
-------------------------
<TABLE>
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) available for common
shareholders (A) $ (561,232) $ 1,761,568 $ (795,430)
============= ============ =============
Average outstanding:
Common stock (B) 11,977,429 11,977,429 10,880,000
Employee stock options - - -
------------- ------------ -------------
Common stock and stock equivalents (C) 11,977,429 11,977,429 10,880,000
============== ============ =============
Earnings (loss) per share:
Basic (A/B) $ (.05) $ .15 $ (.07)
Diluted (A/C) $ (.05) $ .15 $ (.07)
</TABLE>
Unexercised employee stock options, which were previously granted, to purchase
7,530,000, 700,360 and 1,777,793 shares of the Company's common stock as of
December 31, 1999, 1998 and 1997, respectively, were not included in the
computations of diluted earnings per share because the options' exercise prices
were greater than the average market price of the Company's common stock during
the respective period.
24
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation
------------------------
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," for employee stock options.
Accordingly, when the Company grants employee stock options with an exercise
price equal to the NASDAQ bulletin board price ("quoted price") of the shares on
the date of the grant, no compensation expense is recorded. If employee stock
options are granted at an exercise price less than the quoted price,
compensation expense is recorded to the extent of the intrinsic value.
Transactions with nonemployees in which consideration is received for the
issuance of equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable.
3. INVESTMENTS
The following is a summary of the Company's investments as of December 31, 1999
and 1998:
<TABLE>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses Fair value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
1999
----------------------
Equity securities $ 402,796 $483,326 $ - $886,122
========== ======== ========= ========
1998
----------------------
Equity securities $1,407,695 $ - $(962,823) $444,872
========== ======== ========= ========
</TABLE>
4. SALE OF ROYALTY RIGHTS
On December 17, 1997, the Company entered into an Alpha Rights Acquisition
Agreement (the "Acquisition Agreement") with SciClone, pursuant to which the
Company agreed to sell to SciClone its right to receive from SciClone royalties
on the future sales of Thymosin alpha 1. In exchange, during 1997 at initial
settlement, $65,000 cash was received. In October 1998, additional compensation
was received at closing that included $65,000 cash and 444,115 shares of
SciClone stock, valued at $4.053 per share, and the potential to receive a
maximum of 155,885 additional shares of SciClone stock based on the stock's
market value. The additional shares were contingent upon the average closing
sales price of the SciClone Common Stock at certain predetermined dates. An
additional 50,297 and 105,588 shares of SciClone Common stock, were received in
1999 and 1998, respectively.
In addition to the Acquisition Agreement, SciClone made advances to the Company
totaling $350,000 (see note 8).
Under the Acquisition Agreement, the Company relinquished its future rights to
royalties, effective as of the date of the Acquisition Agreement. In addition,
the Company assigned to SciClone (i) all patents held by the Company with
respect to Thymosin alpha 1 and (ii) all of the Company's rights and obligations
under licenses with third parties pursuant to which the Company has acquired
rights to Thymosin alpha 1 (subject to all required consents of such third-party
licensors).
25
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
4. SALE OF ROYALTY RIGHTS (Continued)
The Company has accounted for the sale of the royalty rights based upon the fair
value of the consideration received, which is more readily determinable than the
fair value of the Company's right to receive royalty payments from the future
sales by SciClone and its licensees of Thymosin alpha 1. In 1998, the Company
recorded a gain in the amount of $2,068,637 as determined by the sum of (i)
$130,000 of cash received, (ii) the average price of the 444,115 common shares
received, determined by reference to the average closing market price per share
of SciClone Common Stock for a period of 20 days preceding the Closing Date as
reported by the NASDAQ Stock Market, and (iii) the market price per share of
SciClone Common Stock as reported at closing by the NASDAQ Stock Market on the
dates the additional shares are received.
Throughout 1998 and 1999, the Company sold shares of SciClone Common Stock to
fund operations and pay outstanding liabilities. Under the Acquisition
Agreement, sales were restricted to a maximum of 50,000 shares monthly. During
1998, a total of 131,000 shares were sold, resulting in cash proceeds of
$165,878 and a realized loss on the sales of $365,064. During 1999, a total of
324,327 shares were sold, resulting in cash proceeds of $512,429 and a realized
loss on the sales of $582,059. As of December 31, 1999 and 1998, the Company
held a total of 144,673 and 418,703 shares, respectively, of SciClone Common
Stock with a fair value of $886,122 and $444,872, respectively.
5. PROPRIETARY RIGHTS AND LICENSES
The Company held certain proprietary rights to Thymosin beta 4 in the United
States under a Commercial Text Agreement ("CTA") between the Company and
Hoffman-LaRoche, Inc. and its foreign affiliate ("HLR") effective September 15,
1982. Pursuant the CTA the Company was obligated to pay HLR a royalty of 8% on
commercial sales (or 4% of commercial sales, if the FDA approved Thymosin beta 4
for sale by a competitor). The CTA was amended by an agreement ("Amendment
Agreement") dated August 6, 1991 whereby the Company's royalty obligation would
extend to the latter of expiration of the U.S. Patents that are the subject of
the obligation, or any continuation, continuation in part, division or reissue
thereof, or ten (10) years from the date of the first commercial sale of
Thymosin beta 4. The U.S. Patents identified in the CTA and Amendment Agreement
have all expired and no continuation, continuation in part, division or reissue
thereof has occurred nor has there been any commercial sale of Thymosin beta 4.
As of December 31, 1999, the Company no longer has any obligations under this
agreement.
The Company also has a worldwide license to certain uses of Thymosin beta 4
under a research agreement with George Washington University ("GWU") under which
the Company is obligated to pay GWU a royalty of 4% on commercial sales. No such
royalties have been incurred or paid as of December 31, 1999.
6. RELATED PARTIES
In 1994, the Company entered into a note receivable agreement with the President
of the Company, covering a loan of $149,000 due December 30, 1994, which accrued
interest at the prime rate calculated monthly. The loan was repaid on January 1,
1995, in part with the proceeds of an unsecured second loan to the President
from the Company in the amount of $115,617. 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 through December 31, 1997. Currently,
installment payments are suspended until a repayment plan can be negotiated. As
of December 31, 1999, the outstanding balance on the loan was $69,674, which has
been fully reserved as a doubtful collection.
26
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
6. RELATED PARTIES (Continued)
The President also serves the Company as a consultant. In addition to his
position with the Company, the President is also Chairman of the Department of
Biochemistry and Molecular Biology at GWU. The Company has not funded any
research personally conducted by the President, and anticipates that any future
funding, if any, will also be limited to research projects performed by
principal investigators at GWU other than the President. No funding was provided
during 1998 or 1999.
7. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Fixed assets consist of the following:
<TABLE>
December 31,
-------------------------
1999 1998
-------------------------
<S> <C> <C>
Furniture and equipment $3,123 $40,332
Less accumulated depreciation 1,234 40,332
------ -------
$1,889 $ -
====== =======
</TABLE>
Accrued expenses consist of the following:
<TABLE>
December 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Interest $23,605 $ 8,080
Directors fees 27,832 37,756
Accrued salaries and vacation - 35,832
Other 7,424 13,095
------- --------
$58,861 $94,763
</TABLE>
8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY
Common Stock and Warrants
During 1997, the Company completed a private placement of Units in which it sold
a total of five Units at a 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
$.10 per share and has a term of 10 years.
In June 1997, the Company entered into an agreement with an unrelated third
party to provide financial advisory services. The agreement stipulated
compensation for services to be performed at $10,000 and warrants to purchase
360,000 shares of the Company's Common Stock. The warrants became exercisable
one year after the date of grant at a price equal to the 20 day average price
per share for the period immediately prior to the grant date. The warrants
expire five years subsequent to the grant date. As of December 31, 1999, $7,424
remains payable to the third party.
27
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY (Continued)
Notes Payable and Warrants
--------------------------
During October 1997, the Company received a $60,000 unsecured loan bearing
interest of 8% per annum. As of December 31, 1998, outstanding principal of
$45,100 was due and accrued interest had been fully paid. The note was paid in
full during 1999, including accrued interest. Additionally, during July 1997,
the Company received a $50,000 unsecured loan from an individual to provide
additional operating capital. The terms of the loan agreement provided for
repayment within six months with interest at the rate of 8% per annum.
Additionally, the noteholder received a warrant to purchase 100,000 shares of
the Company's Common Stock at $.13 per share. The warrant has a term of five
years. In January 1998, the terms of the note were amended to provide for
monthly repayment of the loan in equal amounts from January through June 1998.
In consideration of the amended terms, the noteholder received an additional
warrant to purchase 41,666 shares of the Company's Common Stock at $.13 per
share with a term of five years. The note principal and accrued interest was
repaid in full during 1998 and, as of December 31, 1999, none of the warrants
have been exercised.
In conjunction with the Acquisition Agreement, the Company entered into a note
agreement with SciClone in which the Company received advances totaling
$350,000. Under the note agreement, interest accrues at the rate of 8% per annum
and, as of December 31, 1999 and 1998, outstanding principal is $301,722 and
$346,946, respectively, and accrued interest is $23,605 and $8,080,
respectively. In January 2000, the Company and SciClone entered into a Mutual
Release of Claim Agreement where SciClone would accept a one-time payment of
$162,500 in satisfaction of outstanding principal and accrued interest. This
payment was made in February 2000 as satisfaction for all outstanding debt with
SciClone. SciClone has returned all 69,085 shares of stock held as collateral
under the note agreement.
A warrant to purchase 20,000 shares of the Company's Common Stock was issued in
February 1995, in settlement of a suit filed against the Company. The warrant
had an exercise price of $1.00 per share. On February 2, 1998, the warrant
expired.
Shareholders Rights Plan
------------------------
In April 1994, the Board of Directors adopted a Shareholders Rights Plan,
pursuant to which it declared a dividend distribution of one Preferred Stock
Purchase Right ("Right") for each outstanding share of Common Stock. The
dividend distribution was payable to stockholders of record at the close of
business April 29, 1994.
The Rights can become exercisable only if a person or group acquires more than
25% of the Common Stock or announces a tender offer, the consummation of which
would result in ownership by a person or group of more than 25% of the Common
Stock. Each Right would then entitle the holder to purchase one-hundredth
(1/100) of a share of a new series of preferred stock at an exercise price of
$16.00.
If the Company is acquired in a merger or other business combination transaction
with, or a significant portion of the Company's business is acquired by, a
person or group that has acquired more than 25% of its outstanding Common Stock,
each Right will entitle its holder (other than such person or group or any of
their affiliates or associates) to purchase, at the then-current exercise price
of the Right, a number of the acquiring company's common shares having a value
that is twice such exercise price. In addition, if a person or group acquires
more than 25% of the Company's outstanding Common Stock, each Right will entitle
its holder (other than such person or group or any of their affiliates or
associates) to purchase, at the then-current exercise price of the Right, a
number of shares of Common Stock having a market value that is twice such
exercise price.
28
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY (Continued)
Prior to the time that the Rights become exercisable, they are redeemable at the
option of the Board of Directors at a redemption price of $0.01 per Right. The
Board of Directors is required to redeem the rights in the event of an all-cash
tender offer for all of the outstanding shares of the Common Stock that meets
certain requirements. The Rights will expire on April 29, 2004.
Stock Based Compensation
------------------------
The Company accounts for stock based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
APB No. 25, compensation cost is measured as the excess, if any, of the quoted
market price on the Company's Common Stock at the date of the grant over the
exercise price of the quoted market price on the Company's Common Stock at the
date of the grant over the exercise price of the option granted. Compensation
cost for stock options, if any, is recognized ratably over the vesting period.
Generally, the Company's policy is to grant options with an exercise price equal
to the quoted market price of the Company's Common Stock on the grant date. The
Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting
for Stock Based Compensation." The fair value accounting requirement of SFAS No.
123 did not have a material effect on the Company's net earnings (loss) and
basic and diluted net earnings (loss) per share.
Incentive Stock Option Plan
---------------------------
The Company has an Incentive Stock Option Plan established in 1986, and since
amended from time to time, under which options to purchase shares of Common
Stock of the Company may be granted by the Company to any employee. All options
granted under the Plan are exercisable at a price equal to the fair market value
of the Common Stock on the date of the grant. The Plan authorizes the issuance
of up to 1,500,000 shares of Common Stock. The plan expired in 1996. As of
December 31, 1999, there were no options outstanding under the plan.
1987 Non-Qualified Stock Option Plan
------------------------------------
The 1987 Non-Qualified Stock Option Plan was adopted by the Board of Directors
and approved by the stockholders in 1987. The Plan provides for grants of stock
options to any employee. The Plan authorizes the issuance of up to 1,000,000
shares of Common Stock. The plan expired in 1997. As of December 31, 1999, there
were no options outstanding under the plan.
Directors Stock Option Plan
---------------------------
The Directors Stock Option Plan was adopted by the Board of Directors and
approved by the stockholders in 1987. Under the Plan, options to purchase 10,000
shares of Common Stock are granted automatically to each person who becomes a
director after April 10, 1987, and who, at the time such person becomes a
director, is not an employee of the Company. Options granted under the Plan have
an exercise price per share equal to the fair market value of the Common Stock
on the date of the grant. In 1992, the Plan was amended, with the approval of
stockholders at the 1992 Annual Meeting (i) to add an automatic annual grant to
each non-employee director of an option to purchase 5,000 shares of Common Stock
if the individual is re-elected as a Director at the Annual Meeting, and (ii) to
increase to 200,000 the number of shares of Common Stock issuable under the
Plan. Options granted under the Plan have a ten-year term and become exercisable
in 20% increments beginning on the date of the grant and on each anniversary
date thereafter. Since 1992, the Plan has been amended several times to change
the exercise price per share, the most recent amendment being in 1998, stating a
price of $.06 per share. The Plan expired in 1997. As of December 31, 1999,
30,000 options were outstanding under the plan.
29
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY (Continued)
Compensation Committee Option Plan
----------------------------------
On January 7, 1997, the Board of Directors approved a resolution to grant stock
options to officers and employees of the Company. A total of 1,388,120 options
were granted to four individuals under two stock option plans. The options were
exercisable at the closing price of the Company's stock on January 6, 1997. A
total of 813,160 options were granted under the Incentive Stock Option Plan.
None of these options were exercised and all 813,160 options expired in 1998.
Under the Non-Qualified Stock Option Plan, 574,960 options were granted and all
expired unexercised in 1999.
Options Outstanding And Exercisable
-----------------------------------
The following table summarizes the Company's stock option activity for 1997,
1998 and 1999:
<TABLE>
Weighted
Exercise Average
Number Price Exercise
of shares Range Price
------------- ------------------------------
<S> <C> <C> <C>
Options outstanding, December 31, 1996 389,673 $0.53 to $16.25 $7.16
Options granted 1,388,120 $0.13 0.13
--------- --------------- -----
Options outstanding, December 31, 1997 1,777,793 $0.13 to $16.25 1.79
Options terminated (1,077,433) $0.13 to $16.25 1.66
---------- --------------- -----
Options outstanding, December 31, 1998 700,360 $0.13 to $15.00 1.98
Options granted 7,500,000 $0.04 0.04
Options terminated (670,360) $0.13 to $16.25 1.77
---------- --------------- -----
Options outstanding, December 31, 1999 7,530,000 $0.04 to $10.50 $0.07
========== =============== =====
</TABLE>
Options Outstanding And Exercisable
-----------------------------------
The following table summarizes information about the options outstanding at
December 31, 1999:
<TABLE>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------
Weighted-
Average Weighted Weighted
Range Remaining Average Average
of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Outstanding Price
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.50 10,000 3.5 $9.50 10,000 $9.50
10.50 10,000 4.5 10.50 10,000 10.50
0.53 10,000 6.5 0.53 10,000 0.53
0.04 7,500,000 10.0 0.04 7,500,000 0.04
--------- ---------
7,530,000 7,530,000
========= =========
</TABLE>
30
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY (Continued)
At December 31, 1999, 7,530,000 options, with an average exercise price of $0.07
per share, were exercisable. At December 31, 1998, 700,360 options, with an
average exercise price of $1.98, were exercisable. At December 31, 1997,
1,773,793 options, with an average exercise price of $1.79, were exercisable.
In August 1999, the Company granted 7,500,000 options, at an exercise price of
$0.04, which became fully vested during 1999.
9. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) retirement plan that has had no active
participation from employees or the Company in 1998 or 1999.
10. INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
December 31, December 31,
1999 1998
------------------------------------
<S> <C> <C>
Net operating loss carryforwards $13,261,000 $ 13,268,720
Capital loss carryforward 541,000 329,178
Research and development tax credit 614,000 614,000
----------- ------------
14,416,000 14,211,898
Valuation allowance (14,416,000) (14,211,898)
----------- ------------
Net deferred tax assets $ - $ -
=========== ============
</TABLE>
The Company has provided a full valuation allowance for deferred tax assets
since realization of these future benefits cannot be reasonably assured as a
result of recurring operating losses. If the Company achieves profitability,
these deferred tax assets would be available to offset future income tax
liabilities and expense, subject to certain limitations.
At December 31, 1999, the Company had net operating loss and research and
development tax credit carryforwards of approximately $38.3 million and $.6
million, respectively, for income tax purposes which expire in various years
through 2014. Certain substantial changes in the Company's ownership would
result in an annual limitation on the amount of the net operating loss
carryforwards which can be utilized.
31
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
11. COMMITMENTS
Leases
------
In August 1999, the Company entered into an agreement to lease office space in
Bethesda, Maryland. The lease was for a period of three months and expired on
November 30, 1999. Under the terms of the lease agreement, the lease
automatically renews upon expiration for an additional three months, unless
either the Company or the lessor provides notice of termination of the lease 60
days prior to expiration. The Company's rent expense for 1999 and 1998 was
$7,074 and $12,572, respectively. The Company has an operating lease (the
"Master Lease") for a production facility space in Sunnyvale, California, which
expires in January 2002. The Sunnyvale lease was assigned to a third party in
March 1995 on the same terms for the remaining term of the Master Lease. The
assignment is subordinate to the Master Lease and the Company is still liable
under the terms of the Master Lease. Under the Master Lease, future minimum
lease payments are as follows:
<TABLE>
<S> <C> <C>
Year ending December 31, 2000 $376,880
2001 393,032
2002 33,650
----------
$803,562
</TABLE>
12. SUBSEQUENT EVENTS
Settlement Agreements
---------------------
During 2000, the Company entered into Settlement Agreements with several
creditors. These agreements provided for immediate payment to the creditors at
an amount less than currently due. Liability balances totaling $759,176 existing
at December 31, 1999 were settled for payments made in 2000 in the aggregate of
$168,164. Also, in connection with the Settlement Agreement, one creditor was
paid a deposit of $50,000 for a future commitment to purchase $100,000 of
Thymosin beta 4.
Exercise of Consultants' Options
--------------------------------
In February 2000, stock options granted to the four consultants (see note 1)
were exercised. Each consultant exercised the 1,875,000 options at $.04 per
share with payment made in the form of notes receivable from each consultant in
the amount of $75,000. The notes bear interest at 6.09% with interest payable
quarterly beginning June 1, 2000. The notes mature in February 2003.
32
<PAGE>
ALPHA 1 BIOMEDICALS, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 1999 and 1998
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
Third Quarter
Year ended Year ended December 31, 1999
-------------------------------------------------
December 31, 1998 First Quarter Second Quarter Third Quarter
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Consulting $ 750 $ - $ - $ -
Royalties - - - -
Total revenue 750 - - -
---------------- --------- ------------- --------------
EXPENSES
Research and development 13,142 - - -
General and administrative 120,203 7,206 - 17,236
Stock option compensation - - - 150,000
---------------- --------- ------------- -------------
Total operating expenses 133,345 7,206 - 167,236
---------------- --------- ------------- -------------
Total operating loss (132,595) (7,206) - (167,236)
---------------- --------- ------------- -------------
Other income (expense)
Interest income - - 18 -
Gain on sale of royalty rights 1,930,000 - - 89,589
Realized gain (loss) on sale of investments - (365,868) (239,735) 23,544
Interest expense (6,080) (4,281) (3,881) (3,881)
Other income (expense) - - 389 -
---------------- --------- ------------- -------------
Total other income (expense) 1,923,920 (370,149) (243,209) 109,252
---------------- --------- ------------- -------------
Income (loss) before extraordinary item 1,791,325 (377,355) (243,209) (57,984)
---------------- --------- ------------- -------------
Extraordinary item - settlement of vendor payables 657,756 - - -
---------------- --------- ------------- -------------
Net income (loss) $ 2,449,081 $(377,355) $ (243,209) $ (57,984)
================ ========= ============= =============
Basic and diluted income (loss) per common $ 0.14 $ (0.03) $ (0.02) $ (0.01)
Extraordinary item - settlement of vendor payables $ 0.06 $ - $ - $ -
---------------- --------- ------------ -------------
Basic and diluted income (loss) per common share $ 0.20 $ (0.03) $ (0.02) $ (0.01)
================ ========= ============ ============
</TABLE>
(1)Loss per share calculations for each of the quarters are based on the
weighted average shares outstanding for each period. The sum of the quarters
may not necessarily be equal to the full year loss per share amounts.
33
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by Item 304 of Regulation S-B regarding the change
in the Company's accountants was previously filed as part of the Company's
Current Report on Form 8-K filed on May 2, 2000, as amended on Form 8-K/A filed
on May 11, 2000. There were no disagreements with the accountants required to be
disclosed in such report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT
Directors and Executive Officers
The Company's Board of Directors consists of three directors, Allan L.
Goldstein, Joseph C. McNay and Albert Rosenfeld. Directors are elected annually
to serve one-year terms. The Company's executive officers are Dr. Goldstein,
Chairman, President and Chief Executive Officer, and Albert Rosenfeld,
Secretary-Treasurer.
The following table sets forth, with respect to each director and executive
officer, his name and age, the year in which he first became a director of the
Company, and his principal occupation and business experience during the past
five years.
<TABLE>
Name, Year First
Became Director of Principal Occupation and
Company Age Business Experience
------------------------ ------ -----------------------------------
<S> <C> <C>
Allan L. Goldstein, 1982 63 Chairman of the Board of the Company since 1982; Chief
Executive Officer of the Company from 1982 to 1986, and
1999 to present; Chief Scientific Advisor of the Company
from 1982 to present; Professor and Chairman of
Department of Biochemistry and Molecular Biology at The
George Washington University School of Medicine and
Health Sciences from 1978 to present.
Joseph C. McNay, 1987 66 Chairman and Director of Essex Investment Management
Company, Inc., a registered investment advisor, from 1976
to present; Director of Softech, Inc. and MPSI System, Inc.
</TABLE>
34
<PAGE>
<TABLE>
Name, Year First
Became Director of Principal Occupation and
Company Age Business Experience
------------------------ ------ -----------------------------------
<S> <C> <C>
Albert Rosenfeld, 1982 79 Secretary - Treasurer of the Company from 1999 to
present; Consultant on Future Programs for March of
Dimes Birth Defect Foundation from 1973 to present;
Adjunct Professor, Department of Human Biological
Chemistry and Genetics at University of Texas Medical
Branch, from 1974 to 1998; frequent author and lecturer on
scientific matters.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of the Company's common stock, to report to the SEC their initial ownership
of the Company's common stock and any subsequent changes in that ownership.
Specific due dates for these reports have been established by the SEC and the
Company is required to disclose any late filings or failures to file.
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to the Company's executive officers
and directors during 1999 were met except for the inadvertent failure to report
on Form 5 one transaction by Dr. Goldstein.
35
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table summarizes for the years indicated the compensation
paid by the Company to each person who served as the Company's Chief Executive
Officer during 1999. No other executive officer of the Company earned a salary
and bonus for 1999 in excess of $100,000.
<TABLE>
Long Term
Annual Compensation Compensation Awards
Other Restricted
Annual Stock All Other
Fiscal Compensation Award Options Compen-
Name and Principal Position Year Salary Bonus ($)(2) ($) (#) sation
------------------------------------ ---------- ------------- ----------- ----------------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Allan L. Goldstein, President and 1999 --- --- --- --- 1,875,000 ---
Chief Executive Officer(1) 1998 --- --- --- --- --- ---
1997 --- --- --- --- 455,121 ---
Michael L. Berman 1999 $ 22,816 --- --- --- --- ---
Former Chief Executive Officer 1998 104,617 --- --- --- --- ---
1997 149,820 --- --- --- 682,682 $2,960
</TABLE>
-----------------
(1) Dr. Goldstein was appointed Chief Executive Officer upon the resignation of
Dr. Berman in July 1999.
(2) Neither Dr. Goldstein nor Dr. Berman received personal benefits or
perquisites which exceeded the lesser of $50,000 or 10% of his salary and
bonus.
The following table sets forth certain information concerning grants of
stock options to Drs. Goldstein and Berman during fiscal 1999.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of % of Total
Shares Options
Underlying Granted to Per Share
Options Employees in Exercise Expiration
Granted Fiscal Year Price Date
==================================================================================================
<S> <C> <C> <C> <C>
Allan L. Goldstein 1,875,000 100% $0.04 08/15/09
Michael L. Berman --- --- --- ---
====================== =================== ================== ================= ==================
</TABLE>
36
<PAGE>
The following table provides information as to the value of the stock
options held by Drs. Goldstein and Berman as of December 31, 1999 and the values
realized by them upon the exercise of stock options during fiscal 1999.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares
Name Acquired Value
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
(#) ($) (#) (#) ($) ($)
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Allan L. Goldstein --- $--- 1,875,000 --- $---(1) $---
Michael L. Berman --- --- --- --- --- ---
==========================================================================================================================
</TABLE>
(1) An option is in-the-money if the exercise price of the option is less
than the market value of the stock underlying the option. None of Dr.
Goldstein's options were in-the-money as of December 31, 1999.
Directors' Compensation
Prior to the Company's suspension of operations in 1998, non-employee
directors (Directors McNay and Rosenfeld) were each paid an annual fee of $5,000
and a fee of $1,250 for each meeting attended in person, and were reimbursed for
expenses incurred in attending Board meetings. Upon the suspension of
operations, the Company discontinued paying director fees. It is uncertain when
the Company will reinstitute the payment of director fees. Each of Directors
McNay and Rosenfeld are owed director fees earned prior to the suspension of
operations amounting to $13,916. It is uncertain when these amounts will be paid
and whether these amounts will be paid with interest.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table shows, as of October 23, 2000, the beneficial ownership
of the Company's common stock by:
o any persons or entities known by management to beneficially
own more than five percent of the outstanding shares of
Company common stock;
o each director of the Company; and
o all of the executive officers and directors of the Company as
a group.
37
<PAGE>
The persons named in the following table have sole voting and
dispositive powers for all shares of common stock shown as beneficially owned by
them, subject to community property laws where applicable and except as
indicated in the footnotes to the table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock subject to
outstanding options, warrants or other rights to acquire held by a person that
are currently exercisable or exercisable within 60 days after October 23, 2000
are included in the number of shares beneficially owned by the person and deemed
outstanding shares for purposes of calculating the person's percentage
ownership. These shares are not, however, deemed outstanding for the purpose of
computing the percentage ownership of any other person. As of October 23, 2000,
there were 19,477,429 shares of Company common stock outstanding.
<TABLE>
Percent of
Beneficial Common Stock
Name of Beneficial Owner Ownership Outstanding
----------------------------------------------------------------- ----------------------- -------------------
<S> <C> <C>
Roger H. Samet 997,050(1) 5.04%
J. J. Finkelstein 1,875,000(2) 9.63
Richard J. Hindin 1,885,000(3) 9.68
Sidney J. Silver 1,875,000(4) 9.63
Allan L. Goldstein, Chairman, President and Chief 2,342,491(5) 12.03
Executive Officer
Michael L. Berman, 89,450(6) 0.46
Former Chief Executive Officer
Joseph C. McNay, Director 792,000(7) 4.03
Albert Rosenfeld, Director, Secretary and Treasurer 25,100(8) 0.13
All executive officers and directors as a group (3 persons) 3,159,591(9) 16.06
----------
</TABLE>
(1) As reported by Mr. Samet on Amendment No. One to a Schedule 13D filed with
the SEC on February 24, 1999. Mr. Samet reported sole voting and
dispositive powers as to all shares listed. Included among the shares
listed are 292,050 shares which Mr. Samet has the right to acquire pursuant
to Class D warrants issued to him by the Company. Mr. Samet's address is
254 East 68th Street, #29B, New York, NY 10021.
(2) As reported by Mr. Finkelstein on a Schedule 13D filed with the SEC on
November 7, 2000. The address for Mr. Finkelstein is c/o Alpha 1
Biomedicals, Inc., 3 Bethesda Metro Center, Suite 700, Bethesda, Maryland
20814.
(3) As reported by Mr. Hindin on a Schedule 13D filed with the SEC on November
7, 2000. The address for Mr. Hindin is 407 Chain Bridge Road, McLean,
Virginia 22101.
(4) As reported by Mr. Silver on a Schedule 13D filed with the SEC on November
7, 2000. The address for Mr. Silver is c/o Silver, Freedman & Taff, L.L.P.,
1100 New York Avenue, N.W., Washington, D.C. 20005.
(5) As reported by Dr. Goldstein on a Schedule 13D filed with the SEC on
November 7, 2000. Consists of (i) 2,249,285 shares owned directly by Dr.
Goldstein over which he has sole voting and dispositive powers; and (ii)
93,206 shares held by Dr. Goldstein's wife with respect to which Dr.
Goldstein shares voting and dispositive powers. The address for Dr.
Goldstein is c/o Alpha 1 Biomedicals, Inc., 3 Bethesda Metro Center, Suite
700, Bethesda, Maryland 20814.
38
<PAGE>
(6) Consists of (i) 68,000 shares directly owned by Dr. Berman over which he
has sole voting and dispositive powers; and (ii) 21,450 shares which Dr.
Berman has the right to acquire pursuant to the exercise of Class D
warrants. The address for Dr. Berman is c/o Alpha 1 Biomedicals, Inc., 3
Bethesda Metro Center, Suite 700, Bethesda, Maryland 20814.
(7) Consists of (i) 612,000 shares owned directly by Mr. McNay over which he
has sole voting and dispositive powers; (ii) 15,000 shares which Mr. McNay
has the right to acquire through the exercise of stock options that are
currently exercisable; and (iii) 165,000 shares which Mr. McNay has the
right to acquire pursuant to the exercise of Class D warrants. The address
for Mr. McNay is c/o Alpha 1 Biomedicals, Inc., 3 Bethesda Metro Center,
Suite 700, Bethesda, Maryland 20814.
(8) Consists of (i) 10,100 shares owned directly by Mr. Rosenfeld over which he
has sole voting and dispositive powers; and (ii) 15,000 shares which Mr.
Rosenfeld has the right to acquire through the exercise of stock options
that are currently exercisable. The address for Mr. Rosenfeld is c/o Alpha
1 Biomedicals, Inc., 3 Bethesda Metro Center, Suite 700, Bethesda, Maryland
20814.
(9) Consists of (i) 2,871,385 shares owned directly by all directors and
executive officers of the Company as a group; (ii) 30,000 shares which all
directors and executive officers as a group have the right to acquire
through the exercise of stock options that are currently exercisable; (iii)
93,206 shares owned by family members of all directors and executive
officers as a group; and (iv) 165,000 shares which all directors and
executive officers as a group have the right to acquire pursuant to the
exercise of Class D warrants. Does not include shares held by Dr. Berman,
the Company's former Chief Executive Officer.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loan to Dr. Goldstein
In May 1994, the Company extended a loan in the amount of $149,000 to
Dr. Goldstein for the purpose of enabling Dr. Goldstein to meet a margin call on
a brokerage account collateralized by Company common stock 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 sell 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 second 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. The Company
suspended operations in 1998 and principal and interest payments by Dr.
Goldstein ceased during and subsequent to the suspension of operations. As of
December 31, 1999, the balance owed by Dr. Goldstein was $69,674, which has been
fully reserved by the Company as a doubtful collection. In July 2000, the
Company agreed to waive all prior and subsequent interest during and after
suspension of the Company's operations and approved a payment plan for the
$69,674 owed by Dr. Goldstein to the Company in 36 equal monthly installments of
$1,935.38. In August 2000, the Company agreed to pay Dr. Goldstein a consulting
fee of $5,000 per month, $3,000 of which is paid in cash and the remaining
$2,000 of which is retained by the Company and applied toward repayment of the
loan.
39
<PAGE>
Consulting Agreement
On August 16, 1999, the Company entered into an agreement with Dr.
Goldstein, J.J. Finkelstein, Richard J. Hindin and Sidney J. Silver to serve as
financial and business consultants to the Company and manage the Company's
affairs on an interim basis. This agreement was executed following suspension of
the Company's operating activities due to insufficient funds. The agreement
provides for the consultants to prepare a business plan specifying a proposed
business strategy for the Company and evaluate financing and recapitalization
proposals. The agreement also provides for the consultants to, among other
things: work with the Company's creditors to eliminate or restructure its debts;
work with governmental agencies to ensure regulatory compliance and allow
continuation of the Company's business; recruit necessary management for the
Company; and negotiate with companies interested in licensing or other business
and financial relationships with the Company.
In consideration for services provided to the Company, each of the
consultants was granted an option to purchase 1,875,000 shares of Company common
stock at an exercise price of $0.04 per share, the then-fair market value. In
February 2000, each consultant exercised his option in full. The Company
accepted from each consultant as payment of the $75,000 exercise price a note
payable to the Company in the amount of $75,000, accruing interest at 6.09% per
annum and payable quarterly for 36 months beginning June 1, 2000. Each note is
secured by the shares of Company common stock issued upon exercise of the
consultant's option. Mr. Finkelstein, who is responsible for performing certain
operating functions of the Company, also receives a monthly fee of $8,000. In
addition, as noted above, Dr. Goldstein is paid a consulting fee of $5,000 per
month. Mr. Silver is a partner in the law firm of Silver, Freedman & Taff,
L.L.P. This firm has represented the Company in a variety of legal matters,
including the negotiation of settlements with certain creditors and agreements
with certain other parties.
40
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
Exhibit No. Description of Exhibit Reference*
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of Company Exhibit 3.1 to Registration Statement
No. 33-9370, Amendment No. 1 (filed
11/26/86)
3.2 Amendment to Restated Certificate of Incorporation of Company Exhibit 3.2 to the Company's
Transitional Report on Form 10-K,
File No. 1-15070 (filed 3/18/91)
3.3 Bylaws of Company Exhibit 3.2 to Registration Statement
No. 33-9370 (filed 10/8/86)
3.4 Amendment No. 1 to Bylaws of Company adopted 8/11/89 Exhibit 4.7 to Registration Statement
No. 33-34551, Amendment No. 3 (filed
6/21/90)
3.5 Amendment No. 2 to Bylaws of Company Exhibit 4.8 to Registration Statement
adopted 6/18/90 No. 33-34551, Amendment No. 3 (filed
6/21/90)
3.6 Amendment No. 3 to Bylaws of Company Exhibit 3.6 to the Company's
adopted 11/30/90 Transitional Report on Form 10-K, File
No. 1-15070 (filed 3/18/91)
4.1 Form of Stock Certificate Exhibit 4.1 to Registration
Statement No. 33-9370,
Amendment No. 1 (filed
11/26/86)
4.2 Rights Agreement, dated as of April 29, 1994, Exhibit 1 to the Company's
between the Company and American Stock Current Report on Form 8-K, File No.
Transfer & Trust Company, as Rights Agent 1-15070 (filed May 2, 1994)
4.3 Warrant Agreement, dated March 12, 1997 Exhibit 4.3 to the Company's Annual
Report on Form 10-K, File No.
1-15070 (filed 3/31/97)
4.4 Warrant Agreement, dated July 7, 1997 Exhibit 4.4 to the Company's Annual
Report on Form 10-K/A, File No. 1-
15070 (filed 5/13/98)
10.1 Material Transfer Agreement-Cooperative Research and Filed herewith
Development Agreement, between the U.S. Public Health Service
and the Company
10.2 Settlement Agreement and Mutual Release, dated March 17, 2000, Filed herewith
between the Company and Bachem Biosciences, Inc.
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
10.3 Consulting Agreement, dated August 16, 1999, among the Exhibit 99.2 to the Company's Current
Company, Allan L. Goldstein, J.J. Finkelstein, Richard J. Hindin Report on Form 8-K, File No. 1-15070
and Sidney J. Silver (filed 11/09/99)
10.4 Amended and Restated Directors Stock Option Exhibit 10.25 to the
Plan Company's Annual Report on Form
10-K, File No. 1-15070 (filed 3/26/93)
10.5 2000 Stock Option and Incentive Plan Filed as an Appendix to the Company's
preliminary proxy materials, File No. 1-
15070 (filed 9/29/00)
10.6 Lease Agreement, dated February 10, 1993, Exhibit 10.28 to the Company's
between the Company and John Arrillaga, Trustee, and Richard T. Annual Report on Form 10-K, File No.
Perry, Trustee 1-15070 (filed 3/26/93)
(Sunnyvale, California lease)
10.7 Lease Agreement Amendment Number 1, dated Exhibit 10.24 to the
September 1, 1993, and Amendment Number 2, Company's Annual Report on Form
dated December 27, 1993 (Sunnyvale, 10-K, File No.
California lease) 1-15070 (filed 3/28/94)
10.8 Lease Agreement Amendment Number 3, dated Exhibit 10.28 to the
April 19, 1994 (Sunnyvale, California Lease) Company's Annual Report on
Form 10-K, File No. 1-15070
(filed 3/31/95)
10.9 Assignment of Lease, dated March 22, 1995 Exhibit 10.24 to the
from the Company to Scios Nova, Inc. Company's Annual Report on
(Sunnyvale, California Lease) Form 10-K, File No. 1-15070
(filed 3/31/95)
10.10 Lease and Service Agreement, dated August 24, 1999, between Filed herewith
VANTAS, 3 Bethesda Metro, Inc. and the Company (Bethesda,
Maryland lease)
10.11 Unit Purchase Agreement dated March 12, 1997 Exhibit 10.25 to the Company's Annual
Report on Form 10-K, File No.
1-15070 (filed 3/31/97)
10.12 Registration Rights Agreement, dated March 12, 1997 Exhibit 10.26 to the
Company's Annual Report on
Form 10-K, File No. 1-15070
(filed 3/31/97)
23 Consent of Reznick Fedder & Silverman, P.C. Filed herewith
27 Financial Data Schedule Filed herewith
99.1 Information Regarding Forward-Looking Statements Filed herewith
99.2 Letter to Stockholders Filed herewith
</TABLE>
-----------------
* Except where noted, the exhibits referred to in this column have
heretofore been filed with the Securities and Exchange Commission as
exhibits to the documents indicated and are hereby incorporated by
reference thereto. The Registration Statements referred to are
Registration Statements of the Company.
42
<PAGE>
(b) Reports on Form 8-K
A Current Report on Form 8-K dated October 25, 1999 was filed by the
Company on November 9, 1999 (reporting under Items 5 and 7).
43
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ALPHA 1 BIOMEDICALS, INC.
(Registrant)
By: /s/ Allan L. Goldstein
-----------------------
Allan L. Goldstein
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ Allan L. Goldstein Chairman of the Board, President, November 8, 2000
------------------------ Chief Executive Officer and
Allan L. Goldstein Director
/s/ Joseph C. McNay November 8, 2000
------------------------ Director
Joseph C. McNay
/s/ Albert Rosenfeld Director, Secretary and Treasurer November 8, 2000
------------------------
Albert Rosenfeld
44
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
--------------------------------------------------------------------------------
10.1 Material Transfer Agreement-Cooperative Research and
Development Agreement, between the U.S. Public Health
Service and the Company
10.2 Settlement Agreement and Mutual Release, dated March 17,
2000, between the Company and Bachem Biosciences, Inc.
10.10 Lease and Service Agreement, dated August 24, 1999, between
VANTAS, 3 Bethesda Metro, Inc. and the Company
23 Consent of Reznick Fedder & Silverman, P.C.
27 Financial Data Schedule
99.1 Information Regarding Forward-Looking Statements
99.2 Letter to Stockholders
45
