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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For Fiscal Year Ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition Period From to
Commission File Number 0-20023
ALPHA-BETA TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2997834
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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ONE INNOVATION DRIVE
WORCESTER, MA 01605
(508) 798-6900
(Address, including zip code, and telephone number, including area code of
Registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
PREFERRED STOCK, PURCHASE RIGHTS
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was $174,790,749 as of March 10, 1997.
On March 10, 1997, the Registrant had outstanding 16,727,423 shares of Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement (the "Definitive Proxy
Statement") to be filed with the Securities and Exchange Commission relative to
the 1996 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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PART I
ITEM 1. BUSINESS
Alpha-Beta is developing novel classes of pharmaceutical products composed
of complex carbohydrates. The Company's lead product, Betafectin(R) PGG-glucan,
is a proprietary carbohydrate polymer. The Company has recently completed
patient enrollment in its Phase III clinical study of Betafectin for the
prevention of serious infections in gastrointestinal surgery patients at high
risk for post-operative infection. The Company is also conducting a Phase II
clinical study to evaluate the ability of Betafectin to prevent serious
infections in patients undergoing bowel resections for Inflammatory Bowel
Disease (IBD). In addition, Alpha-Beta has implemented an integrated drug
discovery and research plan in which it is applying its carbohydrate expertise
for new infectious disease applications. The Company believes that its expertise
in carbohydrate engineering can be applied to develop a broad range of
pharmaceutical products.
BACKGROUND
CARBOHYDRATES. Carbohydrates are a promising class of biological molecules
being explored for their therapeutic potential. Carbohydrate polymers, otherwise
known as polysaccharides, are molecules in which the repeating units or building
blocks are sugars. The number and composition of the repeating units and the
linkages joining them define their chemical structure and control their
physical, functional and biological properties. Small structural variations can
fundamentally change the properties of carbohydrate polymers. Carbohydrates play
critical roles in various biological functions, such as control of infection and
inflammation.
The Company is utilizing its proprietary carbohydrate engineering
technology to develop modified carbohydrates for therapeutic applications. The
Company's drug discovery programs focus on identifying candidate compounds,
understanding their structure-function relationships, optimizing their
biological activity, genetically engineering microorganisms to produce
proprietary carbohydrate compounds with desired structures and functions and
developing efficient production and purification techniques. The Company is
utilizing its technology to develop products derived from SS-glucan, a
carbohydrate polymer composed of glucose, for the prevention and treatment of
infections.
INFECTIONS AND IMMUNE RESPONSE. The human immune system is the body's
primary defense mechanism against infection and functions through a complex and
highly evolved interplay of cells and biochemical mediators. White blood cells
known as neutrophils and monocytes play a central role in the host defense
against infection caused by bacteria, fungi and viruses. These cells readily
migrate to the site of infection, where they actively ingest and destroy
microorganisms. Neutrophils and monocytes also produce a diverse array of
biochemical mediators such as cytokines, IL-1, TNF and various growth factors
that contribute further to the host defense responses. These mediators can,
however, cause unwanted side effects such as high fever, inflammation, wasting
disease and organ failure.
When functioning normally, this defense mechanism is effective in detecting
and mobilizing the appropriate responses to clear invading pathogens from the
body. The immune system, however, can be compromised by numerous factors,
including surgery, malnutrition and microbial challenge that overwhelm the
normal immune response. In addition, suppression of the immune system caused by
disease or chemotherapy may significantly increase the risk of infection.
To date, therapeutic agents for the prevention and treatment of infection
have consisted primarily of antibiotics. While antibiotics reduce the number of
pathogens, successful anti-infective therapy also depends upon the ability of
the immune system to eliminate residual pathogens. Additionally, antibiotics
only work against specific subsets of infectious agents and become considerably
less effective with continued use due to acquired resistance by bacteria.
Consequently, the Company believes that there is an unmet need for new anti-
infective therapies.
Immunomodulatory agents that selectively enhance host defense responses to
infectious agents would provide a significant benefit to the treatment of
infection. Interferon gamma and the colony-stimulating factors, G-CSF and
GM-CSF, are examples of immunomodulators that are currently used clinically to
treat and prevent infectious diseases resulting from immunosuppression
associated with cancer treatment. These
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agents broadly stimulate the immune system and elicit non-specific antimicrobial
host responses. However, the clinical utility of these drugs as anti-infective
agents has been limited by their relatively narrow therapeutic window. For
example, many of these agents are active over a small dose range and induce
toxic inflammatory effects by stimulating the production of cytokines.
Therefore, there continues to be a significant need for therapeutics that will
selectively amplify white blood cell microbicidal responses without triggering
undesirable inflammatory reactions.
PRODUCTS
BETAFECTIN
Betafectin is a SS-glucan polymer which has been structurally modified to
bind to a specific cellular receptor and activate a desired subset of immune
responses. Betafectin acts by priming the microbicidal activities of neutrophils
and monocytes, as well as increasing their number and infection-fighting
activity. However, unlike other immunomodulatory compounds, including
naturally-occurring SS-glucans, Betafectin does not stimulate the production of
biochemical mediators, such as IL-1 and TNF, that can cause undesirable side
effects such as inflammation and toxicity. In addition to the initial clinical
indications for Betafectin described below, the Company continues to pursue
preclinical studies to expand the potential utility of Betafectin to other
indications.
In February 1997, the Company completed patient enrollment in its pivotal
Phase III clinical trial for Betafectin. This double-blind, placebo-controlled
trial has been conducted at 40 clinical sites in the United States and enrolled
1,249 patients. The process of collecting, verifying and analyzing the clinical
data is expected to take several months and results of the study are expected to
be available at the end of the second quarter. The study is designed to assess
the safety and efficacy of two dose levels of Betafectin in patients undergoing
gastrointestinal surgery who are at high risk of post-operative infection. The
primary endpoint of the study is the efficacy of Betafectin in reducing the
percentage of patients who develop serious infections following surgery.
Secondary endpoints include length of hospital stay, time in ICU and extent of
antibiotic use. To minimize variability, standardized antibiotic prophylaxis
regimens were used at all sites and on all patients. In addition to the
necessary data for regulatory approval, the Company believes that the study has
been designed to provide a strong pharmacoeconomic justification for the use of
Betafectin.
The prevention of infection is an important medical objective. Each year in
United States hospitals, there are approximately 2.2 million reported cases of
infections, which are estimated to add more than $4.5 billion to the cost of
treating patients. It is estimated that two-thirds of these infections and their
incremental cost are associated with surgery. Of the 28 million surgeries
performed in the United States each year, more than 4 million are performed on
the gastrointestinal tract. Major gastrointestinal surgeries where patients are
at high risk of developing an infection, such as colo-rectal, liver, biliary and
small bowel surgery, amount to over 830,000 cases annually. Infections in this
group of patients significantly compromise patient outcomes, add to their length
of stay in the hospital and increase health care costs in the United States by
an estimated $1.4 billion annually. The Company's Phase III clinical trial was
specifically designed to address this group of patients who are at high risk of
post-surgical infection following major gastrointestinal surgery.
In addition to the pivotal Phase III trial of Betafectin, the Company
commenced a 240 patient Phase II study of Betafectin in patients undergoing
surgery for bowel resections for inflammatory bowel disease (IBD) at the end of
1996. Patients with IBD who undergo bowel resections are at high risk of
developing post-operative infection, despite the use of prophylactic
antibiotics. The risk of infection is also increased because IBD patients are
immunosuppressed from steroid and other drug therapies. This double-blind,
placebo-controlled study in the United States is designed to assess the safety
and effectiveness of Betafectin compared with placebo in preventing serious
infections in patients with IBD (ulcerative colitis or Crohn's Disease) who are
undergoing small bowel or colon resections. The primary endpoint of the study is
the efficacy of Betafectin in reducing the proportion of patients who develop
serious infections following surgery. Secondary endpoints include hospital
length of stay, ICU length of stay and days of non-prophylactic antibiotic use.
A standard antibiotic prophylaxis is being used by all sites, on all patients.
An interim analysis of safety and effectiveness from this trial is planned
during the fourth quarter of 1997, and enrollment into the trial is expected to
be completed in the first half of 1998.
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RESEARCH & DEVELOPMENT
INTEGRATED DRUG DISCOVERY AND RESEARCH PLAN
In 1996, the Company underwent an extensive review of its research and
development (R&D) programs and infrastructure. Each program was evaluated on the
basis of scientific merit, product potential, proprietary position and market
potential. Additionally, Alpha-Beta's established technical strengths and
manufacturing capabilities were considered. This effort resulted in an
integrated drug discovery and research plan that focuses the Company's R&D on
the discovery of new anti-infective drugs.
As a result of this strategic planning review, Alpha-Beta terminated its
Betafectin hematopoietic program. This decision reflects the Company's
assessment of the increasingly competitive market for hematopoietic agents and
the Company's decision to focus its resources on infectious disease drug
discovery.
Alpha-Beta's integrated drug discovery and research plan involves two
distinct anti-infective approaches: immunomodulatory drug discovery and
anti-microbial drug discovery. Immunomodulation is based on agents that enhance
the clearance of microorganisms by immune system cells. Anti-microbials focus on
direct inhibitors of fungal and bacterial cell wall biosynthesis.
Immunomodulatory Drug Discovery
Betafectin Receptor -- The Company has identified and characterized a novel
class of receptors on leukocytes that trigger human immune cell defenses in
response to Betafectin. These receptors have provided Alpha-Beta with
proprietary targets for the development of second generation immunomodulators.
The research showed that Betafectin binds to specific receptors on the surface
of human white blood cells and triggers the production of a family of cell
proteins (nuclear transcription factors) that control immune function.
Betafectin-treated white blood cells produce increased levels of reactive
oxygen, allowing them to kill bacteria more effectively. However, this pathway
does not involve the production of inflammatory cytokines which are associated
with potentially harmful side effects.
Polysaccharide A (PSA) -- The Company is evaluating a new class of
proprietary carbohydrate immunomodulators referred to as Polysaccharide A (PSA).
This program utilizes the Company's existing technical expertise in the
development of carbohydrate immunomodulators. PSA is a T-cell specific
immunomodulator that has been shown to significantly protect animals from
intra-abdominal abscess formation. In 1996, the Company confirmed that a
specific subset of T-cells are responsible for PSA's biological activity and
that human T-cells respond to PSA. In animal studies it was demonstrated that
PSA could be administered up to 24 hours after the infectious challenge and
still provide significant protection.
Abscess formation is an infectious complication associated with leakage of
colonic bacteria into the peritoneum. An abscess is a walled-off collection of
bacteria, lymphocytes, macrophages, neutrophils and fibrin that is not
effectively penetrated by antibiotics. Abscesses occur most prevalently
following "dirty" surgical procedures and are difficult to treat, often
requiring surgical intervention. PSA is produced from the bacterium Bacteroides
fragilis, a normal inhabitant of the human colon and the most frequently
isolated anaerobic species from human intra-abdominal abscesses. PSA is a four
sugar (tetrasaccharide) repeating unit with a unique charge structure that is
critical to its biological properties.
C1q Receptor -- In addition to the research performed on the Betafectin
receptor, the Company is researching new classes of proprietary anti-infection
drugs that target leukocyte receptors for C1q. C1q is a human plasma component
that interacts with infectious microbes and initiates their killing and
clearance from the body. Receptors for C1q, which are present on macrophages,
neutrophils and other cell types, play major roles in enhancing phagocytosis of
C1q coated microbes by these cells. In January of 1997, Alpha-Beta entered into
a two-year research collaboration with Dr. Andrea Tenner in the Department of
Molecular Biology and Biochemistry at the University of California, Irvine. The
goal of this project is to develop specific agents that regulate the clearance
of pathogens via the C1q receptor. Dr. Tenner's C1q research has produced a
series of recent scientific discoveries which formed the basis of a patent
application filed last November. Under this collaboration, Alpha-Beta is
developing C1q targeted agents.
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Anti-microbial Drug Discovery
The anti-microbial drug discovery program was initiated to identify
proprietary agents that inhibit fungal cell wall biosynthesis. The cell walls of
pathogenic fungi such as Candida albicans are composed of complex carbohydrates
that are cross-linked into a mesh that provides protection and structural
support for the growing fungus. Inhibition of fungal cell wall biosynthesis has
been demonstrated to be lethal to fungi and thus represents a validated
scientific approach to the discovery of novel anti-fungal drugs. The Company has
obtained unique technical expertise in fungal cell wall complex carbohydrates
developed through its SS-glucan research and Betafectin development programs.
Alpha-Beta intends to apply this expertise to develop novel anti-fungal agents
that target cell wall synthesis.
In February 1997, Alpha-Beta entered into a research agreement with
MycoTox, Inc., (Denver, Colorado), a privately held biotechnology firm, for the
discovery of novel anti-fungal drugs. Under the agreement, MycoTox will screen
small-molecule carbohydrate compounds generated by Alpha-Beta against its
proprietary library of antifungal targets. Alpha-Beta will retain all
commercialization rights to drug candidates that are identified under the
agreement.
Fungal infections have emerged as a major medical problem in recent years,
due to increasing numbers of patients with compromised immune systems as a
consequence of HIV infection, chemotherapy and immune-suppressing drugs for
conditions such as transplant rejection. Currently, few existing treatments are
available and resistant strains to many of these treatments have emerged.
All of the Company's products require governmental approvals for
commercialization which have not yet been obtained.
There can be no assurance that any of the Company's products will be
successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, obtain required regulatory approvals, be
capable of being produced in commercial quantities at reasonable costs or be
successfully marketed or that the Company will not encounter problems in
clinical trials that will cause the Company to delay or suspend product
development. None of the Company's products are expected to be commercially
available prior to 1998.
The testing, marketing and sale of human therapeutic products entail an
inherent risk of allegations of product liability, and there can be no assurance
that substantial product liability claims will not be asserted against the
Company.
For a discussion of research and development expenses over the last three
years, see the Results of Operations section in the Management's Discussion and
Analysis of Financial Condition and Results of Operation (Item 7).
PATENTS, TRADE SECRETS AND LICENSES
Proprietary protection for the Company's products, technology and process
is important to its business. The Company's policy is to protect its technology
by, among other things, obtaining patent protection for technology relating to
its business. The Company owns seven issued U.S. patents and has 15 U.S. patent
applications on file. The Company also has exclusive rights to eight U.S.
patents and two pending U.S. patent applications. Six of the patent applications
have corresponding applications on file outside of the U.S., including Europe,
Japan and certain other countries. All of these patents and pending applications
relate to the Company's carbohydrate engineering technology, including genetic
engineering techniques, proprietary microbial strains, production processes,
novel carbohydrate compositions and their therapeutic uses. The Company intends
to file additional patent applications relating to new developments or
improvements in its technology.
In addition, the Company has an exclusive, worldwide, royalty-bearing
license from the Massachusetts Institute of Technology to seven issued U.S.
patents. The Company also has a license from The Brigham and Women's Hospital
for discoveries relating to a SS-glucan receptor technology developed at The
Brigham and Women's Hospital. One issued U.S. patent relating to the
identification and characterization of one of the SS-
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glucan receptors and SS-glucan molecules and their use for the treatment of
immune system and inflammatory diseases has been exclusively licensed by the
Company under this agreement.
The Company has also entered into research and exclusive, worldwide,
royalty-bearing licensing agreements with The Brigham and Women's Hospital for
discoveries relating to capsular polysaccharide immunomodulator technology
developed at The Brigham and Women's Hospital. Pursuant to such agreements, two
pending U.S. applications and a corresponding foreign application relating to
such technology have been exclusively licensed to the Company.
The Company's success will depend, in part, on its ability to protect its
products and technology under United States and international patent laws and
other intellectual property laws. The Company believes that it owns or has the
right to use all proprietary technology necessary to manufacture and market its
products under development.
The Company also relies on trade secrets and proprietary know-how to
protect certain of its technologies and processes. To protect its proprietary
know-how, the Company's policy is to require all employees, consultants,
advisors and collaborators to enter into confidentiality agreements which
prohibit the disclosure of proprietary information to any third party or use of
proprietary information for commercial purposes. Employees of the Company also
agree to disclose and assign to the Company all methods, improvements,
modifications, developments, discoveries and inventions conceived of on Company
time, using Company property or which relate to the Company's business. There
can be no assurance, however, that the foregoing agreements will effectively
prevent disclosure of the Company's confidential information or provide
meaningful protection for the Company's confidential information if there is
unauthorized use or disclosure. Moreover, certain of the Company's academic
advisors and collaborators have not executed such agreements with the Company,
as this would limit their ability to conduct research and would violate
regulations set forth by their academic institutions.
GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the U.S. and other countries. In
the U.S., drugs and certain biological products are subject to rigorous FDA
regulation under the Federal Food, Drug and Cosmetic Act (the "FDCA"), and the
regulations promulgated thereunder, as well as other federal and state statutes
and regulations that govern, among other things, the testing, manufacture,
safety, efficacy, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products. Product development and approval within
this regulatory framework can take a number of years and involve the expenditure
of substantial resources. Any failure by the Company or its collaborators or
licensees to obtain regulatory approval, or any delay in obtaining such
approvals, could adversely affect the marketing of products being developed by
the Company, its ability to receive products or royalty revenues and its
liquidity and capital resources.
Depending on their characteristics, products may be classified as
"biologics" regulated under the Public Health Service Act and the FDCA, or may
be classified as non-biologic drugs regulated only under the latter act. The
Company believes that any carbohydrate-based products it develops which are
subject to regulation under the FDCA will be classified as biologics. The steps
required before a biologic may be marketed in the United States include (i)
preclinical laboratory tests, in vivo preclinical studies and formulation
studies, (ii) the submission and acceptance of an IND before commencing human
clinical testing, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the drug, and (iv) the submission and
approval of a Product License Application ("PLA") or, in the case of a
non-biologic, a New Drug Application ("NDA"), prior to any commercial sale or
shipment of the drug. In addition to obtaining FDA approval of the PLA for each
biologic product, an Establishment License Application ("ELA") may be required
by the FDA for the manufacturing facilities for some products, and the FDA must
confirm that good laboratory and clinical practices were maintained during
testing. Domestic manufacturing establishments are subject to inspection by the
FDA and must comply with the FDA's cGMP. To supply products for use in the
United
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States, foreign manufacturing establishments must comply with cGMP and are
subject to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.
Preclinical animal testing is generally conducted in the laboratory to
evaluate the potential safety and efficacy of a drug. Although the results of
preclinical testing used to support an application to begin clinical testing may
show the efficacy of a product tested in animals, subsequent clinical trials may
not demonstrate comparable effectiveness in humans. The results of these animal
studies are submitted to the FDA as part of the IND and PLA.
Clinical trials involve the administration of the investigational new drug
to healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials are conducted in accordance with good
clinical practices under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and, if applicable, the efficacy
criteria to be evaluated. Each protocol must be submitted to the FDA as part of
the IND. Further, each clinical study must be conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution at which the
study will be conducted. IRBs will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution. Typically, clinical evaluation involves a three phase process. In
Phase I, trials are conducted with a small number of human subjects to determine
the safety profile, the pattern of drug distribution and metabolism. In Phase
II, trials are conducted with a larger group of patients afflicted with a
specific condition in order to determine preliminary efficacy, optimal dosages
and expanded evidence of safety. In Phase III, large-scale, often multi-center,
comparative trials are conducted with patients afflicted with a target disease
in order to provide enough data for the statistical proof of safety and efficacy
required by the FDA and other regulatory authorities. The pertinent IRB or the
FDA may suspend clinical trials at any time they believe that the subjects or
patients are being exposed to an unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of a PLA. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The FDA may deny a PLA if applicable regulatory criteria are not satisfied,
require additional testing or information, or approve a PLA subject to
postmarketing testing and surveillance or limitations on the indicated uses for
which the subject drug may be marketed. Finally, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
In addition to a PLA, the Company may be required to file an ELA, approval
of which requires that the prospective manufacturer's facility and quality
control and manufacturing procedures are adequate. Regardless of the necessity
of an ELA, manufacturers must continue to expend time, monies and effort in the
area of production and quality control to ensure full compliance with
regulations. Manufacturing establishments, in the United States and elsewhere,
also are subject to inspection by or under the authority of the FDA and by other
federal, state and local agencies.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Resource Conservation and Recovery Act and other present and
potential future federal, state or local regulations. The Company's research and
development activities involve the controlled use of hazardous materials and
organisms. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result and any
such liability could exceed the resources of the Company.
For marketing outside the United States, the Company also is subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. In addition, the Company's products may be subject to export
control.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Changes in the U.S. health care system are likely
to have a substantial impact over time on the manner in
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which the Company conducts its business and markets its products and may impose
additional regulations governing the conduct of the Company's business. The
Company cannot predict what health care reform legislation, if any, will be
enacted.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. Many entities, including pharmaceutical and biotechnology
companies, academic institutions and research organizations are actively engaged
in the discovery and development of products in the therapeutic areas being
pursued by the Company. Certain of these entities have greater financial,
technical, manufacturing and marketing resources than the Company. These
entities also are becoming more active in seeking patent protection and
licensing arrangements to collect royalties for use of technology that they have
developed.
The Company anticipates that its carbohydrate-based products will compete
with immunomodulators and antibiotics. The Company's competitors may develop
technologies and products that are more effective than any which have been or
are being developed by the Company or that render the Company's technologies or
products obsolete or noncompetitive. The Company's ability to compete
effectively will depend on its ability to advance its core technology, maintain
a proprietary position on its technology and products, obtain required
governmental approvals on a timely basis, attract and retain key personnel and
develop effective products that can be manufactured cost-effectively and
marketed successfully. The Company expects that competition among products
approved for sales will be based, among other things, on efficacy, reliability,
product safety, price and patent position.
SALES AND MARKETING STRATEGY
The Company does not currently sell any commercial products and therefore
has no sales or distribution organization. The Company is pursuing marketing and
distribution alliances with pharmaceutical companies in order to advance the
worldwide development and commercialization of Betafectin. The Company plans to
choose among potential marketing partners, in part, on the basis of their
capacity to enhance market introduction and penetration of Betafectin and other
products. To date, the Company has retained all material commercial rights to
its technology and products. The Company plans to establish sales forces to
market those products and indications over which it retains marketing rights.
The Company has not entered into any distribution arrangements for its products
and there can be no assurance that the Company will be able to enter into such a
strategic relationship without undue delays or expenditures, establish sales and
distribution capabilities or gain market acceptance for its products.
The Company does not have experience in marketing, sales or distribution of
commercial products. To market any of its products, the Company must develop a
substantial marketing and sales force with technical expertise and the
capability to support distribution.
HUMAN RESOURCES
As of March 1, 1997, Alpha-Beta employed 170 people of whom 47 hold Ph.D.,
M.D. or other advanced degrees. Of its total work force, 70 people are engaged
in research and development activities, 65 in manufacturing and quality control,
21 in support and administrative functions and 14 in regulatory and clinical
affairs. The Company believes that it has been able to attract skilled and
experienced people, including many with prior experience at pharmaceutical or
biotechnology companies. Alpha-Beta's employees are not members of a union, and
the Company believes that its employee relations are good. All of the Company's
employees have signed confidentiality agreements.
SCIENTIFIC ADVISORS
The Company maintains relationships with Scientific Advisors who review the
Company's research, development and clinical activities and are available for
consultation with the Company's management and scientific staff relating to
their respective areas of expertise.
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ITEM 2. PROPERTIES
The Company intends to retain worldwide manufacturing rights to its
pharmaceutical products. The Company has a commercial-scale manufacturing
facility for Betafectin in Smithfield, Rhode Island. The plant is designed to
supply sufficient quantities of Betafectin for commercial introduction and to
comply with FDA current good manufacturing practices ("cGMP") and other
applicable regulations.
The Betafectin manufacturing process employs non-recombinant-yeast
fermentation, standard scaleable unit operations and aggressive chemical
extractions to purify the product. SS-glucan is present at high levels in yeast
and, due to its structural and functional resistance to extremes of temperature
and chemical treatment, is well suited to cost-effective purification processes.
On February 16, 1996, the Company exercised an option to purchase
approximately eight acres of contiguous land adjacent to its Betafectin
manufacturing facility in Smithfield, Rhode Island for $675,750. Although the
Company did not have specific development plans for the property, the option
would have expired on February 17, 1996 if it was not exercised by such date.
The terms of the option called for payment of the purchase price on May 15,
1996. On March 22, 1996, Alpha-Beta forfeited its rights to purchase the above
referenced property in exchange for an 18 month option to purchase approximately
seven different acres of contiguous land adjacent to its Betafectin
manufacturing facility for $550,000. The Company does not expect to exercise
this option or incur any substantial commitments with respect to the development
of that property prior to the receipt of the results from its Phase III trial of
Betafectin.
The Company's obligations with respect to the debt used to finance a large
part of the construction of the Betafectin commercial manufacturing facility are
secured by a mortgage on the facility and the real estate on which the facility
is located. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Liquidity and Capital Resources" (Item 7).
The Company's administrative offices, research laboratories and clinical
production facilities for Betafectin comprise approximately 56,000 square feet
of leased space in the Massachusetts Biotechnology Research Park located in
Worcester, Massachusetts.
To be successful, the Company's products will have to be manufactured in
commercial quantities, within regulatory requirements and at competitive costs.
The Company has no experience in commercial manufacturing and there can be no
assurance that the Betafectin plant will have sufficient capacity to satisfy the
Company's product requirements or that the Company will be able to manufacture
Betafectin at acceptable costs. At the present time, the Company is developing
improvements to its Betafectin manufacturing process which it believes will lead
to higher yields and a more cost-effective manufacturing process. Any such
improvements will require approval by the FDA.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
9
<PAGE> 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Common Stock (NASDAQ symbol ABTI) began trading publicly in the
over-the-counter market through the NASDAQ National Market System on October 16,
1992. The following table presents quarterly information on the price range of
Common Stock. This information indicates the high and low last sales price for
the Common Stock as reported by the NASDAQ National Market System for the
periods indicated. These prices do not include retail markups, markdowns, or
commissions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1st Quarter 1995............................................ 10 1/2 7
2nd Quarter 1995............................................ 7 3/4 4 3/4
3rd Quarter 1995............................................ 9 1/2 4 3/4
4th Quarter 1995............................................ 14 6 1/8
1st Quarter 1996............................................ 18 11 1/8
2nd Quarter 1996............................................ 13 3/8 8 3/8
3rd Quarter 1996............................................ 10 3/4 7 1/8
4th Quarter 1996............................................ 12 3/4 8 1/2
</TABLE>
As of March 10, 1997, there were approximately 315 holders of record of
Common Stock. On March 10, 1997 the closing price reported on the NASDAQ
National Market System for the Common Stock was $11.125.
Dividend Policy
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in the Company's
business. The payment of any future dividends will be determined by the Board of
Directors in light of conditions then existing, including the Company's
financial condition and requirements, future prospects, restrictions in
financing agreements, business conditions and other factors deemed relevant by
the Board of Directors. In addition, certain of the Company's current loan
agreements with its bank prohibit the payment of cash dividends on the Company's
capital stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 are derived from the Company's consolidated financial statements included
elsewhere in this Report, which have been audited by Arthur Andersen LLP,
independent public accountants. The selected consolidated financial data set
forth below as of December 31, 1992 and 1993 and for the year ended December 31,
1992 are derived from audited financial statements not included in this Report.
This data should be read in conjunction with the Company's consolidated
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ 583,723 $ 921,101 $ 1,985,500 $ 1,886,083 $ 2,683,859
Expenses:
Research and
development............. 4,555,218 10,333,076 18,334,882 20,268,160 25,675,118
General and
administrative.......... 2,461,813 3,709,021 4,879,203 4,523,091 4,699,333
Interest.................. 83,373 104,242 1,946,880 3,384,822 3,270,408
----------- ------------ ------------ ------------ ------------
Total Expenses....... 7,100,404 14,146,339 25,160,965 28,176,073 33,644,859
----------- ------------ ------------ ------------ ------------
Net loss....................... $(6,516,681) $(13,225,238) $(23,175,465) $(26,289,990) $(30,961,000)
=========== ============ ============ ============ ============
Net loss per common share...... $ (.84) $ (1.35) $ (1.99) $ (2.10) $ (1.92)
=========== ============ ============ ============ ============
Weighted average number of
common shares outstanding.... 7,715,051 9,771,556 11,637,225 12,523,026 16,106,147
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and and
marketable securities........ $24,808,429 $ 61,893,659 $ 41,455,322 $ 28,463,909 $ 40,585,436
Total assets................... 28,900,787 99,636,168 78,772,296 61,564,142 70,551,826
Term notes payable and capital
lease obligations............ 1,039,860 27,480,419 28,816,532 27,976,881 26,896,478
Deficit accumulated during
development stage............ (13,210,940) (26,436,178) (49,797,961) (75,840,456) (106,842,888)
Total stockholders' equity..... 26,150,286 71,152,379 48,166,382 32,118,666 40,782,819
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
Since its inception in March 1988, Alpha-Beta has been engaged in research
and development of new classes of carbohydrate products. Alpha-Beta has not
received significant revenues from the sale of its products and expects to incur
substantial operating losses for the next several years. As of December 31,
1996, the Company's accumulated deficit was $106,842,888.
RESULTS OF OPERATIONS
Years ended December 31, 1994, 1995 and 1996
Revenues to date have consisted primarily of interest earned from the
investment of cash balances and limited product sales to the research community.
The Company had revenues of $1,985,500 in the year ended December 31, 1994,
$1,886,083 in the year ended December 31, 1995 and $2,683,859 in the year ended
December 31, 1996. The decrease of $99,417 in the 1995 period resulted primarily
from less interest earned as a result of lower average cash balances in 1995, as
compared to the same period in 1994. The increase of $797,776 in the 1996 period
resulted primarily from additional interest earned on higher average cash
balances in 1996, as compared to the same period in 1995. The Company does not
expect to have significant operating revenues, other than interest income, prior
to the commercialization of its products.
The Company's research and development expenditures have increased each
year since its inception, increasing from $18,334,882 in 1994 to $20,268,160 in
1995 and to $25,675,118 in 1996. The increase in 1995 of $1,933,278 over 1994
was due primarily to higher depreciation and operating expenses related to the
validation of the Betafectin commercial manufacturing facility and increased
expenses related to the Company's clinical development of Betafectin. The
increase in 1996 of $5,406,958 over 1995 was due primarily to increased costs
related to the Company's clinical development of Betafectin. Research and
development expenditures constituted approximately 73%, 72%, and 76% of total
expenses for 1994, 1995, and 1996, respectively. Research and development
expenses are not expected to increase in 1997; however these expenses are
expected to increase in future years as a result of activities related to
performing clinical trials in other indications for Betafectin, the development
of additional products, and the operation of the commercial manufacturing
facility for research and development purposes.
The Company's general and administrative expenditures decreased from
$4,879,203 in 1994 to $4,523,091 in 1995 and increased to $4,699,333 in 1996.
The decrease in expenses in 1995 of $356,112 from 1994 was primarily due to a
decrease in consulting and recruiting expenses. The increase in expenses in 1996
of $176,242 over 1995 was primarily due to corporate development activities.
General and administrative expenses constituted approximately 19%, 16%, and 14%
of total expenses for 1994, 1995, and 1996, respectively. General and
administrative expenses are expected to increase in 1997 and in future years
reflecting the planned efforts to commercialize Betafectin.
Interest expense increased from $1,946,880 in 1994 to $3,384,822 in 1995
and decreased to $3,270,408 in 1996. Interest expense constituted approximately
8%, 12%, and 10% of total expenses for 1994, 1995, and 1996, respectively. The
increase in interest expense in 1995 of $1,437,942 over 1994 was primarily due
to these
11
<PAGE> 12
interest payments being expensed in 1995, whereas in 1994 these payments were
capitalized for 5 months as a part of the Betafectin commercial manufacturing
facility. The decrease from 1995 to 1996 was primarily due to lower loan
balances in 1996 as compared to 1995. For a more complete discussion of the
Rhode Island Port Authority and Economic Development Corporation ("RIPA") loan,
see "Liquidity and Capital Resources" and Note 3 to the Company's Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expansion primarily through the issuance of equity securities and borrowings,
the gross proceeds of which have been approximately $185,965,000. The Company
had approximately $40,585,000 in cash, cash equivalents, and marketable
securities at December 31, 1996, compared to approximately $28,464,000 at
December 31, 1995. The increase in cash for the year ended December 31, 1996,
was primarily due to the net proceeds of approximately $39,295,000 raised from
the Company's issuance and sale of 3,000,000 shares of common stock in March
1996. This increase was offset by approximately $25,852,000 used for operating
activities, and approximately $1,239,000 used to repay the Company's debt
obligations.
In February 1993, the Company entered into a $30,000,000 loan agreement
with RIPA to finance the Betafectin commercial-scale manufacturing facility. The
total cost of this facility was approximately $39,600,000. The Company
contributed all funds, in addition to the RIPA loan, necessary to complete the
facility.
The Company is required to make payments to RIPA of approximately $300,000
per month over a 20-year term. To finance its loan to the Company, RIPA issued
$30,000,000 of taxable revenue bonds. Borrowings under the loan accrue interest
at approximately 9.5% per annum and are secured by the Betafectin manufacturing
facility. The Company's obligation to repay the loan is subject to acceleration
if the Company fails to make any monthly debt service payments or if certain
events of default occur. The Company may also be required to repay the loan on
an accelerated basis over five years if the enabling legislation under which
RIPA issued the bonds used to fund the loan to the Company is eliminated without
an appropriate grandfathering provision, or if RIPA is subject to any bankruptcy
proceedings. The bonds mature through December 2024. The RIPA bonds are subject
to refinancing by RIPA on December 1, 1999 and the terms of the RIPA loan to the
Company are subject to adjustment in connection with such refinancing. If the
bonds cannot be successfully remarketed, the bank will become the owner of the
then outstanding principal amount of the bonds, and the interest rate will be
adjusted to the bank's base rate plus 2%.
Since inception, the Company has invested approximately $6,166,000 in
property and equipment, exclusive of costs related to the investment in the
Betafectin commercial manufacturing facility. The property and equipment have
been financed in large part by approximately $3,862,000 in loans, of which
approximately $1,038,000 was outstanding as of December 31, 1996.
The Company expects to incur substantial additional operating expenses in
1997 and in future years related to research, development, and clinical studies
of Betafectin and other products, as well as the establishment of commercial
manufacturing and sales and marketing capabilities. As of December 31, 1996, the
Company had working capital of approximately $37,240,000. The Company
anticipates that its existing capital resources will enable it to maintain its
current and planned operations and capital expenditures into the second quarter
of 1998. The Company's capital requirements will depend upon numerous other
factors, including the progress of the Company's research and development
programs, preclinical testing and clinical trials, the timing and cost of
obtaining regulatory approvals, and the costs associated with expanding
manufacturing and establishing sales and marketing capabilities. The Company may
raise additional funds prior to the commercialization of any of its products.
The Company may raise these funds through equity or debt financings, or
collaborative or other arrangements. There can be no assurance that additional
funds will be available on favorable terms or that the Company will enter into
collaborative or other arrangements. The Company's ability to raise additional
funds or to enter into collaborative or other arrangements may depend upon a
number of factors including the results of the Company's clinical development
programs and the overall market for biotechnology stocks.
12
<PAGE> 13
In February 1997, the Company completed patient enrollment into its Phase
III trial of Betafectin for the prevention of post-surgical infection among
patients undergoing gastrointestinal surgery. The Company is currently in the
process of collecting and verifying the clinical data. The statistical analysis
of the clinical data will begin once all of the data has been collected and
verified. The Company expects to unblind and announce the results of the Phase
III trial at the end of the second quarter of 1997, following the analysis of
the data.
In October 1996, the Company began a Phase II trial of Betafectin for the
prevention of serious infection in patients undergoing surgery for inflammatory
bowel disease (ulcerative colitis or Crohn's Disease). The principal endpoints
of the study, which is expected to enroll approximately 240 patients, are
similar to the Phase III trial. An interim analysis is planned during the fourth
quarter of 1997 and enrollment in the study is expected to be completed in the
first half of 1998.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual events and results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such difference include but are not limited to the following: the timing
of the collection, verification, and analysis of the clinical data for the
Company's Phase III trial; the results of the Company's Phase III trial and for
its other clinical development programs; the timing and adequacy of patient
accruals for the Company's Phase II trial for Betafectin; the results of the
interim analysis of the Company's Phase II trial; obtaining the requisite
regulatory approvals for the Company's products from the U.S. Food and Drug
Administration; the competitive environment and market conditions for the
biotechnology industry; and general economic conditions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of Alpha-Beta Technology,
Inc. and subsidiaries are included in this Form 10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. 14
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... 15
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1996 and for the period from March 2, 1988 (inception) to December 31,
1996................................................................................ 16
Consolidated Statements of Stockholders' Equity for each of the three years in the
period ended December 31, 1996 and for the period from March 2, 1988 (inception) to
December 31, 1996................................................................... 17
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and for the period from March 2, 1988 (inception) to December 31,
1996................................................................................ 18
Notes to Consolidated Financial Statements............................................ 19
</TABLE>
13
<PAGE> 14
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Alpha-Beta Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Alpha-Beta
Technology, Inc. (a Massachusetts corporation in the development stage) and
subsidiaries as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996 and for the period from
inception (March 2, 1988) to December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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-Beta Technology, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, and for the period from inception to December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 20, 1997
14
<PAGE> 15
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 10,120,843 $ 21,885,111
Marketable securities................................... 18,343,066 18,700,325
Other current assets.................................... 542,361 646,231
------------ -------------
Total current assets............................... 29,006,270 41,231,667
------------ -------------
PROPERTY AND EQUIPMENT, net.................................. 30,863,374 28,116,222
------------ -------------
OTHER ASSETS:
Restricted cash and cash equivalents.................... 381,347 --
Bond issuance costs, net................................ 1,128,998 1,068,383
Other................................................... 184,153 135,554
------------ -------------
Total other assets................................. 1,694,498 1,203,937
------------ -------------
$ 61,564,142 $ 70,551,826
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of term notes payable and capital lease
obligations........................................... $ 1,250,545 $ 1,119,226
Accounts payable........................................ 960,876 2,161,078
Accrued expenses........................................ 507,719 711,451
------------ -------------
Total current liabilities.......................... 2,719,140 3,991,755
------------ -------------
TERM NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of
current portion............................................ 26,726,336 25,777,252
------------ -------------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 7)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-authorized--1,000,000
shares, issued - none................................. -- --
Common stock, $.01 par value-authorized-30,000,000
shares, issued and outstanding--13,650,274 shares and
16,723,369 shares at December 31, 1995 and 1996,
respectively.......................................... 136,502 167,234
Additional paid-in capital.............................. 108,090,944 147,547,833
Deficit accumulated during the development stage........ (75,840,456) (106,842,888)
Deferred compensation................................... (268,324) (89,360)
------------ -------------
Total stockholders' equity......................... 32,118,666 40,782,819
------------ -------------
$ 61,564,142 $ 70,551,826
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 16
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 2, 1988
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
--------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES:
Interest...................... $ 1,965,919 $ 1,850,390 $ 2,546,193 $ 8,032,478
Other......................... 19,581 35,693 137,666 450,627
------------ ------------ ------------ -------------
Total revenues........... 1,985,500 1,886,083 2,683,859 8,483,105
------------ ------------ ------------ -------------
EXPENSES:
Research and development...... 18,334,882 20,268,160 25,675,118 83,768,791
General and administrative.... 4,879,203 4,523,091 4,699,333 22,680,387
Interest...................... 1,946,880 3,384,822 3,270,408 8,896,560
------------ ------------ ------------ -------------
Total expenses........... 25,160,965 28,176,073 33,644,859 115,345,738
------------ ------------ ------------ -------------
Net loss................. $ (23,175,465) $(26,289,990) $(30,961,000) $(106,862,633)
============ ============ ============ =============
NET LOSS PER COMMON SHARE (Note
2(i))............................ $ (1.99) $ (2.10) $ (1.92)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 2(i))... 11,637,225 12,523,026 16,106,147
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 17
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
CONVERTIBLE ---------------------- ADDITIONAL DURING THE
PREFERRED NUMBER OF $.01 PAID-IN DEVELOPMENT
STOCK SHARES PAR VALUE CAPITAL STAGE
----------- ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
INITIAL SALE OF COMMON STOCK AT INCEPTION
(March 2, 1988)............................................. $-- 1,006,500 $ 10,065 $ (9,150) $ --
Issuance of common stock at $1.64 per share, net of issuance
costs of $8,000........................................... -- 178,376 1,784 282,103 --
Issuance of common stock at $4.36 per share, net of issuance
costs of $15,478.......................................... -- 180,345 1,803 769,679 --
Initial public offering of common stock at $8.00 per share,
net of issuance costs of $2,006,015....................... -- 2,300,000 23,000 16,370,985 --
Conversion of all convertible preferred stock to common
stock..................................................... -- 5,166,348 51,664 20,622,790 --
Issuance of common stock from exercise of stock options at
prices ranging from $.009 to $15.75 per share............. -- 372,916 3,729 103,431 --
Issuance of common stock at $20.00 per share, net of
issuance costs of $1,452,850.............................. -- 1,000,000 10,000 18,537,150 --
Issuance of common stock at $30.00 per share, net of
issuance costs of $2,784,768.............................. -- 1,372,000 13,720 38,361,512 --
Grant of warrants to purchase common stock.................. -- -- -- 974,243 --
Grant of common stock....................................... -- 2,200 22 3,378 --
Deferred compensation related to grant of stock options and
restricted stock.......................................... -- -- -- 1,996,153 --
Compensation expense related to stock options and
restricted stock.......................................... -- -- -- -- --
Deferred compensation related to issuance of warrants....... -- -- -- 132,000 --
Compensation expense related to warrants.................... -- -- -- -- --
Net loss since inception.................................... -- -- -- -- (26,436,178)
---- ---------- -------- ------------ -------------
BALANCE, December 31, 1993................................... -- 11,578,685 115,787 98,144,274 (26,436,178)
Issuance of common stock from exercise of stock options at
prices ranging from $.09 to $15.75 per share.............. -- 91,258 912 110,304 --
Grant of common stock....................................... -- 2,970 30 63,801 --
Compensation expense related to stock options and
restricted stock.......................................... -- -- -- -- --
Deferred compensation adjustment related to termination of
stock options............................................. -- -- -- (48,423) --
Unrealized loss on marketable securities.................... -- -- -- -- (186,318)
Net loss.................................................... -- -- -- -- (23,175,465)
---- ---------- -------- ------------ -------------
BALANCE, December 31, 1994................................... -- 11,672,913 116,729 98,269,956 (49,797,961)
Issuance of common stock at an average of $4.53 per share,
net of issuance costs of $258,604......................... -- 838,438 8,384 3,533,010 --
Issuance of 65,000 shares of convertible preferred stock at
$100.00 per share, net of issuance costs of $363,988...... 650 -- -- 6,135,362 --
Conversion of 65,000 shares of convertible preferred
stock..................................................... (650) 1,090,224 10,902 (10,252) --
Issuance of common stock from exercise of stock options at
prices ranging from $.09 to $8.50 per share............... -- 37,985 380 85,963 --
Grant of common stock....................................... -- 10,714 107 77,162 --
Compensation expense related to stock options and
restricted stock.......................................... -- -- -- -- --
Deferred compensation adjustment related to termination of
stock options............................................. -- -- -- (257) --
Unrealized gain on marketable securities.................... -- -- -- -- 247,495
Net loss.................................................... -- -- -- -- (26,289,990)
---- ---------- -------- ------------ -------------
BALANCE, December 31, 1995................................... -- 13,650,274 136,502 108,090,944 (75,840,456)
Issuance of common stock at $14.00 per share, net of
issuance costs of $2,704,625.............................. -- 3,000,000 30,000 39,265,375 --
Issuance of common stock from exercise of stock options at
prices ranging from $.09 to $10.25 per share.............. -- 67,451 675 184,825 --
Grant of common stock....................................... -- 5,644 57 61,022 --
Compensation expense related to stock options and
restricted stock.......................................... -- -- -- -- --
Deferred compensation adjustment related to termination of
stock options............................................. -- -- -- (54,333) --
Unrealized loss on marketable securities.................... -- -- -- -- (41,432)
Net loss.................................................... -- -- -- -- (30,961,000)
---- ---------- -------- ------------ -------------
BALANCE, December 31, 1996................................... $-- 16,723,369 $167,234 $147,547,833 $(106,842,888)
==== ========== ======== ============ =============
<CAPTION>
TOTAL
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------ -------------
<S> <C<C> <C>
INITIAL SALE OF COMMON STOCK AT INCEPTION
(March 2, 1988)............................................. $ -- $ 915
Issuance of common stock at $1.64 per share, net of issuance
costs of $8,000........................................... -- 283,887
Issuance of common stock at $4.36 per share, net of issuance
costs of $15,478.......................................... -- 771,482
Initial public offering of common stock at $8.00 per share,
net of issuance costs of $2,006,015....................... -- 16,393,985
Conversion of all convertible preferred stock to common
stock..................................................... -- 20,674,454
Issuance of common stock from exercise of stock options at
prices ranging from $.009 to $15.75 per share............. 42,301 149,461
Issuance of common stock at $20.00 per share, net of
issuance costs of $1,452,850.............................. -- 18,547,150
Issuance of common stock at $30.00 per share, net of
issuance costs of $2,784,768.............................. -- 38,375,232
Grant of warrants to purchase common stock.................. -- 974,243
Grant of common stock....................................... -- 3,400
Deferred compensation related to grant of stock options and
restricted stock.......................................... (1,996,153) --
Compensation expense related to stock options and
restricted stock.......................................... 1,282,348 1,282,348
Deferred compensation related to issuance of warrants....... (132,000) --
Compensation expense related to warrants.................... 132,000 132,000
Net loss since inception.................................... -- (26,436,178)
----------- ------------
BALANCE, December 31, 1993................................... (671,504) 71,152,379
Issuance of common stock from exercise of stock options at
prices ranging from $.09 to $15.75 per share.............. -- 111,216
Grant of common stock....................................... -- 63,831
Compensation expense related to stock options and
restricted stock.......................................... 200,739 200,739
Deferred compensation adjustment related to termination of
stock options............................................. 48,423 --
Unrealized loss on marketable securities.................... -- (186,318)
Net loss.................................................... -- (23,175,465)
----------- ------------
BALANCE, December 31, 1994................................... (422,342) 48,166,382
Issuance of common stock at an average of $4.53 per share,
net of issuance costs of $258,604......................... -- 3,541,394
Issuance of 65,000 shares of convertible preferred stock at
$100.00 per share, net of issuance costs of $363,988...... -- 6,136,012
Conversion of 65,000 shares of convertible preferred
stock..................................................... -- --
Issuance of common stock from exercise of stock options at
prices ranging from $.09 to $8.50 per share............... -- 86,343
Grant of common stock....................................... -- 77,269
Compensation expense related to stock options and
restricted stock.......................................... 153,761 153,761
Deferred compensation adjustment related to termination of
stock options............................................. 257 --
Unrealized gain on marketable securities.................... -- 247,495
Net loss.................................................... -- (26,289,990)
----------- ------------
BALANCE, December 31, 1995................................... (268,324) 32,118,666
Issuance of common stock at $14.00 per share, net of
issuance costs of $2,704,625.............................. -- 39,295,375
Issuance of common stock from exercise of stock options at
prices ranging from $.09 to $10.25 per share.............. -- 185,500
Grant of common stock....................................... -- 61,079
Compensation expense related to stock options and
restricted stock.......................................... 124,631 124,631
Deferred compensation adjustment related to termination of
stock options............................................. 54,333 --
Unrealized loss on marketable securities.................... -- (41,432)
Net loss.................................................... -- (30,961,000)
----------- ------------
BALANCE, December 31, 1996................................... $ (89,360) $ 40,782,819
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 18
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MARCH 2, 1988
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
-------------------------------------------- DECEMBER 31,
1994 1995 1996 1996
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(23,175,465) $(26,289,990) $(30,961,000) $(106,862,633)
Adjustments to reconcile net loss to net cash used
for operating activities --
Depreciation and amortization.................... 2,620,127 4,306,216 3,253,404 11,805,451
Amortization of investment premium............... 908,716 272,366 138,713 1,828,268
Amortization of deferred financing and bond
issuance costs................................ 115,377 230,858 230,755 576,990
Noncash compensation related to stock options and
restricted stock.............................. 264,570 230,923 185,709 1,966,950
Noncash compensation related to warrants......... -- -- -- 132,000
Changes in assets and liabilities --
Other current assets.......................... (315,068) 496,085 (103,870) (646,231)
Accounts payable.............................. 586,019 (32,039) 1,200,202 2,161,078
Accrued expenses.............................. 199,993 (288,748) 203,732 711,451
------------ ------------ ------------ -------------
Net cash used for operating activities............. (18,795,731) (21,074,329) (25,852,355) (88,326,676)
------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in marketable securities....... (2,534,536) 4,419,836 (537,404) (20,508,855)
Increase in property and equipment................. (11,653,842) (582,329) (506,252) (39,401,284)
Decrease (increase) in restricted cash............. (209,480) -- 381,347 (32,425,737)
Payments from restricted cash...................... 10,101,407 -- -- 32,425,737
Increase in bond issuance costs.................... -- -- -- (1,303,237)
(Increase) decrease in other assets................ (62,846) (63,847) 48,599 (212,622)
------------ ------------ ------------ -------------
Net cash provided by (used for) investing
activities....................................... (4,359,297) 3,773,660 (613,710) (61,425,998)
------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible subordinated
notes payable to stockholders.................... -- -- -- 2,300,000
Proceeds from equipment line of credit............. 1,665,295 297,030 -- 3,261,600
Payments on capital lease obligations.............. (36,738) (35,108) (11,831) (180,867)
Proceeds from term notes payable................... -- -- -- 27,835,947
Payments on term notes payable..................... (462,584) (1,271,709) (1,238,712) (3,881,301)
Proceeds from issuance of convertible redeemable
preferred stock, net of issuance costs........... -- 6,136,012 -- 24,560,465
Proceeds from issuance of common stock, net of
issuance costs................................... 111,216 3,627,737 39,480,876 117,741,941
------------ ------------ ------------ -------------
Net cash provided by financing activities.......... 1,277,189 8,753,962 38,230,333 171,637,785
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (21,877,839) (8,546,707) 11,764,268 21,885,111
CASH AND CASH EQUIVALENTS, beginning of period....... 40,545,389 18,667,550 10,120,843 --
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of period............. $ 18,667,550 $ 10,120,843 $ 21,885,111 $ 21,885,111
============ ============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of capitalized interest)........ $ 2,181,679 $ 3,154,058 $ 2,834,043 $ 8,466,136
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 19
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS
Alpha-Beta Technology, Inc. (the "Company") was incorporated in
Massachusetts on March 2, 1988 to engage in the discovery, development and
commercialization of novel carbohydrate-based products for the prevention and
treatment of infectious disease.
The Company is in the development stage and is devoting substantially all
of its efforts toward product research and development, raising capital,
marketing products under development, clinical trials and manufacturing. The
Company is subject to a number of risks similar to those of other development
stage companies, including dependence on key individuals, competition from
substitute products and larger companies, the development of commercially usable
products, and the need to obtain adequate additional financing necessary to fund
the development of its products.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain accounting policies described below and elsewhere in these notes to
consolidated financial statements.
(a) Consolidation
The Company has established two wholly owned subsidiaries, ABT Securities
Corp. and SmithfieldAB Corp. All intercompany transactions have been eliminated
in consolidation.
(b) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and marketable financial
instruments with original maturities of 90 days or less. The Company held the
following cash and cash equivalents at December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Cash and money market accounts................ $10,120,843 $ 9,585,994
Corporate debt securities..................... -- 12,299,117
----------- -----------
$10,120,843 $21,885,111
=========== ===========
</TABLE>
(c) Marketable Securities
Marketable securities consist of marketable financial instruments with
original maturities greater than 90 days. The Company has established guidelines
relative to concentration, maturities, and credit ratings that maintain safety
and liquidity.
In accordance with Statement of Financial Accounting Standard No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), the Company has classified its investments in marketable securities as
"Available-for-Sale" Securities. Accordingly, marketable securities as of
December 31, 1995 and 1996 are recorded at market with the unrealized gain or
loss from cost recorded as a component of Stockholders' Equity.
The Company held the following marketable securities at December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
U.S. Government and Government Agency
securities.................................. $ 3,894,663 $ 2,503,940
Corporate bonds............................... 11,646,703 11,973,812
Commercial paper.............................. 2,801,700 4,222,573
----------- -----------
$18,343,066 $18,700,325
=========== ===========
</TABLE>
19
<PAGE> 20
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and estimated fair market values of the Company's
securities at December 31, 1996 are presented below. There were no realized
gains or losses in the year ended December 31, 1996.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
-------------------------------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government Agency obligations
(average maturity of 5.3 months).... $ 2,496,720 $ 7,220 $-- $ 2,503,940
Corporate debt securities (average
maturity of 4.6 months)............. 16,183,860 12,525 -- 16,196,385
----------- -------- ------ -----------
$18,680,580 $ 19,745 $-- $18,700,325
=========== ======== ====== ===========
</TABLE>
The amortized cost and estimated fair market values of the Company's
securities at December 31, 1995 are presented below. There were no realized
gains or losses in the year ended December 31, 1995.
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
SECURITIES AVAILABLE-FOR-SALE COST GAINS LOSSES VALUE
--------------------------------------- ----------- ------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government Agency obligation
(average maturity of 20 days)........ $ 3,889,868 $ 4,795 $-- $ 3,894,663
Corporate debt securities (average
maturity of 2 months)................ 14,392,021 56,382 -- 14,448,403
--
----------- ------- -----------
$18,281,889 $61,177 $-- $18,343,066
=========== ======= == ===========
</TABLE>
(d) Restricted Cash and Cash Equivalents
As of December 31, 1995, restricted cash and cash equivalents, stated at
cost that approximated market value, consisted of cash and marketable financial
instruments which were restricted for specific uses or pledged as collateral for
certain obligations (see Note 3).
(e) Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation and amortization by charges to operations in amounts estimated to
allocate the cost of property and equipment over their estimated useful lives on
a declining-balance method. Laboratory equipment, computer equipment, production
machinery, and furniture and fixtures are depreciated over five to ten years;
leasehold improvements and equipment under capital lease are amortized over the
term of the lease; and the commercial manufacturing building is depreciated over
31.5 years. Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
----------- ------------
<S> <C> <C>
Land and land improvements.................... $ 1,733,124 $ 1,733,124
Building...................................... 19,289,524 19,291,789
Production machinery.......................... 11,995,936 11,995,936
Laboratory equipment.......................... 3,303,482 3,602,359
Leasehold improvements........................ 1,586,081 1,680,515
Computer equipment............................ 780,139 851,166
Furniture and fixtures........................ 517,035 556,684
Equipment under capital lease................. 178,616 178,616
----------- ------------
39,383,937 39,890,189
Less accumulated depreciation and
amortization................................ (8,520,563) (11,773,967)
----------- ------------
$30,863,374 $ 28,116,222
=========== ============
</TABLE>
20
<PAGE> 21
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred tax assets or liabilities are computed based
on the differences between the financial statement and income tax bases of
assets and liabilities using the enacted marginal tax rate.
The approximate tax effect of each type of carryforward, credit and
temporary difference that give rise to the Company's deferred tax assets as of
December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards............. $ 30,058,000 $ 42,294,000
Capitalized research and development
expenses................................... 1,804,000 1,804,000
Research and development credits --
Federal.................................... 2,161,000 2,434,000
Research and development credits -- State.... 1,210,000 1,423,000
Depreciation................................. (660,000) (523,000)
Other, net................................... 49,000 79,000
------------ ------------
34,622,000 47,511,000
Less: valuation allowance.................... (34,622,000) (47,511,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
The United States Tax Reform Act of 1986 contains provisions that may limit
the net operating loss carryforwards and research and development credits
available to be used in any given year in the event of significant changes in
ownership interests in the Company. The Company has completed numerous
financings since its inception and has incurred ownership changes as defined in
the Tax Reform Act of 1986. The Company believes that the ownership changes will
not significantly impact its ability to utilize its net operating loss and tax
credit carryforwards. The Company's net operating loss carryforwards and
research and development credits expire through 2011.
Because the level of future taxable income and the realizability of the
deferred tax asset are uncertain, the Company has recorded a valuation allowance
equal to the deferred tax asset.
(g) Accounting for Postretirement Benefits
The Company is not impacted by SFAS No. 106, "Employers' Accounting for
Postretirement Benefits other than Pensions," as it does not currently offer
such benefits.
(h) Research and Development Expenses
The Company charges research and development expenses to operations, as
incurred, for financial reporting purposes.
(i) Net Loss Per Common Share
Net loss per common share was computed using the weighted average number of
shares of common stock, including the number of shares of common stock issuable
upon conversion of preferred stock, if any, outstanding during the period.
(j) Management's Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements
21
<PAGE> 22
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(3) TERM NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
In May 1993, the Company's $1,000,000 equipment line of credit was
converted into a term note, at which time the outstanding balance became payable
in equal monthly principal installments of $25,641 plus interest. At December
31, 1995, approximately $179,000 was outstanding under this term note. This
amount was repaid in full during 1996.
In October 1994, the Company secured a $2,000,000 line of credit from a
bank to be used for equipment purchases and working capital requirements. In
January 1995, this line of credit was converted into a term note, at which time
the outstanding balance became payable in 45 equal monthly principal
installments of $40,352. At December 31, 1996, approximately $1,038,000 was
outstanding under this term note. This term note bears interest at the lesser of
8 3/4% or the Prime Rate (7.75% at December 31, 1996) plus 1/2%. In the event
that the Company's cash balances and marketable securities fall below $18
million in the aggregate, the Company will be required to maintain, as
restricted cash, a Repurchase Agreement Investment Account ("Investment
Account") with the bank in an amount equal to the then outstanding balance of
the loan. If the Company's cash balances and marketable securities subsequently
fall below $10 million in the aggregate, the Company will be required, on demand
by the bank, to pledge the Investment Account to the bank as security for the
loan.
In February 1993, the Company entered into a $30,000,000 loan agreement
with the Rhode Island Port Authority and Economic Development Corporation
("RIPA"), a quasi-public Rhode Island government agency, to partially finance
the acquisition, development, construction and equipping of a commercial-scale
Betafectin(R)PGG-Glucan manufacturing facility. Borrowings under the RIPA loan
are payable in monthly principal and interest payments over a 20 1/2-year period
and accrue interest at approximately 9.5% per annum. These borrowings are
secured by the Betafectin commercial manufacturing facility. The Company's
obligation to repay the loan is subject to acceleration if the Company fails to
make any monthly debt service payments or if certain other events of default
occur. The Company may also be required to repay the loan on an accelerated
basis over five years if the enabling legislation under which RIPA issued the
Bonds (as defined below) used to fund the loan to the Company is eliminated
without an appropriate grandfathering provision, or if the state of Rhode Island
or RIPA is subject to any bankruptcy proceedings. The principal payments due
under this loan agreement are as follows at December 31, 1996:
<TABLE>
<CAPTION>
PRINCIPAL
YEAR PAYMENT
------------------------------------------------------------ -----------
<S> <C>
1997........................................................ $ 635,000
1998........................................................ 696,000
1999........................................................ 767,000
2000........................................................ 847,000
2001........................................................ 928,000
Thereafter.................................................. 24,985,000
-----------
$28,858,000
===========
</TABLE>
To finance the loan to the Company, RIPA issued $30,000,000 of taxable
revenue bonds (the "Bonds"). The Bonds mature through December 2024; however,
they are subject to mandatory tender for purchase on December 1, 1999. RIPA has
a letter-of-credit facility with a financial institution (the "Bank") to, among
other things, fund the mandatory tender by the bondholders. In connection with
the mandatory tender by bondholders, the Company has agreed to cooperate with
RIPA and the Bank in remarketing the Bonds. The terms of the Bonds subsequent to
such remarketing are subject to change. If the Bonds cannot be successfully
22
<PAGE> 23
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remarketed, the Bank will become the owner of the then outstanding principal
amount of the Bonds, and the interest rate will be adjusted to the Bank's base
rate plus 2%.
In connection with the Company's agreement with RIPA, the Company issued
RIPA warrants to purchase 50,006 shares of common stock at $5.91 per share. In
1993, the Company recorded the fair value of the warrants, approximately
$974,000, and approximately $2,679,000 of original issue discount, as a
reduction against the outstanding principal amount of the loan. In addition, the
Company incurred and has capitalized approximately $1,303,000 of debt issuance
costs associated with the loan. The Company amortized these amounts along with
other related costs to capitalized interest during the construction period of
the Betafectin manufacturing facility. The Company is amortizing the balance of
these costs to interest expense over the remaining term of the note. In 1994,
the Company amortized approximately $230,000 of these costs, of which
approximately $115,000 was capitalized and approximately $115,000 was recorded
as interest expense. In 1995 and 1996, the Company recorded approximately
$231,000 of these costs annually as interest expense.
(4) LICENSE AGREEMENTS
The Company, as licensee, is engaged in an exclusive license agreement with
Massachusetts Institute of Technology to license technology for certain products
and processes for the life of the respective patents. Royalties are payable
quarterly based on 2.5% to 4% of the net sales price of products incorporating
the licensed technology. Minimum annual royalties of $50,000 are due under the
license agreement.
The Company, as licensee, is engaged in an exclusive license agreement with
The Brigham and Woman's Hospital, Inc. to license technology for certain
products and processes for the life of the respective patents. Royalties are
payable quarterly based on 5% of the net sales price of products incorporating
the licensed technology. In addition, annual license maintenance fees and
milestone payments are due under this license agreement. These fees and
milestone payments are credited against 50% of each earned royalty payment due
until the entire credit is exhausted.
(5) STOCKHOLDERS' EQUITY
(a) Common Stock
The Company has 30 million shares of $.01 par value common stock
authorized.
In 1992, the Company completed an initial public offering of 2,300,000
shares of common stock at $8 per share resulting in net proceeds of
approximately $16,394,000. In connection with this offering, all of the
outstanding preferred stock was converted into 5,166,348 shares of common stock.
In July 1993, the Company issued 1,000,000 shares of common stock at $20 per
share through a private placement. The net proceeds totaled approximately
$18,547,000. In October and November 1993, the Company issued 1,372,000 shares
of common stock at $30 per share through a public offering resulting in net
proceeds of approximately $38,375,000.
In 1995, the Company raised $10,300,000 in a series of private placements.
These financings consisted of an aggregate of $3,800,000 for 838,438 shares of
common stock and $6,500,000 for 65,000 shares of convertible preferred stock.
The price of the newly issued common stock reflected a 20% discount to the
market value of the Company's common stock at the time the agreement was reached
with the purchasers. The preferred shares converted into common shares at a 20%
discount to the average closing price for the Company's common stock prior to
conversion. The net proceeds to the Company totaled approximately $9,700,000. In
addition, the Company issued warrants to the placement agent to purchase 51,500
shares of common stock at exercise prices ranging from $5.67 to $7.61 per share.
As of December 31, 1995, all of the 65,000 shares of convertible preferred stock
were converted into 1,090,224 shares of the Company's common stock.
23
<PAGE> 24
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1996, the Company completed a $42 million public stock offering by
selling 3,000,000 shares of common stock at $14 per share. The net proceeds from
this offering totaled approximately $39,295,000.
(b) Restricted Stock Sales
The Company sold to certain Directors a total of 99,000 shares of
restricted common stock at a price of $.51 per share. The shares vested over two
to four years. As of December 31, 1996, all of these shares of common stock were
vested. The Company recorded $194,100 of deferred compensation relating to these
stock sales, of which $31,202, $7,218 and $0 was recognized as compensation
expense during 1994, 1995 and 1996, respectively.
(c) Stock Option and Grant Plan
The Company has a Stock Option and Grant Plan (the "Plan"), under which it
may grant incentive stock options, nonqualified stock options and common stock.
The Company has reserved 2,300,000 shares of common stock for issuance under the
Plan. At December 31, 1996, 140,219 shares of common stock are available for
future stock option and stock grants. Activity in the Plan for each of the three
years in the period ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- ------------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1993.......................... 755,866 $.009 - $27.00
1994 activity --
Options granted....................................... 217,703 7.75 - 28.25
Options exercised..................................... (91,258) .09 - 15.75
Options terminated.................................... (90,895) .09 - 27.00
--------- -----
Outstanding, December 31, 1994.......................... 791,416 .009 - 28.25
1995 activity --
Options granted....................................... 632,929 4.94 - 9.75
Options exercised..................................... (48,699) .09 - 8.50
Options terminated.................................... (47,129) .09 - 27.00
--------- -----
Outstanding, December 31, 1995.......................... 1,328,517 .009 - 28.25
1996 activity --
Options granted....................................... 611,780 6.75 - 12.50
Options exercised..................................... (73,095) .09 - 10.25
Options terminated.................................... (39,569) .51 - 28.25
--------- -----
Outstanding, December 31, 1996.......................... 1,827,633 $.009 - $27.00
========= =====
Exercisable at December 31, 1996........................ 860,387 $.009 - $27.00
========= =====
</TABLE>
During 1991 and 1992, the Company recorded deferred compensation of
$751,221, which represents the excess of the fair value, as determined for
financial reporting purposes, over the exercise price of certain options granted
under the Plan. This deferred compensation is being recognized ratably over the
period in which the options vest. During the years ended December 31, 1994, 1995
and 1996, the results of operations include $141,705, $118,711 and $96,798,
respectively, of compensation expense on these options.
During 1994 and 1995, the Company granted officers of the Company 2,000 and
2,000 shares of common stock from the Plan. In addition, in 1994, 1995 and 1996,
the Company contributed 970, 8,714 and 5,644 shares of common stock to its
401(k) benefit plan for employees. In connection with these grants, the Company
recorded approximately $63,800, $77,300 and $61,079, respectively, of expense
based on the fair market value of these shares on the date of grant.
24
<PAGE> 25
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Other Stock Options
During 1991, the Company granted a director/officer options to purchase
6,710 and 88,000 shares of common stock at a purchase price of $.09 and $.51 per
share, respectively, which are not included in the Plan. The options for 6,710
shares vested immediately, of which options to purchase 540 shares of common
stock were exercised in 1993. The options for 88,000 shares vest ratably through
December 31, 1998, and options for 73,800 shares are vested at December 31,
1996. The vesting of the options will be accelerated upon the occurrence of
certain defined business development and financial milestones. The Company
recorded deferred compensation on these options of $353,130 based on the
difference between the fair value of the Company's common stock, as determined
for financial reporting purposes, and the option exercise price. The Company is
recording compensation expense on these options as the options vest. During
1994, 1995 and 1996, the Company recorded compensation expense on these options
of $27,832 in each of these years.
(e) Stock Warrants
In connection with the Company's series of private placements in 1995, the
Company issued warrants to the placement agent to purchase 51,500 shares of
common stock at exercise prices ranging from $5.67 to $7.61 per share. As of
December 31, 1996, all of these warrants were outstanding.
(f) Proforma Disclosure of Stock-Based Compensation
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In
October 1995, the Financial Accounting Standards Board issued SFAS No. 123
Accounting for Stock-Based Compensation, effective for fiscal years beginning
after December 15, 1995. SFAS No. 123 establishes a fair-value based method of
accounting for stock-based compensation plans. The Company has adopted the
disclosure-only alternative for grants to employees, which requires disclosure
of the proforma effects on earnings and earnings per share as if SFAS No. 123
had been adopted, as well as certain other information.
The Company has computed the proforma disclosures required under SFAS No.
123 for all employee stock options granted for the years ended December 31, 1995
and 1996 using the Black-Scholes option pricing model prescribed by SFAS No.
123. The assumptions used are as follows:
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Risk free interest rate................... 5.53 - 7.87% 5.41 - 6.63%
Expected dividend yield................... 0 0
Expected lives............................ 3 - 5 years 3 - 5 years
Expected volatility....................... 73.14% 73.14%
</TABLE>
Under SFAS No. 123, the aggregate fair market value of options granted to
employees in 1995 and 1996 is $1,803,000 and $1,811,000, respectively. The
effects of applying SFAS No. 123 are as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Net loss.................................. $(26,289,990) $(30,961,000)
Proforma net loss......................... $(26,490,990) $(31,718,000)
Net loss per share........................ $(2.10) $(1.92)
Pro forma net loss per share.............. $(2.11) $(1.96)
</TABLE>
25
<PAGE> 26
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Accrued research expenses........................ $135,944 $136,665
Accrued professional fees........................ 142,274 342,273
Accrued other.................................... 229,501 232,513
-------- --------
$507,719 $711,451
======== ========
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases its office and research facilities and certain equipment
under operating leases that expire through 2001. Future minimum lease payments
under these lease agreements, as amended, are approximately as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
------------------------------------------------------------- ----------
<S> <C>
1997......................................................... $1,891,000
1998......................................................... 1,844,000
1999......................................................... 1,815,000
2000......................................................... 1,753,000
2001......................................................... 744,000
----------
$8,047,000
==========
</TABLE>
Rent expense included in the accompanying consolidated statements of
operations was approximately $1,545,000, $1,914,000 and $1,727,000 for 1994,
1995 and 1996, respectively.
(b) Research Funding
The Company has entered into agreements with a university and several
hospitals to fund certain research programs. The total amount committed under
these agreements as of December 31, 1996 was approximately $640,000, of which
approximately $468,000 is due in 1997. The Company has the option of licensing
products resulting from these research agreements.
(8) EMPLOYEE BENEFIT PLAN
In January 1993, the Company adopted an employee benefit plan under Section
401(k) of the Internal Revenue Code. This plan allows employees to make
contributions up to a specified percentage of their compensation. Under the
plan, the Company may, but is not obligated to, match a portion of the
employees' contribution up to a defined maximum. In 1995 and 1996, the Company
made matching contributions of 8,714 and 5,644 shares of its common stock into
the plan, respectively. These contributions resulted in approximately $57,800
and $61,079 of noncash payroll expense in 1995 and 1996, respectively.
(9) SHAREHOLDER RIGHTS PLAN
Effective as of February 2, 1995, the Company's Board of Directors adopted
a Shareholder Rights Plan (the "Rights Plan") and declared a dividend
distribution of one preferred stock purchase right (a "Right") for each
outstanding share of common stock to stockholders of record as of the close of
business on February 22, 1995. Each share of common stock issued by the Company
in the future also will include a Right. The Rights
26
<PAGE> 27
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are currently not exercisable and trade with the shares of common stock. The
Rights become exercisable if a person or group acquires 15% or more of the
Company's common stock, announces a tender offer that would result in that
person or group owning 15% or more of the Company's common stock, or is declared
an 'adverse person' by the Company's Board of Directors.
In the event that the Rights become exercisable, each holder of a Right
will have the right to receive upon exercise that number of shares of Series A
Junior Participating Cumulative Preferred Stock of the Company having a market
value equal to two times the exercise price of the Right. In the event that the
Company is acquired in a merger or other business combination transaction or 50%
of the Company's assets or earning power is sold, each holder of a Right will
thereafter have the right to receive, upon exercise, that number of shares of
common stock of the acquiring company having a value equal to two times the
exercise price of the Right.
The Rights may be redeemed in whole by the Company at $.01 per Right at any
time prior to (i) the date on which a person is declared an 'adverse person,'
(ii) the tenth business day after the first public announcement that a person or
group has acquired 15% or more of the Company's common stock, or (iii) the
expiration date of the Rights Plan.
27
<PAGE> 28
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
The accompanying financial statements include the following noncash
investing and financing activities:
<TABLE>
<CAPTION>
MARCH 2, 1988
YEARS ENDED DECEMBER 31, (INCEPTION) THROUGH
-------------------------------------- DECEMBER 31,
1994 1995 1996 1996
--------- ----------- -------- -------------------
<S> <C> <C> <C> <C>
Capital lease obligations............... $ -- $ -- $ -- $ (178,886)
Equipment under capital lease........... -- -- -- 178,886
Conversion of line of credit to term
note payable.......................... -- (1,845,295) -- (2,144,525)
Issuance of term note payable........... -- 1,845,295 -- 2,144,525
Grant of common stock................... 60,831 77,269 61,079 202,579
Compensation related to common stock
grant................................. (60,831) (77,269) (61,079) (202,579)
Grant of stock options and restricted
stock................................. -- -- -- 1,996,153
Deferred compensation on stock options
and restricted stock.................. 48,423 257 54,333 (1,829,983)
Cancellation of stock options........... (48,423) (257) (54,333) (166,170)
Grant of warrants....................... -- -- -- 132,000
Deferred compensation on warrants....... -- -- -- (132,000)
Conversion of subordinated notes payable
to redeemable preferred stock......... -- -- -- (2,300,000)
Issuance of redeemable preferred stock
...................................... -- -- -- 2,300,000
Conversion of redeemable preferred stock
to common stock....................... -- -- -- (20,674,454)
Common stock............................ -- -- -- 20,674,454
Other assets............................ -- -- -- (50,000)
Issuance costs associated with proceeds
on sale of redeemable preferred
stock................................. -- -- -- 50,000
Note payable............................ -- -- -- 2,679,165
Grant of warrants....................... -- -- -- 974,627
Note payable discount................... -- -- -- (3,653,792)
Unrealized losses (gains) on marketable
securities............................ 186,318 (247,495) 41,432 (19,745)
Accumulated deficit..................... (186,318) 247,495 (41,432) 19,745
Capitalized interest on property and
equipment............................. (115,379) -- -- (312,476)
Amortization of bond issuance costs..... 30,308 -- -- 83,315
Amortization of note payable discount
...................................... 85,071 -- -- 229,161
--------- ----------- -------- -------------
$ -- $ -- $ -- $ --
========= =========== ======== =============
</TABLE>
28
<PAGE> 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the portion of the to be filed Definitive
Proxy Statement captioned "Proposal I - Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the portion of the to be filed Definitive
Proxy Statement captioned "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the portion of the to be filed Definitive
Proxy Statement captioned "Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the portion of the to be filed Definitive
Proxy Statement captioned "Certain Transactions."
29
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Form 10-K:
(1) Index to Consolidated Financial Statements.
See index on page 13.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 1996.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------
<C> <S> <C>
3.1 Amended and Restated Articles of Organization. *1* (3.1)
3.2 By-laws, as amended. *1* (3.2)
3.3 Certificate of Vote of Directors Establishing the Series A Junior *9* (3.3)
Participating Cumulative Preferred Stock, dated February 3, 1995
4.1 Shareholder Rights Agreement dated as of February 2, 1995, *7*
between the Company and the First National Bank of Boston.
10.1 Research Agreement dated as of July 1, 1990 between Brigham and *1* (10.1)
Women's Hospital, Inc. ("Brigham and Women's") and the Company
("Onderdonk Research Agreement").
10.2 Modification Number 1 to Onderdonk Research Agreement dated *1* (10.2)
November 21, 1991.
10.3 Modification Number 2 to Onderdonk Research Agreement dated *4* (10.3)
February 9, 1993.
10.4 Modification Number 3 to Onderdonk Research
Agreement dated June 9, 1993. *4* (10.3A)
10.5 Research Agreement (Czop) dated as of November 30, 1990 between *1* (10.3)
Brigham and Women's and the Company ("Czop Research Agreement").
10.6 Amendment No. 1 to Czop Research Agreement effective as of *3* (10.4)
November 1, 1992.
10.7 License Agreement dated as of November 30, 1990 between Brigham *1* (10.4)
and Women's and the Company.
10.8 License Agreement dated March 22, 1988 between Massachusetts *1* (10.5)
Institute of Technology ("MIT") and the Company ("MIT License
Agreement").
10.9 Amendment to MIT License Agreement dated June 27, 1991. *1* (10.6)
10.10 Revised Letter Agreement dated October 8, 1992 between the *3* (10.8)
Company and Bruce Bistrian.
10.11 Loan Agreement dated May 15, 1991 between the Company and *1* (10.10)
Flagship Bank and Trust Company ("Flagship").
10.12 Security Agreement dated May 15, 1991 between the Company and *1* (10.11)
Flagship.
10.13 Loan Agreement dated July 30, 1992 between the Company and *2* (10.11A)
Flagship.
10.14 Loan Agreement dated October 18, 1994 between the Company and *8* (10.14)
Flagship.
10.14A Security Agreement dated October 18, 1994 between the Company and *8* (10.14A)
Flagship.
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------
<C> <S> <C>
10.15 Amended and Restated Shareholders Agreement dated as of February *1* (10.12)
14, 1992 among the Company and certain stockholders.
10.16 Convertible Preferred Stock Purchase Agreement dated as of *1* (10.13)
February 14, 1992 among the Company and certain purchasers of the
Company's Series E Convertible Redeemable Preferred Stock.
10.17 Convertible Preferred Stock Purchase Agreement dated as of April *1* (10.14)
30, 1991 among the Company and certain purchasers of the
Company's Series D Convertible Redeemable Preferred Stock.
10.18 Convertible Preferred Stock Purchase Agreement dated as of *1* (10.15)
September 26, 1990 among the Company and certain purchasers of
the Company's Series C Convertible Redeemable Preferred Stock.
10.19 Convertible Preferred Stock Purchase Agreement dated as of March *1* (10.16)
23, 1989 among the Company and certain purchasers of the
Company's Series B Convertible Redeemable Preferred Stock.
10.20 Convertible Preferred Stock Purchase Agreement dated as of March *1* (10.17)
3, 1988 among the Company and certain purchasers of the Company's
Series A Convertible Redeemable Preferred Stock.
10.21 Employment Letter with Gustav Christensen dated November 20, *1* (10.20)
1991, as amended through March 16, 1992.
10.22 Employment Letter with Gary Ostroff dated August 1, 1988. *1* (10.21)
10.23 Retainer Letter with Lawrence C. Hoff dated January 23, 1992. *1* (10.22)
10.24 Employment Letter with Robert DuFresne dated January 31, 1992. *1* (10.23)
10.25 Employment Letter with Peter H. Grassam dated August 18, 1993. *6* (10.24)
10.26 Retainer Letter with Bernard Canavan dated January 19, 1994. *6* (10.25)
10.27 Employment Letter with Michael E. Fiander dated October 29, 1994. *8* (10.27)
10.28 Employment Letter with Augustine Lawlor dated October 24,1994. *8* (10.28)
10.29 Form of Employee Confidentiality Agreement. *1* (10.25)
10.30 Form of Employee Non-Compete Agreement. *1* (10.26)
10.31 Stock Purchase and Restriction Agreement dated as of January 1, *1* (10.27)
1992 between the Company and Lawrence C. Hoff.
10.32 Stock Purchase and Restriction Agreement dated as of November 5, *1* (10.27)
1991 between the Company and Michael E. Porter.
10.33 Stock Restriction Agreement dated as of December 31, 1991 between *1* (10.29)
the Company and Dean Witter Reynolds, Inc. as custodian for
Gustav A. Christensen IRA.
10.34 Stock Purchase and Restriction Agreement dated as of December 31, *1* (10.30)
1991 between the Company and Gustav A. Christensen.
10.35 Stock Purchase and Restriction Agreement dated as of December 31, *1* (10.31)
1991 between the Company and Dean Witter Reynolds Inc. as
custodian for Gustav A. Christensen IRA.
10.36 Lease dated February 1, 1990 between the Company and Worcester *2* (10.32)
Business Development Corporation ("Two Biotech Park Lease").
10.37 First Amendment to Two Biotech Park Lease dated as of June 1, *2*
1991.
( 10.32A)
10.38 Second Amendment to Two Biotech Park Lease dated as of February *2*
1, 1992.
( 10.32B)
10.39 Lease dated July 11, 1990 between the Company and Worcester *2* (10.33)
Business Development Corporation ("Three Biotech Park Lease").
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------
<C> <S> <C>
10.40 First Amendment to Three Biotech Park Lease dated as of August *1* (10.34)
13, 1991.
10.41 Second Amendment to Three Biotech Park Lease dated as of April 1, *2*
1992.
( 10.34A)
10.42 Third Amendment to Three Biotech Park Lease dated as of December *8* (10.42)
21, 1992.
10.42A Fourth Amendment to Three Biotech Park Lease dated as of October
29,
( 10.42A) 1993. *8*
10.42B Fifth Amendment to Three Biotech Park Lease dated as of May 31, *8*
1994.
( 10.42B)
10.42C Sixth Amendment to Three Biotech Park Lease dated as of March 27,
( 10.42C) 1995. *8*
10.43 Sublease dated December 1, 1993 between the Company and Phytera, *6* (10.40)
Inc.
10.44 1988 Stock Option and Grant Plan, as amended on February 22, *6* (10.41)
1994.
10.45 Open-End Mortgage Deed and Security Agreement dated as of *3* (10.40)
February 1, 1993 between the Company and Rhode Island Port
Authority and Economic Development Corporation ("RIPA").
10.46 Loan Agreement dated as of February 1, 1993 between the Company *3* (10.41)
and RIPA.
10.47 Option Agreement dated as of February 17, 1993 between the *3* (10.42)
Company and RIPA.
10.48 Letter Agreement dated as of February 17, 1993 between the *3* (10.43)
Company and RIPA.
10.49 Trust Indenture dated as of February 1, 1993 between RIPA and *3* (10.44)
Fleet National Bank, as Trustee.
10.50 Agreement to Contract Subdivision Improvements dated as of *3* (10.45)
February 17, 1993 between the Company and RIPA.
10.51 Form of Clinical Trial Agreement. *3* (10.46)
10.52 Form of Purchase Agreement dated as of May 28, 1993 between the *5* (10.45)
Company and the Purchasers.
10.53 Master Lease Agreement August 5, 1996, between the Company and Filed Herewith
Comdisco, Inc.
22 Subsidiaries of the Registrant. *3* (22)
23 Consent of Independent Public Accountants. Filed Herewith
*1* Incorporated by reference to the designated exhibit of the
Registration Statement on Form S-1 No. 33-46606 filed March 24,
1992.
*2* Incorporated by reference to the designated exhibit of Amendment
No. 1 to the Registration Statement on Form S-1 No. 33-46606
filed August 24, 1992.
*3* Incorporated by reference to the designated exhibit of the Annual
Report on Form 10-K, Commission File No. 0-20023, filed March 31,
1993.
*4* Incorporated by reference to the designated exhibit of the
Registration Statement on Form S-1 No. 33-64336 filed June 11,
1993.
*5* Incorporated by reference to the designated exhibit of Amendment
No. 1 to the Registration Statement on Form S-1 No. 33-64336
filed July 2, 1993.
*6* Incorporated by reference to the designated exhibit of the Annual
Report on Form 10-K, Commission File No. 0-20023, filed March 31,
1994.
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----------------------------------------------------------------
<C> <S> <C>
*7* Incorporated by reference to Exhibit 4.1 of the Current Report on
Form 8- K, Commission File No. 0-20023, filed February 6, 1995.
*8* Incorporated by reference to the designated exhibit of the Annual
Report on Form 10-K, Commission File No. 0-20023, filed March 24,
1995.
*9* Incorporated by reference to the designated exhibit of the Annual
Report on Form 10-K, Commission File No. 0-20023, filed January
29, 1996.
</TABLE>
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALPHA-BETA TECHNOLOGY, INC.
(Registrant)
By: /s/ SPIROS JAMAS
----------------------------------
SPIROS JAMAS, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
Registrant and in the capacities and on the date set forth above.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------------------------------------------- ---------------------------------------------
<C> <S>
/s/ SPIROS JAMAS Director, President and Chief Executive
- --------------------------------------------- Officer (Principal Executive Officer)
SPIROS JAMAS
/s/ D. DAVIDSON EASSON, JR. Director, Treasurer and Executive Vice
- --------------------------------------------- President (Principal Financial Officer)
D. DAVIDSON EASSON, JR.
/s/ WILLIAM D. ROMEO Director of Finance (Principal Accounting
- --------------------------------------------- Officer)
WILLIAM D. ROMEO
/s/ GUSTAV A. CHRISTENSEN Chairman of the Board
- ---------------------------------------------
GUSTAV A. CHRISTENSEN
/s/ BERNARD CANAVAN Director
- ---------------------------------------------
BERNARD CANAVAN
/s/ LAWRENCE C. HOFF Director
- ---------------------------------------------
LAWRENCE C. HOFF
/s/ PETER H. LEVINE Director
- ---------------------------------------------
PETER H. LEVINE
/s/ MICHAEL E. PORTER Director
- ---------------------------------------------
MICHAEL E. PORTER
</TABLE>
34
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF VOTE OF DIRECTORS
(to come)
<PAGE> 1
Exhibit 10.53
MASTER LEASE AGREEMENT
[LOGO COMDISCO]
MASTER LEASE AGREEMENT dated 8/5/96 by and between COMDISCO, INC. ("Lessor") and
ALPHA-BETA TECHNOLOGY, INC. ("Lessee").
IN CONSIDERATION of the mutual agreements described below, the parties agree as
follows (all capitalized terms are defined in Section 15.12):
1. PROPERTY LEASED.
Lessor leases to Lessee all of the Equipment described on each Schedule. In
the event of a conflict the terms of a Schedule prevail over this Master Lease
2. TERM.
On the Commencement Date Lessee will be deemed to accept the Equipment,
will be bound to its rental obligations for each item of Equipment and the term
of a Schedule will begin and continue through the Initial Term and thereafter
until terminated by either party upon prior written notice received during the
Notice Period. No termination may be effective prior to the expiration of the
Initial Term.
3. RENT AND PAYMENT.
Rent is due and payable in advance, in immediately available funds, on the
first day of each Rent Interval to the payee and at the location specified in
Lessor's invoice. Interim Rent is due and payable when invoiced. If any payment
is not made when due, Lessee will pay interest at the Overdue Rate.
4. SELECTION AND WARRANTY AND DISCLAIMER OF WARRANTIES.
4.1 Selection. Lessee acknowledges that it has selected the Equipment and
disclaims any reliance upon statements made by the Lessor.
4.2 Warranty and Disclaimer of Warranties. Lessor warrants to Lessee that,
so long as Lessee is not in default, Lessor will not disturb Lessee's quiet and
peaceful possession, and unrestricted use of the Equipment. To the extent
permitted by the manufacturer, Lessor assigns to Lessee during the term of the
Schedule any manufacturer's warranties for the Equipment. LESSOR MAKES NO OTHER
WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT
LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR A PARTICULAR
PURPOSE. Lessor is not responsible for any liability, claim, loss, damage or
expense of any kind (including strict liability in tort) caused by the Equipment
except for any loss or damage caused by the negligent acts of Lessor. In no
event is Lessor responsible for special, incidental or consequential damages.
5. TITLE AND ASSIGNMENT.
5.1 Title. Lessee holds the Equipment subject and subordinate to the rights
of the Owner, Lessor, any Assignee and any Secured Party. Lessee authorizes
Lessor, as Lessee's agent, to prepare, execute and file in Lessee's name
precautionary Uniform Commercial Code financing statements showing the interest
of the Owner, Lessor, and any Assignee or Secured Party in the Equipment and to
insert serial numbers in Schedules as appropriate. Except as provided in
Sections 5.2 and 7.2, Lessee will, at its expense, keep the Equipment free and
clear from any liens or encumbrances of any kind (except any caused by Lessor)
and will indemnify and hold Lessor, Owner, any Assignee and Secured Party
harmless from and against any loss caused by Lessee's failure to do so.
5.2 Relocation or Sublease. Upon prior written notice, Lessee may relocate
Equipment to any location within the continental United States provided (i) the
Equipment will not be used by an entity exempt from federal income tax, (ii) all
additional costs (including any administrative fees, additional taxes and
insurance coverage) are reconciled and promptly paid by Lessee. Lessee may
sublease the Equipment upon the reasonable consent of the Lessor and the Secured
Party. No relocation or sublease will relieve Lessee from any of its obligations
under this Master Lease and the relevant Schedule.
5.3 Assignment by Lessor. The terms and conditions of each Schedule have
been fixed by Lessor in order to permit Lessor to sell and/or assign or transfer
its interest or grant a security interest in each Schedule and/or the Equipment
to a Secured Party or Assignee. In that event the term Lessor will mean the
Assignee and any Secured Party. However, any assignment, sale, or other transfer
by Lessor will not relieve Lessor of its obligations to Lessee and will not
materially change Lessee's duties or materially increase the burdens or risks
imposed on Lessee. The Lessee consents to and will acknowledge such assignments
in a written notice given to Lessee. Lessee also agrees that:
(a) The Secured Party will be entitled to exercise all of Lessor's rights.
but will not be obligated to perform any of the obligations of Lessor.
The Secured Party will not disturb Lessee's quiet and peaceful
possession and unrestricted use of the Equipment so long as Lessee is
not in default and the Secured Party continues to receive all Rent
payable under the Schedule;
(b) Lessee will pay all Rent and all other amounts payable to the Secured
Party, despite any defense or claim which it has against Lessor.
Lessee reserves its right to have recourse directly against Lessor for
any defense or claim; and
(c) Subject to and without impairment of Lessee's leasehold rights in the
Equipment, Lessee holds the Equipment for the Secured Party to the
extent of the Secured Party's rights in that Equipment.
6. NET LEASE AND TAXES AND FEES.
6.1 Net Lease. Each Schedule constitutes a net lease. Lessee's obiligation
to pay Rent and all other amounts is absolute and unconditional and is not
subject to any abatement, reduction, set-off, defense, counterclaim,
interruption, deferment or recoupment for any reason whatsoever.
6.2 Taxes and Fees. Lessee will pay when due or reimburse Lessor for all
taxes, fees or any other charges (together with any related interest or
penalties not arising from the negligence of Lessor) accrued for or arising
during the term of each Schedule against Lessor, Lessee or the Equipment lay any
governmental authority (except only Federal, state and local taxes on the
capital or the net income of Lessor). Lessor will file all personal property tax
returns for the Equipment and pay all property taxes due. Lessee will reimburse
Lessor for property taxes within thirty (30) days of receipt of an invoice.
7. CARE, USE AND MAINTENANCE, ATTACHMENTS AND RECONFIGURATIONS AND INSPECTION BY
LESSOR.
7.1 Care, Use and Maintenance. Lessee will maintain the Equipment in good
operating order and appearance, protect the Equipment from deterioration, other
than normal wear and tear, and will not use the Equipment for any purpose other
than that for which it was designed. If commercially available, Lessee will
maintain in force a standard maintenance contract with the manufacturer of the
Equipment, or another party acceptable to Lessor, and upon request will provide
Lessor with a complete copy of that contract. With Lessor's prior written
consent, Lessee may have the Equipment maintained by a party other than the
manufacturer. Lessee agrees to pay any costs necessary for the manufacturer to
bring the Equipment to then current release, revision and engineering change
levels, and to re-certify the Equipment as eligible for manufacturer's
maintenance at the expiration of the lease term. The lease term will continue
upon the same terms and conditions until recertification has been obtained.
7.2 Attachments and Reconfigurations. Upon Lessor's prior written consent,
Lessee may reconfigure and install Attachments on the Equipment. In the event of
such a Reconfiguration or Attachment, Lessee shall upon the return of the
Equipment, at its expense, restore the Equipment to the original configuration
specified on the Schedule, in accordance with the manufacturer's specifications
and in the same operating order, repair and appearance as when installed (normal
wear and tear excluded). Alternatively, with Lessor's prior consent, which shall
not be unreasonably withheld, Lessee may return the Equipment with any
Attachment or upgrade.
7.3 Inspection by Lessor. Upon request, Lessee, during reasonable business
hours and subject to Lessee's security requirements, will make the Equipment and
its related log and maintenance records available to Lessor for inspection.
8. REPRESENTATIONS AND WARRANTIES OF LESSEE.
Lessee represents and warrants that for the Master Lease and each Schedule:
(a) The execution, delivery and performance of the Lessee have been duly
authorized by all necessary corporate action;
(b) The individual executing was duty authorized to do so;
(c) The Master Lease and each Schedule constitute legal, valid and binding
agreements of the Lessee enforceable in accordance with their terms;
and
(d) The Equipment is personal property and when subjected to use by the
Lessee will not be or become fixtures under applicable law.
9. DELIVERY AND RETURN OF EQUIPMENT.
Lessee assumes the full expense of transportation of the Equipment to its
initial location, installation, deinstallation, and return to a location within
the continental United States (including without limitation the expense of
in-transit insurance) all pursuant to Lessor's instructions and manufacturer's
specifications. Regarding deinstallation, Lessee will assure that the Equipment
is deinstalled by the manufacturer in accordance with the manufacturer's
recommended procedures and any Environmental Law, and returned with a
Certificate of Decontamination in the same operating order, repair, condition
and appearance as when originally installed (less normal wear and tear and
depreciation) meeting all original equipment manufacturer's specifications for
continued manufacturer's maintenance, and accompanied by all associated
documents, manuals, maintenance records for the duration of the Initial Term,
spare parts and accessories. In connection with deinstallation, any Contaminant
removed from the Equipment will be removed and
1/93
<PAGE> 2
transported by a licensed waste removal transporter who shall name Lessor as
additional insured on its environmental liability policy. During the period
subsequent to receipt of a notice under Section 2, Lessor may demonstrate the
Equipment's operation in place and Lessee will supply any of its personnel as
may reasonably be required to assist in the demonstrations.
10. LABELING.
Upon request, Lessee will mark the Equipment indicating Lessor's interest.
Lessee will keep all Equipment free from any other marking or labeling which
might be interpreted as a claim of ownership.
11. INDEMNITY.
Lessee will indemnify and hold Lessor, any Assignee and any Secured Party
harmless from and against any and all claims, costs, expenses, damages and
liabilities, including reasonable attorney's fees, arising out of the ownership
(for strict liability in tort only), selection, possession, leasing, operation,
control, use, maintenance, delivery, return or other disposition of the
Equipment. However, Lessee is not responsible to a party indemnified hereunder
for any claims, costs, expenses, damages and liabilities occasioned by the
negligent acts of such indemnified party. Lessee agrees to carry bodily injury
and property damage liability insurance during the term of the Master Lease in
amounts and against risks customarily insured against by the Lessee on
equipment owned by it. Any amounts received by Lessor under that insurance will
be credited against Lessee's obligations under this Section.
12. RISK OF LOSS.
Effective upon delivery and until the Equipment is returned, Lessee
relieves Lessor of responsibility for all risks of physical damage to or loss or
destruction of the Equipment. Lessee will carry casualty insurance for each item
of Equipment in an amount not less than the Casualty Value. All policies for
such insurance will name the Lessor and any Secured Party as additional insured
and as loss payee, and will provide for at least thirty (30) days prior written
notice to the Lessor of cancellation or expiration. The Lessee will furnish
appropriate evidence of such insurance. Lessee shall promptly repair any damaged
item of Equipment unless such Equipment has suffered a Casualty Loss. Within
fifteen (15) days of a Casualty Loss, Lessee will provide written notice of that
loss to Lessor and Lessee will, at Lessor's option, either (a) replace the item
of Equipment with Like Equipment and marketable title to the Like Equipment will
automatically vest in Lessor or (b) pay the Casualty Value and after that
payment and the payment of all other amounts due and owing, Lessee's obligation
to pay further Rent for the item of Equipment will cease.
13. DEFAULT, REMEDIES AND MITIGATION.
13.1 Default. The occurrence of any one or more of the following Events of
Default constitutes a default under a Schedule:
(a) Lessee's failure to pay Rent or other amounts payable by Lessee when
due if that failure continues for ten (10) days after written notice;
or
(b) Lessee's failure to perform any other term or condition of the
Schedule or the material inaccuracy of any representation or warranty
made by the Lessee in the Schedule or in any document or certificate
furnished to the Lessor hereunder if that failure or inaccuracy
continues for fifteen (15) days after written notice; or
(c) An assignment by Lessee for the benefit of its creditors, the failure
by Lessee to pay its debts when due the insolvency of Lessee, the
filing by Lessee or the filing against Lessee of any petition under
any bankruptcy or insolvency law or for the appoinment of a trustee or
other officer with similar powers, the adjudication of Lessee as
insolvent, the liquidation of Lessee, or the taking of any action for
the purpose of the foregoing; or
(d) The occurrence of an Event of Default under any Schedule or other
agreement between Lessee and Lessor or its Assignee or Secured Party.
13.2 Remedies. Upon the occurrence of any of the above Events of Default,
Lessor, at its option, may:
(a) enforce Lessee's performance of the provisions of the applicable
Schedule by appropriate court action in law or in equity:
(b) recover from Lessee any damages and or expenses, including Default
Costs;
(c) with notice and demand recover all sums due and accelerate and
recover the present value of the remaining payment stream of all Rent
due under the defaulted Schedule (discounted at the same rate of
interest at which such defaulted Schedule was discounted with a
Secured Party plus any prepayment fees charged to Lessor by the
Secured Party or, if there is no Secured Party, then discounted at 6%)
together with all Rent and other amounts currently due as liquidated
damages and not as a penalty;
(d) with notice and process of law and in compliance with Lessee's
security requirements, Lessor may enter on Lessee's premises to remove
and repossess the Equipment without being liable to Lessee damages due
to repossession, except those resulting from Lessor's, its assignees'
or agents' or representatives negligence; and
(e) pursue any other remedy permitted by law or equity.
The above remedies, in Lessor's discretion and to the extent permitted by
law, are cumulative and may be exercised successively or concurrently.
13.3 Mitigation. Upon return of the Equipment pursuant to the terms of
Section 13.2, Lessor will use its best efforts in accordance with its normal
business procedures (and without obligation to give any priority to such
Equipment) to mitigate Lessor's damages as described below. EXCEPT AS SET FORTH
IN THIS SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY
STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY
ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or
otherwise dispose of all or any part of the Equipment at a public or private
sale for cash or credit with the privilege of purchasing the Equipment. The
proceeds from any sale, lease or other disposition of the Equipment are defined
as either:
(a) if sold or otherwise disposed of, the cash proceeds less the Fair
Market Value of the Equipment at the expiration of the Initial Term
less the Default Costs; or
(b) if leased, the present value (discounted at three points over the
prime rate as referenced in the Wall Street Journal at the time of the
mitigation) of the rentals for a term not to exceed the Initial Term,
less the Default Costs.
Any proceeds will be applied against liquidated damages and any other sums
due to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor
may recover, the amount by which the proceeds are less than the liquidated
damages and other sums due to Lessor from Lessee.
14. ENVIRONMENTAL CONDITION.
14.1 Indemnification. Lessee shall fully and promptly pay, perform,
discharge, defend, indemnify and hold harmless Lessor and its Affiliates,
successors and assigns, directors, officers, employees and agents from and
against any Environmental Claim or Environmental Loss.
14.2 Lessee Cooperation. In the event of an Environmental Claim, Lessee
shall, upon request, immediately provide Lessor with copies of all
correspondence reports, notices, orders, findings, declarations and other
materials pertinent to the Lessee's compliance with and requirements of any
Environmental Law.
14.3 Lessee Insurance. The Lessee shall name Lessor as an additional
insured on its environmental liability insurance policy.
15. ADDITIONAL PROVISIONS.
15.1 Entire Agreement. This Master Lease and associated Schedules supersede
all other oral or written agreements or understandings between the parties
concerning the Equipment including, for example, purchase orders. ANY AMENDMENT
OF THIS MASTER LEASE OR A SCHEDULE, MAY ONLY BE ACCOMPLISHED BY A WRITING SIGNED
BY THE PARTY AGAINST WHOM THE AMENDMENT IS SOUGHT TO BE ENFORCED.
15.2 No Waiver. No action taken by Lessor or Lessee shall be deemed to
constitute a waiver of compliance with any representation, warranty or covenant
contained in this Master Lease or a Schedule. The waiver by Lessor or Lessee of
a breach of any provision of this Master Lease or a Schedule will not operate or
be construed as a waiver of any subsequent breach.
15.3 Binding Nature. Each Schedule is binding upon, and inures to the
benefit of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR
OBLIGATIONS.
15.4 Survival of Obligations. All agreements, obligations including, but
not limited to those arising under Section 6.2, representations and warranties
contained in this Master Lease, any Schedule or in any document delivered in
connection with those agreements are for the benefit of Lessor and any Assignee
or Secured Party and survive the execution, delivery, expiration or termination
of this Master Lease.
15.5 Notices. Any notice, request or other communication to either party by
the other will be given in writing and deemed received upon the earlier of
actual receipt or three days after mailing if mailed postage prepaid by regular
or airmail to Lessor (to the attention of "Lease Administrator") or Lessee, at
the address set out in the Schedule or, one day after it is sent by courier or
facsimile transmission if receipt is verified by the receiving party.
15.6 Applicable Law. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL
HAVE BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE
GOVERNED AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE
OF ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR
REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE
CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE.
15.7 Severability. If any one or more of the provisions of this Master
Lease or any Schedule is for any reason held invalid, illegal or unenforceable,
the remaining provisions of this Master Lease and any such Schedule will be
unimpaired, and the invalid, illegal or unenforceable provision replaced by a
mutually acceptable valid, legal and enlorceable provision that is closest to
the original intention of the parties.
15.8 Counterparts. This Master Lease and any Schedule may be executed in
any number of counterparts, each of which will be deemed an original, but all
such counterparts together constitute one and the same instrument. If Lessor
grants a security interest in all or any part of a Schedule, the Equipment or
sums payable thereunder, only that counterpart Schedule marked "Secured Party's
Original" can transfer Lessor's rights and all other counterparts will be marked
"Duplicate".
<PAGE> 3
15.9 Licensed Products. Lessee shall obtain no title to Licensed Products
which will at all times remain the property of the owner of the Licensed
Products. A license from the owner may be required and it is Lessee's
responsibility to obtain any required license before the use of the Licensed
Products. Lessee agrees to treat the Licensed Products as confidential
information of the owner, to observe all copyright restrictions, and not to
reproduce or sell the Licensed Products.
15.10 Additional Documents. Lessee will, upon execution of this Master
Lease and as may be requested thereafter, provide Lessor with a secretary's
certificate of incumbency and authority and any other documents reasonably
requested by Lessor. Upon the execution of each Schedule with an aggregate Rent
in excess of $2,000,000, Lessee will provide Lessor with an opinion from
Lessee's counsel regarding the representations and warranties in Section 8.
Lessee will furnish, upon request, audited financial statements for the most
recent period.
15.11 Electronic Communications. Each of the parties may communicate with
the other by electronic means under mutually agreeable terms.
15.12 Definitions.
ADVERSE ENVIRONMENTAL CONDITION - means (i) the existence or the continuation of
the existence, of an Environmental Emission (including, without limitation, a
sudden or non-sudden accidental or non-accidental Environmental Emission), of or
exposure to, any substance, chemical, material, pollutant, contaminant, odor or
audible noise or other release or emission in, into or onto the environment
(including without limitation, the air, ground, water or any surface) at, in,
by, from or related to any Equipment, (ii) the environmental aspect of the
transportation, storage, treatment or disposal of materials in connection with
the operation of any Equipment, or (iii) the violation, or alleged violation of
any statutes, ordinances, orders, rules, regulations, permits or licenses of, by
or from any governmental authority, agency or court relating to environmental
matters connected with any Equipment.
AFFILIATE - means any entity that directly or indirectly, through one or more
intermediaries, controls or is controlled by, or is under common control with
Lessor.
ASSIGNEE - means an entity to whom Lessor has sold or assigned its rights as
owner and Lessor of Equipment.
ATTACHMENT - means any accessory, equipment or device and the installation
thereof that does not impair the original function or use of the Equipment and
is capable of being removed without causing material damage to the Equipment and
is not an accession to the Equipment.
CASUALTY LOSS - means the irreparable loss or destruction of Equipment.
CASUALTY VALUE - means an amount equal to the present value of the aggregate
rent remaining for the balance of the Initial Term, plus the present value of
the Fair Market Value (determined as of the expiration of the Initial Term) of
Like Equipment computed using an interest rate equal to the rate for Treasury
Securities having a comparable term to the Initial Term.
CERTIFICATE OF DECONTAMINATION - means a document certifying that a permit
decontaminating the Equipment was obtained from a local administrative agency,
that the party performing the decontamination was licensed by OSHA and that the
actual decontamination was completed according to the conditions required on the
permit.
COMMENCEMENT CERTIFICATE - means the Lessor provided certificate which must be
signed by Lessee within ten days of the Commencement Date as requested by
Lessor.
COMMENCEMENT DATE - is defined in each Schedule.
CONTAMINANT - means those substances which are regulated by or form the basis of
liability under any Environmental Law, including without limitation, asbestos,
polychlorinated biphenyls ("PCB"), and radioactive substances, or other material
or substance which has in the past or could in the future constitute a healthy,
safety or environmental hazard to any person, property or natural resources.
DEFAULT COSTS - means reasonable attorney's fees and remarketing costs resulting
from a Lessee default or Lessor's enforcement of its remedies.
ENVIRONMENTAL CLAIM - means any accusation, allegation, notice of violation,
claim, demand, abatement or other order or direction (conditional or otherwise)
by an governmental authority or any Person for personal injury (including
sickness, disease, or death), tangible or intangible property damage, damage to
the environment or natural resources, nuisance, pollution, contamination or
other adverse effects on the environment, or for fines, penalties or
restrictions, resulting from or based upon any Adverse Environmental Condition.
ENVIRONMENTAL EMISSION - means any actual or threatened release, spill,
omission, leaking, pumping, injection, deposition, disposal, discharge,
dispersal, leaching or migration into the indoor or outdoor environment, or into
or out of any of the Equipment, including. without limitation, the movement of
any Contaminant or other substance through or in the air, soil, surface water,
groundwater or property.
ENVIRONMENTAL LAW - means any federal, foreign, state or local law, rule or
regulation pertaining to the protection of the environment, including, but not
limited to, the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA") (42 U.S.C. Section 9601 et seq.), the Federal Water Pollution
Control Act (33 U.S.C. 1251, et seq.), the Resource Conservation and Recovery
Act (42 U.S.C. 6901 et seq.), the Clean Air Act (42 U.S.C. 7401 et seq.), the
Toxic Substances Control Act (15 U.S.C. 2601 et seq.), the Federal Insecticide,
Fungicide, and Rodenticide Act (7 U.S.C. 1361 et seq.), and the Occupational
Safety and Health Act (10 U.S.C. 651 et seq.), as these laws have been amended
or supplemented, and any analogous foreign, state or local statutes, and the
regulations promulgated pursuant thereto.
ENVIRONMENTAL LOSS - means any loss, cost, damage, liability, deficiency, fine,
penalty or expense (including, without limitation, reasonable attorney's fees,
engineering and other professional or expert fees), investigation, removal,
cleanup and remedial costs (voluntanly or involuntarily incurred) and damages
to, loss of the use of or decrease in value of the Equipment arising out of or
related to any Adverse Environmental Condition.
EQUIPMENT - means the property described on a Schedule and any replacement for
that property required or permitted by this Master Lease or a Schedule but not
including any Attachment.
EVENT OF DEFAULT - means the events described in Subsection 13.1.
FAIR MARKET VALUE - means the aggregate amount which would be obtainable in an
arm's-length transaction between an informed and willing buyer/user purchasing
the Equipment in place for its originally intended use and an informed and
willing seller under no compulsion to sell.
INITIAL TERM - means the period of time beginning on the first day of the first
full Rent Interval following the Commencement Date for all items of Equipment
and continuing for the number of Rent Intervals indicated on a Schedule.
INSTALLATION DATE - means the day on which Equipment is installed and qualified
for a commercially available manufacturer's standard maintenance contract or
warranty coverage, if available.
INTERIM RENT - means the pro-rata portion of Rent due for the period from the
Commencement Date through but not including the first day of the first full Rent
Interval included in the Initial Term.
LICENSED PRODUCTS - means any software or other licensed products attached to
the Equipment.
LIKE EQUIPMENT - means replacement Equipment which is lien free and of the same
model, type, configuration and manufacture as Equipment.
LIKE PART - means a substituted part which is lien free and of the same
manufacturer for and part number as the removed part, and which when installed
on the Equipment will be eligible for maintenance coverage with the manufacturer
of the Equipment.
NOTICE PERIOD - means the time period described in a Schedule during which
Lessee may give Lessor notice of the termination of the term of that Schedule.
OVERDUE RATE - means the lesser of 18% per year or the maximum rate permitted by
the law of the state where the Equipment is located.
OWNER - means the owner of Equipment.
PERSON - means any individual, partnership, corporation, trust, unincorporated
organization, government or department or agency thereof and any other entity.
RECONFIGURATION - means any change to Equipment that would upgrade or downgrade
the performance capabilities of the Equipment in any way.
RENT - means the rent, including Interim Rent, Lessee will pay for each item of
Equipment expressed in a Schedule either as a specific amount or an amount equal
to the amount which Lessor pays for an item of Equipment multiplied by a lease
rate factor plus all other amounts due to Lessor under this Master Lease or a
Schedule.
RENT INTERVAL - means a full calendar month or quarter as indicated on a
Schedule.
SCHEDULE- means an Equipment Schedule which incorporates all of the terms and
conditions of this Master Lease and, for purposes of Section 15.8, its
associated Commencement Certificate(s).
SECURED PARTY - means an entity to whom Lessor has granted a security interest
in a Schedule and related Equipment for the purpose of securing a loan.
IN WITNESS WHEREOF the parties hereto have executed this Master Lease on or as
of the day and year first above written.
ALPHA-BETA TECHNOLOGY, INC. COMDISCO, INC.,
- ---------------------------------- as Lessor
as Leessee
By: illegible By: illegible
------------------------------- -----------------------------------
VICE PRESIDENT/COMDISCO
TITLE: VP Finance TITLE: ELECTRONICS GROUP
--------------------------- --------------------------------
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-K, into Alpha-Beta Technology, Inc.'s
previously filed Registration Statements, file Nos. 33-56060, 33-64336,
33-71060, 33-83042, 33-95334 and 333-10627.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 26, 1997
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 21,885,111
<SECURITIES> 18,700,325
<RECEIVABLES> 202,157
<ALLOWANCES> 0
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<PP&E> 39,890,189
<DEPRECIATION> 11,773,967
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0
0
<COMMON> 147,715,067
<OTHER-SE> (106,932,248)
<TOTAL-LIABILITY-AND-EQUITY> 70,551,826
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<TOTAL-REVENUES> 2,683,859
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<OTHER-EXPENSES> 30,374,451
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<INTEREST-EXPENSE> 3,270,408
<INCOME-PRETAX> (30,961,000)
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<EPS-PRIMARY> (1.92)
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