SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee Required)
For the year ended December 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _______ to _______
Commission File Number 0-19041
AMERICAN BIOGENETIC SCIENCES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 11-2655906
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1375 Akron Street, Copiague, New York 11726
(Address of principal executive offices) (Zip Code)
516-789-2600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock
(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 ]
As of the close of business on March 14, 1997, there were outstanding
17,441,654 shares of the registrant's Class A Common Stock and 1,475,500
shares of its Class B Common Stock. The approximate aggregate market value
based upon the closing price on The Nasdaq Stock Market's National Market)
of shares held by non-affiliates of the registrant as of March 14, 1997
was $70,094,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to its 1997
Annual Meeting of Stockholders are incorporated by reference into Part III
of this report.
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PART I
Item 1. Business
General
American Biogenetic Sciences, Inc. ("ABS" or the "Company") is
engaged in the research and development of cardiovascular and
neurobiology products for commercial development. The Company
conducts research and development at its own research facilities and
through its Global Scientific Network in the U.S., Europe, China,
Israel and Russia. The Company's enabling technology is a patented
antigen-free mouse colony which allows the generation of highly
specific monoclonal antibodies that are difficult to obtain from
conventional systems. The Company has utilized this technology to
supply antibodies for its innovative in vitro and in vivo diagnostic
products.
Over the last few years the Company has directed its efforts
primarily toward the development of cardiovascular and neurobiology
products, which has led to the development of the Company's Thrombus
Precursor Protein (TpP ) test, an assay for the risk assessment of
thrombosis and the monitoring of anticoagulant therapy, and Functional
Intact Fibrinogen (FiF ) test, an assay to measure levels of
fibrinogen in blood, as well as the Company's patented specific
monoclonal antibody MH1, with radioisotope, for use as an in vivo
agent. In October 1995, the Company entered into a worldwide license
and collaboration agreement with F.Hoffmann-La Roche Ltd. ("Hoffmann-La
Roche") for the Company's TpP test and, in December 1995, granted a
worldwide license to Abbott Laboratories ("Abbott") for the TpP test.
See "Products in Development - Thrombus Precursor Protein (TpP )". In
June 1996, the Company filed with the United States Food and Drug
Administration (FDA) for 510(k) pre-market clearance (see "Government
Regulation" for a discussion of the 510(k) process) for its TpP test,
clearance for which was received from the FDA in October 1996, to aid
in the risk assessment of thrombosis (blood clot formation) and the
monitoring of anticoagulant therapy. Also in June 1996, ABS obtained
from the Medical Research Council (MRC) a license to practice the
technique of humanizing monoclonal antibodies. In September 1996, ABS
entered into a manufacture and distribution agreement with Gull
Laboratories, Inc. ("Gull") for its TpP test in a microtiter plate
format and for use with Gull's automated microtiter plate instrument,
the DEUT. The two companies also entered into a joint venture to
develop a TpP test for sale to the renal dialysis market. In
September 1996, the Company completed a $9 million private placement
of convertible debentures. In January 1997, the Company filed a 510(k)
pre-market notification with the FDA to market its FiF test. In
February 1997, the Company moved its research and development
facilities to Boston, Massachusetts.
ABS was incorporated in Delaware in September 1983. The
Company's principal executive offices are located at 1375 Akron
Street, Copiague, New York 11726 and its telephone number is 516-789-2600.
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In order to keep investors informed of the Company's future plans
and objectives, this Report (and other reports and statements issued
by the Company and its officers from time to time) contain certain
statements concerning the Company's future results, future
performance, intentions, objectives, plans and expectations that are
or may be deemed to be "forward-looking statements". The Company's
ability to do this has been fostered by the Private Securities
Litigation Reform Act of 1995 which provides a "safe harbor" for
forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those discussed
in the statement. The Company believes it is in the best interests of
investors to take advantage of the "safe harbor" provisions of that
Act. Such forward-looking statements are subject to a number of known
and unknown risks and uncertainties that, in addition to general
economic and business conditions (both in the United States and in the
overseas markets where the Company also intends to distribute
products), could cause the Company's anticipated results, performance,
and achievements to differ materially from those described or implied
in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, the
Company's ability to complete products under development and to
maintain superior technological capability, foresee changes and
continue to identify, develop and commercialize innovative and
competitive products (see "Products in Development" below), meet
competition (see "Competition" below), to comply with various
governmental regulations related to the Company's products (see
"Government Regulation" below), successfully expand its manufacturing
capability (see "Manufacturing" below), ability to attract and retain
technologically qualified personnel (see "Personnel" below), and
generate cash flows and obtain financing to support its operations and
growth (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this Report).
Global Scientific Network
ABS' operations are comprised of a portfolio of interrelated
programs and projects seeking a high level of synergism between ABS'
management and its scientific entities. This synergistic relationship
has led to the formation of the Company's Global Scientific Network
for promoting and facilitating collaborative scientific research
leading to product development.
This network brings together interactive teams of scientists from
many disciplines in a joint effort to expedite the research,
development and commercialization of ABS' diagnostic and therapeutic
products. This resource offers ABS' management a first look at new
technologies available in addition to a network of certain scientific
leaders who offer advice and direction. To facilitate the
identification and screening of new technologies, ABS has scientific
coordinators in St. Petersburg, Russia; Beijing, China; and Jerusalem,
Israel. These activities are coordinated from ABS' office in Dublin,
Ireland.
ABS is currently collaborating with leading medical and
scientific institutions worldwide including University College Dublin,
Ireland; Free University of Berlin, Germany; William Harvey Research
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Institute, London, England; and Research Center for Medical Genetics,
Russian Academy of Medical Sciences, Moscow, Russia.
The Company, under its Global Scientific Network, has entered
into various agreements which generally grant the Company an exclusive
license to the results of the research. Pursuant to these agreements,
the Company is paying certain research expenses and the costs of
filing and processing patent applications in the United States and
other countries, and is to pay the inventors or the university a
royalty, typically 5% of net product sales. The term of the
agreements, generally, is the duration of any patents that may be
granted with a minimum term of 10 years.
The Antigen-Free Mouse Colony -- Monoclonal Antibodies
ABS' enabling technology is a patented antigen-free (AF) mouse
colony which allows the generation of highly specific monoclonal
antibodies that are difficult to obtain from conventional systems.
The Company utilizes this technology to supply antibodies for its in
vitro and in vivo diagnostic products. The proprietary AF mouse
colony is maintained in a germ-free environment and fed a chemically
defined and ultrafiltered diet. When the antigen-free mice are
challenged with a foreign entity, there is a large immune response
that eventually results in the proliferation of a large number of
specific monoclonal antibody secreting cells. The AF mouse colony is
covered under the Company's U.S. Patent No. 5,223,410, entitled
"Method for Production of Antibodies Utilizing an Antigen-Free
Animal".
Medical Background For Cardiovascular Products
Several epidemiological studies have revealed a significant
causal relationship between high fibrinogen levels and coronary artery
disease (CAD). These studies suggest that events leading to CAD are
caused as much by biochemical processes in the coagulation system as
by the metabolism of cholesterol. One of the landmark trials, the
Framingham epidemiology study (1985) conducted at the Institute for
Prevention of Cardiovascular Disease at the Deaconess Hospital,
Harvard Medical School, concluded that elevated levels of fibrinogen
"exceeded that of all risk factors except elevated systolic blood
pressure".
Studies support that individuals with elevated levels of
fibrinogen are predisposed to thrombosis. On the other hand,
diminished levels may result in hemorrhage. Thus, reagents that can
be used to measure fibrinogen can play a vital role in determining the
appropriate level of thrombolytic therapy, as well as determine an
individual's risk of CAD.
The Company has developed, through its AF mouse colony,
monoclonal antibodies that react specifically with both fibrinogen and
fibrin.
Some of the most hazardous sites for inappropriate blood clot
formation include, the coronary arteries where a blood clot can lead
to myocardial infarction (heart attack); the arteries leading to the
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brain, where a blood clot can cause stroke; and the veins of the legs
which can lead to a pulmonary embolism.
Thrombi (blood clots) that form in the bloodstream consist of two
major parts: a cellular component made up of platelets, and a meshwork
of fibrin fibers which cements the platelets into an insoluble mass
which has the mechanical strength to withstand the pressure of blood
in the circulation. The fibrin component is insoluble and is derived
from a blood protein, fibrinogen, that is manufactured in the liver.
When thrombin, an enzyme produced in response to injury of a blood
vessel, is present in blood, it converts soluble fibrinogen to fibrin
at the site of vascular injury.
Just as the generation of thrombin is the seminal event in fibrin
formation, the generation of plasmin plays the major role in
fragmentation of the fibrin meshwork, a process known as fibrinolysis.
Like thrombin, plasmin does not ordinarily circulate in plasma but is
derived from the circulating protein plasminogen when the fibrinolytic
system is activated.
In addition to causing fragmentation of fibrin, plasmin also
attacks fibrinogen and institutes changes in its structure that
prevent its polymerization to fibrin. In extreme cases
fibrinogenolysis, e.g., dissolution of fibrinogen, can lead to
bleeding caused by lack of clottable fibrinogen.
Fragmentation of fibrin leads to the production of soluble fibrin
degradation products that circulate in plasma and are generally
elevated in patients following a thrombotic event. Since all these
products are proteins, it is possible to produce antibodies that can
react specifically with individual fibrin degradation products.
Products in Development
In Vitro Diagnostic Tests Based on Monoclonal Antibody 45J
The Company in February 1992 obtained U.S. Patent No. 5,091,512
for a monoclonal antibody, designated 45J, that recognizes
(crossreacts with) fibrinogen and is intended to be used as an in
vitro diagnostic tool for assessing accurate measurement of fibrinogen
in blood. The 45J antibody recognizes a structural epitope on the
fibrinogen molecule that is destroyed when plasmin converts fibrinogen
to its degradation products. As a result, the antibody does not
cross-react with plasmin-generated degradation products, nor does it
recognize the major degradation products of cross-linked fibrin, e.g.,
D-dimer.
On January 24, 1992, the Company entered into an agreement with
Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi") of Japan granting
Yamanouchi the exclusive right to manufacture, use and sell in Japan
and Taiwan diagnostic test kits which utilize 45J. Pursuant to the
license agreement, Yamanouchi made an initial payment to the Company
of $1,000,000, and is to pay a 10% royalty of net sales, if any, made
in Japan and Taiwan. In accordance with the provisions of the
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agreement, Yamanouchi withheld $100,000 of this payment to make
withholding tax payments under the laws of Japan on behalf of the
Company, resulting in a net remittance to the Company of $900,000.
Additionally, the license agreement requires Yamanouchi to purchase
its 45J requirements from the Company. The agreement is for a period
of fifteen years, provided that if any of the Company's patent rights
for 45J have not yet expired at the end of that period, the agreement
will continue until such expiration. Yamanouchi and the Company have
also agreed not to disclose confidential information that one party
may reveal to the other for a period of five years from the date of
the disclosure. The Company has filed a patent application in Japan
relating to 45J. Yamanouchi is required to use its best efforts to
obtain all required governmental approvals, authorizations and
consents and is to bear the expense of generating clinical data and
other information required to obtain said approvals, authorizations
and consents of the agreement, its terms and any product distribution.
Cadkit : The first version of the fibrinogen test system
developed by the Company, a manual latex agglutination kit, is a
qualitative test that can be used for initial screening of a person's
blood to determine if fibrinogen levels are within the normal range.
The test is intended to be quick and inexpensive. Another intended
use is to monitor fibrinogen levels during thrombolytic therapy.
Studies have shown that specific fibrinogen levels after therapy have
a high correlation with therapeutic success or failure. If the level
is above the desired range, therapy is unlikely to be successful and,
if fibrinogen falls below the desired range, bleeding problems are
likely to occur.
The Company received a 510(k) clearance from the FDA to commence
commercial marketing of the manual latex agglutination in vitro
diagnostic test. See "Government Regulation." The Company has
elected to proceed with the development of a Functional Intact
Fibrinogen Assay (FiF ) a quantitative version of the test.
Functional Intact Fibrinogen Assay (FiF ): The quantitative
version of the test developed by the Company is intended to be used on
automated or non-automated instruments. This test is an
immunoprecipitation assay, known as Functional Intact Fibrinogen
(FiF ), and is intended to provide a direct and accurate quantitative
measurement of the amount of fibrinogen present in plasma. In May
1996, a research group of the Framingham Heart Study reported that the
FiF test to be an accurate method of detecting elevated fibrinogen
levels, a risk factor for cardiovascular disease. Furthermore, the
findings demonstrated that the fibrinogen levels measured by the FiF
test was correlated with the prevalence of cardiovascular disease both
by itself and when adjusted for age, weight, smoking and diabetes. In
January 1997, the Company filed a 510(k) pre-market notification with
the FDA to market the FiF test.
Fibrinogen concentration in the blood is currently estimated by
functional clotting assays. Thrombin, an enzyme that converts
fibrinogen to fibrin, is added to a sample of blood and the fibrinogen
concentration is estimated by the amount of time that passes before a
clot is formed. The current clotting tests are an indirect measure of
fibrinogen which can be influenced by the presence of degradation
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products of fibrin/fibrinogen. FiF on the other hand is a direct
measure of fibrinogen that is not adversely influenced by these
products.
Diagnostic and Therapeutic Products Based on Monoclonal Antibody MH1
In June 1992, the Company obtained U.S. Patent No. 5,120,834 for
a monoclonal antibody (designated MH1) that is specific to fibrin and
does not react to fibrinogen or fibrin degradation products. This
property sets it apart from all other fibrin specific antibodies known
to the Company. Since an interactive epitope is located only on the
fibrin molecule and is not found on the degradation products of fibrin
resulting from the fibrinolytic process, the Company believes that
these circulating degradation products will not interfere with the
performance of MH1 as an imaging agent, as a carrier of a thrombolytic
agent to a blood clot, or the ability of the antibody to inhibit clot
formation. This is especially important since levels of fibrin
degradation products become extremely elevated during clot development
as well as thrombolytic (clot dissolving) therapy. The Company is
seeking to use MH1 in four potential products described below:
MH1 as an Imaging Agent: The Company has labeled a Fab' fragment
of its MH1 with a radioisotope for use as an in vivo imaging agent to
show the size and location of blood clots in pre-clinical animal
studies and clinical human studies which generates an image with the
resolution required for commercial use. The product is intended to
permit the rapid imaging of blood clots in the lungs, a condition
known as pulmonary embolism (PE); and the detection of blood clots in
the legs (a clinical condition known as deep vein thrombosis (DVT)).
Traditional methods for detecting a thrombus in the circulatory
system have consisted of angiography, venography, duplex doppler and
monitoring radiolabeled blood clot components, derived from a human
donor, injected into the circulatory system and then absorbed by the
clot. These procedures are costly, often may lack sensitivity and
some can pose potential risks to the patient. The large quantity of
dye required in angiography and venography may cause kidney problems
and may irritate the walls of blood vessels. Also, in angiography a
catheter is used for delivery of the dye into the arterial system
which adds further to the risk of the patient. In contrast, only a
minimum quantity of the Company's radiolabeled MH1 need be used, and
since the antibody is not derived from man, there is no risk of human
blood-borne disease. However, whenever a foreign substance is
introduced into the human body, there is the risk of an immune
reaction and cases of reactions to mouse-derived antibody have been
reported.
The primary protein component of a thrombus is fibrin, and an
antibody that can differentiate fibrin from its plasma precursor,
fibrinogen, can be used when appropriately labeled with a
radioisotope, to image the site and extent of an occlusion and to
carry thrombolytic reagents to the site.
In March 1993, the Company was cleared by the FDA, under an
Investigational New Drug (IND) application, to begin Phase I human
clinical testing of MH1 in imaging blood clots for PE and DVT, thus
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becoming the Company's first product to be evaluated in humans. In
January 1995, the Company completed Phase I testing for PE and DVT.
The final Phase I report was submitted to the FDA in October 1995.
Currently, MH1 is in Phase I/II clinical trials for additional PE
studies.
Thrombus Precursor Protein (TpP ): The TpP test is an enzyme
immunoassay which uses ABS' monoclonal antibodies MH1 and 45J. TpP
measures soluble fibrin polymers in blood to indicate active blood
clot formation (thrombosis) in individuals with possible myocardial
infarction (MI) and other clinical conditions precipitated by clot
formation such as deep vein thrombosis (DVT). Approximately 10
million people in the U.S. present with chest pain each year at
emergency rooms. However, as much as 80% of these individuals do not
have a heart attack and may be suffering from some less serious
conditions. An early warning test that establishes those patients
that are not having a heart attack will eliminate expensive diagnostic
procedures and unnecessary hospital admissions. Furthermore, the
early identification of those patients who are forming life
threatening blood clots or suffering from a heart attack would permit
earlier use of thrombolytics (clot dissolving drugs) or
anticoagulants.
Current biochemical tests for acute myocardial infarction (AMI)
measure cardiac muscle proteins which leak out as a result of dying
heart muscle. Examples of muscle cell proteins used to confirm MI
include, creatine kinase (CK), creatine kinase MB isoform (CKMB),
lactate dehydrogenase (LD), troponin and myoglobin. This release of
cardiac specific proteins only occurs 4-6 hours after the onset of
clinical symptoms; therefore, there is a clinical need for an earlier
warning of MI. The detection of blood clot formation early in the
clinical event should facilitate proper identification and treatment
of MI patients with life saving, clot dissolving drugs. TpP relies on
the measurement of soluble fibrin polymers which are produced and
circulate freely when a clot starts to form, even before the onset of
clinical symptoms, and is elevated when the patient first begins to
experience chest pain.
In addition, there are 12 million surgical procedures performed
each year in the U.S. alone which put patients at risk of forming a
blood clot. TpP provides a means to measure intravascular coagulation
(fibrin formation) in post-operative patients to determine the risk of
deep vein thrombosis and its clinical sequelae, pulmonary embolism.
As described in the TpP product insert, soluble fibrin polymers have
been identified by electrophoretic techniques in the plasma of
patients with different clinical conditions including myocardial
information (MI) and deep vein thrombosis (DVT). Elevated soluble
fibrin levels, as determined by ELISA, have also been reported in
other clinical conditions where intravascular fibrin formation has
been indicated, included disseminated intravascular coagulation (DIC);
and patients undergoing surgical procedures who are experiencing
thrombotic complications. It has also been demonstrated that TpP
levels are significantly lower in patients who are undergoing invasive
surgical procedures (e.g. PTCA) and have been adequately
anticoagulated. Additional studies are underway. The Company's TpP
test is also expected to offer physicians a screening tool to monitor
patients post-operatively for blood clot formation and to effect
therapeutic intervention if required and monitor their response to
anticoagulant therapy. A study using the Company's TpP test to
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monitor patients post-operatively for the formation of DVT and PE is
being conducted at Johns Hopkins School of Medicine.
In September 1995, the Company obtained U.S. Patent No. 5,453,359
for the use of this test to measure intravascular fibrin polymer
formation in patients with symptoms indicating a blood clotting event.
In October 1995, the Company entered into a license and
collaboration agreement with Hoffmann-La Roche for the co-development
and marketing of the Company's TpP assay for the detection of active
thrombosis (blood clot formation). The agreement grants Hoffmann-La
Roche a worldwide license to market the TpP test in a latex based
particle agglutination format. Under the agreement, ABS has received
certain, and is to receive additional, development payments to adapt
the TpP test in the latex based particle agglutination format to
Hoffmann-La Roche's automated diagnostic systems. ABS is also to
receive milestone payments upon achievement of certain
commercialization goals. The TpP test is to be manufactured by ABS
for use on Hoffmann-La Roche's instruments. The Company is to receive
a percentage of Hoffmann-La Roche's net selling price for the
Company's manufacturing of the TpP test plus a 5% royalty on net sales
made by Hoffmann-La Roche. Under the agreement, the TpP test is also
to be sold by ABS and Hoffmann-La Roche to other diagnostic companies
using similar particle agglutination technology. On these sales,
gross profit is to be shared equally between the Company and Hoffmann-La
Roche.
In December 1995, ABS entered into a license agreement with
Abbott for the marketing of the Company's TpP assay. The license
agreement grants Abbott a worldwide license to market the TpP test for
Abbott's immunoassay formats. ABS has and is to receive non-refundable
up-front and milestone payments upon achievement of certain
development and commercialization goals. The Company is to receive a
5% royalty on net sales made by Abbott. In addition, the reagent for
the TpP test is to be manufactured by ABS for use by Abbott.
In June 1996, the Company filed a 510(k) pre-market notification
with the FDA to market the TpP test. In October 1996, the Company
received 510(k) clearance from the FDA to market the TpP test to aid
in the risk assessment of thrombosis (blood clot formation) and the
monitoring of anticoagulant therapy.
In September 1996, the Company entered into an agreement with
Gull Laboratories for the manufacture and distribution of TpP in a
microtiter plate format. Under the agreement, Gull will develop,
manufacture and market the TpP test for use with Gull's DUET
instrument. ABS is to sell antibodies and proprietary reagents to
Gull, and will receive certain payments on Gull sales. ABS may also
sell the products of the alliance directly or through its own
distributors.
The Company and Gull also entered into a joint venture agreement
to develop a TpP test to detect the early onset of blood clot
formation in renal dialysis patients. Under the agreement, Gull is to
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develop with ABS a TpP test in a format suitable for the thrombus
detection in dialysis patients. Gull is to manufacture the products
of the venture and ABS will supply the critical reagents.
In addition, the Company intends to develop, either itself or in
conjunction with outside sources, a hand-held, disposable, point-of-care
device which will measure TpP levels in blood, either
qualitatively, semi-quantitatively or quantitatively. The Company
intends to seek outside sources for the manufacture of its point-of-care
device.
MH1 as a Delivery Vehicle for Thrombolytic Therapy: ABS is
seeking to develop a product using MH1 as a delivery-vehicle for known
thrombolytics. Tests by the Company have demonstrated the ability to
link MH1 to a known thrombolytic agent to form a potent, fibrin
specific, therapeutic agent which, in animals, has demonstrated
superior clot dissolving properties.
MH1 as an Antithrombotic: The Company is also investigating the
utility of MH1 as an antithrombotic agent for the interference and/or
inhibition of excess fibrin deposition in surgical procedures such as
angioplasty. In January 1996, the Company obtained U.S. Patent No.
5,487,892 for this clinical application.
There can be no assurance that the Company's products in
development will prove to be commercially viable, that any of the
products will receive regulatory clearance or clearance for particular
indications, or that the Company will successfully market any products
or achieve significant revenues or profitable operations. The Company
is seeking to enter into additional collaborative, licensing and/or
co-marketing arrangements with third parties to expedite the
commercialization of its products. However, there can be no assurance
that the Company will be able to enter into any such additional
arrangements, or if it does, that any such arrangements will be on
terms that will be favorable to the Company.
Neurobiology Program
The goal of this longer term program is to develop fine chemical
compounds to halt the progression of neurodegenerative diseases such
as Alzheimer's, Parkinson's, Amyotrophic Lateral Sclerosis (ALS), and
for the treatment of patients suffering from stroke.
Diagnostic
ABS has exclusive worldwide rights to U.S. Patent No. 5,492,812
issued in February 1996 covering a non-invasive blood test to detect
Alzheimer's disease. The blood test detects tau-peptide fragments,
which are released into the blood by degenerating neurons in
Alzheimer's disease sufferers. Because little tau-peptide is found in
normal blood, the Company believes that the blood test will be a test
specific to Alzheimer's disease.
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Therapeutics
ABS, in collaboration with the National University of Ireland,
Dublin and fellow researchers within the Company's Global Scientific
Network, has identified chemical compounds for the potential treatment
of neurodegenerative diseases.
The ABS 200 series of compounds are putative neuroprotectants
designed to halt the progression of neurodegenerative diseases. The
compounds have been evaluated in cells where they exhibit nerve growth
factor (NGF)-like activity. The ABS 200 series compounds can
penetrate the blood-brain barrier, unlike NGF, which requires specific
development of a delivery system. These compounds induce the
expression of a protein known as neural cell adhesion molecule (NCAM)
in vitro. NCAM is involved in memory, neurodevelopment and other
neuroplastic events. If these compounds can enhance NCAM function in
vivo, it may be possible to preserve memory function. Preliminary in
vivo results suggest that members of this series protect against
chemical induced amnesia in animals and help prevent age-associated
loss of memory in animals. The Company has filed for patent
protection in the United States and other countries.
The ABS 401 compound has undergone preliminary evaluation in vivo
and has demonstrated protection against chemically induced amnesia in
animals.
Epilepsy
The Company is developing a series of anticonvulsant compounds
which are related to valproate, which is currently used for the
treatment of epilepsy. In pre-clinical trials in Germany, one
compound has been shown to potently control seizure activity without
sedative action and the induction of birth defects commonly associated
with other anticonvulsants. The Company has filed for patent
protection in the United States and other countries.
Agreements for Neuroscience Programs
The Company has entered into various agreements, primarily with
universities and/or individual scientists under the Company's Global
Scientific Network, which generally grant the Company an exclusive
license to the results of the research for use in various neuroscience
applications, which may include compounds and antibodies. In general,
the agreements are for a term equal to the duration of any patents
that may be granted with a minimum term of 10 years. In exchange for
a license, the Company is to pay certain research expenses and the
costs of filing and processing patent applications in the United
States and any other countries that the Company may select. Pursuant
to these agreements, the Company is also to pay the inventors or the
university a royalty, typically 5% of net product sales. The Company
is seeking to commercialize the products under development by entering
into collaborative arrangements, licensing agreements and/or through
research development partners.
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There can be no assurance that the Company's Neurobiology
products will prove to be commercially viable, or that the Company
will successfully market the products or achieve significant revenues
or profitable operations or enter into any arrangements with third
parties for development of the Neurobiology products, or if it does,
that any such arrangements will be on terms that will be favorable to
the Company.
Hepatitis A Vaccine
In March 1994, the Company was issued U.S. Patent No. 5,294,548
for its recombinant Hepatitis A virus vaccine. Hepatitis A is an
inflammatory process of the liver caused by a virus that is spread by
fecal-oral contact. It is highly contagious and is more common in
children and young adults. Hepatitis A is a source of concern in day
care centers, the armed forces and other organizations populated by
young people who are working, living and playing in close proximity to
one another. In developed countries there is a surprisingly high
percentage of non-immune individuals. In underdeveloped countries
children are exposed to the virus at an early age and thus acquire
lifetime immunity. However, as standards of hygiene improve in
developing countries, there is less exposure and, therefore, less
immunity developed resulting in a greater need for the vaccine.
The Company, in collaboration with researchers at the University
of Iowa, demonstrated the ability to produce neutralizing antibodies
to several of its recombinant viral vaccine candidates. The research
focus involved the production of non-infectious Hepatitis A empty
capsids, in both the vaccinia and the baculovirus expression systems.
The Company has conducted a test of its recombinant Hepatitis A virus
vaccine in primates in collaboration with an independent third party.
After one inoculation, the primates exhibited a level of anti-Hepatitis
A antibodies indicative of a protective immune response.
There can be no assurance that the Company's Hepatitis A Vaccine
product will prove to be commercially viable, or that the Company will
successfully market this product or achieve significant revenues or
profitable operations or enter into any arrangements with third
parties for development of the vaccine, or if it does, that any such
arrangements will be on terms that will be favorable to the Company.
Various Other Agreements
As part of its development stage activities, the Company, in the
ordinary course of business, enters into various agreements that
provide for the expenditure of funds for research and development
activities. These agreements typically provide for the payment of
royalties (typically 2% to 8% of net sales) by the Company if any
products are successfully developed and marketed as a result of the
work being performed under the agreement. Reference is made to Notes
3 and 6 of the Notes to Consolidated Financial Statements for a
discussion of various arrangements which the Company has entered into
for collaborative research and development projects (including
arrangements for the use of space and services) and technology license
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arrangements for the development and prospective manufacturing and
sale of products being developed.
Marketing and Sales
Because the Company lacks the necessary financial resources, it
intends to rely on collaborative arrangements with pharmaceutical
firms to conduct and fund the major portion of the human clinical
trials that are necessary to obtain regulatory approval for any in
vivo products it may develop. The Company also intends to rely on
these firms to market and sell the products exclusively during the
first few years of the collaboration. The Company expects that most
of these collaborations will be based on licenses to sell in specific
countries. While each arrangement may vary, the Company intends to
require payment to it of a royalty based on sales of the product with
an amount to be paid "up front" upon entering into the arrangement.
The licensee may also be required to obtain all or a part of its
product requirements from the Company. The Company expects to retain
rights to enter the market, selling the product under its own label,
possibly after an exclusive sales period granted to the licensee.
There can be no assurance that any such marketing arrangements that
will be entered into, or if entered into, will be on terms similar to
those discussed above or on terms that will be favorable to the
Company. If no arrangements are entered into, the Company will
require substantial alternative financing in order to initiate
commercial marketing of any in vivo products that it may successfully
develop. There can be no assurance that any such financing
arrangements will be available to the Company or, if available to, it
will be available on terms acceptable or favorable to the Company.
The use of any products that the Company may develop for in vivo
diagnosis and therapy will require educating the medical community as
to their reliability, safety and effectiveness. Currently used in
vivo products employ non-specific X-ray imaged dyes for diagnosis and
thrombolytics for therapy. Commercial sales of any in vivo products
developed by the Company will be dependent on general acceptance by
physicians. The Company and a pharmaceutical company with which it
may collaborate, may use several approaches to obtain the general
acceptance in the medical community of the Company's proposed
products. Such promotional approaches may include: publicizing
existing studies; offering the products to current practitioners and
researchers who are leaders in their fields for their use and
publication of their findings; conducting comparative studies with
competitive products and methodologies and publishing the results of
the studies; and sponsoring professional symposia and seminars. The
personnel resources of the Company are not sufficient to permit the
Company to alone gain the acceptance of the medical community for the
Company's proposed in vivo pharmaceutical products or vaccines.
Accordingly, the Company may be required to collaborate with one or
more pharmaceutical companies, which will provide the necessary
financing and expertise to obtain the acceptance of the medical
community of the Company's proposed in vivo products. Such
arrangements are likely to entail, among other things, the sharing of
revenue or profits with such companies.
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Sales of the Company's proposed products on a commercial basis
for use as diagnostics, therapeutics or vaccines will be substantially
dependent on widespread acceptance by the medical community.
Widespread acceptance of the Company's in vitro diagnostic tests as a
useful adjunct to diagnosis and treatment will require educating the
medical community as to the benefits and reliability of such products.
The Company anticipates that commercial sales of its in vitro test
kits will be directed to hospitals, laboratories, clinical
laboratories and physicians in large group medical practices. The
Company believes that sales to hospitals and clinical laboratories
will be dependent on general acceptance by physicians using direct
fibrinogen level measurement as part of routine and special blood
analyses. There can be no assurance that any of the Company's
products will be accepted in the medical community, and the Company is
unable to estimate whether it will be able to, and if so the length of
time it would take to, gain such acceptance.
The Company intends to seek arrangements with large
pharmaceutical companies to market in vitro products. In the event
the Company is unable to enter into other arrangements or if the
arrangements which it has entered into or may enter into in the future
are not successful, the Company would likely seek to market such
products through independent distributors which would require the
Company to develop a marketing program to support sales. In such
event, the Company would be required, among other things, to pay the
expenses of developing promotional literature and aides, hiring sales
representatives and completing studies to interest distributors in
selling the Company's in vitro diagnostic tests. Any independent
distributors that the Company may use would in all likelihood also
market competitive products. There can be no assurance that the
Company will be able to enter into arrangements for the distribution
of any in vitro products on satisfactory terms. Any in vivo products
will require the marketing and sales organization of a large
pharmaceutical company to establish them in the marketplace. In the
event the Company is not able to enter into satisfactory marketing
arrangements, it would be unable to commercially market any in vivo
products.
Competition
Many new companies and research and development units of
established companies have entered the biotechnology field. These
companies, both public and private, include several well-known
pharmaceutical and chemical companies. Many of these companies, in
addition to universities and research institutions, have the capacity
to conduct substantial research activities in these areas, and have
substantially greater capital resources, research and development
staffs and facilities than the Company, greater name recognition and
established sales, marketing and distribution networks.
Proprietary Technology, Patents and Trade Secrets
The Company's policy is to seek patent protection for its
proposed products, whether resulting from its own research and
development activities or any development and licensing arrangements
that the Company may enter into. The Company presently has two issued
United States Patents, Nos. 4,870,023 and 5,041,379, which will expire
2006 and 2008, respectively; one United States Patent, No. 5,294,548,
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relating to the Hepatitis A vaccine, filed jointly with the University
of Iowa, which will expire 2011. In addition, the Company has been
issued United States Patent, Nos. 5,091,512 and 5,120,834, each of
which will expire in 2009, covering monoclonal antibodies specific for
fibrinogen and monoclonal antibodies specific for fibrin respectively.
The Company has also been issued a United States Patent No. 5,223,410,
which will expire in 2010, covering the use of its AF mouse colony to
generate monoclonal antibodies. The Company has further been issued
United States Patent No. 5,453,359, which will expire in 2012,
covering an immunoassay for soluble fibrin using the Company's
proprietary fibrin-specific monoclonal antibody as a method of
detecting a thrombotic event, such as myocardial infarction. The
Company has also been issued United States Patent No. 5,487,892, which
will expire in 2014, covering use of the Company's proprietary fibrin-
specific monoclonal antibody as an antithrombotic agent. Additional
patent applications are pending covering alternative embodiments of
the Company's proprietary fibrin-specific monoclonal antibody, as well
as improved methods of raising fibrin-specific monoclonal antibodies
and of using the soluble fibrin immunoassay. The Company has twenty-two
counterpart applications (including designated countries under
patent treaties) covering monoclonal antibodies specific for
fibrinogen, monoclonal antibodies specific for fibrin, methods for use
of the Company's proprietary fibrin-specific monoclonal antibody in a
soluble fibrin assay, and as an antithrombotic agent, and the use of
the AF mouse colony to generate monoclonal antibodies. The Company
presently has issued three patents in Australia covering monoclonal
antibodies specific for fibrinogen, monoclonal antibodies specific for
fibrin, methods for localizing a blood clot in a patient, an
immunoassay for determining fibrin levels in a patient's blood, and
use of the AM mouse colony to generate monoclonal antibodies. The
Company has exclusive worldwide rights in technology relating to
certain methods and compositions for treating epilepsy. Patent
applications to protect this technology have been filed on behalf of
the Company in the United States and the European Patent Office. The
Company has filed additional patent applications in other foreign
jurisdictions to further protect this technology. The Company also
has exclusive worldwide rights in technology related to certain novel
neurotrophic methods and compositions. Two United States Patent
applications, one of which has been allowed, and two foreign
applications relating to this technology are pending. Additional
foreign applications to protect this technology worldwide are planned.
The Company is the worldwide exclusive licensee of United States
Patent No. 5,492,812, issued to Trinity College (Dublin, Ireland),
which will expire in 2013, covering a method for diagnosing
Alzheimer's disease, and a corresponding pending European patent
application.
There can be no assurance that any of the claims in pending or
future applications will issue as patents, that any issued patents
will provide the Company with significant competitive advantages, or
that challenges will not be instituted against the validity or
enforceability of any patent issued to the Company or, if instituted,
that such challenges will not be successful. The cost of litigation
to uphold the validity and prevent infringement can be substantial.
Furthermore, there can be no assurance that others have not
independently developed or will not develop similar technologies or
will not develop distinctively patentable technology duplicating the
Company's technology or that they will not design around the
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patentable aspects of the Company's technology. While obtaining
patents is deemed important by the Company, patents are not considered
essential to the success of its business. However, if patents do not
issue from present or future patent applications, the Company may be
subject to greater competition. Moreover, unpatented technology could
be independently developed by others who would then be free to use the
technology in competition with unpatented technology of the Company.
With respect to certain aspects of its technology, the Company
currently relies upon, and intends to continue to rely upon, trade
secrets, unpatented proprietary know-how and continuing technological
innovation to protect its potential commercial position.
Relationships between the Company and its scientific consultants and
collaborators may provide access to the Company's know-how, although,
in general, the Company has entered into confidentiality agreements
with the parties involved. Similarly, the Company's employees and
consultants have entered into agreements with the Company which
require that they forebear from disclosing confidential information of
the Company and to assign to the Company all rights in any inventions
made while in the Company's engagement relating to Company activities.
There can be no assurance that trade secrets will be developed and
maintained, or that secrecy obligations will be honored, or that
others will not independently develop similar or superior technology.
To the extent that consultants, employees, collaborators or other
third parties apply technological information independently developed
by them or by others to Company projects, disputes may arise as to the
ownership of such information which may not be resolved in favor of
the Company. All members of the Company's Scientific Advisory
Committee are employed by or have consulting agreements with third
parties, the business of which may conflict or compete with the
Company, and any inventions discovered by such individuals will not
become the property of the Company. See "Management - Scientific
Advisory Committee".
Trademarks
The Company owns trademarks registered with the United States
Patent and Trademark Office for the names Global Scientific Network
and Cadkit . Federally registered trademarks have a perpetual life,
as long as they are renewed on a timely basis, subject to the rights
of third parties to seek cancellation of the marks. The Company has
filed other trademark applications, including for TpP and FiF , may
claim common law trade name rights as to other potential products, and
anticipates filing additional trademark applications in the future.
The Company does not believe that any of its trademarks (or applied
for trademarks) is material to its business.
Government Regulation
The Company's present and proposed activities are subject to
government regulation in the United States and any other countries in
which the Company may choose to market its proposed products or
conduct product development, research or manufacturing. The Company
has not determined those countries, other than the United States,
where it will seek regulatory approvals to market its proposed
products. The following is a discussion of the processes required in
order to obtain FDA approval for marketing a product, which are
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different for the three types of products being developed by the
Company: monoclonal antibodies for in vitro use, monoclonal antibodies
for in vivo use and vaccines.
In Vitro Diagnostic Products
For some in vitro diagnostic products, a process known as a
"510(k) review" is available to enable the manufacturer to demonstrate
that the proposed product is "substantially equivalent" to another
product that was in commercial distribution in the United States
before May 28, 1976 or is lawfully marketed under a 510(k) (a
"predicate device"). When a 510(k) review is used, a sponsor is
required to submit a pre-market notification to the FDA. In February
1991, the Company submitted a pre-market notification as required
under Section 510(k) for its Cadkit in vitro diagnostic product, and
in April 1991, received notice from the FDA that the FDA had
determined that the device was substantially equivalent (granted
"510(k) clearance"). The Company has submitted a pre-market
notification for its FiF test in January 1997 and plans to submit
additional in vitro diagnostic tests in the future. The Company
cannot proceed with commercial sales of such products for diagnostic
use in the United States until it receives 510(k) clearance from the
FDA. In the event that the FDA requests additional information for
the pre-market notification, this could result in multiple cycles of
submissions, each potentially involving additional review periods
until 510(k) clearance is granted or FDA determines that the device is
not substantially equivalent. The FDA has statutory authority to also
require clinical data to support a pre-market notification. In
October 1996, the Company received 510(k) clearance from the FDA to
market the TpP test as an aid in the risk assessment of thrombosis
(blood clot formation) and the monitoring of anticoagulant therapy and
plans to submit additional per-market notifications to obtain
clearance to market the test for additional specific indications.
In cases where the Company's product is determined by the FDA not
to be "substantially equivalent" to the predicate device, an approved
pre-market approval application ("PMA"), which involves a lengthier
and more burdensome process, will be required before commercial
distribution is permitted. There can be no assurance that any present
or future in vitro test the Company develops will be determined to be
substantially equivalent by the FDA or receive PMA approval by the FDA
in a timely manner or at all. A PMA may be required for some or all
the Company's future proposed in vitro products.
The FDA invariably requires clinical data for a PMA and, although
the FDA may grant 510(k) clearance without supporting clinical data,
such data may be required by the FDA. The Company expects that it
will submit clinical data in at least some of its anticipated 510(k)
notices. If clinical studies are necessary, the FDA may require the
Company to obtain an investigational device exemption ("IDE"). An IDE
restricts the sale of an investigational device to a limited number of
investigators, for the purpose of performing studies to be submitted
to the FDA in a Pre-Market Notification or a PMA. The amount that can
be charged for use of an investigational device in a clinical study is
limited to recovery of costs until a 510(k) notification is cleared or
PMA approval is granted by the FDA. Accordingly, no significant
economic return can be expected during the study of investigational
devices.
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Diagnostic products may be exempt from IDE requirements if they
satisfy four criteria. The exemption applies only to tests that in
addition to having certain investigational use labeling statements,
are not invasive, do not require invasive sampling procedures that
present significant risk to the patient, do not introduce energy (such
as X-rays) into a subject, and are not used as diagnostics without a
confirmatory diagnosis by a medically established diagnostic product
or procedure. Certain diagnostic products under development by the
Company may not meet the requirements for this exemption. For
instance, energy may be introduced into test subjects by certain
imaging procedures. Although there can be no assurances, the Company
believes that the clinical investigation of its in vitro diagnostic
products are exempt from the IDE regulation. Such products may still
be subjected to informed consent and institutional review board
requirements.
Medical devices may be exported before receiving 510(k)
clearance, an IDE or PMA approval under certain conditions. To export
a device subject to 510(k) clearance the device must meet the
specifications of the foreign purchaser, not be in conflict with the
laws of the importing country, not be sold or offered for sale in
domestic commerce and be properly labeled. Other restrictions also
apply to devices that must go through the PMA process. Once cleared
for marketing, a diagnostic device must comply with certain regulatory
requirements, such as good manufacturing practice, medical device
reporting, and restrictions on advertising and promotion.
The European Union is developing a structure for the regulation
of in vitro diagnostic devices. The Company believes that there are
no material regulatory impediments to the sale of its in vitro
diagnostic tests presently under development in North Africa and the
Middle East.
Monoclonal Antibodies for In Vivo Use and Vaccines
Any products intended for in vivo use, including vaccines, will
be subject to regulation by the FDA. The products produced, depending
on their characteristics, may be classified as "biologics" regulated
under the Public Health Service Act (the "PHS" Act) and the Federal
Food, Drug, and Cosmetic Act (the "FDCA") or may be classified as non-
biologic drugs regulated only under the FDCA. Development of a
pharmaceutical product for use in humans under either statute is a
multistep process. First, laboratory animal testing establishes
probable safety and parameters of use of the experimental product for
testing in humans and suggests potential efficacy with respect to a
given disease. Once the general investigative plan and protocols for
specific human studies are developed, an investigational new drug
("IND") application is submitted to the FDA. FDA regulations do not,
by their terms, require FDA approval of an IND. Rather, they allow a
clinical investigation to commence if the FDA does not notify the
sponsor to the contrary within 30 days of receipt of the IND. As a
practical matter, however, FDA approval is typically necessary before
a company would commence clinical investigations. That approval may
come within 30 days of IND submission but may involve substantial
delays if the FDA places the IND on clinical hold and requests
additional information.
The initial phase of clinical testing (Phase I) is conducted to
evaluate the pharmacological actions and side effects of the
experimental product in humans and, possibly, to gain early evidence
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of possible effectiveness. Phase I studies evaluate the safety of the
drug. A demonstration of therapeutic benefit is not required in order
to complete such trials successfully. If acceptable product safety is
demonstrated, then Phase II trials may be initiated. Phase II trials
are designed to evaluate the effectiveness of the product in the
treatment of a given disease and, often are well-controlled, closely
monitored studies in a relatively small number of patients. Routes,
dosages and schedules of administration may also be studied. If Phase
II trials are successfully completed, Phase III trials may be
commenced. Phase III trials are expanded, controlled trials which are
intended to gather additional information about safety and
effectiveness in order to evaluate the overall risk/benefit
relationship of the product and provide the evidence of safety and
effectiveness necessary for product approval. Although this is the
standard drug testing pattern, different approaches are often used,
such as combining Phases I and II.
It is not possible to estimate the time in which Phase I, II and
III studies will be completed with respect to a given product,
although the time period to complete all the testing is often as long
as five to ten years. There can be no assurance that the FDA will
approve marketing applications for any of the products developed by
the Company in a timely manner, or at all.
In March 1993, the FDA cleared the Company to begin Phase I human
clinical testing for its patented fibrin specific monoclonal antibody
MH1. In January 1995, the Company completed Phase I studies of MH1
for imaging deep vein thrombosis (DVT) and pulmonary embolism (PE) and
initiated Phase I/II clinical trials for PE. Data on the clinical
trials was submitted as a final report on Phase I to the FDA.
Following the successful completion of clinical trials, the
clinical evidence that has been accumulated is submitted to the FDA as
part of a new drug application ("NDA") for a non-biologic drug
product. For some biologic products, a Product License Application
("PLA") and an Establishment License Application ("ELA") must be
submitted. For other products, such as certain monoclonal antibody
products for in vivo use, a single application known as biologics
license application ("BLA") may be submitted. Either way, there may
be limits imposed on the Company's ability to contract out different
manufacturing steps to different companies.
The FDA also has extensive regulations concerning good
manufacturing practices. The Company's compliance with good
manufacturing practice, and its ability to assure the potency, purity
and quality of the drugs and biologics manufactured, must be
documented in the NDA's, BLA's, or PLA's and ELA's submitted for the
products, and manufacturing facilities will be subject to pre-approval
and other inspections by the FDA and other government agencies. The
Company has completed its agreement with Verax Corporation ("Verax"),
which manufactured the MH1 monoclonal antibody for the Phase I human
trials. The Company has contracted with Creative BioMolecules Inc.
("Creative"), a bioprocess technology company which succeeded Verax,
to manufacture a sufficient quantity of the Company's in vivo
monoclonal antibody to conduct human trials for Phase II, at a total
cost of approximately $250,000.
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Approval of the NDA, BLA, or PLA\ELA is necessary before a
company may market the product. The approval process can be very
lengthy and depends upon the FDA's review of the application and the
time required to provide satisfactory answers or additional clinical
data when requested. With any given product, there is no assurance
that an NDA, BLA, or PLA/ELA will be approved in a timely manner, or
at all. Failure to obtain such approvals would prevent the Company
from commercializing its products and would have a material adverse
effect on the Company's business.
Continued compliance with current good manufacturing practices is
required to market both biologic and non-biologic drug products once
they are approved. Failure to comply with the good manufacturing
practice regulations, or to comply with other applicable legal
requirements, can lead to seizure of violative products, injunctive
actions, other enforcement actions, and potential criminal and civil
liability on the part of a Company and of the officers and employees
of a Company.
Furthermore, the process of seeking and obtaining FDA approval
for a new product generally requires substantial funding. The Company
anticipates that, in most instances where it develops a product, the
Company will seek to enter into a joint venture or similar arrangement
with an established chemical or pharmaceutical company that will
conduct the required toxicity studies and clinical trials and bear a
substantial portion of the expense of obtaining FDA approval.
In addition to complying with FDA regulations, the Company and
the facilities used by it are also required to comply with federal and
state environmental, occupational health and other applicable
regulations. The Company believes that its facilities comply with
such regulations.
Manufacturing
While the Company is presently producing a limited quantity of
monoclonal antibodies for testing and evaluation of its in vitro
products, there can be no assurances that the Company will be able to
either finance or meet FDA regulations for good manufacturing
procedures required in order to convert and operate such facility for
commercial production of such products. The Company does not intend
to establish its own manufacturing operations for its in vivo products
unless and until, in the opinion of management of the Company, the
size and scope of its business and its financial resources so warrant.
It is the Company's intention to seek additional third parties to
manufacture its in vivo monoclonal antibody for commercial production
or enter into a joint venture or license agreement with a partner who
will be responsible for future manufacturing. Each joint venture
partner or contract manufacturer participating in the manufacturing
process of the Company's monoclonal antibody must comply with FDA
regulations and file documentation with the FDA to support that part
of the manufacturing process in which it is involved. There is no
assurance that third parties will be able to manufacture sufficient
quantities of the Company's in vivo monoclonal antibody necessary to
obtain full FDA clearance, that the FDA will accept the Company's
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manufacturing arrangements, or that these commercial manufacturing
arrangements can be obtained on acceptable terms.
Product Liability
The testing, marketing, manufacture and sale of pharmaceutical
products entails a risk of product and other liability claims by
consumers and others. Additionally, the Company's monoclonal
antibodies are generated from an antigen free mouse colony and
instances of the human immune system negatively reacting to mouse
derived antibodies have been reported. Product and other liability
claims may be asserted by physicians, laboratories, hospitals or
patients relying upon the results of the Company's proposed diagnostic
tests. Product liability claims may be asserted by physicians,
laboratories, hospitals or patients relying upon the results of the
Company's diagnostic tests. Claims may also be asserted against the
Company by end users of the Company's products, including persons who
may be treated with any in vivo diagnostic or therapeutics.
Certain distributors of pharmaceutical products require minimum
product liability insurance coverage as a condition precedent to
purchasing or accepting products for distribution. Failure to satisfy
such insurance requirements could impede the ability of the Company to
achieve broad distribution of its proposed products, which would have
a material adverse effect upon the business and financial condition of
the Company.
The Company does not presently maintain product liability
insurance coverage and, although the Company will attempt to obtain
product liability insurance prior to the marketing of any of its
proposed products, there is no assurance that the Company will be able
to obtain such insurance or, if obtained, that such insurance can be
acquired at a reasonable cost or will be sufficient to cover all
possible liabilities. In the event of a successful suit against the
Company, lack or insufficiency of insurance coverage could have a
material adverse effect on the Company.
Scientific Advisory Committee
The Company has a Scientific Advisory Committee (the "Committee")
comprised of scientists and physicians active in the fields of
microbiology, immunology and molecular biology and in cardiovascular
disease, hepatic disease and drug development. These scientists serve
as consultants to the Company. Members of the Committee generally
make themselves available on an informal basis for consultations with
the Company. Members of the Committee are selected by the Company's
management.
Members of the Committee review the feasibility of the Company's
proposed research and development programs, the progress of programs
undertaken and assist in establishing both the scientific goals of the
Company and the priorities of its product development. All members of
the Company's Scientific Advisory Committee may be employed by or have
consulting agreements with third parties, the business of which may
conflict or compete with the Company, and any inventions discovered by
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such individuals will not become the property of the Company. These
individuals are expected to devote only a small portion of their time
to the Company, and are not expected to actively participate in the
development of the Company's technology. It is possible regulations
or policies now in effect or adopted in the future might limit the
ability of the scientific advisors to continue their relationship with
the Company. Members of the Scientific Advisory Committee were used
on an informal basis for consultations in 1996. Payments to the
members, exclusive of expenses, is $1,000 per meeting attended.
Members of the Advisory Committee have been granted ten year options
to purchase from 10,000 to 35,000 shares of Common Stock from the
Company, an aggregate of 237,500 shares, at prices ranging from $1.94
per share to $7.75 per share. The 1996 annual compensation for the
advisors as a group was approximately $61,000. Certain members of the
Committee are associated with institutions with which the Company has
undertaken or may in the future engage in collaborative research
efforts. Arrangements with such institutions may result in one or
more members of the Committee receiving royalties or other
compensation from such institution or the Company if such member works
as a scientist in the collaborative effort.
The members of the Committee have no general fiduciary duties to
the Company, have entered into limited confidentiality agreements and
may, in their discretion, engage in activities which are competitive
with those engaged in by the Company. The members of the Committee as
of March 14, 1997 are:
Giancarlo Agnelli, M.D., is Associate Professor of Internal
Medicine at the University of Perugia, Italy, where he received his
medical education. Prior to appointment to his present post he was a
research fellow and clinical fellow in the Department of Pathology and
Department of Medicine at McMaster University, Hamilton, Ontario,
Canada. He continues as an associate member of the Hamilton Civic
Hospital Research Center at McMaster University. Dr. Agnelli is a
member of the editorial board or a manuscript reviewer for such
journals as Haemostasis, Blood, Diabetologia, Thrombosis and
Haemostasis, and Thrombosis Research. He has presented lectures at
more than 200 international and national meetings and is the author or
co-author of more than 200 scientific articles.
Denian Ba, M.D., is presently Academician, The Chinese Academy of
Engineering; President of the Chinese Academy of Medical Sciences &
Peking Union Medical College; Chairman, Chinese Society of Immunology;
Vice Chairman, Chinese Medical Association. Dr. Ba was engaged in
research on Cancer Immunology as Associate Chief, Chief, Department of
Immunology at the Institute of Cancer Research in Harbin Medical
University, and Deputy Director, Director at the Institute of Cancer
Research in Harbin Medical University. Dr. Ba received his M.D. from
the Department of Medicine of Harbin Medical University, received his
Master of Science of Biochemistry from Beijing Medical University and
received his Ph.D. from the School of Medicine of Hokkaido University,
Japan.
Konrad T. Beyreuther, Ph.D., is presently professor of Molecular
Biology and Head of Laboratory for Molecular Neuropathology at the
Center of Molecular Biology, University of Heidelberg, Federal
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Republic of Germany. His primary research deals with genetics and
molecular biology of Alzheimer's disease and related dementia
disorders. He earned his doctorate at the Max-Plank Institute for
Biochemistry Munich, University Munich, Germany.
Gustav Victor Rudolf Born, M.D., D. Phil., F.R.S., is presently
Research Director of The William Harvey Research Institute at St.
Bartholomew's Hospital Medical College, London, England, and Emeritus
Professor of Pharmacology in the University of London. Among
Professor Born's distinctions, appointments and activities are:
Fellowship and Royal Medal of the Royal Society; Foundation President
of the British Society for Thrombosis and Haemostasis; Corresponding
Member of the Belgian Royal Academy of Medicine; Professor of the
Foundation de France, Paris; Robert Pfleger, Paul Morawitz and
Alexander-von-Humbolst Prizes; Honorary Life Member of the New York
Academy of Sciences; Medical Advisor of the Heineman Medical Research
Center, Charlotte, North Carolina; Co-Director for Centre for
Thrombosis and Loyola Research, Perugia, Italy; Honorary Doctorates
from eight universities including Brown.
Francis J. Castellino, Ph.D., is Dean of the College of Science,
and Kleiderer-Pezold Professor of Biochemistry at the University of
Notre Dame. He earned a doctorate in biochemistry at the University
of Iowa, and was a postdoctoral fellow at Duke University Medical
Center. He maintains a research program studying blood coagulation
and fibrinolysis.
Jeffrey Ginsberg, M.D., is a hematologist with research training
in clinical and laboratory aspects of thrombosis. His current
research interests include the clinical development of novel
antithrombotic agents, the diagnosis and management of thrombosis
during pregnancy, the prevention and treatment of the post-phlebitic
syndrome, the investigation of the clinical complications of
antiphospholipid antibodies, and the diagnosis of venous thrombosis
and pulmonary embolism. He is currently the principal investigator of
a number of clinical trials relative to thrombosis. He is the Director
of the Thromboembolism Unit at Chedoke-McMaster Hospitals and a
Research Scholar of the Heart and Stroke Foundation of Canada.
Lawrence Grossman, Ph.D., is University Distinguished Service
Professor of Biochemistry at the Johns Hopkins University School of
Hygiene and Public Health, Baltimore, Maryland. He is consultant to
Applied DNA Systems, Inc. He earned a Ph.D. degree from the
University of Southern California, and subsequently trained and worked
thereafter at Johns Hopkins University and Brandeis University. His
expertise are in DNA repair, molecular basis of mutagenesis and
molecular biology in general.
Thomas W. Meade, CBE, DM, FRCP, FRS, is presently Director of the
Medical Research Council Epidemiology and Medical Care Unit, Wolfson
Institute of Preventive Medicine, St. Bartholomew's and the Royal
London Hospital School of Medicine and Dentistry, London, England.
Additional appointments include: Professor of Epidemiology University
of London, Hon. Consultant in Epidemiology, Northwick Park and St.
Mark's NHS Trust, Hon. Consultant in Epidemiology, The Royal Hospitals
NHS Trust. Hon. Director British Heart Foundation Cardiovascular
Page 23
<PAGE>
Epidemiology Research Group. He is: Doctor of Medicine, Fellow of the
Royal College of Physicians and Fellow of the Royal Society.
Daniel M. Michaelson, Ph.D., is presently Professor of
Neurobiology, Department of Neurobiochemistry, Tel Aviv University,
Tel Aviv, Israel. He earned a Ph.D. in Biophysics from the University
of California, Berkley. Among Professor Michaelson's distinctions,
appointments and activities are: Membership of the International
Society of Neurochemistry, International Society for Developmental
Neuroscience, International Brain Research Organization, the New York
Academy of Sciences, Israel Society of Neurosciences, Israel
Biochemical Society and the Israel Society for Pharmacology and
Physiology. He is a member of the Scientific Advisory Board of the
Alzheimer Foundation, a board member of the Israel Society for
Neuroscience, and a board member of Ramot - University Authority for
Applied Research and Industrial Development Ltd.
Peter Victorovich Morozov, M.D., Ph.D., is Professor of
Psychiatry at the Russian State Medical University, Moscow. He has
served as the Secretary of the International Section of the National
Scientific Society of Psychiatrists and is currently secretary of the
Russian Section of French-Russian Society of Psychiatrists. Dr.
Morozov's primary area of research is psychopharmacology, problems of
classification and diagnosis, post-traumatic stress disorders. Dr.
Morozov graduated from Pirogov II Medical School and received his
doctorate from the Institute of Psychiatry AMS USSR.
Gerald P. Murphy, M.D., before joining The Pacific Northwest
Research Foundation in 1993 was with the American Cancer Society as
the Chief Medical Officer since 1988, served as the Associate Director
and Director of the Roswell Park Memorial Institute, Cancer Research
and Treatment Center, Buffalo, New York, from 1968 to 1985. Dr.
Murphy was Professor of Urology and in charge of the Urologic Cancer
Research Laboratory at the State University of New York at Buffalo
from 1985 to June 1988. Dr. Murphy was National American Cancer
Society President for 1983 & 1984. Dr. Murphy received his B.Sc.
degree (Summa Cum Laude) from Seattle University and a M.D. degree
from the University of Washington.
Alfred Nisonoff, Ph.D., is Professor of Biology (Emeritus) at the
Rosenstiel Research Center, Brandeis University, Waltham,
Massachusetts. He earned a doctorate in chemistry from Johns Hopkins
University, Baltimore, Maryland and was a postdoctoral fellow at the
Johns Hopkins Medical School. Dr. Nisonoff is on the Scientific
Advisory Committee of the Roswell Park Cancer Institute, Buffalo, New
York. His expertise is in the field of immunology and idiotypic
antibodies. Member, U.S. National Academy of Sciences; Former
President, American Association of Immunologists; Member, American
Academy of Avis and Sciences; Foreign Correspondent; Belgian Academy
of Medicine.
Rem V. Petrov, M.D., is currently Vice-President of Russian
Academy of Sciences, Moscow, Russia and chief of the Immunology
Department of the Institute of Bioorganic Chemistry of the Academy.
Page 24
<PAGE>
His main scientific interests are in fields of Immunogenetics
(genetical control of Immune response, interactions of syngeneic and
nonsyngeneic cells) and Immunobiotechnology (artificial immunogens and
vaccines, immunopharmacology-myelopeptides and other natural
immunodulators).
Craig M. Pratt, M.D., currently is a Professor of Medicine,
Section of Cardiology, Department of Internal Medicine, Baylor College
of Medicine, Houston, Texas. Dr. Pratt is currently Director of the
Coronary Care Unit and Non-invasive Laboratories at The Methodist
Hospital. Nationally, Dr. Pratt is Chairman of the Cardiovascular and
Renal Drugs Advisory Board to the Food and Drug Administration. Dr.
Pratt also serves on the Program Planning Committee for the Annual
Meeting, American College of Cardiology.
John H. Proctor, Ph.D., was Secretary General of the World
Academy of Art and Science from 1986-1997, and Past President of the
Washington Academy of Sciences in Washington, D.C., and a
corresponding member of the Spanish Royal Academy of Pharmacy. He
has facilitated national and international technology transfer,
organizational development and productivity improvement projects for
over thirty years. Dr. Proctor has written three books and has
published sixty-three technical papers.
Ciaran M. Regan, Ph.D., D.Sc. is presently Statutory Lecturer in
Pharmacology at University College, Dublin, Ireland. Dr. Regan
received his B.Sc. and Ph.D., both in Zoology, from University
College, Dublin. He is a past Postdoctoral Fellow, Department of
Biochemistry, University of Nijmegen, The Netherlands and past
Scientific Officer of Medical Research Council, Institute of
Neurology, London. Dr. Regan has numerous publications.
Jacob Szmuszkovicz, Ph.D., is a Professor of Chemistry at the
University of Notre Dame, Notre Dame, Indiana. He earned a doctorate
in Chemistry from the Hebrew University, Jerusalem. He served as a
Member of Staff at the Weizmann Institute before joining the Upjohn
Company where he held the position of a Distinguished Scientist in the
CNS (Central Nervous System) Unit from 1954 to 1985. Dr. Szmuszkovicz
is co-inventor on over 100 patents. He has served as a Member of the
Executive Committee of the Organic Division of the ACS (American
Chemical Society).
Personnel
As of March 14, 1997, the Company had 35 full time employees and
six part-time employees. Of the full-time employees 21 are research
and development personnel, and the remaining are executive and
administrative personnel.
The President, Chief Operating Officer, Executive Vice President,
and Senior Vice President-Research and Development of the Company are
parties to employment agreements with the Company ending June 30,
1998, December 31, 1999, September 30, 2001 and February 3, 2002,
respectively. They also are parties to agreements with the Company to
keep all information with regard to the business of the Company
confidential during and subsequent to their employment with the
Page 25
<PAGE>
Company. The Company believes its personnel relations are
satisfactory.
Item 2. Properties
The Company leases 7,700 square feet of space from Boston
University in Boston, Massachusetts which houses all of the Company's
research and development activities for an annual base rent of
$275,000 for a three year term ending December 31, 1999.
The Company also has leases covering 8,200 square feet in South
Bend, Indiana, with a total annual base rent of $82,600 and terms
ending March 31, 2000. These facilities are being phased out and the
Company is in the process of subleasing the facilities.
The Company has an office lease in Copiague, New York (6,000
square feet) expiring July 1998 and Dublin, Ireland under a short-term
office and facilities arrangement.
Item 3. Legal Proceedings
On December 13, 1994, certain stockholders filed a complaint, and
on August 5, 1995, certain other stockholders filed a similar
complaint, in the United States District Court for the Eastern
District of New York against the Company and certain of its present
and former executive officers and directors. The complaints alleged,
among other things, that such persons made misleading statements
relating to the Company. The actions sought an unspecified amount of
damages and possible equitable relief.
To avoid the expense and disruption of protracted litigation, the
Company and the plaintiffs reached an agreement in December 1996 to
settle the lawsuits, the amount of which was not material to the
Company. The settlement agreement was approved by the United States
District Court for the Eastern District of New York in January 1997.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of fiscal 1996.
Page 26
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters
The Company's Class A Common Stock ("Common Stock") is traded on
the Nasdaq National Market tier of the Nasdaq Stock Market under the
trading symbol MABXA. The following table sets forth the high and low
closing bid prices for the Company's Common Stock for the periods
indicated, as reported by Nasdaq, without retail mark-ups, mark-downs
or commissions.
Fiscal Years
High Low
1996
First Quarter $6 7/8 $2 7/16
Second Quarter 8 1/8 5
Third Quarter 6 1/8 4 3/16
Fourth Quarter 6 1/16 4
1995
First Quarter 2 3/4 1 9/16
Second Quarter 2 7/8 1 5/8
Third Quarter 3 1/2 1 7/8
Fourth Quarter 3 15/16 2
There were approximately 685 holders of record of Common Stock as
of March 14, 1997 (exclusive of stockholders whose shares are held in
street name by brokers, depositories and other institutional firms).
The Company has not paid any cash dividends on its Common Stock
since its inception and does not anticipate paying dividends for the
foreseeable future.
Page 27
<PAGE>
Item 6. Selected Financial Data
The following selected financial data for the periods indicated
have been derived from the consolidated financial statements of the
Company audited by Arthur Andersen, LLP, independent public
accountants. This information should be read in conjunction with the
related financial statements and notes thereto included elsewhere in
this report.
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Operating Results
Revenues:
Royalties/License Fees - $100,000 - - $900,000
Collaborative Agreements $54,000 $27,000 - - -
Net Loss ($7,700,000) ($5,607,000) ($7,431,000) ($6,521,000) ($4,016,000)
Net Loss Per Share ($0.45) ($0.39) ($0.52) ($0.46) ($0.30)
Weighted Average Shares 17,209,000 14,455,000 14,399,000 14,327,000 13,425,000
As Of December 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
Balance Sheet
Working Capital $13,697,000 $9,485,000 $7,055,000 $14,489,000 $20,240,000
Total Assets $16,473,000 $12,521,000 $8,964,000 $16,636,000 $21,225,000
Long-Term Debt $10,319,000 $7,865,000 - - -
Total Liabilities $10,931,000 $8,376,000 $408,000 $846,000 $479,000
Accumulated Deficit ($42,268,000) ($34,568,000) ($28,961,000) ($21,530,000) ($15,009,000)
</TABLE>
The Company has not paid any cash dividends on its Common Stock
since its inception.
Page 28
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
The Company, although incorporated in September 1983, remains in
its development stage as it has not yet completed the commercial
development of any products nor derived any revenues from the sale of
products. The Company has funded its research and development
activities to date principally from the sale of Common Stock issued in
an initial public offering, the exercise of the Class A and Class B
Warrants issued in the Company's initial public offering, the private
placement of $8.5 million 8% Convertible Debentures and $9.0 million
7% Convertible Debentures, the exercise of stock options, capital
contributions to the Company by the Chairman of the Board, a $900,000
net initial license fee payment and the income on funds invested in
bank deposits, U.S. Treasury bills and notes and other high grade
liquid investments.
The Company expects to continue to incur substantial expenditures
in research and product development and the FDA approval process
relating to Phase I and Phase II human clinical testing of its MH1
imaging product and 510(k) filings for TpP , the Company's Thrombus
Precursor Protein diagnostic tests, and FiF , the Company's Functional
Intact Fibrinogen diagnostic test.
As of December 31, 1996, the Company had working capital of
$13,697,000, compared to $9,485,000 at December 31, 1995. The
Company's management believes that current working capital will be
sufficient to fund its liquidity needs beyond 1997. Currently,
product development plans of the Company include entering into
collaborative, licensing and co-marketing arrangements with large
pharmaceutical companies to provide additional funding and clinical
expertise to perform tests necessary to obtain regulatory approvals,
provide manufacturing expertise and market the Company's products.
Without such collaborative, licensing or co-marketing arrangements,
additional sources of funding will be required to finance the Company.
At December 31, 1996, the Company had net operating loss
carryforwards of approximately $40,200,000 for income tax purposes.
The net operating loss carryforwards will expire through 2011. Since
the Company has significant net operating loss carryforwards, income
tax consequences of Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" has not had any effect on the
Company's reported financial position or results of operations. The
Company has recorded a valuation allowance to fully reserve for the
deferred tax benefit attributable to its net operating loss
carryforwards due to the uncertainty as to their ultimate
realizability.
In accordance with certain provisions of the Tax Reform Act of
1986, a change in ownership of a corporation of greater than 50
percentage points within a three-year period places an annual
limitation on a corporation's ability to utilize its existing net
Page 29
<PAGE>
operating loss carryforwards, investment tax and research and
development credit carryforwards (collectively "tax attributes").
Such a change in ownership was deemed to have occurred in connection
with the Company's 1990 initial public offering at which time the
Company's tax attributes amounted to approximately $4.9 million. The
annual limitation of the utilization of such tax attributes is
approximately $560,000. To the extent the annual limitation is not
utilized, it may be carried forward for utilization in future years.
At December 31, 1996, the Company has approximately $3,716,000 of net
operating losses previously subject to limitation that have not been
utilized. This limitation could affect the Company's future
provisions for or payment of Federal income tax should the Company's
operations produce increased amounts of taxable income in the future.
At December 31, 1996, the Company had $39,300,000 of net operating
loss carryforwards which are not subject to any such limitation.
Results of Operations
Since its inception, the Company's primary activities have
consisted of research and development, acquiring laboratory equipment,
developing and improving proprietary rights, preparing and filing
patent applications, preparing and filing FDA applications, monitoring
clinical trials, negotiating license agreements and hiring and
training personnel with respect to the development of its proposed
products.
The Company has not generated any revenues from the sale of any
products. Revenues from inception through December 31, 1996 of
$1,293,000 are attributable to nonrefundable initial license fees and
collaborative research agreements. As a result of the Company's
substantial start-up expenses and minimal revenues, the Company had an
accumulated deficit of $42,268,000 as of December 31, 1996. The
Company's research and development expenses are anticipated to be
substantial for the foreseeable future and the Company expects to
continue to incur significant operating losses.
The Company expects to increase research and development costs in
1997 due to additional personnel to develop additional formats for its
TpP and FiF products, increased clinical trial costs for MH1 imaging
product and TpP test and costs associated with the move of the
Company's laboratories from South Bend, Indiana to Boston,
Massachusetts.
The Company believes that the impact of inflation and changing
prices on its operations during the three years ended December 31,
1996 were minimal.
Comparison of Years Ended December 31, 1996 and 1995
The Company's net loss was $7,700,000 for the year ended December
31, 1996 compared to $5,607,000 for the year ended December 31, 1995.
The increase of $2,093,000 was the result of the non-cash amortization
($1,351,000) of debt discount relating to the 7% Convertible
Debentures issued in September 1996, non-cash amortization of $285,000
Page 30
<PAGE>
relating to the accounting for warrants issued for certain consulting
agreements and increases in public and stockholder communication
costs.
Research and development costs decreased by $270,000 in 1996 as a
result of reduced research personnel, travel costs and consulting
services offset by increases in clinical costs and FDA filing costs.
General and administrative costs increased by $762,000 in 1996
primarily due to increases in public and stockholder communication
costs, additional personnel relating to licensing efforts, increased
travel and meeting costs and professional service costs.
Interest expense increased $1,725,000 due to the issuance of $8.5
million 8% Convertible Debentures in late October 1995, and $9.0
million 7% Convertible Debentures in September 1996. Of the $1,950,000
interest expense in 1996, $1,351,000 related to the amortization of
debt discount and $431,000 related to amortization of debt issuance
costs. The interest on the 8% Convertible Debentures is included with
the principal amount to determine the number of shares issued at
conversion. During 1996, $6,050,000 of principal amount plus $166,000
interest on the 8% Debentures was converted into 2,269,755 shares of
Class A Common Stock. Interest on the 7% Convertible Debentures is
paid in cash at the end of each quarter, while conversions during a
calendar quarter include accrued but unpaid interest. During 1996, no
conversions occurred relating to the 7% Convertible Debentures.
During January and February 1997, $3,630,000 of Convertible Debentures
plus $31,000 of accrued interest were converted into 1,155,410 shares
of Class A Common Stock. The amount of interest expense in 1997 will
depend upon the extent to which the debentures are converted.
Investment income, net, increased by $203,000 in 1996 primarily
due to the increased average balances in cash equivalents and
marketable securities during 1996. The Company invested in U.S.
Treasury Bills and Notes with an average maturity of five months
during 1996.
Comparison of Years Ended December 31, 1995 and 1994
The Company's net loss was $5,607,000 for the year ended December
31, 1995 compared to $7,431,000 for the year ended December 31, 1994.
The decrease of $1,824,000 was the result of the Company's downsizing
strategy implemented during the fourth quarter of 1994 and revenues
generated from the signing of the license and collaboration agreements
with Abbott Laboratories and F.Hoffmann-La Roche.
Research and development costs decreased by $1,427,000 in 1995 as
a result of reduced research personnel, project costs, travel and
meeting costs and consultant costs.
General and administrative costs decreased by $141,000 in 1995 as
a result of decreases in travel and meeting costs, public relations
costs, insurance costs and personnel costs offset by higher legal
Page 31
<PAGE>
costs relating to two lawsuits and entering into license agreements
and higher consulting costs.
Interest expense of $225,000 resulted from the issuance of $8.5
million principal amount of 8% Convertible Debentures in late
October 1995. Included in interest expense is the amortization of the
debt issuance costs which amounted to $81,000 in 1995. The debt
issuance costs are being amortized as a component of interest expense
over the term of the debentures. Upon the conversion of the
debentures the related unamortized deferred financing costs are
charged to paid-in capital.
Investment income changed from a loss of $12,000 in 1994 to
income of $336,000 in 1995. The increase was the result of the
absence in 1995 of realized losses of $514,000 from the sale of
marketable securities during 1994. Exclusive of the realized loss in
1994, investment income decreased during the 1995 period due to lower
average fund balances for the first ten months offset by higher
interest rates on U.S. Government obligations.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted in a separate section of
this report, starts on page F-1.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
The information called for by Part III (Items 10, 11, 12 and 13
of Form 10-K) is incorporated herein by reference to such information
which will be contained in the Company's Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 with
respect to the Company's 1997 Annual Meeting of Stockholders.
Page 32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of the Company
are annexed hereto immediately following the signature page of this
Report.
Financial Statements Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-22
Information required by schedules called for under Regulation S-X
is either not applicable or the information required therein is
included in the consolidated financial statements or notes thereto.
Page 33
<PAGE>
3. Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation of the Company, as
filed with the Secretary of State of Delaware on July 30,
1996. Incorporated herein by reference to Exhibit 4.01 to
the Company's Registration Statement on Form S-8, File No.
333-09473.
3.2 Amended and Restated By-Laws of the Company. Incorporated
herein by reference to Exhibit 4.02 to the Company's
Registration Statement on Form S-8, File No. 333-09473.
4.1(a) Form of the Company's 8% Convertible Debentures due
October 13, 1998. Incorporated herein by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K
dated October 12, 1995 (date of earliest event reported),
File No. 0-19041.
4.1(b) Form of the Company's 7% Convertible Debentures due
September 30, 1998. Incorporated herein by reference to
Exhibit 4.01 to the Company's Current Report on Form 8-K
dated September 30, 1996 (date of earliest event
reported), File No. 0-19041.
10.1 + * Employment Agreement dated May 10, 1996 between the
Company and Dr. Paul E. Gargan.
10.2(a) + The Company's Stock Option Plan, as amended. Incorporated
herein by reference to Exhibit 28.1 to the Company's
Registration Statement on Form S-8, File No. 33-51240.
10.2(b) + The Company's 1993 Non-Employee Director Stock Option
Plan. Incorporated herein by reference to Exhibit 99.01
to the Company's Registration Statement on Form S-8, File
No. 33-65416.
10.2(c) + The Company's 1996 Stock Option Plan. Incorporated herein
by reference to Exhibit A to the Company's Proxy Statement
dated April 29, 1996 used in connection with the Company's
1996 Annual Meeting of Stockholders, File No. 0-19041.
10.3 Exclusive License Agreement dated January 24, 1992 between
the Company and Yamanouchi Pharmaceutical Co., Ltd.
Incorporated herein by reference to Exhibit 10.29 to the
Company's Current Report on Form 8-K dated January 24,
1992 (date of earliest event reported), File No. 0-19041.
Page 34
<PAGE>
10.4 Warrant dated October 25, 1995 issued to Swartz
Investments, Inc. Incorporated herein by reference to
Exhibit 10.13 to the Company's Current Report on Form 8-K
dated October 12, 1995 (date of earliest event reported),
File No. 0-19041.
21* List of Subsidiaries
24 * Consent of Independent Public Accountants
* Filed herewith. All other exhibits are incorporated
by reference to the document following the
description thereof.
+ Management contract or compensatory plan.
(b) Reports on Form 8-K
The only Report on Form 8-K filed during the fourth
quarter of the year ended December 31, 1996 was dated
September 30, 1996 (date of earliest event reported),
reporting Item 5. Other Events.
Page 35
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN BIOGENETIC SCIENCES, INC.
(Registrant)
March 27, 1997 By /s/ Josef C. Schoell
- -------------------- ----------------------------
(Date) Josef C. Schoell
Vice President, Finance
Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
March 27, 1997 By /s/ Alfred J. Roach
- -------------------- ----------------------------
(Date) Alfred J. Roach, Chairman of
the Board of Directors and
Chief Executive Officer and
Director
March 27, 1997 By /s/ Josef C. Schoell
- -------------------- ----------------------------
(Date) Josef C. Schoell
Vice President, Finance
(Principal Financial and
Accounting Officer)
March 27, 1997 By /s/ Paul E. Gargan
- -------------------- ----------------------------
(Date) Paul E. Gargan, President,
Chief Scientific Officer and
Director
Page 36
<PAGE>
Signatures
March 27, 1997 By /s/ Timothy J. Roach
- -------------------- ----------------------------
(Date) Timothy J. Roach, Secretary,
Treasurer, and Director
March 27, 1997 By /s/ Ellena M. Byrne
- -------------------- ----------------------------
(Date) Ellena M. Byrne, Executive
Vice President and Director
March 27, 1997 By /s/ Joseph C. Hogan
- -------------------- ----------------------------
(Date) Joseph C. Hogan, Director
March 27, 1997 By /s/ William G. Sharwell
- -------------------- ----------------------------
(Date) William G. Sharwell, Director
March 27, 1997 By /s/ Gustav Victor Rudolf Born
- -------------------- ----------------------------
(Date) Gustav Victor Rudolf Born,
Director
Page 37
<PAGE>
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Stockholders' Equity F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-22
Information required by schedules called for under Regulation
S-X is either not applicable or the information required therein is
included in the consolidated financial statements or notes thereto.
Page F - 1
<PAGE>
Report of Independent Public Accountants
To American Biogenetic Sciences, Inc.:
We have audited the accompanying consolidated balance sheets
of American Biogenetic Sciences, Inc. (a Delaware corporation in
the development stage) and subsidiary as of December 31, 1996 and
1995, and the related consolidated statements of operations, cash
flows and stockholders' equity for each of the three years in the
period ended December 31, 1996 and for the period from inception
(September 1, 1983) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of American Biogenetic Sciences, Inc. and subsidiary as of
December 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1996 and for the period from inception to December 31,
1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Melville, New York
February 20, 1997
Page F - 2
<PAGE>
<TABLE>
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
Assets 1996 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents 10,760,000 5,436,000
Marketable securities 3,021,000 4,397,000
Other current assets 528,000 163,000
------------ ------------
Total current assets 14,309,000 9,996,000
------------ ------------
Fixed assets, at cost, net of accumulated
depreciation and amortization of $1,183,000
and $902,000, respectively 591,000 714,000
Patent costs, net of accumulated
amortization of $212,000 and $154,000,
respectively 983,000 766,000
Debt issuance costs, net of accumulated
amortization of $370,000 and $168,000,
respectively 569,000 1,022,000
Other assets 21,000 23,000
------------ ------------
16,473,000 12,521,000
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses 609,000 508,000
Current portion of capital lease obligation 3,000 3,000
------------ ------------
Total current liabilities 612,000 511,000
------------ ------------
Long Term Liabilities:
7% convertible debentures, net of unamortized
debt discount of $492,000 8,508,000 -
8% convertible debentures 1,800,000 7,850,000
Long-term portion of capital lease obligation 11,000 15,000
------------ ------------
Total liabilities 10,931,000 8,376,000
------------ ------------
Commitments and Contingencies (Notes 1, 3, 5, 6 and 8)
Stockholders' Equity:
Class A common stock, par value $.001 per
share; 50,000,000 and 25,000,000 shares authorized,
respectively; 16,270,994 and 13,431,364 shares issued
and outstanding, respectively 16,000 13,000
Class B common stock, par value $.001 per
share; 3,000,000 shares authorized;
1,375,500 shares issued and outstanding 1,000 1,000
Additional paid-in capital 47,793,000 38,699,000
Deficit accumulated during the
development stage (42,268,000) (34,568,000)
------------ ------------
Total stockholders' equity 5,542,000 4,145,000
------------ ------------
16,473,000 12,521,000
============ ============
The accompanying notes are an integral part of these consolidated balance she
Page F - 3
</TABLE>
<PAGE>
<TABLE>
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period
<CAPTION> From Inception
Year Ended December 31, (September 1,
---------------------------------------- 1983) Through
December 31,
1996 1995 1994 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Revenues:
Royalties / license fees $ - $100,000 $ - $1,000,000
Collaborative agreements 54,000 27,000 - 293,000
------------ ------------ ------------ --------------
54,000 127,000 - 1,293,000
Expenses:
Research and development 2,703,000 2,973,000 4,400,000 23,403,000
General and administrative 3,640,000 2,878,000 3,019,000 20,994,000
------------ ------------ ------------ --------------
Loss from operations (6,289,000) (5,724,000) (7,419,000) (43,104,000)
------------ ------------ ------------ --------------
Other Income (Expense):
Interest expense (1,950,000) (225,000) - (2,827,000)
Net gain on sale of fixed assets - 6,000 - 6,000
Investment income (loss), net 539,000 336,000 (12,000) 3,657,000
------------ ------------ ------------ --------------
Net loss ($7,700,000) ($5,607,000) ($7,431,000) ($42,268,000)
============ ============ ============ ==============
Net Loss Per Common Share ($0.45) ($0.39) ($0.52) ($6.06)
============ ============ ============ ==============
Weighted Average Number of
Common Shares Outstanding 17,209,000 14,455,000 14,399,000 6,972,000
============ ============ ============ ==============
The accompanying notes are an integral part of these consolidated statements.
Page F - 4
</TABLE>
<PAGE>
<TABLE>
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period
From Inception
<CAPTION> (September 1,
Year Ended December 31, 1983)
---------------------------------------- Through
December 31,
1996 1995 1994 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) ($7,700,000) ($5,607,000) ($7,431,000) ($42,268,000)
Adjustments to reconcile net (loss) to
net cash used in operating activities:
Depreciation and amortization 541,000 392,000 274,000 1,694,000
Net (gain) loss on sale of fixed assets - (6,000) - (6,000)
Net (gain) loss on sale of marketable securities - - 514,000 (217,000)
Other non-cash expenses accrued primarily for warrants 285,000 122,000 - 1,437,000
Amortization of debt discount included in interest expense 1,351,000 - - 1,351,000
Write-off of patent costs - - - 93,000
(Increase) decrease in other current assets (365,000) 41,000 24,000 (528,000)
(Increase) decrease in other assets 2,000 (5,000) 3,000 74,000
Increase (decrease) in accounts payable and accrued expens 267,000 108,000 (438,000) 665,000
Increase in interest payable to stockholder - - - 112,000
------------ ------------ ------------ --------------
Net cash used in operating activities (5,619,000) (4,955,000) (7,054,000) (37,593,000)
------------ ------------ ------------ --------------
Cash Flows From Investing Activities:
Capital expenditures (158,000) (41,000) (282,000) (1,780,000)
Proceeds from sale of fixed assets - 16,000 - 16,000
Payments for patent costs and other assets (275,000) (257,000) (195,000) (1,265,000)
Proceeds from maturity and sale of marketable securities 11,098,000 6,705,000 17,620,000 61,732,000
Purchases of marketable securities (9,722,000) (5,872,000) (12,422,000) (64,536,000)
------------ ------------ ------------ --------------
Net cash provided by (used in) investing activities 943,000 551,000 4,721,000 (5,833,000)
------------ ------------ ------------ --------------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net 1,439,000 23,000 197,000 35,468,000
Proceeds from issuance of 7% convertible debentures, net 8,565,000 - - 8,565,000
Proceeds from issuance of 8% convertible debentures, net - 7,790,000 - 7,790,000
Principal payments under capital lease obligation (4,000) (2,000) - (6,000)
Capital contributions from chairman - - - 1,000,000
Increase in loans payable to stockholder / affiliates - - - 2,669,000
Repayment of loans payable to stockholder and affiliates
(remainder contributed to capital by the stockholder) - - - (1,300,000)
------------ ------------ ------------ --------------
Net cash provided by (used in) financing activities 10,000,000 7,811,000 197,000 54,186,000
------------ ------------ ------------ --------------
Net Increase (Decrease) in Cash and Cash Equivalents 5,324,000 3,407,000 (2,136,000) 10,760,000
Cash and Cash Equivalents at Beginning of Period 5,436,000 2,029,000 4,165,000 -
------------ ------------ ------------ --------------
Cash and Cash Equivalents at End of Period $10,760,000 $5,436,000 $2,029,000 $10,760,000
============ ============ ============ ==============
Supplemental Disclosure of Non-cash Activities:
Capital expenditures made under capital lease obligation - $20,000 - $20,000
============ ============ ============ ==============
8% Convertible Debentures converted into 2,269,755, 354,204,
0, and 2,623,959 shares of Common Stock, respectively $5,485,000 $571,000 - $6,056,000
============ ============ ============ ==============
Warrants issued to placement agents $45,000 $480,000 - $525,000
============ ============ ============ ==============
The accompanying notes are an integral part of these consolidated statements.
Page F - 5
</TABLE>
<PAGE>
<TABLE>
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Class A Class B
Per Common Stock Common Stock
Share --------------------------- ------------------------
Amount Shares Dollars Shares Dollars
------- ------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, AT INCEPTION, (SEPTEMBER 1, 1983) $ - $ - - $ -
Sale of common stock to chairman for cash .33 78,000 - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1983 78,000 - - -
Sale of common stock to chairman for cash .33 193,500 - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1984 271,500 - - -
Sale of common stock to chairman for cash .33 276,700 - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1985 548,200 1,000 - -
Sale of common stock to chairman for cash .33 404,820 - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1986 953,020 1,000 - -
Sale of common stock to chairman for cash .33 48,048 - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1987 1,001,068 1,000 - -
Exchange of common stock for Class B stock (1,001,068) (1,000) 1,001,068 1,000
Sale of Class B stock to chairman for cash .33 - - 1,998,932 2,000
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1988 - - 3,000,000 3,000
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1989 - - 3,000,000 3,000
Conversion of loans payable to stockholder into
additional paid-in capital - - - -
Sale of 1,150,000 Units to public consisting of
3,450,000 shares of Class A common stock and
warrants (net of $1,198,000 underwriting exp 2.00 3,450,000 3,000 - -
Conversion of Class B stock into
Class A stock 668,500 1,000 (668,500) (1,000)
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1990 4,118,500 $4,000 2,331,500 $2,000
------------ ------------- ----------- -----------
CONTINUED
Page F - 6
<PAGE>
BALANCE, DECEMBER 31, 1990 4,118,500 $4,000 2,331,500 $2,000
Exercise of Class A Warrants (net of $203,000
in underwriting expenses) for cash 3.00 3,449,955 3,000 - -
Exercise of Class B Warrants for cash 4.50 79,071 - - -
Conversion of Class B stock
into Class A stock 850,000 1,000 (850,000) (1,000)
Exercise of stock options 2.00 417,750 1,000 - -
Expense for warrants issued - - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1991 8,915,276 9,000 1,481,500 1,000
Exercise of Class B Warrants (net of $701,000
in underwriting expenses) for cash 4.50 3,370,884 3,000 - -
Conversion of Class B stock
into Class A stock 106,000 - (106,000) -
Exercise of stock options 2.49 348,300 1,000 - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1992 12,740,460 13,000 1,375,500 1,000
Sale of common stock to Medeva PLC. 7.50 200,000 - - -
Exercise of stock options 2.00 32,700 - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1993 12,973,160 13,000 1,375,500 1,000
Exercise of stock options 2.16 91,250 - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1994 13,064,410 13,000 1,375,500 1,000
Conversion of 8% Convertible Debentures into
Class A Common Stock 1.85 354,204 - - -
Exercise of stock options 1.82 12,750 - - -
Expense for warrants/options issued - - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 31, 1995 13,431,364 13,000 1,375,500 1,000
Conversion of 8% Convertible Debentures into
Class A Common Stock 2.74 2,269,755 2,000 - -
Exercise of stock options 2.53 569,875 1,000 - -
Expense for warrants/options issued - - - -
Discount on 7% convertible debentures - - - -
Net (loss) for the period - - - -
------------ ------------- ----------- -----------
BALANCE, DECEMBER 30, 1996 16,270,994 $16,000 1,375,500 $1,000
============ ============= =========== ===========
The accompanying notes are an integral part of these consolidated statements.
Page F - 7
</TABLE>
<PAGE>
<TABLE>
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Deficit
Accumulated
Additional During the
Paid-in Development
Capital Stage Total
------------ ------------- -----------
<S> <C> <C> <C>
BALANCE, AT INCEPTION, (SEPTEMBER 1, 1983) $ - $ - $ -
Sale of common stock to chairman for cash 26,000 - 26,000
Net (loss) for the period - (25,000) (25,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1983 26,000 (25,000) 1,000
Sale of common stock to chairman for cash 65,000 - 65,000
Net (loss) for the period - (242,000) (242,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1984 91,000 (267,000) (176,000)
Sale of common stock to chairman for cash 92,000 - 92,000
Net (loss) for the period - (305,000) (305,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1985 183,000 (572,000) (388,000)
Sale of common stock to chairman for cash 134,000 - 134,000
Net (loss) for the period - (433,000) (433,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1986 317,000 (1,005,000) (687,000)
Sale of common stock to chairman for cash 16,000 - 16,000
Net (loss) for the period - (730,000) (730,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1987 333,000 (1,735,000) (1,401,000)
Exchange of common stock for Class B stock - - -
Sale of Class B stock to chairman for cash 664,000 - 666,000
Net (loss) for the period - (1,031,000) (1,031,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1988 997,000 (2,766,000) (1,766,000)
Net (loss) for the period - (1,522,000) (1,522,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1989 997,000 (4,288,000) (3,288,000)
Conversion of loans payable to stockholder into
additional paid-in capital 1,481,000 - 1,481,000
Sale of 1,150,000 Units to public consisting of
3,450,000 shares of Class A common stock and
warrants (net of $1,198,000 underwriting expenses) 5,699,000 - 5,702,000
Conversion of Class B stock into
Class A stock - - -
Net (loss) for the period - (2,100,000) (2,100,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1990 $8,177,000 ($6,388,000) $1,795,000
------------ ------------- -----------
CONTINUED
Page F - 6 (column continuation)
<PAGE>
BALANCE, DECEMBER 31, 1990 $8,177,000 ($6,388,000) $1,795,000
Exercise of Class A Warrants (net of $203,000
in underwriting expenses) for cash 10,143,000 - 10,146,000
Exercise of Class B Warrants for cash 356,000 - 356,000
Conversion of Class B stock
into Class A stock - - -
Exercise of stock options 835,000 - 836,000
Expense for warrants issued 900,000 - 900,000
Net (loss) for the period - (4,605,000) (4,605,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1991 20,411,000 (10,993,000) 9,428,000
Exercise of Class B Warrants (net of $701,000
in underwriting expenses) for cash 14,465,000 - 14,468,000
Conversion of Class B stock
into Class A stock - - -
Exercise of stock options 865,000 - 866,000
Net (loss) for the period - (4,016,000) (4,016,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1992 35,741,000 (15,009,000) 20,746,000
Sale of common stock to Medeva PLC. 1,500,000 - 1,500,000
Exercise of stock options 65,000 - 65,000
Net (loss) for the period - (6,521,000) (6,521,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1993 37,306,000 (21,530,000) 15,790,000
Exercise of stock options 197,000 - 197,000
Net (loss) for the period - (7,431,000) (7,431,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1994 37,503,000 (28,961,000) 8,556,000
Conversion of 8% Convertible Debentures into
Class A Common Stock 571,000 - 571,000
Exercise of stock options 23,000 - 23,000
Expense for warrants/options issued 602,000 - 602,000
Net (loss) for the period - (5,607,000) (5,607,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1995 38,699,000 (34,568,000) 4,145,000
Conversion of 8% Convertible Debentures into
Class A Common Stock 5,483,000 - 5,485,000
Exercise of stock options 1,438,000 - 1,439,000
Expense for warrants/options issued 330,000 - 330,000
Discount on 7% convertible debentures 1,843,000 - 1,843,000
Net (loss) for the period - (7,700,000) (7,700,000)
------------ ------------- -----------
BALANCE, DECEMBER 31, 1996 $47,793,000 ($42,268,000) $5,542,000
============ ============= ===========
See notes to unaudited consolidated financial statements
Page F - 7 (column continuation)
</TABLE>
<PAGE>
AMERICAN BIOGENETIC SCIENCES, INC. AND SUBSIDIARY
(a development stage company)
Notes to Consolidated Financial Statements
1. Business and Development Stage Risks:
American Biogenetic Sciences, Inc. (together with its
subsidiary, the "Company") was incorporated in Delaware on
September 1, 1983. The Company was formed to engage in the
research, development and production of bio-pharmaceutical
products. As a development stage company, the Company has not
commenced its principal operations. Most of its efforts have been
devoted to research and development, acquiring equipment,
recruiting and training personnel, and financial planning. The
Company's research efforts have been focused on the development of
products to diagnose, prevent and treat diseases in humans.
The Company has made no product sales to date and has had
limited revenues from collaborative and licensing agreements. See
Note 6 relating to the various license agreements. Since its
inception, the Company has been dependent upon the receipt of
capital investment or other financing to fund its continuing
research activities. The Company expects to incur substantial
expenditures in research and product development and the Food and
Drug Administration approval process relating to Phase I and Phase
II human clinical studies of its MH1 imaging product and processing
510(k) applications for its TpP diagnostic test. Currently product
development plans of the Company include entering into
collaborative, licensing and co-marketing arrangements with large
pharmaceutical companies to provide additional funding and clinical
expertise to perform tests necessary to obtain regulatory
approvals, provide manufacturing expertise and market the Company's
products. Without such collaborative, licensing or co-marketing
arrangements, additional sources of funding will be required to
finance the Company. In addition to the normal risks associated
with a business engaged in research and development of new
products, there can be no assurance that the Company's research and
development will be successfully completed, that any products
developed will obtain the necessary U.S. regulatory approvals
(principally from the FDA ), that any approved product will be a
commercial success, that adequate product liability insurance can
be obtained or that sufficient capital will be available when
required to permit the Company to realize its plans. In addition,
the Company operates in an environment of rapid changes in
technology and in an industry which has many competitors who have
far more resources available to them than does the Company.
Further, the Company is dependent upon the services of several
employees and advisors.
While losses from development stage activities are expected to
continue in 1997, management believes that its liquidity and
capital resources at December 31, 1996 are adequate to fund its
planned activities beyond 1997.
Page F - 8
<PAGE>
2. Summary of Significant Accounting Policies:
Principles of Consolidation
During 1989, the Company formed a subsidiary, American
Biogenetic Sciences (Ireland), Ltd., which is 99% owned by the
Company and, to fulfill legal requirements, 1% owned by an officer
of the Company. The financial statements reflect the accounts of
the Company and this subsidiary since formation. All significant
intercompany transactions and balances have been eliminated in
consolidation.
Fixed Assets
Depreciation and amortization of fixed assets are recorded on
the straight-line method over the estimated useful life of the
assets or life of the lease, whichever is shorter, generally 5
years.
Research and Development Income and Expenses
Revenues from collaborative agreements are recognized as the
Company performs research activities under the terms of each
agreement. Research and development costs are charged to expense
in the year incurred.
Patent Costs
Costs of certain patent applications are capitalized. Upon
issuance of a patent, such costs are charged to operations over the
estimated period of benefit or 17 years, whichever is shorter, on
the straight-line method. Costs of unsuccessful patent
applications or discontinued projects are charged to expense.
Net Loss Per Common Share
Net loss per common share has been computed based on the
weighted average number of Class A Common and Class B Common shares
outstanding during each period. Common stock equivalents are not
considered as they would be anti-dilutive.
Cash Equivalents
Cash equivalents include highly liquid securities which have
an original maturity of less than three months from date of
purchase.
Page F - 9
<PAGE>
Deferred Financing Costs
Deferred financing costs, which were incurred by the Company
in connection with the issuance of convertible debentures (Note 4 -
Long Term Debt) are capitalized and charged to operations as
additional interest expense over the life of the related debt.
Upon the conversion of the underlying debt, any unamortized
deferred financing costs are charged to paid-in capital.
Marketable Securities
Marketable securities consist of short-term U.S. Government
obligations, which have an original maturity of greater than 3
months. At December 31, 1996, the maturities of U.S. Treasury
Bills range from March 1997 to May 1997.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". This
Statement requires the classification of debt and equity securities
based on whether the securities will be held to maturity, are
considered trading securities or are available for sale.
Classification within these categories may require the securities
to be reported at their fair market value with unrealized gains and
losses included either in current earnings or reported as a
separate component of stockholders' equity, depending on the
ultimate classification. The Company adopted the provisions of
this Statement effective January 1, 1994. As of December 31, 1996,
all debt securities have been classified as held to maturity. These
investments are stated at cost which approximates market. Interest
is accrued as earned.
Investment Income (Loss)
Investment income (loss), net, includes net losses from the
sale of securities of $514,000 in 1994, as well as interest and
dividends.
Fixed Assets
The following table lists fixed assets by category:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
----- -----
<S> <C> <C>
Laboratory equipment $1,097,000 $983,000
Office equipment, furniture and vehicles 462,000 423,000
Leasehold improvements 215,000 210,000
------------------------
1,774,000 1,616,000
Accumulated depreciation and amortization 1,183,000 902,000
------------------------
$591,000 $714,000
========================
</TABLE>
Page F - 10
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
3. Agreements with Boston University; Agreement with the
University of Notre Dame; Employment Agreements; Scientific
Advisory Board Agreements:
Boston University Agreements
On December 1, 1996, the Company entered into a Sublease
Agreement and effective January 1, 1997, an Agreement for Services
with Boston University. These two agreements provide for
approximately 7,700 square feet of space for laboratories and the
antigen free technology at a total annual payment of $275,000. The
agreements have an initial term of three years.
University of Notre Dame Agreement
On December 1, 1983, the Company entered into a five year
agreement with the University of Notre Dame ("Notre Dame
Agreement") which was amended and extended on November 15, 1988 to
cover the period from that date until November 30, 1993, at which
time it was terminated. As of December 1, 1993 the Company entered
into a lease with Notre Dame ("Notre Dame Lease"), for
substantially the same premises occupied by the Company under the
Notre Dame Agreement, for a term ending August 31, 1994. Notre
Dame extended the rental of a portion of the space through August
31, 1995. In February 1995, the Company entered into a lease in
South Bend, Indiana for approximately 5,200 square feet with an
annual base rent of $52,200. This lease commenced on April 1, 1995
and is a five-year lease with three one year renewal options after
the initial five year period. In September 1995, the Company
entered into a second lease in South Bend, Indiana for
approximately 3,000 square feet with an annual base rent of
$30,400. This lease is a three year lease.
Under the Notre Dame Agreement, the Company was required to
pay Notre Dame for the direct and indirect payroll cost of
substantially all of the Company's research and development
personnel, purchases of laboratory supplies, items of equipment or
other costs associated with the research projects. The Notre Dame
Agreement and Notre Dame Lease provided the Company with use of a
research building and use of certain on site equipment as well as
access to other university assets and facilities.
Page F - 11
<PAGE>
Notre Dame has granted the Company all rights, title and
interest in and to any inventions, patents and patent applications
for research projects funded by the Company. Inventors of any
processes or technology which receive Company support have assigned
his or her interest in the product, patent or patent applications
to the Company. The Company incurred costs under the Notre Dame
Agreement of approximately $14,000, $35,000 and $45,000 during the
years ended December 31, 1996, 1995, and 1994, respectively, and
$6,150,000 for the period from inception (September 1, 1983)
through December 31, 1996.
The Company has agreed to pay Notre Dame a royalty of 5% of
the net income the Company achieves from sales of products
resulting from Company-sponsored research activities at Notre Dame.
Royalty payments shall continue for a ten-year period from the date
of the first commercial sale of a product, regardless of the
continuation of the Notre Dame Agreement.
Employment Agreements
The President, Chief Operating Officer, Executive Vice
President, and Senior Vice President-Research and Development of
the Company are parties to employment agreements with the Company
ending June 30, 1998, December 31, 1999, September 30, 2001 and
February 3, 2002, respectively. They also are parties to
agreements with the Company to keep all information with regard to
the business of the Company confidential during and subsequent to
their employment with the Company. The Company believes its
personnel relations are satisfactory.
Scientific Advisory Committee Agreements
The Company has entered into advisory board agreements with
certain research scientists with respect to specific projects in
which the Company has an interest. The 1996 annual compensation
for the advisors as a group was approximately $61,000. Generally,
members of the Company's Scientific Advisory Committee are employed
by or have consulting agreements with third parties, the businesses
of which may conflict or compete with the Company and any
inventions discovered by such individuals will not become the
property of the Company.
4. Long Term Debt:
On October 26, 1995, the Company completed an $8,500,000
private placement of 8% Convertible Debentures. The Debentures are
payable on October 13, 1998 and accrue interest, payable at
maturity, at a rate of 8% per annum. Each holder of Debentures is
entitled to convert one-third of the aggregate principal amount and
accrued interest of the Debentures held by the holder commencing
December 11, 1995, an additional one-third commencing January 10,
1996 and the remainder of the Debentures commencing February 9,
1996 at an exercise price equal to the lesser of the closing bid
Page F - 12
<PAGE>
price of the Company's Common Stock on October 13, 1995 ($3.375) or
85% of the average closing bid price of the Company's Common Stock
for the five trading days prior to the conversion date. The Company
has the right to demand conversion of the Debentures and any
accrued interest on or after April 13, 1997. The Company also has
the right to redeem Debentures submitted for conversion for an
amount determined under a formula related to the market price of
the shares which would otherwise be issued upon conversion. In
conjunction with this offering, the Company incurred both cash and
noncash issuance costs totaling $1,190,000. These issuance costs
are being amortized as a component of interest expense over the
term of the Debentures. Upon the conversion of the Debentures the
related unamortized deferred financing costs are charged to paid-in
capital. As compensation to the placement agent of the Debentures,
the Company paid the placement agent an 8% commission and issued
warrants entitling the placement agent to purchase 201,481 shares
of Common Stock at an exercise price of $4.05 per share at any time
until October 23, 2000. The estimated noncash value of these
warrants, $480,000, has been recorded as additional paid-in
capital, while their cost has been included in the $1,190,000 total
issuance costs described above.
On September 30, 1996, the Company completed a $9,000,000
private placement of 7% Convertible Debentures due September 30,
1998. Interest on the Debentures is payable quarterly at the rate
of 7% per annum. The Debentures (together with any accrued
interest) are convertible to the extent of 25% of the principal
amount thereof commencing on December 23, 1996, with an additional
25% of the principal amount of the Debentures becoming convertible
on each of the 30th, 60th and 90th days thereafter, at a conversion
price equal to 83% of the average of the closing prices of the
Company's Class A Common Stock for the five consecutive trading
days ending on the trading day immediately preceding the conversion
date of the Debentures (the "Current Market Price"); provided,
however, that in no event may the conversion price be less than
$3.00 per share (the "Minimum Conversion Price") nor greater than
$8.00 per share (the "Maximum Conversion Price"). In the event
that, but for the Minimum Conversion Price, the number of shares
that would have been issued is greater than the number of shares
actually issued, the holder converting such Debenture shall also be
entitled to receive cash in an amount equal to such difference
multiplied by the Current Market Price. In the event any Debenture
remains outstanding at its maturity date, the Company has the
option to either convert such Debenture into shares of Class A
Common Stock on the same basis as the Debenture holder could have
converted such Debenture or pay the outstanding principal amount
thereof, plus any accrued interest thereon, in cash. In
conjunction with this offering, the Company incurred both cash and
noncash issuance costs totaling $480,000. These issuance costs are
being amortized as a component of interest expense over the term of
the Debentures. Upon the conversion of the Debentures the related
unamortized deferred financing costs are charged to paid-in-capital.
As compensation to the placement agent of the Debentures,
the Company paid the placement agent a 4% commission and issued to
brokers affiliated with the placement agent warrants entitling them
to purchase an aggregate of 15,618 shares of Common Stock at an
exercise price of $5.76 per share at any time until September 30,
1998. The estimated noncash value of these warrants, $45,000, has
been recorded as additional paid-in capital, while their cost is
Page F - 13
<PAGE>
included in the $480,000 total issuance costs related to these
Debentures. In addition, the Company recorded additional paid in
capital and debt discount of $1,843,000 to reflect the dollar value
of the market price conversion discount (17%) related to these
Debentures. The debt discount is being amortized and charged to
interest expense beginning October 1, 1996 through March 23, 1997,
the period during which the Debentures become 100% convertible. In
1996, $1,351,000 of this debt discount was amortized and charged to
interest expense.
5. Stockholders' Equity:
Description of Class A and Class B Common Stock
Holders of Class A Common Stock and Class B Common Stock have
equal rights to receive dividends, equal rights upon liquidation,
vote as one class on all matters requiring stockholder approval,
h ave no preemptive rights, are not redeemable and do not have
cumulative voting rights; however, holders of Class A Common Stock
have one vote for each share held while holders of the Class B
Common Stock have ten votes for each share held on all matters to
be voted on by the stockholders. All Class B Common Stock is owned
by the Chairman of the Board and may be converted into Class A
Common Stock on a share for share basis at the option of the holder
and generally are automatically converted in the event of sale or,
with certain exceptions, transfer.
Initial Public Offering
In May and June 1990, the Company completed an initial public
offering of 1,150,000 units of its equity securities. Each unit
consisted of three shares of Class A Common Stock and three
redeemable Class A Warrants. As a result of this offering, the
Company received approximately $5,702,000 of proceeds, net of
underwriting and other expenses.
Each holder of a Class A Warrant was entitled to purchase one
share of Class A Common Stock and one Class B Warrant at an
exercise price of $3.00 at any time until five years from the date
of the public offering. Each holder of a Class B Warrant was
entitled to purchase one share of Class A Common Stock at an
exercise price of $4.50 at any time after exercise of the Class A
Warrants and until May 1995.
During 1991, 3,449,955 Class A Warrants and 79,071 Class B
Warrants were exercised yielding net proceeds to the Company of
approximately $10,502,000 (after expenses of approximately
$203,000). During 1992, 3,370,884 Class B Warrants were exercised
for $14,468,000 (net of approximately $701,000 of expenses). At
December 31, 1996 and December 31, 1995, there were no outstanding
Class A and Class B Warrants.
Page F - 14
<PAGE>
Stock Option Plans
The Company's 1986 Stock Option Plan (the "1986 Plan")
provided for the grant of incentive stock options and/or non-qualified
options until July 1996 up to an aggregate of 4,450,000
shares of Class A Common Stock to employees, officers and
consultants of the Company. Options were granted at exercise
prices not less than the fair market value at the date of grant and
for a term not to exceed ten years from the date of grant; except
that an incentive stock option granted under the 1986 Plan to a
stockholder owning more than 10% of the outstanding Common Stock of
the Company could not exceed five years nor have an exercise price
of less than 110% of the fair market value of the Class A Common
Stock on the date of the grant. The outstanding options have a
vesting period ranging two years to four years ratably from the
date of grant.
Changes in outstanding options and options available for grant
under the 1986 Plan, expressed in number of shares, are as follows:
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------------------------------
December 31, 1996 December 31, 1995
---------------------------- ----------------------------
Shares Weighted Avg. Shares Weighted Avg.
Under Option Under Option
Option Price Option Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year 3,540,750 $3.74 3,079,500 $4.23
Granted 126,000 $4.33 817,000 $1.79
Exercised (552,375) $2.49 (12,750) $1.82
Cancelled (134,875) $1.93 (343,000) $3.62
Options outstanding,
end of year 2,979,500 $4.07 3,540,750 $3.74
Options exercisable,
end of year 2,516,750 $4.26 2,512,375 $4.12
Options available
for grant, end
of year - 6,500
</TABLE>
The Company's 1993 Non-Employee Director Stock Option Plan
(the "1993 Plan") provides for the issuance of stock options for
up to 500,000 shares of Class A Common Stock to outside directors
of the Company. Options are automatically granted immediately
following each Annual Meeting of the Company to purchase 10,000
shares of Class A Common Stock to each outside director elected at
the Annual Meeting. The option exercise price is 100% of the fair
Page F - 15
<PAGE>
market value of the Class A Common Stock on the date of grant and
the option may be exercised during a period of five years from the
date of grant at the rate of 25% each year on a cumulative basis,
commencing one year from the date of grant.
Changes in outstanding options and options available for
grant under the 1993 Plan, expressed in number of shares, are as
follows:
<TABLE>
<CAPTION>
For the Years Ended
-------------------------------------------------------------
December 31, 1996 December 31, 1995
---------------------------- ----------------------------
Shares Weighted Avg. Shares Weighted Avg.
Under Option Under Option
Option Price Option Price
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year 90,000 $3.42 60,000 $3.76
Granted 20,000 $6.75 30,000 $2.75
Exercised (12,500) $3.83 - -
Cancelled (17,500) $3.13 - -
Options outstanding,
end of year 80,000 $4.25 90,000 $3.42
Options exercisable,
end of year 30,000 $3.65 22,500 $3.88
Options available
for grant, end
of year 407,500 410,000
</TABLE>
The Company's 1996 Stock Option Plan (the "1996 Plan"),
which has replaced the 1986 plan, provides for the issuance of
incentive stock options and/or non-qualified options to purchase up
to an aggregate of 1,000,000 shares of Class A Common Stock to
employees, officers and consultants of the Company. Options may
be granted at exercise prices not less than the fair market value
at the date of grant and may be exercisable for a period not to
exceed ten years from the date of grant; except that the term of an
incentive stock option granted under the 1996 plan to a stockholder
owning more than 10% of the outstanding Common Stock of the Company
must not exceed five years nor have an exercise price of less than
110% of the fair market value of the Class A Common Stock on the
date of the grant. The options outstanding are exercisable 25%
each year on a cumulative basis, commencing one year from the date
of grant.
Page F - 16
<PAGE>
Changes in outstanding options and options available for
grant under the 1996 Plan, expressed in number of shares, are as
follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
----------------------------
Shares Weighted Avg.
Under Option
Option Price
----------- --------------
<S> <C> <C>
Options outstanding,
beginning of year - -
Granted 155,000 $4.86
Exercised - -
Cancelled (75,000) $4.78
Options outstanding,
end of year 80,000 $4.94
Options exercisable,
end of year - -
Options available
for grant, end
of year 920,000
</TABLE>
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plans. Had compensation
cost for the Company's stock option plans been determined based on
the fair value at the grant date for options granted in 1995 and
1996 with the provisions of SFAS No. 123, the Company's net loss
and loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Net loss - as reported ($7,700,000) ($5,607,000)
Net loss - pro forma ($8,075,000) ($5,814,000)
Net loss per share - as reported ($.45) ($.39)
Net loss per share - pro forma ($.47) ($.40)
- -----------------------------------------------------------------------------------
</TABLE>
Page F - 17
<PAGE>
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1995 and
1996: dividend yield of 0%; expected volatility of 84%; risk-free
interest rate of range 5.4% to 7.2% and expected lives of seven
years.
The weighted average fair value of all three option plans
for options granted were $3.77 and $1.42 in 1996 and 1995,
respectively. Of the total 3,139,500 options outstanding for all
three plans at December 31, 1996 the following table lists
additional SFAS No. 123 disclosure information:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercisable Exercise Weighted Average Remaining
Outstanding Shares Price Range Exercise Price Contractual Life
- ---------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
793,750 546,125 $1.50 - $2.25 $1.86 6.5
138,250 44,750 $2.50 - $3.75 $3.05 8.0
2,151,500 1,932,375 $3.88 - $5.75 $4.92 5.6
50,000 17,500 $5.88 - $7.75 $6.63 7.4
6,000 6,000 $10.00 $10.00 5.2
- ------------------------------
3,139,500 2,546,750
</TABLE>
Other Options Granted
The Company entered into a consulting agreement with an
unaffiliated third party to assist in the strategic planning and
implementation of the Company's licensing, collaborative and co-
marketing plans, which expired February 29, 1996. Pursuant to the
agreement, the Company granted an option to purchase up to 50,000
shares of Class A Common Stock on or before February 28, 2000 at
$2.25 per share. The Company also granted performance options to
purchase up to 50,000 shares of Class A Common Stock at $2.25 for
each licensing or collaborative agreement entered into which met
certain criteria. These options are exercisable for five years
from the date of grant. The Company has recorded a noncash charge
of $122,000 in 1995, relating to options for 100,000 shares
granted.
The Company has granted an investor relations consultant a
warrant to purchase up to 100,000 shares of Class A Common Stock on
or before November 14, 2000 at $3.50 per share pursuant to an
agreement dated November 27, 1995. The warrant may be exercised in
increments of 25,000 share amounts only if certain milestones are
met during the period ending May 14, 1997. The Company is
recording a noncash charge of $254,000 ratably over the life of the
agreement relating to these warrants.
The Company entered into an agreement with an unaffiliated
third party dated October 6, 1995 to assist with the marketing of
the Company's products and intellectual property which has expired.
Pursuant to this agreement, the Company granted performance options
to purchase 25,000 shares of Class A Common Stock and issued 5,000
Page F - 18
<PAGE>
shares for services rendered under the agreement. Options were
granted for 12,500 shares at $3.00 per share and 12,500 shares at
$5.50. These options are exercisable for five years from the date
of grant.
6. Various Other Agreements:
As part of its development stage activities, the Company
enters into various agreements that provide for the expenditure of
funds for research and development activities and typically provide
for the payment of royalties (typically 2% to 8% of net sales) by
the Company if any products are successfully developed and marketed
as a result of the work being performed under the agreement. The
following is a summary of significant agreements the Company has
entered into:
Collaborative Research and Development Agreements
In November 1993, the Company entered into an agreement with
Creative BioMolecules Inc., successor to Verax Corporation, to
manufacture a sufficient quantity of the Company's in vivo
monoclonal antibody to conduct human trials for Phase II. The
Company expensed $0 in 1996, $11,000 in 1995, and $219,000 in 1994
under this agreement.
License Agreements
On May 20, 1988, the Company entered into a non-exclusive
license agreement with Texas A&M University ("TAMU"), whereby the
Company has the right to market, manufacture, use, grant
sublicenses and sell the products and/or treatment resulting from
a U.S. patent wholly owned by TAMU. The Company incurred a non-
refundable $20,000 fee to acquire this right and agreed to a
minimum semi-annual fee of $10,000 thereafter. No royalties have
been paid under this agreement. This agreement has been phased out
in 1995. The Company paid $10,000 to TAMU in 1995.
On February 26, 1991, the Company entered into an exclusive
worldwide license agreement with Trinity College, Dublin for a
protein to be used to generate a monoclonal antibody which is
designed to serve as a diagnostic test for Alzheimer's Disease.
The Company will continue to have its rights to any patents that
have been filed and improvements thereon under the license
agreement. The agreement lasts the life of the patent or a minimum
of 10 years. The Company has agreed to pay Trinity College a
continuing royalty of 5% of net sales of products sold under the
license. The Company has expensed $0 in 1996 and 1995, and
approximately $97,000 in 1994, relating to this agreement. The
research funding under this agreement has been phased out; however
the Company continues to have an exclusive worldwide license. A
patent was issued on February 20, 1996.
Page F - 19
<PAGE>
On January 24, 1992, the Company entered into an exclusive,
15 year license agreement with Yamanouchi Pharmaceutical Co., Ltd.
("Yamanouchi"), a Japanese pharmaceutical company. Under this
agreement, Yamanouchi may manufacture, use or market diagnostic
assays that contain the Company's monoclonal antibody, 45-J, in
Japan and Taiwan. Yamanouchi has paid a non-refundable, initial
sign-up payment to the Company of $1,000,000. In accordance with
the provisions of the agreement, Yamanouchi withheld $100,000 of
this payment to make withholding tax payments under the laws of
Japan on behalf of the Company, resulting in a net remittance of
$900,000. The agreement provides that Yamanouchi is to pay the
Company a fixed percentage over the Company's manufacturing costs
of the 45-J antibody supplied to Yamanouchi. On an ongoing basis,
Yamanouchi is to pay the Company royalties at the rate of 10% of
all net sales of diagnostic assays sold by Yamanouchi or its
affiliates during each calendar year of the agreement term.
Additionally, Yamanouchi is to pay the Company 50% of any initial
fees, royalties or other consideration received with respect to any
sublicense granted by Yamanouchi. No payments have been made by
Yamanouchi to the Company since the initial sign-up payment.
On December 10, 1992, the Company entered into an agreement
(as amended) with University College Dublin, Ireland granting the
Company an exclusive license for drugs/compounds to halt the onset
and/or progression of neurodegenerative diseases, in general, and
Alzheimer's Disease, in particular. The agreement's term is the
duration of any patents that may be granted to the university with
a minimum of 10 years. Pursuant to the agreement, the Company is
to pay the university a royalty of 5% of net income relating to
product sales. The Company expensed $62,000 in 1996, $150,000 in
1995 and $197,000 in 1994 for certain research expenses, supplies
and equipment under this agreement.
On August 10, 1993, the Company entered into a five-year
collaboration agreement with the Free University of Berlin to
develop therapeutic compounds. The Company also acquired a series
of anticonvulsant compounds. Pursuant to the agreement, the
Company is to pay a royalty of 5% of the net product sales. The
agreement lasts the life of the patent or a minimum of 10 years.
The Company expensed $117,000 in both 1996 and 1995, and $104,000
in 1994 for research expenses and supplies under this agreement.
On October 12, 1995, the Company entered into a license and
collaboration agreement with F.Hoffmann-La Roche Ltd. ("Hoffmann-La
Roche") for the co-development and marketing of the Company's
Thrombus Precursor Protein (TpP ) for the detection of active
thrombosis (blood clot formation). The agreement grants Hoffmann-
La Roche a worldwide license to market the TpP test in a latex
based particle agglutination format. Under the agreement, the
Company has received certain, and is to receive additional,
development payments to adapt the TpP test in the latex based
particle agglutination format to Hoffmann-La Roche's automated
diagnostic systems. The Company is also to receive non-refundable
milestone payments upon achievement of certain commercialization
goals. The TpP test is to be manufactured by the Company for use
on Hoffmann-La Roche's instruments. The Company is to receive a
percentage of Hoffmann-La Roche's net selling price for the
Company's manufacturing of the TpP test plus a 5% royalty on net
sales made by Hoffmann-La Roche. Under the agreement, the TpP test
is also to be sold by the Company and Hoffmann-La Roche to other
Page F - 20
<PAGE>
diagnostic companies using similar particle agglutination
technology. On these sales, gross profit is to be shared equally
between the Company and Hoffmann-La Roche.
On December 13, 1995, the Company entered into a license
agreement with Abbott Laboratories, Inc. ("Abbott") for the
marketing of the Company's Thrombus Precursor Protein (TpP )
immunoassay. This agreement grants Abbott a worldwide license to
market the TpP test for Abbott's immunoassay formats. The Company
has and is to receive non-refundable up-front and milestone
payments upon achievement of certain development and
commercialization goals. The Company is to receive a 5% royalty on
net sales made by Abbott. In addition, the reagent for the TpP
test is to be manufactured by the Company for use by Abbott.
Option Agreement
On December 10, 1992, the Company entered into an agreement
with Medeva PLC. ("Medeva") pursuant to which the Company granted
Medeva an option to acquire a license for the worldwide rights to
a Hepatitis A vaccine based on the Company's proprietary
technology. In connection with the option agreement, the Company
and Medeva worked together to develop the vaccine. The Company
funded certain research expenditures toward the commercialization
of this vaccine totaling $400,000 during 1993 and 1994. In October
1994, Medeva elected not to exercise its option with the Company
due to Medeva's inability to acquire a license under a third party
patent. The Company has discontinued any joint research projects
with Medeva. In January 1993, Medeva purchased 200,000 shares of
the Company's Class A Common Stock at a cash price of $7.50 per
share, for an aggregate of $1,500,000.
7. Federal Income Taxes:
At December 31, 1996, the Company had net operating loss
carryforwards of approximately $40,200,000 for income tax purposes.
The net operating loss carryforwards will expire through 2011.
Since the Company has significant net operating loss carryforwards,
income tax consequences of Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" have not had any
effect on the Company's reported financial position or results of
operations. The Company has recorded a valuation allowance to fully
reserve for the deferred tax benefit attributable to its net
operating loss carryforwards due to the uncertainty as to their
ultimate realizability.
In accordance with certain provisions of the Tax Reform Act
of 1986, a change in ownership of a corporation of greater than 50
percentage points within a three-year period places an annual
limitation on the corporation's ability to utilize its existing net
operating loss carryforwards, investment tax and research and
development credit carryforwards (collectively "tax attributes").
Such a change in ownership was deemed to have occurred in
connection with the Company's 1990 initial public offering at which
time the Company's tax attributes amounted to approximately $4.9
million. The annual limitation of the utilization of such tax
Page F - 21
<PAGE>
attributes is approximately $560,000. To the extent the annual
limitation is not utilized, it may be carried forward for
utilization in future years. At December 31, 1996, the Company has
approximately $3,716,000 of net operating losses previously subject
to limitation that have not been utilized. This limitation could
affect the Company's future provisions for or payment of Federal
income tax should the Company's operations produce increased
amounts of taxable income in the future.
8. Legal Matters:
On December 13, 1994, certain stockholders filed a
complaint, and on August 5, 1995, certain other stockholders filed
a similar complaint, in the United States District Court for the
Eastern District of New York against the Company and certain of its
present and former executive officers and directors. The complaints
alleged, among other things, that such persons made misleading
statements relating to the Company. The actions sought an
unspecified amount of damages and possible equitable relief.
To avoid the expense and disruption of protracted
litigation, the Company and the plaintiffs reached an agreement in
December 1996 to settle the lawsuits, the amount of which was not
material to the Company. The settlement agreement was approved by
the United States District Court for the Eastern District of New
York in January 1997.
Page F - 22
<PAGE>
EXHIBIT 10.1
May 10, 1996
Paul E. Gargan, Ph.D.
American Biogenetic Sciences, Inc.
1539 N. Ironwood Drive
South Bend, IN 46635
Dear Paul,
This letter will confirm our offer of continued employment
with American Biogenetic Sciences, Inc. ("Company") and supersedes
all prior agreements, understandings and arrangements between Paul
E. Gargan, Ph.D. ("Employee") and the Company relating to such
employment. The parties agree as follows:
1. Retention of Services: The Company hereby retains the
services of Employee, and Employee agrees to furnish such services,
upon the term and conditions hereinafter set forth.
2. Term: The term of this Agreement shall be for a period of
two (2) years commencing July 1, 1996 and automatically terminating
on June 30, 1998 subject to earlier termination as provided herein
or unless extended by mutual consent of both parties in writing
sixty (60) days prior to the end of the term of this Agreement or
any extension thereof. Nothing herein shall require the Company or
the Employee to agree to any specific term or condition or to any
continuation of Employee's employment beyond June 30, 1998.
3. Employment: Subject to the terms and conditions and for
the compensation hereinafter set forth, the Company employs the
Employee for and during the term of this Agreement. Employee is
hereby employed by the Company, his powers and duties of an
executive nature shall be determined only by the Chairman of the
Board or the Board of Directors or their duly authorized designee,
from time to time; and the Employee does hereby accept such
employment and agrees to use his best efforts and to devote all his
normal business time, during the term of this Agreement, to the
performance of his duties faithfully, diligently and to the best of
his abilities upon the conditions hereinafter set forth. Employee
shall report to the Chairman of the Board and Board of Directors
(collectively hereinafter referred to as the "Board") of the
Company.
4. Compensation: During the term of this Agreement, the
Company agrees to pay Employee, and Employee agrees to accept, an
annual salary of One Hundred and Seventy-Five Thousand Dollars
($175,000.00) per year less all applicable taxes, payable every two
weeks, for all services rendered by Employee hereunder including
being a Director of the Company.
5. Expenses: The Company shall reimburse Employee, not less
often than monthly, for all reasonable and actual business expenses
incurred by him in connection with his service to the Company, upon
submission by Employee of appropriate vouchers and expense account
reports.
6. Benefits: In addition to the salary to be paid to
Employee hereunder, the Company shall continue to provide medical
and dental insurance in accordance with the Company's Plan(s). The
Employee shall be entitled to a three (3) weeks annual vacation.
7. Employee Covenant: The "Employee's Confidentiality and
Non-Competition Agreement" with the Company dated July 30, 1987 is
in full force and effect and replaces all other such agreements,
and is incorporated herein by reference as if fully set forth
herein.
8. Return of Company Property: Employee agrees that
following the termination of his employment for any reason, he
shall return all property of the Company which is then in or
thereafter comes into his possession, including, but not limited
to, documents, contracts, agreements, plans, photographs, books,
notes, electronically stored data and all copies of the foregoing
as well as any other materials or equipment supplied by the Company
to the Employee.
9. Termination:
[A] Death: In the event of the Employee's death during the
term of his employment, this Agreement shall automatically
terminate on the date of death, and Employee's estate shall be
entitled to payment of Employee's salary until date of death.
[B] Disability: In the event the Employee, by reason of
physical or mental incapacity, shall be disabled for a period of at
least two (2) consecutive months in any of the years of this
Agreement or any extension hereof, the Company shall have the
option at any time thereafter, to terminate Employee's employment
and to terminate this Agreement; such termination to be effective
ten (10) days after the Company gives written notice of such
termination to the Employee, and all obligations of the Company
hereunder shall cease upon the date of such termination.
"Incapacity" as used herein shall mean the inability of the
Employee to perform his normal duties as an executive officer of
the Company.
[C] Company's Rights To Terminate This Agreement:
[a] The Company shall have the right, before the
expiration of the term of this Agreement, to terminate this
Agreement and to discharge Employee for cause (hereinafter
"Cause"), and all compensation to Employee shall cease to accrue
upon discharge of the Employee for Cause. For the purposes of this
Agreement, the term "Cause" shall mean the Employee's (i) violation
of the Company's written policy or specific written directions of
the Chairman of the Board which directions are consistent with
normally acceptable business practices or the failure to observe,
or the failure or refusal to perform any obligations required to be
performed in accordance with this Agreement. (ii) admission or
conviction of a serious crime involving moral turpitude or (iii) if
the Chairman of the Board determines that employee has committed a
demonstrable act (or omission) of malfeasance seriously detrimental
to this Company (which shall not include any exercise of business
judgment in good faith).
[b] If the Company, elects to terminate Employee's
employment for Cause, under Section 9[C][a](i), the Company shall
first give Employee written notice and a period of twenty (20) days
to cure such Cause, and if such Cause is not cured in said twenty
(20) days, such termination shall be effective five (5) days after
the Company gives written notice of such termination to the
Employee. In the event of a termination of the Employee's
employment for Cause in accordance with the provisions of Section
9[C][a](i), (ii) or (iii), the Company shall have no further
obligation to the Employee, except for the payment of salary
through the date of such termination from employment.
[D] Termination Without Cause by the Employee or Company
[a] The Employee or the Company shall have the right to
terminate the Agreement without cause on ninety (90) days' written
notice during the second year of this Agreement.
[b] In the event the Agreement is terminated pursuant to
subsection 9[D][a], by the Company, the Company shall pay the
Employee his then existing compensation for ninety (90) days
commencing with the day following the day the notice becomes
effective.
10. Waiver: Any waiver by either party of a breach of any
provision of this Agreement shall not operate as or be construed as
a waiver of any other breach or default hereof.
11. Governing Law: The validity of this Agreement or of any
of the provisions hereof shall be determined under and according to
the laws of the State of New York, and this Agreement and its
provisions shall be construed according to the laws of the State of
New York without reference to its choice of law rules.
12. Notice: Any notice required to be given pursuant to the
provisions of this Agreement shall be in writing and by registered
or certified mail and mailed to the following addresses:
Company: American Biogenetic Sciences, Inc.
1375 Akron Street
Copiague, New York 11726
Attention: Alfred J. Roach
Chairman and CEO
Employee: Dr. Paul E. Gargan
15379 Roscommon Lane
Granger, Indiana 46530
13. Assignment: The Employee's assignment of this
Agreement or any interest herein, or any monies due or to become
due by reason of the terms hereof, without the prior written
consent of the Company shall be void. This Agreement shall be
binding upon the Company, its successors (including any transferee
of the good will of the Company) or assigns.
14. Prior Agreements Superseded: This Agreement supersedes
any employment agreements, oral or written, entered into between
Employee and the Company prior to the date of this Agreement.
15. Miscellaneous: This Agreement contains the entire
understanding between the parties hereto and supersedes all other
oral and written agreements or understandings between them. No
modification or addition hereto or waiver or cancellation of any
provision shall be valid except by a writing signed by the party to
be charged therewith.
16. Obligations of a Continuing Nature: It is expressly
understood and agreed that the covenants, agreements and
restrictions undertaken by or imposed on Employee hereunder, which
are stated to exist or continue after termination of Employee's
employment with the Company, shall exist and continue irrespective
of the method or circumstances of such termination from employment
or termination of this Agreement.
17. Severability: Employee agrees that if any of the
covenants, agreements or restrictions on the part of Employee are
held to be invalid by any court of competent jurisdiction, such
holding will not invalidate any of the other covenants, agreements
and/or restrictions herein contained and such invalid provisions
shall be severable so that the invalidity of any such provision
shall not invalidate any others. Moreover, if any one or more of
the provisions contained in this Agreement shall be held to be
excessively broad as to duration, activity or subject, such
provisions shall be construed by limiting and reducing them so as
to be enforceable to the maximum extent allowed by applicable law.
18. Descriptive Headings. The paragraphs headings contained
herein are for reference purposes only and shall not in any affect
the meaning or interpretation of this Agreement.
If the foregoing is in accordance with your understanding of
the agreement between us, will you kindly signify same by signing
this Agreement in the space provided below.
Sincerely,
AMERICAN BIOGENETIC SCIENCES, INC.
/s/ Alfred J. Roach
----------------------------------
Alfred J. Roach
Chairman of the Board
AGREED AND ACCEPTED
as of the above date
/s/ Paul E. Gargan
- -------------------------
Paul E. Gargan, Ph.D.
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
Jurisdiction of Name(s) under which
Subsidiary Incorporation Subsidiary does business
American Biogenetic Sciences (Ireland) Ltd. Ireland *
* Not applicable
<PAGE>
Exhibit 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated February 20, 1997 included in this
Form 10-K, into American Biogenetic Sciences, Inc.'s previously filed
Registration Statements on Form S-8 (File Nos. 33-35992, 33-39683, 33-51240,
33-65416, and 333-09473), and previously filed Registration
Statements on Form S-3 (File Nos. 333-13615, 333-13619, 333-13623, and
333-14447).
ARTHUR ANDERSEN LLP
Melville, New York
March 21, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS TWELVE MONTHS YEAR-TO-DATE SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM AMERICAN BIOGENETIC SCIENCES, INC. 1996
10-K DECEMBER 31, 1996
</LEGEND>
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0
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