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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 [NO FEE REQUIRED]
For Fiscal Year Ended December 31, 1997
[ ] 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 $48,444,822 as of March 13, 1998.
On March 13, 1998, the Registrant had outstanding 20,399,504 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 1997 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 a novel class of immune modulation pharmaceutical
products composed of complex carbohydrates and is discovering and developing new
anti-fungal diagnostics and drugs. The Company's lead product, Betafectin(R)
PGG-glucan, is a proprietary carbohydrate polymer. In January 1998, the Company
began patient enrollment in its confirmatory Phase III clinical study of
Betafectin for the prevention of serious infections in upper gastrointestinal
surgery patients at high risk for post-operative infection. In addition,
Alpha-Beta has developed a rapid in vitro diagnostic to detect and monitor
systemic fungal infections and has an anti-fungal research program to discover
direct inhibitors of fungal cell wall synthesis.
BACKGROUND
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
become 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 agents stimulate the immune system and
elicit non-specific antimicrobial host responses. There continues to be a
significant need for therapeutics that will selectively amplify white blood cell
microbicidal responses without triggering undesirable inflammatory reactions.
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
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utilizing its technology to develop products derived from SS-glucan, a
carbohydrate polymer composed of glucose, for the prevention and treatment of
infections.
CLINICAL DEVELOPMENT
BETAFECTIN
Betafectin is a SS-glucan polymer which binds to specific cellular
receptors and triggers 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 August 1997, the Company announced its preliminary analysis of its Phase
III clinical study of Betafectin for the prevention of serious infections in
patients at high risk for post-operative infections. In the overall study 21% of
placebo patients suffered serious post-operative infections compared with 17% of
Betafectin-treated patients. This positive trend did not achieve statistical
significance in the incidence of patients who developed serious infection or
death within 30 days of their surgery, the primary end-point of the trial.
However, a 39% reduction of infections was demonstrated in one of the two
prospectively defined strata in the trial, patients undergoing upper
gastrointestinal ("GI") (non-colorectal) surgeries. In this stratum, 36% of the
placebo patients suffered serious post-operative infections compared with 22% of
the Betafectin-treated patients. These results were statistically significant
(p [less than] 0.015). In the other prospectively defined stratum, patients
undergoing lower GI (colorectal) surgeries, there was no difference in the
incidence of serious infections between the placebo and Betafectin arms. The
results in the upper GI group, however, were robust and consistently positive
across a variety of measures. These results did not meet fully the regulatory
requirements for approval because the study was designed for a significant
effect in the entire enrolled population. They provide, however, the foundation
for initiating a confirmatory trial in upper GI surgery patients.
The upper GI surgery group, which included 391 patients, was prospectively
designed into the trial. These surgeries were defined as distinct from lower GI
procedures based on input from surgical experts and included gastric, biliary,
pancreatic and small intestine procedures. Upper GI surgery patients are more
likely to be immunosuppressed due to their underlying disease and the complexity
of their surgical procedures. For example, more than half of the upper GI
patients in the study were malnourished, which is known to suppress immune
function.
In the malnourished subgroup, Betafectin produced an even more pronounced
effect; reducing the proportion of patients with series infection by 45% (44%
placebo vs. 24% Betafectin) in the 0.5mg/kg dose group and by 61% (44% placebo
vs. 17% Betafectin) in the 1.0mg/kg dose group. This result was statistically
significant (p [less than] 0.001).
In addition, for both Betafectin dose groups in the overall study, most
secondary endpoints showed consistent improvements versus placebo. In the upper
GI group, mean number of serious infections, length of ICU stay, days of
non-prophylactic antibiotics, and mortality generally showed trends of reduction
in the two Betafectin groups compared with placebo.
In October 1997, the Company met with FDA officials to review the data of
its completed Phase III trial of Betafectin and discuss the development path for
the product. As a result of these discussions, the Company is conducting a
confirmatory Phase III trial of Betafectin in upper GI (non-colorectal) surgery
patients. This second study, along with the results of the first study, is
designed to form the basis for a Product License Application (PLA) filing for
Betafectin. The confirmatory Phase III study is designed to verify the efficacy
and safety of 1.0 mg/kg Betafectin in patients undergoing upper GI surgeries who
are at risk of post-operative infections. The randomized double-blind,
placebo-controlled study will enroll at least 618 patients at approximately 30
sites throughout the United States. The study is expected to be completed in
approximately 18 months and will include an interim analysis when 50 percent of
the patients have been enrolled. The interim analysis is planned to be completed
by the end of 1998.
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Following the unblinding of its first Phase III clinical trial of
Betafectin, the Company suspended indefinitely patient enrollment in its Phase
II clinical trial of patients undergoing surgery for inflammatory bowel disease
(IBD). Ninety-eight patients had been enrolled in this double-blinded
placebo-controlled study.
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 upper gastrointestinal surgeries where
patients are at high risk of developing an infection, such as gastric, liver,
biliary and small intestine surgery, amount to over 430,000 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. The
total incremental costs associated with a hospital acquired infection in the
United States exceed $12,000 for a patient undergoing major GI surgery.
The commercial market for Betafectin in treating post-operative upper GI
surgery patients is substantial. Each year in the United States and Europe,
approximately 900,000 patients undergo major upper GI surgeries. Post-operative
infection in this patient population is a major cause of morbidity, mortality
and extended hospital stay.
RESEARCH & DEVELOPMENT
INTEGRATED DRUG DISCOVERY AND RESEARCH PLAN
In 1996, Alpha-Beta implemented an integrated drug discovery and research
plan focusing on infectious disease: anti-microbial drug discovery and
immunomodulatory drug discovery. Anti-microbials focus on direct inhibitors of
fungal and bacterial cell wall biosynthesis. The Company's acquisition of
MycoTox in 1997 added proprietary anti-fungal screening technology and drug
discovery capabilities. Immunomodulation is based on agents that enhance the
clearance of microorganisms by immune system cells.
Anti-microbial Drug Discovery
The anti-microbial drug discovery program was initiated to identify
proprietary agents that inhibit fungal cell wall biosynthesis and assembly. 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 and assembly.
In June 1997, Alpha-Beta acquired MycoTox, Inc., (Denver, Colorado), a
privately held biotechnology firm, focusing on the discovery of novel
anti-fungal drugs. Through the merger, the Company expanded its anti-fungal
strategy to include three distinct programs; an operating anti-fungal screening
service, a proprietary anti-fungal drug discovery program aimed at cell-wall
targeted agents and the development of a rapid fungal diagnostic.
Fungal Diagnostic Program -- Alpha-Beta and MycoTox have combined novel
technologies for capturing and detecting glucans to develop an in vitro
diagnostic to rapidly detect systemic and sub-acute fungal infections. Despite
the growing incidence and morbidity associated with fungal infections, most
cases remain unconfirmed and treatment decisions are based on empirical
evidence. Since conventional fungal diagnostic tests have severe limitations
such as slow turn around time and unreliability, there is an unmet need for a
quick and accurate test to verify fungal infections.
Alpha-Beta's test measures beta-glucan, a cell wall component that is
unique to fungi and is shed into the bloodstream as fungal cells grow. The test
measures levels of beta glucan in urine or blood simply and quickly. Research
suggests that elevations in beta glucans can be detected five to seventeen days
before culture methods can detect a fungal infection.
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The Company's commercial strategy is to strike an alliance with a corporate
partner to develop and market diagnostics world-wide, and is in active
discussions with several prospective partners.
Anti-Fungal Drug Discovery Program -- The Company's program is focused on
systemic infections caused by two major pathogens, candida and aspergillis.
These pathogens are major contributors to morbidity and mortality in patients
with suppressed immune function, such as cancer and organ transplant patients.
Presently there are few drugs available to treat fungal infections and
resistance to these existing drugs has emerged as a major problem.
The discovery program is based on several proprietary targets involving
cell wall biosynthesis. These cell wall targets are unique to fungi and are
accessible to therapeutic compounds without having to cross the fungal cell
membrane. The Company has identified novel compounds against these targets that
show promise against drug resistant fungal strains.
The Company is developing a number of targets and screens for outlicensing.
Since mid-1997, the Company's anti-fungal program has generated approximately
$500,000 in research funding from the National Institutes of Health.
Immunomodulatory Drug Discovery
Betafectin Receptors and Mechanism -- 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 are providing
Alpha-Beta with proprietary targets for the development of second generation
products. The research showed that Betafectin binds to specific receptors on the
surface of human white blood cells and triggers the production of a unique
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.
C1q Receptor -- C1q is a blood component that specifically targets
infectious microbes and triggers their killing and clearance by the immune
system. Receptors for C1q are present on macrophages, neutrophils and other
immune cells and play major roles in stimulating phagocytosis and killing.
Alpha-Beta has entered the second year of a two-year research collaboration on
C1q receptors with Dr. Andrea Tenner in the Department of Molecular Biology and
Biochemistry at the University of California, Irvine. The ultimate goal of this
project is to identify specific agents that bind to the C1q receptor and
regulate the clearance of C1q coated infectious agents. During the first year of
this research collaboration, Dr. Tenner's laboratory purified and cloned the
gene for the C1q receptor from human leukocytes. Current research efforts are
focused on using the recombinant C1q receptor to establish screens for
anti-infective drug discovery efforts. Dr. Tenner's work has been the basis of a
patent application filed in November, 1997.
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 be commercially
available prior to 1999.
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).
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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 sixteen issued U.S. patents and has 14 U.S.
patent applications on file. The Company also has exclusive rights to ten U.S.
patents and one pending U.S. patent application. Eight of the patent
applications have corresponding applications on file outside of the U.S.,
including Europe, Japan and certain other countries. Most of these patents and
pending applications relate to the Company's carbohydrate engineering
technology, including genetic engineering techniques, proprietary microbial
strains, diagnostic assays, production processes, novel carbohydrate
compositions and their therapeutic uses. Additional applications relate to the
Company's antifungal program. The Company intends to file additional patent
applications relating to new developments or improvements in its technologies.
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 two licenses 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-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
issued U.S. patents have been exclusively licensed to the Company.
The Company has also entered into research and exclusive, worldwide,
royalty-bearing license agreements with the University of California, Irvine for
discoveries relating to the C1q receptor. One pending application and a
corresponding foreign application 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
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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 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
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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 which the Company
conducts its business 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 and potential
anti-fungal products. 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.
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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, 1998, Alpha-Beta employed 103 people of whom 47 hold Ph.D.,
M.D. or other advanced degrees. Of its total work force, 35 people are engaged
in research and development activities, 47 in manufacturing and quality control,
16 in support and administrative functions and 5 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 did not exercise this option
and allowed it to lapse in September 1997.
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 38,000 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.
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.
10
<PAGE> 11
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.
HIGH LOW
---- ---
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
1st Quarter 1997............................................ 13 1/4 9 7/8
2nd Quarter 1997............................................ 11 1/8 7 1/2
3rd Quarter 1997............................................ 11 9/16 2 7/8
4th Quarter 1997............................................ 3 3/4 2 13/32
As of March 13, 1998, there were approximately 315 holders of record of
Common Stock. On March 13, 1998 the closing price reported on the NASDAQ
National Market System for the Common Stock was $2.375.
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.
11
<PAGE> 12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997 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, 1993, 1994 and 1995 and for the years ended
December 31, 1993 and 1994 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,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 921,101 $ 1,985,500 $ 1,886,083 $ 2,683,859 $ 1,534,757
Expenses:
Research and
development............ 10,333,076 18,334,882 20,268,160 25,675,118 24,878,114
General and
administrative......... 3,709,021 4,879,203 4,523,091 4,699,333 4,283,931
Acquired in-process
research and
development............ -- -- -- -- 2,514,004
Interest................. 104,242 1,946,880 3,384,822 3,270,408 3,167,356
------------ ------------ ------------ ------------ ------------
Total Expenses...... 14,146,339 25,160,965 28,176,073 33,644,859 34,843,405
------------ ------------ ------------ ------------ ------------
Net loss...................... $(13,225,238) $(23,175,465) $(26,289,990) $(30,961,000) $(33,308,648)
============ ============ ============ ============ ============
Basic net loss per common
share....................... $ (1.35) $ (1.99) $ (2.10) $ (1.92) $ (1.94)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding... 9,771,556 11,637,225 12,523,026 16,106,147 17,210,452
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities....... $ 61,893,659 $ 41,455,322 $ 28,463,909 $ 40,585,436 $ 19,612,971
Total assets.................. 99,636,168 78,772,296 61,564,142 70,551,826 46,503,175
Term notes payable and capital
lease obligations........... 27,480,419 28,816,532 27,976,881 26,896,478 25,947,394
Deficit accumulated during
development stage........... (26,436,178) (49,797,961) (75,840,456) (106,842,888) (140,171,324)
Total stockholders' equity.... 71,152,379 48,166,382 32,118,666 40,782,819 19,343,676
</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 and anti-fungal 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, 1997, the Company's accumulated deficit was $140,171,324.
RESULTS OF OPERATIONS
Years ended December 31, 1995, 1996 and 1997
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 $1,886,083 in the year ended December 31, 1995,
$2,683,859 in the year ended December 31, 1996 and $1,534,757 in the year ended
December 31, 1997. The increase of $797,776 in the 1996 period resulted
primarily from additional interest
12
<PAGE> 13
earned on higher average cash balances in 1996, as compared to the same period
in 1995. The decrease of $1,149,102 in the 1997 period resulted primarily from
less interest earned as a result of lower average cash balances in 1997, as
compared to the same period in 1996. 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 increased from
$20,268,160 in 1995 to $25,675,118 in 1996 and decreased to $24,878,114 in 1997.
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. The decrease
in 1997 of $797,004 from 1996 was due to the completion of the first Phase III
Betafectin clinical trial in the third quarter of 1997. Research and development
expenditures constituted approximately 72%, 76%, and 71% of total expenses for
1995, 1996, and 1997, respectively. Research and development expenses are not
expected to increase in 1998; however, in future years these expenses are
expected to increase 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.
For the twelve month period ended December 31, 1997, the Company recorded
$2,514,004 of acquired in-process research and development expense related to
the acquisition of MycoTox, Inc. See Note 3 in notes to the Company's
Consolidated Financial Statements for a further discussion of this acquisition.
The Company's general and administrative expenditures increased from
$4,523,091 in 1995 to $4,699,333 in 1996 and decreased to $4,283,931 in 1997.
The increase in expenses in 1996 of $176,242 over 1995 was primarily due to
corporate development activities. The decrease in expenses in 1997 of $415,402
over 1996 was primarily due to corporate development activities. General and
administrative expenses constituted approximately 16%, 14%, and 12% of total
expenses for 1995, 1996, and 1997, respectively. General and administrative
expenses are not expected to increase in 1998; however, in future years these
expenses are expected to increase reflecting the planned efforts to
commercialize Betafectin.
Interest expense decreased from $3,384,822 in 1995 to $3,270,408 in 1996
and to $3,167,356 in 1997. Interest expense constituted approximately 12%, 10%,
and 9% of total expenses for 1995, 1996, and 1997, respectively. The decrease
from 1995 to 1996 and to 1997 was primarily due to declining loan balances in
each of these periods. For a more complete discussion of the Rhode Island Port
Authority and Economic Development Corporation ("RIPA") loan, see "Liquidity and
Capital Resources" and Note 4 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 $195,645,000.
The Company had approximately $19,613,000 in cash, cash equivalents, and
marketable securities at December 31, 1997, compared to approximately
$40,585,000 at December 31, 1996. The decrease in cash for the year ended
December 31, 1997, was primarily due to approximately $29,000,000 used for
operating activities, and approximately $1,119,000 used to repay the Company's
debt obligations. This decrease was offset by the net proceeds of approximately
$9,589,000 raised from the Company's issuance of 3,366,795 shares of common
stock in November 1997.
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
13
<PAGE> 14
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 $6,447,000 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 $554,000 was outstanding as of December 31, 1997.
The Company expects to incur substantial additional operating expenses in
1998 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, 1997, the
Company had working capital of approximately $17,433,000. The Company
anticipates that its existing capital resources are sufficient to maintain its
operations and capital expenditures through 1998, after taking into account
certain potential cost saving activities. The Company's actual capital
requirements will depend upon numerous 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 will need to 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.
On June 9, 1997 the Company acquired all the outstanding shares of MycoTox,
Inc., a privately owned biotechnology company located in Denver, Colorado. Under
the agreement, MycoTox shareholders received an up-front payment valued at $1.0
million consisting of $500,000 in cash and 56,813 shares of the Company's common
stock. On June 9, 1998, an additional 113,636 shares of common stock will be
issued to MycoTox shareholders. The 56,813 and 113,636 common shares granted on
June 9, 1997 and to be granted on June 9, 1998, respectively, were valued at
$8.80 per share (the 10 day average price of the Company's common stock
preceding June 9, 1997). An additional $1.0 million of common stock will be
issued subject to the attainment of performance milestones. On November 7, 1997,
the first milestone was met and resulted in the issuance of 180,551 shares of
the Company's common stock at $2.70 per share resulting in an aggregate value of
approximately $500,000.
On August 4, 1997, the Company announced its preliminary analysis of its
Phase III clinical study of Betafectin for the prevention of serious infections
in patients at high risk for post-operative infections. In the overall study 21%
of placebo patients suffered serious post-operative infections compared with 17%
of Betafectin-treated patients. This positive trend did not achieve statistical
significance in the incidence of patients who developed serious infection or
death within 30 days of surgery, the primary end-point of the trial. However, a
39% reduction of infections was demonstrated in one of the two prospectively
defined strata in the trial, patients undergoing upper gastrointestinal ("GI")
(non-colorectal) surgeries. In this stratum, 36% of the placebo patients
suffered serious post-operative infection compared with 22% of the
Betafectin-treated patients. The results were statistically significant
(p 1/4 0.015). In the other prospectively defined stratum, patients undergoing
lower GI (colorectal) surgeries, there was no difference in the incidence of
serious infections between the placebo and Betafectin arms. The results in the
upper GI group, however, were robust and consistently positive across a variety
of measures. These results did not meet fully the regulatory requirements for
approval because the study was designed for a significant effect in the entire
enrolled population. They provide, however, the foundation for initiating a
confirmatory trial in upper GI surgery patients.
14
<PAGE> 15
The upper GI surgery group, which included 391 patients, was prospectively
designed into the trial. These surgeries were defined as distinct from lower GI
procedures based on input from surgical experts and included gastric, biliary,
pancreatic and small intestine procedures. Upper GI surgery patients are more
likely to be immunosuppressed due to their underlying disease and the complexity
of their surgical procedures. For example, more than half of the upper GI
patients in the study were malnourished, which is known to suppress immune
function.
In the malnourished subgroup, Betafectin produced an even more pronounced
effect; reducing the proportion of patients with series infection by 45% (44%
placebo vs. 24% Betafectin) in the 0.5mg/kg dose group and by 61% (44% placebo
vs. 17% Betafectin) in the 1.0mg/kg dose group. This result was statistically
significant (p [less than] 0.001).
In addition, for both Betafectin dose groups in the overall study, most
secondary endpoints showed consistent improvements versus placebo. In the upper
GI group, mean number of serious infections, length of ICU stay, days of
non-prophylactic antibiotics, and mortality generally showed trends of reduction
in the two Betafectin groups compared with placebo.
In October 1997, the Company met with FDA officials to review the data of
its recently completed Phase III trial of Betafectin and discuss the development
path for the product. As a result of these discussions, the Company is
conducting a confirmatory Phase III trial of Betafectin in upper GI
non-colorectal gastrointestinal surgery patients. This second study, along with
the results of the recently completed study, is designed to form the basis for a
PLA filing for Betafectin. The confirmatory Phase III study is designed to
verify the efficacy and safety of 1.0 mg/kg Betafectin in patients undergoing
upper GI surgeries who are at risk of post-operative infections. The randomized
double-blind, placebo-controlled study will enroll at least 618 patients at
approximately 30 sites throughout the United States. The study is expected to be
completed in approximately 18 months and will include an interim analysis when
50 percent of the patients have been enrolled. The interim analysis is expected
to be completed by the end of 1998.
The commercial market for Betafectin in treating post-operative upper GI
surgery patients is substantial. Each year in the United States and Europe,
approximately 900,000 patients undergo major upper GI surgeries. Post-operative
infection in this patient population is a major cause of morbidity, mortality
and extended hospital stay.
Following the unblinding of its first Phase III clinical trial of
Betafectin, the Company suspended indefinitely patient enrollment in its ongoing
Phase II clinical trial of patients undergoing surgery for inflammatory bowel
disease (IBD). Ninety-eight patients had been enrolled in this double blinded
placebo-controlled study.
The Company is evaluating Year 2000 issues and their potential impact on
its information systems and computer technologies. All evaluation costs will be
expensed as incurred. Year 2000 issues are not expected to have a significant
impact on the Company's ongoing results of operations.
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 ability to raise additional funds;
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.
15
<PAGE> 16
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.................... 17
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... 18
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997 and for the
period from March 2, 1988 (inception) to December 31,
1997...................................................... 19
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 1997 and
for the period from March 2, 1988 (inception) to December
31, 1997.................................................. 20
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997 and for the
period from March 2, 1988 (inception) to December 31,
1997...................................................... 21
Notes to Consolidated Financial Statements.................. 22
</TABLE>
16
<PAGE> 17
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, 1996 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997 and for the period from
inception (March 2, 1988) to December 31, 1997. 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 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, and for the period from inception to December 31, 1997 in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
January 27, 1998
17
<PAGE> 18
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 21,885,111 $ 16,288,035
Marketable securities.................................. 18,700,325 3,324,936
Other current assets................................... 646,231 212,131
------------ -------------
Total current assets.............................. 41,231,667 19,825,102
------------ -------------
PROPERTY AND EQUIPMENT, net................................. 28,116,222 25,469,751
------------ -------------
OTHER ASSETS:
Bond issuance costs, net............................... 1,068,383 1,007,767
Other.................................................. 135,554 200,555
------------ -------------
Total other assets................................ 1,203,937 1,208,322
------------ -------------
$ 70,551,826 $ 46,503,175
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of term notes payable and capital lease
obligations.......................................... $ 1,119,226 $ 1,180,059
Accounts payable....................................... 2,161,078 647,832
Accrued expenses....................................... 711,451 564,273
------------ -------------
Total current liabilities......................... 3,991,755 2,392,164
------------ -------------
TERM NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS, net of
current portion........................................... 25,777,252 24,767,335
------------ -------------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 10)
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--16,723,369 shares and
20,394,727 shares at December 31, 1996 and 1997,
respectively......................................... 167,234 203,947
Additional paid-in capital............................. 147,547,833 159,338,073
Deficit accumulated during the development stage....... (106,842,888) (140,171,324)
Deferred compensation.................................. (89,360) (27,020)
------------ -------------
Total stockholders' equity........................ 40,782,819 19,343,676
------------ -------------
$ 70,551,826 $ 46,503,175
============ =============
</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)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MARCH 2, 1988
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------ DECEMBER 31,
1995 1996 1997 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
REVENUES:
Interest....................... $ 1,850,390 $ 2,546,193 $ 1,454,112 $ 9,486,590
Other.......................... 35,693 137,666 80,645 531,272
------------ ------------ ------------ -------------
Total revenues............ 1,886,083 2,683,859 1,534,757 10,017,862
------------ ------------ ------------ -------------
EXPENSES:
Research and development....... 20,268,160 25,675,118 24,878,114 108,646,905
General and administrative..... 4,523,091 4,699,333 4,283,931 26,964,318
Acquired in-process research &
development.................. -- -- 2,514,004 2,514,004
Interest....................... 3,384,822 3,270,408 3,167,356 12,063,916
------------ ------------ ------------ -------------
Total expenses............ 28,176,073 33,644,859 34,843,405 150,189,143
------------ ------------ ------------ -------------
Net loss............................ $(26,289,990) $(30,961,000) $(33,308,648) $(140,171,281)
============ ============ ============ =============
BASIC NET LOSS PER COMMON SHARE
(Note 2(h))....................... $ (2.10) $ (1.92) $ (1.94)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 2(h)).... 12,523,026 16,106,147 17,210,452
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 20
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL DURING THE TOTAL
NUMBER OF $.01 PAID-IN DEVELOPMENT DEFERRED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL STAGE COMPENSATION EQUITY
--------- --------- ---------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL SALE OF COMMON STOCK AT INCEPTION
(March 2, 1988).......................... 1,006,500 $ 10,065 $ (9,150) $ -- $ -- $ 915
Issuance of common stock at $1.64 per
share, net of issuance costs of
$8,000................................. 178,376 1,784 282,103 -- -- 283,887
Issuance of common stock at $4.36 per
share, net of issuance costs of
$15,478................................ 180,345 1,803 769,679 -- -- 771,482
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 -- -- 16,393,985
Conversion of all convertible preferred
stock to common stock.................. 5,166,348 51,664 20,622,790 -- -- 20,674,454
Issuance of common stock from exercise of
stock options at prices ranging from
$.009 to $15.75 per share.............. 464,174 4,641 213,735 -- 42,301 260,677
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 -- -- 18,547,150
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 -- -- 38,375,232
Grant of warrants to purchase common
stock.................................. -- -- 974,243 -- -- 974,243
Grant of common stock.................... 5,170 52 67,179 -- -- 67,231
Deferred compensation related to grant of
stock options and restricted stock..... -- -- 1,996,153 -- (1,996,153) --
Compensation expense related to stock
options and restricted stock........... -- -- -- -- 1,483,087 1,483,087
Deferred compensation related to issuance
of warrants............................ -- -- 132,000 -- (132,000) --
Compensation expense related to
warrants............................... -- -- -- -- 132,000 132,000
Deferred compensation adjustment related
to termination of stock options........ -- -- (48,423) -- 48,423 --
Unrealized loss on marketable
securities............................. -- -- -- (186,318) -- (186,318)
Net loss since inception................. -- -- -- (49,611,643) -- (49,611,643)
---------- -------- ------------ ------------- ----------- ------------
BALANCE, December 31, 1994................ 11,672,913 116,729 98,269,956 (49,797,961) (422,342) 48,166,382
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 -- -- 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 -- -- 6,136,012
Conversion of 65,000 shares of
convertible preferred stock............ 1,090,224 10,902 (10,902) -- -- --
Issuance of common stock from exercise of
stock options at prices ranging from
$.09 to $8.50 per share................ 37,985 380 85,963 -- -- 86,343
Grant of common stock.................... 10,714 107 77,162 -- -- 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) -- 257 --
Unrealized gain on marketable
securities............................. -- -- -- 247,495 -- 247,495
Net loss................................. -- -- -- (26,289,990) -- (26,289,990)
---------- -------- ------------ ------------- ----------- ------------
BALANCE, December 31, 1995................ 13,650,274 136,502 108,090,944 (75,840,456) (268,324) 32,118,666
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 -- -- 39,295,375
Issuance of common stock from exercise of
stock options at prices ranging from
$.09 to $10.25 per share............... 67,451 675 184,825 -- -- 185,500
Grant of common stock.................... 5,644 57 61,022 -- -- 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) -- 54,333 --
Unrealized loss on marketable
securities............................. -- -- -- (41,432) -- (41,432)
Net loss................................. -- -- -- (30,961,000) -- (30,961,000)
---------- -------- ------------ ------------- ----------- ------------
BALANCE, December 31, 1996................ 16,723,369 167,234 147,547,833 (106,842,888) (89,360) 40,782,819
Issuance of common stock at $2.88 per
share, net of issuance costs of
$91,014................................ 3,366,795 33,668 9,554,853 -- -- 9,588,521
Issuance of common stock at $8.80 and
$2.70 per share in connection with
acquisition............................ 237,364 2,374 1,985,114 -- -- 1,987,488
Issuance of common stock from exercise of
stock options at prices ranging from
$.009 to $10.25 per share.............. 55,745 557 185,965 -- -- 186,522
Grant of common stock.................... 11,454 114 64,308 -- -- 64,422
Compensation expense related to stock
options and restricted stock........... -- -- -- -- 62,340 62,340
Unrealized loss on marketable
securities............................. -- -- -- (19,788) -- (19,788)
Net loss................................. -- -- -- (33,308,648) -- (33,308,648)
---------- -------- ------------ ------------- ----------- ------------
BALANCE, December 31, 1997................ 20,394,727 $203,947 $159,338,073 $(140,171,324) $ (27,020) $ 19,343,676
========== ======== ============ ============= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE> 21
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,
1995 1996 1997 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(26,289,990) $(30,961,000) $(33,308,648) $(140,171,281)
Adjustments to reconcile net loss to net cash used
for operating activities --
Depreciation and amortization...................... 4,306,216 3,253,404 2,633,021 14,438,472
Amortization of investment premium................. 272,366 138,713 59,501 1,887,769
Amortization of deferred financing and bond
issuance costs.................................. 230,858 230,755 230,756 807,746
Noncash compensation related to stock options,
warrants and restricted stock................... 230,923 185,709 174,468 2,273,418
Charges related with acquired in-process research &
development..................................... -- -- 2,514,004 2,514,004
Changes in assets and liabilities --
Other current assets............................ 496,085 (103,870) 436,820 (209,411)
Accounts payable................................ (32,039) 1,200,202 (1,549,413) 611,665
Accrued expenses................................ (288,748) 203,732 (190,035) 521,416
------------ ------------ ------------ -------------
Net cash used for operating activities............... (21,074,329) (25,852,355) (28,999,526) (117,326,202)
------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in marketable securities......... 4,419,836 (537,404) 15,296,099 (5,212,756)
Net cash used in the purchase of MycoTox............. -- -- (593,412) (593,412)
Increase in property and equipment................... (582,329) (506,252) (280,956) (39,682,240)
Decrease (increase) in restricted cash............... -- 381,347 -- (32,425,737)
Payments from restricted cash........................ -- -- -- 32,425,737
Increase in bond issuance costs...................... -- -- -- (1,303,237)
(Increase) decrease in other assets.................. (63,847) 48,599 23,332 (189,290)
------------ ------------ ------------ -------------
Net cash provided by (used for) investing
activities......................................... 3,773,660 (613,710) 14,445,063 (46,980,935)
------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible subordinated
notes payable to stockholders...................... -- -- -- 2,300,000
Proceeds from equipment line of credit............... 297,030 -- -- 3,261,600
Proceeds from equipment lease........................ -- -- 349,273 349,273
Payments on capital lease obligations................ (35,108) (11,831) -- (180,867)
Proceeds from term notes payable..................... -- -- -- 27,835,947
Payments on term notes payable....................... (1,271,709) (1,238,712) (1,119,224) (5,000,525)
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..................................... 3,627,737 39,480,876 9,727,338 127,469,279
------------ ------------ ------------ -------------
Net cash provided by financing activities............ 8,753,962 38,230,333 8,957,387 180,595,172
------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... (8,546,707) 11,764,268 (5,597,076) 16,288,035
CASH AND CASH EQUIVALENTS, beginning of period......... 18,667,550 10,120,843 21,885,111 --
------------ ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of period............... $ 10,120,843 $ 21,885,111 $ 16,288,035 $ 16,288,035
============ ============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid (net of capitalized interest).......... $ 3,154,058 $ 2,834,043 $ 2,866,204 $ 11,332,340
============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 22
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 MycoTox, Inc. (formerly 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>
1996 1997
---- ----
<S> <C> <C>
Cash and money market accounts................ $ 9,585,994 $ 4,544,093
U.S. Government Agency obligations............ -- 2,619,272
Corporate debt securities..................... 12,299,117 9,124,670
----------- -----------
$21,885,111 $16,288,035
=========== ===========
</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 Standards (SFAS) No.
115, Accounting for Certain Investments in Debt and Equity Securities, the
Company has classified its investments in marketable securities as
"Available-for-Sale" Securities. Accordingly, marketable securities as of
December 31, 1996 and 1997 are recorded at market with the unrealized gain or
loss from cost recorded as a component of Stockholders' Equity.
22
<PAGE> 23
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company held the following marketable securities at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
U.S. Government and Government Agency
securities................................... $ 2,503,940 $1,004,200
Corporate bonds................................ 11,973,812 2,320,736
Commercial paper............................... 4,222,573 --
----------- ----------
$18,700,325 $3,324,936
=========== ==========
</TABLE>
The amortized cost and estimated fair market values of the Company's
securities at December 31, 1997 are presented below. There were no realized
gains or losses in the year ended December 31, 1997.
<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 15.7 months)..... $1,004,402 -$- $202 $1,004,200
Corporate debt securities (average
maturity
of 4.0 months)........................ 2,320,578 158 -- 2,320,736
---------- ---- ---- ----------
$3,324,980 $158 $202 $3,324,936
========== ==== ==== ==========
</TABLE>
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>
23
<PAGE> 24
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) 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>
1996 1997
---- ----
<S> <C> <C>
Land and land improvements................... $ 1,733,124 $ 1,733,124
Building..................................... 19,291,789 19,307,789
Production machinery......................... 11,995,936 12,136,490
Laboratory equipment......................... 3,602,359 3,391,419
Leasehold improvements....................... 1,680,515 1,712,172
Computer equipment........................... 851,166 857,430
Furniture and fixtures....................... 556,684 521,852
Equipment under capital lease................ 178,616 178,616
------------ ------------
39,890,189 39,838,892
Less accumulated depreciation and
amortization............................... (11,773,967) (14,369,141)
------------ ------------
$ 28,116,222 $ 25,469,751
============ ============
</TABLE>
(e) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. 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, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Net operating loss carryforwards............. $ 42,294,000 $ 56,488,000
Capitalized research and development
expenses................................... 1,804,000 1,804,000
Research and development
credits -- Federal......................... 2,434,000 3,782,000
Research and development credits -- State.... 1,423,000 2,620,000
Depreciation................................. (523,000) (1,257,000)
Other, net................................... 79,000 66,000
------------ ------------
47,511,000 63,503,000
Less: valuation allowance.................... (47,511,000) (63,503,000)
------------ ------------
$ -- $ --
============ ============
</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'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 assets are uncertain, the Company has recorded a valuation
allowance equal to the deferred tax assets.
24
<PAGE> 25
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(f) 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.
(g) Research and Development Expenses
The Company charges research and development expenses to operations, as
incurred, for financial reporting purposes.
(h) Net Loss Per Common Share
In 1997, the Company adopted SFAS No. 128, Earnings per Share. Basic net
loss per common share was computed using the weighted average number of shares
of common stock outstanding. Diluted earnings per share have not been presented
as the inclusion of common equivalents would be antidilutive.
(i) 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 and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(j) New Accounting Standard
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The Company does not expect the
adoption of SFAS No. 130 to have a material effect on its financial statements,
as the only element of comprehensive income related to the Company is unrealized
gains or losses in marketable securities.
(3) ACQUISITION OF MYCOTOX, INC.
On June 9, 1997, the Company acquired all the outstanding shares of
MycoTox, Inc., a privately owned biotechnology company located in Denver,
Colorado. Under the agreement, MycoTox shareholders received an up-front payment
valued at $1.0 million consisting of $500,000 in cash and 56,813 shares of
Alpha-Beta common stock. On June 9, 1998, an additional 113,636 shares of common
stock will be issued to MycoTox shareholders. The 56,813 and 113,636 common
shares granted on June 9, 1997 and to be granted on June 9, 1998, respectively,
were valued at $8.80 per share (the 10 day average price of the Company's common
stock preceding June 9, 1997). An additional $1.0 million of common stock will
be issued subject to the attainment of performance milestones. On November 7,
1997, the first milestone was met and resulted in the issuance of 180,551 shares
of the Company's common stock at $2.70 per share resulting in an aggregate value
of approximately $500,000.
25
<PAGE> 26
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate purchase price of $2,664,024 consisted of the following:
<TABLE>
<S> <C>
Common stock................................................ $1,987,488
Liabilities assumed......................................... 79,024
Cash paid for acquisition and acquisition costs............. 597,512
----------
$2,664,024
==========
</TABLE>
In conjunction with the acquisition, the Company recorded approximately
$2,514,000 as acquired in-process research and development expense. The
remaining $500,000 of common stock, which is subject to future performance
milestones, will be accounted for if those milestones are achieved. For
financial statement purposes, this acquisition was accounted for as a purchase,
and accordingly, the results of operations of MycoTox subsequent to June 9, 1997
are included in the Company's consolidated statements of operations.
Unaudited pro forma information has not been presented, as the operations
of MycoTox, Inc. were not material to the Company's operations.
The purchase price was allocated based upon the fair value of the assets
and intangible assets acquired. The purchase price has been allocated as
follows:
<TABLE>
<S> <C>
Current assets.............................................. $ 6,820
Equipment................................................... 43,200
Goodwill.................................................... 100,000
In-process research and development......................... 2,514,004
----------
$2,664,024
==========
</TABLE>
The acquired in-process research and development has been expensed as a
charge against operations as of the closing of the transaction, and is included
in the accompanying consolidated statement of operations. The amount allocated
to acquired in-process research and development relates to projects that had not
yet reached technological feasibility and that, until completion of development,
have no alternative future use. These projects will require substantial high
risk development and testing prior to reaching of technological feasibility.
(4) 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. 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, 1997, approximately $554,000 was
outstanding under this term note. This term note bears interest at the lesser of
8 3/4% or the Prime Rate (8.5% at December 31, 1997) 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
26
<PAGE> 27
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, 1997:
<TABLE>
<CAPTION>
PRINCIPAL
YEAR PAYMENT
---- ---------
<S> <C>
1998........................................................ $ 696,000
1999........................................................ 767,000
2000........................................................ 847,000
2001........................................................ 928,000
2002........................................................ 1,024,000
Thereafter.................................................. 23,961,000
-----------
$28,223,000
===========
</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 Bonds. The terms of the Bonds subsequent to
such remarketing are subject to change. 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%.
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 1995,
1996 and 1997, the Company recorded approximately $231,000 of these costs
annually as interest expense.
(5) 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 Women'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
27
<PAGE> 28
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement. These fees and milestone payments are credited against 50% of each
earned royalty payment due until the entire credit is exhausted.
In May 1997, the Company entered into a license and sublicense agreement
with a third party for patent rights and know-how relating to whole glucan
particles. In connection with this agreement, the Company received 200,000
shares of Series C convertible preferred stock of this entity, which represents
an ownership interest of approximately 9% on a fully diluted basis. The Company
is also entitled to receive license fees based on the net sales, if any, of
products incorporating the licensed technology. The Company has not recorded any
value relating to this transaction as there is significant uncertainty
surrounding the realizibility of any value associated with the shares received.
(6) RESTRUCTURING COSTS
In the third quarter of 1997, the Company recorded approximately $689,000
of restructuring costs as a result of a corporate downsizing. Research and
development expenses, and general and administrative expenses relating to the
downsizing were approximately $519,000 and $170,000, respectively. These charges
consist primarily of severance charges of approximately $639,000 for 61
employees. As of December 31, 1997, approximately $627,000 of the restructuring
costs have been paid.
(7) RELATED PARTY TRANSACTION
In the connection with the November 1997 private placement (see note 8(a)),
the Company recorded a payable to two officers of the Company for a total of
$48,015. As per the letter of employment between the Company and the Company's
Chairman, a fee of half of one percent of the net proceeds will be paid to the
Chairman for certain transactions including equity investments, in which a
placement agent or underwriter was not retained. The Chairman agreed to share
equally in this fee with the Company's CEO as they were both instrumental in
arranging the financing.
(8) 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.
28
<PAGE> 29
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1996, the Company completed a $42,000,000 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.
In November 1997, the Company raised approximately $9,680,000 in a private
placement by selling 3,366,795 unregistered shares of common stock at $2.88 per
share to a single institutional investor. The net proceeds from this offering
totaled approximately $9,589,000.
(b) Stock Option and Grant Plan
In May 1997, the 1997 Stock Option and Grant Plan (the "1997 Plan") was
approved by the stockholders. Under the 1997 Plan the Company may grant
incentive stock options, nonqualified stock options and common stock. The
Company has reserved 837,165 plus five percent of the shares of stock issued by
the Company since December 31, 1996. At December 31, 1997, 580,191 shares of
common stock are available for future stock option and stock grants under the
1997 Plan.
Under the Company's 1988 Stock Option and Grant Plan (the "1988 Plan"), 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, 1997, 9,276 shares of common stock are available for
future stock option and stock grants.
Activity in the 1988 Plan and 1997 Plan for each of the three years in the
period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE PRICE
SHARES PER SHARE PER SHARE
--------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding, December 31, 1994................... 791,416 $.009 - $28.25 $10.56
1995 activity --
Options granted................................ 632,929 4.94 - 9.75 8.14
Options exercised.............................. (48,699) .09 - 8.50 1.77
Options terminated............................. (47,129) .09 - 27.00 12.78
---------- ------------------- ----------------
Outstanding, December 31, 1995................... 1,328,517 .009 - 28.25 9.24
1996 activity --
Options granted................................ 611,780 6.75 - 12.50 9.49
Options exercised.............................. (73,095) .09 - 10.25 2.54
Options terminated............................. (39,569) .51 - 28.25 8.48
---------- ------------------- ----------------
Outstanding, December 31, 1996................... 1,827,633 .009 - 27.00 9.61
1997 activity --
Options granted................................ 2,098,612 2.56 - 11.00 3.20
Options exercised.............................. (87,507) .009 - 10.25 4.42
Options terminated............................. (1,730,848) 3.00 - 27.00 10.20
---------- ------------------- ----------------
Outstanding, December 31, 1997................... 2,107,890 $.009 - $12.25 $ 2.99
========== =================== ================
Exercisable at December 31, 1997................. 845,072 $.009 - $12.25 $ 2.96
========== =================== ================
</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 1988 Plan. This deferred compensation is being recognized ratably over
the period in which the options vest. During the years ended December 31, 1995,
1996 and 1997, the results of operations include $118,711, $96,798 and $34,508,
respectively, of compensation expense on these options.
29
<PAGE> 30
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company granted officers of the Company 2,000 shares of
common stock from the 1988 Plan. In addition, in 1995, 1996 and 1997, the
Company contributed 8,714, 5,644 and 11,454 shares of common stock to its 401(k)
benefit plan for employees. In connection with these grants, the Company
recorded approximately $77,000, $61,000 and $64,000, respectively, of expense
based on the fair market value of these shares on the date of grant.
(c) 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
1995, 1996 and 1997, the Company recorded compensation expense on these options
$27,832 in each of these years.
(d) 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, 1997, all of these warrants were outstanding.
(e) Pro Forma 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 pro forma 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 pro forma disclosures required under SFAS No.
123 for all employee stock options granted for the years ended December 31, 1996
and 1997 using the Black-Scholes option pricing model prescribed by SFAS No.
123. The assumptions used are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Risk-free interest rate.................... 5.41 - 6.63% 5.69 - 5.88%
Expected dividend yield.................... 0 0
Expected lives............................. 3 - 5 years 3 - 5 years
Expected volatility........................ 73.14% 90.92%
</TABLE>
30
<PAGE> 31
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under SFAS No. 123, the aggregate fair market value of options granted to
employees in 1996 and 1997 is approximately $1,811,000 and $2,759,000,
respectively. The effects of applying SFAS No. 123 are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Net loss........................................ $(30,961,000) $(33,309,000)
Pro forma net loss.............................. $(31,718,000) $(34,243,000)
Basic net loss per share........................ $(1.92) $(1.94)
Pro forma net loss per share.................... $(1.96) $(1.99)
</TABLE>
(9) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Accrued research expenses.............................. $136,665 $134,165
Accrued professional fees.............................. 342,273 140,411
Accrued other.......................................... 232,513 289,697
-------- --------
$711,451 $564,273
======== ========
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases its office and research facilities and certain equipment
under operating leases that expire through 2007. Future minimum lease payments
under these lease agreements, as amended, are approximately as follows:
<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
---- ---------
<S> <C>
1998........................................................ $ 1,214,000
1999........................................................ 1,152,000
2000........................................................ 1,103,000
2001........................................................ 1,078,000
2002........................................................ 1,155,000
Thereafter.................................................. 6,234,000
-----------
$11,936,000
===========
</TABLE>
Rent expense included in the accompanying consolidated statements of
operations was approximately $1,914,000, $1,727,000 and $1,687,000 for 1995,
1996 and 1997, 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, 1997 was approximately $260,000, all of
which is due in 1998. The Company has the option of licensing products resulting
from these research agreements.
(11) 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'
31
<PAGE> 32
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contribution up to a defined maximum. In 1996 and 1997, the Company made
matching contributions of 5,644 and 11,454 shares of its common stock into the
plan, respectively. These contributions resulted in approximately $61,000 and
$64,000 of noncash payroll expense in 1996 and 1997, respectively.
(12) 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 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.
32
<PAGE> 33
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) 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,
1995 1996 1997 1997
---- ---- ---- -------------------
<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..................... 77,269 61,079 174,468 377,047
Compensation related to common stock
grant................................... (77,269) (61,079) (174,468) (377,047)
Grant of stock options and restricted
stock................................... -- -- -- 1,996,153
Deferred compensation on stock options and
restricted stock........................ 257 54,333 -- (1,829,983)
Cancellation of stock options............. (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.............................. (247,495) 41,432 19,788 43
Accumulated deficit....................... 247,495 (41,432) (19,788) (43)
Capitalized interest on property and
equipment............................... -- -- -- (312,476)
Amortization of bond issuance costs....... -- -- -- 83,315
Amortization of note payable discount..... -- -- -- 229,161
----------- -------- --------- -----------
$ -- $ -- $ -- $ --
=========== ======== ========= ===========
</TABLE>
33
<PAGE> 34
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 and Management 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."
34
<PAGE> 35
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
The Registrant filed a report on Form 8-K on November 18, 1997.
(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 *9*
Junior 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
("Shareholder Rights Agreement").
4.2 Amendment to Shareholder Rights Agreement dated November 13, *12*
1997.
10.1 Research Agreement dated as of July 1, 1990 between Brigham *1* (10.1)
and 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 *4* (10.3A)
June 9, 1993.
10.5 Research Agreement (Czop) dated as of November 30, 1990 *1* (10.3)
between 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 *1* (10.4)
Brigham 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 *1* (10.11)
and Flagship.
10.13 Loan Agreement dated July 30, 1992 between the Company and *2*
Flagship.
(10.11A)
10.14 Loan Agreement dated October 18, 1994 between the Company *8* (10.14)
and Flagship.
10.14A Security Agreement dated October 18, 1994 between the *8*
Company and
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----
<C> <S> <C>
(10.14A) Flagship.
10.15 Amended and Restated Shareholders Agreement dated as of *1* (10.12)
February 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 *1* (10.14)
April 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 *1* (10.16)
March 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 *1* (10.17)
March 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, *1* (10.22)
1992.
10.24 Employment Letter with Robert DuFresne dated January 31, *1* (10.23)
1992.
10.25 Employment Letter with Peter H. Grassam dated August 18, *6* (10.24)
1993.
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, *8* (10.27)
1994.
10.28 Employment Letter with Augustine Lawlor dated October 24, *8* (10.28)
1994.
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* (10.27)
1, 1992 between the Company and Lawrence C. Hoff.
10.32 Stock Purchase and Restriction Agreement dated as of *1* (10.27)
November 5, 1991 between the Company and Michael E. Porter.
10.33 Stock Restriction Agreement dated as of December 31, 1991 *1* (10.29)
between the Company and Dean Witter Reynolds, Inc. as
custodian for Gustav A. Christensen IRA.
10.34 Stock Purchase and Restriction Agreement dated as of *1* (10.30)
December 31, 1991 between the Company and Gustav A.
Christensen.
10.35 Stock Purchase and Restriction Agreement dated as of *1* (10.31)
December 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 *2* (10.32)
Worcester Business Development Corporation ("Two Biotech
Park Lease").
10.37 First Amendment to Two Biotech Park Lease dated as of June *2*
1, 1991.
(10.32A)
10.38 Second Amendment to Two Biotech Park Lease dated as of *2*
February 1, 1992.
(10.32B)
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----
<C> <S> <C>
10.39 Lease dated July 11, 1990 between the Company and Worcester *2* (10.33)
Business Development Corporation ("Three Biotech Park
Lease").
10.40 First Amendment to Three Biotech Park Lease dated as of *1* (10.34)
August 13, 1991.
10.41 Second Amendment to Three Biotech Park Lease dated as of *2*
April 1, 1992.
(10.34A)
10.42 Third Amendment to Three Biotech Park Lease dated as of *8* (10.42)
December 21, 1992.
10.42A Fourth Amendment to Three Biotech Park Lease dated as of *8*
October 29,
(10.42A) 1993.
10.42B Fifth Amendment to Three Biotech Park Lease dated as of May *8*
31, 1994.
(10.42B)
10.42C Sixth Amendment to Three Biotech Park Lease dated as of *8*
March 27,
(10.42C) 1995.
10.43 Sublease dated December 1, 1993 between the Company and *6* (10.40)
Phytera, 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 *3* (10.41)
Company 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 *3* (10.44)
and 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 *5* (10.45)
the Company and the Purchasers.
10.53 Master Lease Agreement August 5, 1996, between the Company *10*
and 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.
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
- ----------- -----
<C> <S> <C>
*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.
*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 26, 1996.
*10* Incorporated by reference to the designated exhibit of the
Annual Report on Form 10-K, Commission File No. 0-20023,
filed March 26, 1997.
*11* Incorporated by reference to the designated exhibit of the
Quarterly Report on Form 10-Q, Commission File No. 0-20023,
filed August 13, 1997.
*12* Incorporated by reference to Exhibit 4.2 of the current
Report on Form 8-K, Commission File No. 0-20023, filed
November 18, 1997.
</TABLE>
38
<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, 33-83042,
33-95334, 333-10627 and 333-43131.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 16,288,035
<SECURITIES> 3,324,936
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,825,102
<PP&E> 39,838,892
<DEPRECIATION> 14,369,141
<TOTAL-ASSETS> 46,503,175
<CURRENT-LIABILITIES> 2,392,164
<BONDS> 0
0
0
<COMMON> 203,947
<OTHER-SE> 19,139,729
<TOTAL-LIABILITY-AND-EQUITY> 46,503,175
<SALES> 11,289
<TOTAL-REVENUES> 1,534,757
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 31,676,049
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,167,356
<INCOME-PRETAX> (33,308,648)
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,308,648)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,308,648)
<EPS-PRIMARY> (1.94)
<EPS-DILUTED> (1.94)
</TABLE>
