<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 1998.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ______ to _______.
Commission File Number 0-20023
ALPHA-BETA TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Massachusetts 04-2997834
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Innovation Drive
Worcester, MA 01605
(Address of principal executive offices)
508-798-6900
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 10, 1998
- ---------------------------- ---------------------------------
Common stock, $.01 par value 20,597,272
<PAGE> 2
ALPHA-BETA TECHNOLOGY, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1997, and September 30, 1998......................... 3
Condensed Consolidated Statements of Operations
for the three and nine month periods
ended September 30, 1997 and 1998, and from the period
from inception through September 30, 1998......................... 4
Condensed Consolidated Statements of Cash Flows for the
nine month periods ended September 30, 1997 and 1998,
and from the period from inception through
September 30, 1998 ............................................. 5
Notes to Condensed Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings............................................ 13
Item 2. Changes in Securities........................................ 13
Item 3. Defaults Upon Senior Securities.............................. 13
Item 4. Submission of Matters to a Vote of Security Holders.......... 13
Item 5. Other Information............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
SIGNATURES................................................................. 14
2
<PAGE> 3
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,288,035 $ 3,811,159
Marketable securities 3,324,936 1,001,600
Other current assets 212,131 230,391
------------- -------------
Total current assets 19,825,102 5,043,150
------------- -------------
Property and equipment, net of accumulated
depreciation and amortization 25,469,751 23,866,570
------------- -------------
Other assets:
Bond issuance costs, net 1,007,767 962,305
Other 200,555 233,695
------------- -------------
Total other assets 1,208,322 1,196,000
------------- -------------
$ 46,503,175 $ 30,105,720
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of term notes payable and
capital lease obligations $ 1,180,059 $ 928,930
Accounts payable 647,832 1,494,681
Accrued expenses 564,273 463,885
------------- -------------
Total current liabilities 2,392,164 2,887,496
------------- -------------
Term notes payable and capital lease
obligations, net of current portion 24,767,335 24,260,141
------------- -------------
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
-- 20,394,727 shares and 20,597,272 shares at
December 31, 1997 and September 30,
1998, respectively 203,947 205,973
Additional paid-in capital 159,338,073 159,439,693
Deficit accumulated during the development stage (140,171,324) (156,681,437)
Deferred compensation (27,020) (6,146)
------------- -------------
Total stockholders' equity 19,343,676 2,958,083
------------- -------------
$ 46,503,175 $ 30,105,720
============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
March 2, 1988
Three months ended Nine months ended (inception)
September 30, September 30, through
--------------------------- ----------------------------- September 30,
1997 1998 1997 1998 1998
----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Interest $ 292,416 $ 94,882 $ 1,206,492 $ 489,400 $ 9,975,990
Other 4,020 9,505 6,553 523,836 1,055,108
----------- ----------- ------------ ------------ -------------
Total revenues 296,436 104,387 1,213,045 1,013,236 11,031,098
----------- ----------- ------------ ------------ -------------
Expenses:
Research and development 6,843,990 4,161,359 20,822,605 12,701,456 121,348,361
General and administrative 1,225,376 739,564 3,512,810 2,508,131 29,472,449
Acquired in-process research
and development -- -- 2,014,004 -- 2,514,004
Interest 801,577 775,643 2,392,578 2,313,553 14,377,469
----------- ----------- ------------ ------------ -------------
Total expenses 8,870,943 5,676,566 28,741,997 17,523,140 167,712,283
----------- ----------- ------------ ------------ -------------
Net loss $(8,574,507) $(5,572,179) $(27,528,952) $(16,509,904) $(156,681,185)
=========== =========== ============ ============ =============
Basic and diluted net loss per
common share $ (0.51) $ (0.27) $ (1.64) $ (0.81)
=========== =========== ============ ============
Weighted average number of common
shares outstanding 16,839,273 20,593,072 16,771,262 20,485,217
=========== =========== ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
March 2, 1988
Nine months ended (inception)
September 30, through
----------------------------- September 30,
1997 1998 1998
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(27,528,952) $(16,509,904) $(156,681,185)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 1,971,850 1,638,262 16,076,734
Amortization of investment premium 59,445 19,111 1,906,880
Amortization of deferred financing and bond
issuance costs 173,067 173,067 980,813
Noncash compensation related to stock options,
warrants and common stock 167,510 89,874 2,363,292
Charges related with acquired in-process research
and development 2,014,004 -- 2,514,004
Changes in operating assets and liabilities:
Other current assets 221,364 (18,260) (227,671)
Accounts payable (164,860) 846,849 1,458,514
Accrued expenses 245,842 (100,388) 421,028
------------ ------------ -------------
Net cash used for operating activities (22,840,730) (13,861,389) (131,187,591)
------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in marketable securities 11,282,261 2,304,016 (2,908,740)
Net cash used in the purchase of MycoTox (580,900) -- (593,412)
Increase in property and equipment (292,002) (20,081) (39,702,321)
Increase in restricted cash -- -- (32,425,737)
Payments from restricted cash -- -- 32,425,737
Decrease (increase) in other assets 17,498 (48,140) (237,430)
Increase in bond issuance costs -- -- (1,303,237)
------------ ------------ -------------
Net cash provided by (used for)
investing activities 10,426,857 2,235,795 (44,745,140)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible subordinated notes
payable to stockholders -- -- 2,300,000
Proceeds from equipment line of credit -- -- 3,261,600
Proceeds from equipment lease 291,032 -- 349,273
Payments on capital lease obligations -- -- (180,867)
Proceeds from notes payable -- -- 27,835,947
Payments on notes payable (835,668) (885,928) (5,886,453)
Proceeds from sale of convertible redeemable
preferred stock, net of issuance costs -- -- 24,560,465
Proceeds from sale of common stock, net of
issuance costs 113,889 34,646 127,503,925
------------ ------------ -------------
Net cash provided by (used for)
financing activities (430,747) (851,282) 179,743,890
------------ ------------ -------------
Net increase (decrease) in cash and cash equivalents (12,844,620) (12,476,876) 3,811,159
Cash and cash equivalents, beginning of period 21,885,111 16,288,035 --
------------ ------------ -------------
Cash and cash equivalents, end of period $ 9,040,491 $ 3,811,159 $ 3,811,159
============ ============ =============
Interest paid (net of capitalized interest) $ 2,334,888 $ 2,090,397 $ 13,422,737
============ ============ =============
</TABLE>
See accompanying notes.
5
<PAGE> 6
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Unaudited)
<TABLE>
<CAPTION>
March 2, 1988
Nine months ended (inception)
September 30, through
----------------------- September 30,
1997 1998 1998
--------- --------- ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment under capital lease ......................................... $ -- $ -- $ (178,886)
Furniture and equipment under capital lease ........................... -- -- 178,886
Conversion of line of credit to term note payable ..................... -- -- (2,144,525)
Issuance of term note payable ......................................... -- -- 2,144,525
Grant of common stock ................................................. 156,572 102,666 479,713
Compensation related to common stock grant ............................ (156,572) (102,666) (479,713)
Cancellation of stock options ......................................... -- -- (166,170)
Grant of stock options and restricted stock ........................... -- -- 1,996,153
Deferred compensation on stock options and restricted stock ........... -- -- (1,829,983)
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 on marketable securities ............................ 3,143 209 252
Accumulated deficit ................................................... (3,143) (209) (252)
Capitalized interest in property and equipment ........................ -- -- (312,476)
Amortization of bond issuance costs ................................... -- -- 83,315
Amortization of note payable discount ................................. -- -- 229,161
--------- --------- ------------
$ -- $ -- $ --
========= ========= ============
</TABLE>
See accompanying notes.
6
<PAGE> 7
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim unaudited condensed consolidated financial statements
contained herein have been prepared in accordance with generally accepted
accounting principles for interim financial information. They do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In management's opinion, the
unaudited information includes all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The results of
operations for the interim periods shown in this report are not necessarily
indicative of results expected for the full year. The financial statements
should be read in conjunction with the financial statements and notes for the
year ended December 31, 1997, included in the Company's Annual Report on Form
10-K.
2. NET LOSS PER COMMON SHARE
For the three and nine month periods ended September 30, 1997 and 1998,
basic net loss per common share was computed using the weighted average number
of common shares outstanding during the period in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings per Share. Diluted net
loss per share is the same as basic net loss, as the inclusion of common
equivalents would be antidilutive.
3. CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and marketable financial
instruments with original maturities of 90 days or less.
4. MARKETABLE SECURITIES
The amortized cost and estimated fair market values of the Company's
securities at September 30, 1998 are presented below. The Company did not
realize any gains or losses from securities sold in the three months ended
September 30, 1997 and 1998.
<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 less than 1 month) $1,001,852 $ -- $252 $1,001,600
---------- ------- ---- ----------
$1,001,852 $ -- $252 $1,001,600
========== ======= ==== ==========
</TABLE>
7
<PAGE> 8
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. TERM NOTE PAYABLE
At September 30, 1998, approximately $185,000 was outstanding under a
term note with a bank. This note is payable in monthly installments of $46,242
and bears interest at the lesser of 8-3/4% or the Prime Rate (8.0% at September
30, 1998) 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 ("the 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. The Company has received a waiver from the bank
releasing the Company from the obligation to maintain the Investment Account as
of September 30, 1998.
6. 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 was issued to MycoTox shareholders. The 56,813 and 113,636 common shares
granted on June 9, 1997 and 1998, respectively, were valued at $8.80 per share
(the 10 day average price of the Company's common stock preceding June 9, 1997).
The Company is also required to issue an additional $1.0 million of common stock
upon 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.
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.
8
<PAGE> 9
ALPHA-BETA TECHNOLOGY, INC. & SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
7. PRIVATE PLACEMENT
On October 21, 1998, the Company entered into an agreement for the
private placement of $3 million of Convertible Preferred Stock with a single
institutional investor. Under the terms of the agreement, $1.5 million of
Convertible Preferred Stock was issued upon execution of the agreement. The
additional $1.5 million is committed to be purchased upon effectiveness of the
related resale registration statement and the occurrence of certain other
closing conditions. The net proceeds to the Company will be approximately $2.6
million.
8. NEW ACCOUNTING STANDARD
The Company adopted SFAS No. 130, Reporting Comprehensive Income,
effective January 1, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
The adoption of this did not have a material effect on the financial statements,
as the only element of comprehensive income related to the Company is unrealized
gains or losses in marketable securities.
9
<PAGE> 10
ALPHA-BETA TECHNOLOGY, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alpha-Beta Technology, Inc. is engaged in research and development of
new classes of carbohydrate and antifungal products. The Company 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 September 30,
1998, the Company's accumulated deficit was $156,681,437.
RESULTS OF OPERATIONS
REVENUES
Revenues to date have consisted primarily of funding for the antifungal
research program from the National Institutes of Health and interest earned from
the investment of cash balances. For the three month periods ended September 30,
1998 and 1997, revenues were $104,387 and $296,436 respectively. This decrease
of $192,049 was primarily due to less interest earned as a result of lower
average cash and investment balances in the third quarter of 1998 compared with
the third quarter of 1997. Revenues in the nine month periods ended September
30, 1998 and 1997 were $1,013,236 and $1,213,045, respectively. An increase in
other revenues of $517,283 was due to income from research grants. This increase
in other revenues was offset by a decrease in interest income of $717,092
primarily due to less interest earned as a result of lower average cash and
investment balances in the first nine months of 1998 compared with the first
nine months of 1997.
OPERATING EXPENSES
For the three month periods ended September 30, 1998 and 1997, research
and development expenses were $4,161,359 and $6,843,990, respectively. For the
nine month periods ended September 30, these expenses decreased 39% to
$12,701,456 in 1998 from $20,822,605 in 1997. The decreases were primarily due
to lower expenses as a result of a corporate downsizing in September 1997. The
Company does not expect significant changes in the level of research and
development for the remainder of 1998; however, these expenses may increase in
future years, reflecting activities related to further development and
commercialization of Betafectin, the development of additional products and the
operation of the Company's commercial manufacturing facility for research and
development purposes.
For the three month periods ended September 30, 1998 and 1997, general
and administrative expenses were $739,564 and $1,225,376, respectively. The
decrease of $485,812 in the third quarter of 1998 as compared to the third
quarter of 1997 was primarily due to lower expenses as a result of the corporate
downsizing in September 1997. For the nine month periods ended September 30,
1998 and 1997, these expenses decreased 29% to $2,508,131 in 1998 from
$3,512,810 in 1997. General and administrative expenses are expected to remain
at current levels through the end of 1998; however, these expenses may increase
in future years reflecting planned efforts to commercialize Betafectin.
For the three month periods ended September 30, 1998 and 1997, interest
expense was $775,643 and $801,577, respectively. For the nine month periods
ended September 30, interest expense decreased to $2,313,553 in 1998 from
$2,392,578 in 1997. This decrease of $79,025 was primarily due to lower loan
balances in the first nine months of 1998 compared with the first nine months of
1997.
10
<PAGE> 11
NET LOSS
The net loss for the three months ended September 30, 1998 was
$5,572,179 ($0.27 per share) compared to $8,574,507 ($0.51 per share) for the
same period in 1997. The net loss for the nine months ended September 30, 1998
was $16,509,904 ($0.81 per share) compared to $27,528,952 ($1.64 per share) for
the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $4,812,759 in cash, cash equivalents and marketable
securities at September 30, 1998, compared with $19,612,971 at December 31,
1997. This decrease was primarily due to the expenditure of $13,861,389 in cash
used for operating activities during the first nine months of 1998.
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 September
30, 1998, the Company had working capital of approximately $2,156,000. The
Company anticipates that its existing capital resources and the funds received
in the first closing and to be received upon the closing of the sale of the
second tranche of Convertible Preferred Stock (see footnote 7) are sufficient to
maintain its operations and capital expenditures through January 1999. However,
there can be no assurance that the Company will be able to satisfy all of the
conditions to closing necessary to complete the sale of the second tranche of
Convertible Preferred Stock. If the Company is unable to complete the sale of
the second tranche of Convertible Preferred Stock, the Company anticipates that
its existing capital resources are sufficient to maintain its operations and
capital expenditures through December 1998. 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 marketing capabilities.
The Company will need to raise additional funds prior to the completion of the
current Phase III clinical trial of Betafectin) through collaborative alliances,
equity or debt financings or other arrangements. There can be no assurance that
additional funds will be available on favorable terms or at all 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, the status of its discussions with the
FDA concerning obtaining regulatory approval of Betafectin and the overall
market for biotechnology stocks.
In February 1993, the Company entered into a $30,000,000 loan agreement
with RIPA to finance the Betafectin commercial-scale manufacturing facility. The
total cost of this facility was approximately $39,600,000. The Company
contributed all funds, in addition to the RIPA loan, necessary to complete the
facility.
The Company is required to make payments to RIPA of approximately
$300,000 per month over a 20~-year term. To finance its loan to the Company,
RIPA issued $30,000,000 of taxable revenue bonds. Borrowings under the loan
accrue interest at approximately 9.5% per annum and are secured by the
Betafectin manufacturing facility. The Company's obligation to repay the loan is
subject to acceleration if the Company fails to make any monthly debt service
payments or if certain events of default occur. The Company may also be required
to repay the loan on an accelerated basis over five years if the enabling
legislation under which RIPA issued the bonds used to fund the loan to the
Company is eliminated without an appropriate grandfathering provision, or if
RIPA is subject to any bankruptcy proceedings. The bonds mature through December
2024. The RIPA bonds are subject to refinancing by RIPA on December 1, 1999 and
the terms of the RIPA loan to the Company are subject to adjustment in
connection with such refinancing. If the bonds cannot be successfully
remarketed, the bank will become the owner of the then outstanding principal
amount of the bonds, and the interest rate will be adjusted to the bank's base
rate plus 2%.
11
<PAGE> 12
On January 12, 1998, the Company announced that it had begun a
confirmatory Phase III clinical trial of Betafectin for the prevention of
serious infections in non-colorectal gastrointestinal surgery patients. This
trial, along with the results of the Company's first Phase III study, will
provide the basis for a PLA filing for Betafectin. The double-blind,
placebo-controlled study involves approximately 600 patients at 30 sites
throughout the United States. The study is expected to be completed by the end
of 1999 and will include an interim analysis in early 1999.
In April 1998, after the Company conducted an interim analysis of safety
and efficacy, patient enrollment was resumed in the Phase II clinical trial of
patients undergoing surgery for inflammatory bowel disease (IBD). The
double-blind, placebo-controlled Phase II trial is being conducted at twelve
sites in the United States and will enroll approximately 240 patients undergoing
surgery for Crohn's Disease or ulcerative colitis.
YEAR 2000 READINESS DISCLOSURE
The statements in the following section include "Year 2000 Readiness
Disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
The Company's State of Readiness. The Company has undertaken an
assessment of the ability of its information and non-information systems to
function properly with respect to dates in the year 2000 and thereafter. The
assessment is based upon communications with software vendors, literature
supplied with software, literature received in connection with maintenance
contracts and test evaluations of the Company's systems. The Company has
identified potential problems in certain of these systems, including the
Company's administrative systems. The Company will reprogram or replace, as
appropriate, those systems with respect to which the Company has identified
potential problems. The Company commenced the reprogramming and replacement of
such systems during the second quarter of fiscal 1998 and expects completion by
fiscal year end 1999.
Costs to Remedy the Company's Year 2000 Issues. The Company anticipates
that the total costs to remedy year 2000 issues will be approximately $300,000
($250,000 for information systems and $50,000 for non-information systems),
which includes approximately $100,000 in accelerated replacement costs for
technology which the Company would have otherwise replaced within two years of
the year 2000. The Company will expense its year 2000 remediation costs as
incurred.
Year 2000 Risks of Material Third Parties. The Company has also begun
to assess the year 2000 risks of third parties with whom the Company has a
material relationship. These material third parties include clinical research
organizations, consultants and statisticians involved in the Company's current
Phase III clinical trial of Betafectin. The Company is in the process of
circulating year 2000 questionnaires to each of these parties. The Company has
substantially completed its assessment of potential risks. Because the Company
expects that its clinical trial of Betafectin will be completed prior to the
year 2000, the Company does not believe that the potential risks of these third
parties will have a material effect on the Company. However risks relating to
the year 2000 could impact clinical programs, if any, existing at such time.
Year 2000 Risks; Contingency Plan. While the Company anticipates that
its year 2000 risks will be remedied before the year 2000, no assurance can be
given that the Company's or its material third parties year 2000 conversion
will be completed by such time. The Company's contingency plan in the event
that its year 2000 conversion is not successfully completed is to perform
manually those tasks which would otherwise be performed by the defective
systems until such systems are remedied or replaced. The Company believes that
in the event of its most reasonably likely worst case scenario, the Company
will experience slower production runs. However, actual results may differ
materially from those anticipated.
CERTAIN FACTORS AFFECTING FUTURE EVENTS AND RESULTS
This Form 10-Q to Stockholders contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities 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 differences 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; obtaining the requisite regulatory
approvals for the Company's products from the U.S. Food and Drug Administration;
ability to satisfy the closing conditions necessary to complete the sale of the
second tranche of Convertible Preferred Stock; ability to obtain additional
financing; the ability to achieve potential cost savings; potential adverse
consequences arising from Year 2000 issues (including unanticipated expenses or
delays on the part of the Company or material third parties with whom the
Company has a relationship); the competitive environment and market conditions
for the biotechnology industry; and general economic conditions.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to a Vote of Security Holders. None
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits. None
B. Reports on Form 8-K. None
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALPHA-BETA TECHNOLOGY, INC.
Date: November 16, 1998 By: /s/ Joseph Grimm
----------------- ----------------------------------
Joseph Grimm,
Chief Financial Officer
14
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