**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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**FORM 10-Q**

 

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| **ý**                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------|
|                                                         |       |                                                                                                       |
| **For the Quarterly Period Ended: September 30,  2005** |
|                                                         |       |                                                                                                       |
| **o**                                                        | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**    |

 

**Commission File No: 000-51436**

 

**ADVANCEDLIFE SCIENCES HOLDINGS, INC****.**

(Exact name of registrant as specified in itscharter)

 
| **DELAWARE**                                                    | ** ** | **30-0296543**                      |
|-----------------------------------------------------------------|------------|-------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. EmployerIdentification no.) |

 

**1440 Davey RoadWoodridge, IL 60517**

(Address of principal executive offices) (Zipcode)

 

Registrant’s telephone number: **(630) 739-6744**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    Yes  ý    No  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).    Yes o     No ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o     No ý

 

As of October 31,2005, the registrant had 17,989,322 shares of common stock, $0.01 par value pershare, outstanding.

 

 

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC**

**INDEX**

**Form 10-Q**

 
| ** **         | ** ** | **PART I — FINANCIAL  INFORMATION**                                                                                                | ** ** |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.       |       | Financial Statements:                                                                                                                             |       |
|               |       | Condensed Consolidated  Balance Sheets as of September 30, 2005 and December 31, 2004                                                   |       |
|               |       | Condensed Consolidated  Statements of Operations for the three and nine months ended  September 30, 2005 and 2004                            |       |
|               |       | Condensed Consolidated  Statements of Stockholders’ Equity for period from inception (January 1,  1999) through September 30, 2005 |       |
|               |       | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2005  and 2004                                      |       |
|               |       | Notes to Condensed  Consolidated Financial Statements                                                                                             |       |
| Item 2.       |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                                       |       |
| Item 3.       |       | Quantitative and Qualitative  Disclosures About Market Risk                                                                                       |       |
| Item 4.       |       | Controls and Procedures                                                                                                                           |       |
|               |       |                                                                                                                                              |       |
| ** **         | ** ** | **PART II — OTHER INFORMATION**                                                                                                    | ** ** |
| Item 6.       |       | Exhibits                                                                                                                                          |       |
| Signatures         |       |                                                                                                                                              |       |
| Exhibit Index |       |                                                                                                                                              |       |

 

1

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**PART I —FINANCIAL INFORMATION**

 

**Item 1.****                     *Financial Statements (Unaudited)***

 

**ADVANCEDLIFE SCEINCES HOLDINGS, INC.**

**(A  DEVELOPMENT STAGE COMPANY)**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(UNAUDITED)**

 
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **As of**              | ** ** | **Year ended**        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                                                                                                                             | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                        |       |                   |       |                  |       |
| Cash &  cash equivalents                                                                                                                                                                                                                                                                      |       | $                      | 9,481,827  |                  | $          | 194,555 |   |
| Investments -  available for sale                                                                                                                                                                                                                                                                      |       | 9,375,000              |       | —                |       |
| Accounts  receivable - related party                                                                                                                                                                                                                                                                   |       | 3,664                  |       | 24,868                |       |
| Clinical trials  supplies                                                                                                                                                                                                                                                                              |       | 533,333                |       | 533,333               |       |
| Prepaid  insurance                                                                                                                                                                                                                                                                                     |       | 459,039                |       | —                |       |
| Prepaid expenses  and other                                                                                                                                                                                                                                                                            |       | 59,634                 |       | 25,806                |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total current  assets                                                                                                                                                                                                                                                                                  |       | 19,912,497             |       | 778,562               |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| FURNITURE AND EQUIPMENT:                                                                                                                                                                                                                                                                               |       |                   |       |                  |       |
| Furniture and  fixtures                                                                                                                                                                                                                                                                                |       | 140,849                |       | 139,005               |       |
| Laboratory  equipment                                                                                                                                                                                                                                                                                  |       | 142,928                |       | 142,928               |       |
| Computer  equipment                                                                                                                                                                                                                                                                                    |       | 81,465                 |       | 79,146                |       |
| Leasehold  improvements                                                                                                                                                                                                                                                                                |       | 40,646                 |       | 40,646                |       |
| Construction  in-progress                                                                                                                                                                                                                                                                              |       | 23,255                 |       | —                |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total furniture  and equipment—at cost                                                                                                                                                                                                                                                            |       | 429,143                |       | 401,725               |       |
| Less accumulated  depreciation                                                                                                                                                                                                                                                                         |       | (235,643               | )          | (180,807              | )          |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Furniture and  equipment—net                                                                                                                                                                                                                                                                      |       | 193,500                |       | 220,918               |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| OTHER LONG-TERM ASSETS:                                                                                                                                                                                                                                                                                |       |                   |       |                  |       |
| Deferred  financing costs                                                                                                                                                                                                                                                                              |       | 59,629                 |       | 15,000                |       |
| Other assets                                                                                                                                                                                                                                                                                           |       | 4,782                  |       | 1,452                 |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total other  long-term assets                                                                                                                                                                                                                                                                          |       | 64,411                 |       | 16,452                |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                                                                                                                           |       | $                      | 20,170,408 |                  | $          | 1,015,932 |   |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                          | ** ** | ** **             | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                                                       |       | $                      | 182,413    |                  | $          | 255,880 |   |
| Accrued expenses                                                                                                                                                                                                                                                                                       |       | 251,144                |       | 185,348               |       |
| Accrued interest  payable                                                                                                                                                                                                                                                                              |       | 3,946                  |       | 4,319                 |       |
| Licenses payable                                                                                                                                                                                                                                                                                       |       | 2,000,000              |       | 14,000,000            |       |
| Notes payable,  net of $11,766 debt discount                                                                                                                                                                                                                                                           |       | —                 |       | 2,238,234             |       |
| Short-term lease  payable                                                                                                                                                                                                                                                                              |       | 13,573                 |       | 12,070                |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total current  liabilities                                                                                                                                                                                                                                                                             |       | 2,451,076              |       | 16,695,851            |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Long-term lease payable                                                                                                                                                                                                                                                                                |       | 16,903                 |       | 27,279                |       |
| Accrued interest payable - related party                                                                                                                                                                                                                                                               |       | 715,787                |       | 566,603               |       |
| Grant payable                                                                                                                                                                                                                                                                                          |       | 500,000                |       | —                |       |
| Notes payable - net of $25,349 debt discount                                                                                                                                                                                                                                                           |       | 3,889,651              |       | —                |       |
| Notes payable - related party                                                                                                                                                                                                                                                                          |       | 2,000,000              |       | 2,000,000             |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                                                                                                                                                                     |       | 9,573,417              |       | 19,289,733            |       |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                                                                                             |       |                   |       |                  |       |
| Common stock,  $0.01 par value—September 30, 2005: 60,000,000 shares authorized; 17,989,322  issued and outstanding; December 31, 2004: 10,604,584 shares issued and  outstanding; December 31, 2003: no par value; 3,970,000 shares  authorized, 1,588,000 issued and outstanding |       | 179,893                |       | 106,046               |       |
| Series A  preferred stock of Advanced Life Sciences Inc., no par value— 250,000 shares  authorized, issued and outstanding                                                                                                                                                                   |       | —                 |       | —                |       |
| Deferred  compensation                                                                                                                                                                                                                                                                                 |       | —                 |       | (23,219               | )          |
| Additional  paid-in capital                                                                                                                                                                                                                                                                            |       | 54,563,967             |       | 21,917,665            |       |
| Deficit  accumulated during the development stage                                                                                                                                                                                                                                                      |       | (44,146,869            | )          | (40,274,293           | )          |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| Total  stockholders’ equity                                                                                                                                                                                                                                                                       |       | 10,596,991             |       | (18,273,801           | )          |
|                                                                                                                                                                                                                                                                                                   |       |                   |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                        |       | $                      | 20,170,408 |                  | $          | 1,015,932 |   |

 

See notes tocondensed consolidated financial statements.

 

2

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

**(ADEVELOPMENT STAGE COMPANY)**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

 
| ** **                                                              | ** ** | ** **                                | ** ** | ** **                               | ** ** | **Period From  Inception** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|----------------------------|------------|
| ** **                                                              | ** ** | ** **                                | ** ** | ** **                               | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** | **Through**                | ** ** |
| ** **                                                              | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005**                   | ** ** | **2004** | ** ** | **September 30, 2005** | ** ** |
| ** **                                                              | ** ** | ** **                                | ** ** | ** **                               | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue:                                                                |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Management fees                                                         |       | $                                         | 8,502      |                                     | $          | 64,983                     |       | $ | 52,881 |   | $ | 209,820 |   | $ | 1,152,822 |   |
| Grant                                                                   |       | —                                    |       | —                                   |       | —                     |       | 38,136 |   | 935,571 |   |
| Royalty—related  party                                             |       | —                                    |       | 10,000                                   |       | —                     |       | 10,000 |   | 45,238 |   |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Total revenue                                                           |       | 8,502                                     |       | 74,983                                   |       | 52,881                     |       | 257,956 |   | 2,133,631 |   |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Expenses:                                                               |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Research and  development                                               |       | 938,813                                   |       | 302,133                                  |       | 1,604,749                  |       | 873,119 |   | 30,416,369 |   |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Contracted  research and development— related party                |       | —                                    |       | —                                   |       | —                     |       | — |   | 7,980,299 |   |
| Selling, general  and administrative                                    |       | 1,239,674                                 |       | 559,829                                  |       | 2,078,246                  |       | 1,198,914 |   | 6,475,367 |   |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Total expenses                                                          |       | 2,178,487                                 |       | 861,962                                  |       | 3,682,995                  |       | 2,072,033 |   | 44,872,035 |   |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Loss from operations                                                    |       | (2,169,985                                | )          | (786,979                                 | )          | (3,630,114                 | )          | (1,814,077 | ) | (42,738,404 | ) |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Other income (expense):                                                 |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Interest Income                                                         |       | 97,712                                    |       | —                                   |       | 97,712                     |       | — |   | 97,712 |   |
| Interest expense                                                        |       | (135,925                                  | )          | (46,134                                  | )          | (340,174                   | )          | (142,523 | ) | (1,506,177 | ) |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Net other income (expense)                                              |       | (38,213                                   | )          | (46,134                                  | )          | (242,462                   | )          | (142,523 | ) | (1,408,465 | ) |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Net loss                                                                |       | (2,208,198                                | )          | (833,113                                 | )          | (3,872,576                 | )          | (1,956,600 | ) | (44,146,869 | ) |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Less accumulated  preferred dividends for the period                    |       | 43,750                                    |       | 43,750                                   |       | 131,250                    |       | 131,250 |   | 1,101,042 |   |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Net loss  available to common shareholders                              |       | $                                         | (2,251,948 | )                                        | $          | (876,863                   | )          | $ | (4,003,826 | ) | $ | (2,087,850 | ) | $ | (45,247,911 | ) |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Basic and  dilluted net loss per share available to common shareholders |       | $                                         | (0.15      | )                                        | $          | (0.55                      | )          | $ | (0.33 | ) | $ | (1.31 | ) |   |   |
|                                                                    |       |                                      |       |                                     |       |                       |       |   |   |   |   |
| Weighted average  number common shares outstanding- basic and diluted   |       | 14,819,191                                |       | 1,588,397                                |       | 12,134,776                 |       | 1,588,222 |   |   |   |

 

See notes tocondensed consolidated financial statements.

 

3

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

**(A  DEVELOPMENT STAGE COMPANY)**

**CONDENSEDCONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**

**(UNAUDITED)**

 
| ** **                                                                                                                            | ** ** | ** **       | ** ** | ** **          | ** ** | ** **  | ** ** | ** **   | ** ** | ** **      | ** ** | ** **       | ** ** | **Deficit**     | ** ** | ** **  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|-------------|------------|--------------|------------|-----------------|------------|------------------|------------|-----------------|------------|-------------|------------|
| ** **                                                                                                                            | ** ** | ** **       | ** ** | ** **          | ** ** | ** **  | ** ** | ** **   | ** ** | ** **      | ** ** | ** **       | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
| ** **                                                                                                                            | ** ** | ** **       | ** ** | ** **          | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**  | ** ** | ** **       | ** ** | **During the**  | ** ** | ** **  | ** ** |
| ** **                                                                                                                            | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Paid-in** | ** ** | **Deferred** | ** ** | **Development** | ** ** | ** **       | ** ** |
| ** **                                                                                                                            | ** ** | **Shares**       | ** ** | **Amount**          | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**     | ** ** | **Compensation** | ** ** | **Stage**       | ** ** | **Total**   | ** ** |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| BALANCE—January 1,  1999 (inception)                                                                                        |       | —           |       | $                   | —     |        | —     |         | $          | —          |       | $                | —     |            | $          | —      |       | $ | — |   | $ | — |   |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| Issuance of  common stock in exchange for contributed intellectual property in  January 1999                                     |       | 1,588,000        |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| Exchange of  shares under recapitalization and spin-off from MediChem Life  Sciences, Inc. in June 1999, at historical cost |       | (1,588,000       | )          |                |       | 250,000     |       |         |       |            |       |             |       |            |       |        |       |
| Issuance of  common stock in June 1999, at $0.157 per share                                                                      |       | 1,588,000        |       | 250,000             |       |        |       |         |       |            |       |             |       |            |       | 250,000     |       |
| Compensation  expense related to stock options since inception                                                                        |       |             |       |                |       |        |       |         |       | 15,097          |       |             |       |            |       | 15,097      |       |
| Conversion of  loans to stockholder into equity, August 2001                                                                     |       | —           |       | —              |       | —      |       | —       |       | 5,751,753       |       |             |       |            |       | 5,751,753   |       |
| Capital  contributions                                                                                                                |       |             |       |                |       |        |       |         |       | 1,165,118       |       |             |       |            |       | 1,165,118   |       |
| Net loss since  inception                                                                                                             |       | —           |       | —              |       | —      |       | —       |       | —          |       | —           |       | (9,274,336      | )          | (9,274,336  | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| BALANCE—December 31, 2001                                                                                                   |       | 1,588,000        |       | 250,000             |       | 250,000     |       | —       |       | 6,931,968       |       | —           |       | (9,274,336      | )          | (2,092,368  | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| Capital  contributions                                                                                                                |       |             |       |                |       |        |       |         |       | 1,161,000       |       |             |       |            |       | 1,161,000   |       |
| Net loss                                                                                                                              |       | —           |       | —              |       | —      |       | —       |       | —          |       | —           |       | (1,261,551      | )          | (1,261,551  | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| BALANCE—December 31, 2002                                                                                                   |       | 1,588,000        |       | 250,000             |       | 250,000     |       | —       |       | 8,092,968       |       | —           |       | (10,535,887     | )          | (2,192,919  | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| Capital contributions                                                                                                                 |       |             |       |                |       |        |       |         |       | 2,337,728       |       |             |       |            |       | 2,337,728   |       |
| Net loss                                                                                                                              |       | —           |       | —              |       | —      |       | —       |       | —          |       | —           |       | (2,551,488      | )          | (2,551,488  | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| BALANCE—December 31, 2003                                                                                                   |       | 1,588,000        |       | 250,000             |       | 250,000     |       | —       |       | 10,430,696      |       | —           |       | (13,087,375     | )          | (2,406,679  | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| Issuance of  common stock at $0.157 per share                                                                                         |       | 41,685           |       | 6,563               |       |        |       |         |       |            |       |             |       |            |       | 6,563       |       |
| Compensation  expense related to stock options                                                                                        |       |             |       |                |       |        |       |         |       | 28,823          |       | (23,219          | )          |            |       | 5,604       |       |
| Exchange of  shares under recapitalization                                                                                            |       | (1,629,685       | )          | (256,563            | )          |        |       |         |       |            |       |             |       |            |       | (256,563    | )          |
| Issuance of  shares under recapitalization                                                                                            |       | 9,482,015        |       | 94,820              |       |        |       |         |       | 161,743         |       |             |       |            |       | 256,563     |       |
| Capital  contributions                                                                                                                |       |             |       |                |       |        |       |         |       | 2,295,731       |       |             |       |            |       | 2,295,731   |       |
| Issuance of  14,887 warrants                                                                                                          |       |             |       |                |       |        |       |         |       | 11,898          |       |             |       |            |       | 11,898      |       |
| Issuance of  common stock in exchange for licenses                                                                                    |       | 1,122,569        |       | 11,226              |       |        |       |         |       | 8,988,774       |       |             |       |            |       | 9,000,000   |       |
| Net loss                                                                                                                              |       | —           |       | —              |       | —      |       | —       |       | —          |       | —           |       | (27,186,918     | )          | (27,186,918 | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| BALANCE—December 31, 2004                                                                                                   |       | 10,604,584       |       | 106,046             |       | 250,000     |       | —       |       | 21,917,665      |       | (23,219          | )          | (40,274,293     | )          | (18,273,801 | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| Issuance of  common stock, net of offering costs                                                                                      |       | 6,721,814        |       | 67,218              |       |        |       |         |       | 29,206,458      |       |             |       |            |       | 29,273,676  |       |
| Issuance of stock  related to option exercises                                                                                        |       | 62,924           |       | 629                 |       |        |       |         |       | 9,250           |       |             |       |            |       | 9,879       |       |
| Compensation  expense related to stock options                                                                                        |       |             |       |                |       |        |       |         |       | 411,669         |       | 23,219           |       |            |       | 434,888     |       |
| Issuance of  common stock in exchange for reduction of milestones payable                                                             |       | 600,000          |       | 6,000               |       |        |       |         |       | 3,000,000       |       |             |       |            |       | 3,006,000   |       |
| Modification of  14,887 warrants                                                                                                      |       |             |       |                |       |        |       |         |       | 18,925          |       |             |       |            |       | 18,925      |       |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| Net loss                                                                                                                              |       |             |       |                |       |        |       |         |       |            |       |             |       | (3,872,576      | )          | (3,872,576  | )          |
|                                                                                                                                  |       |             |       |                |       |        |       |         |       |            |       |             |       |            |       |        |       |
| BALANCE—September 30,  2005 (unaudited)                                                                                     |       | 17,989,322       |       | 179,893             |       | 250,000     |       | —       |       | 54,563,967      |       | —           |       | (44,146,869     | )          | 10,596,991  |       |
|                                                                                                                                       |            |                  |            |                     |            |             |            |              |            |                 |            |                  |            |                 |            |             |            |  |  |  |  |  |  |

 

See notes tocondensed consolidated financial statements.

 

4

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC.**

**(A  DEVELOPMENT STAGE COMPANY)**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

 
| ** **                                                                         | ** ** | ** **             | ** ** | ** **                 | ** ** | **Period From**             | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | ** **             | ** ** | ** **                 | ** ** | **Inception**               | ** ** |
| ** **                                                                         | ** ** | **Nine months ended**  | ** ** | **(January 1, 1999)** | ** ** |
| ** **                                                                         | ** ** | **September 30,** | ** ** | **Through**                | ** ** |
| ** **                                                                         | ** ** | **2005**               | ** ** | **2004**                   | ** ** | **September 30, 2005** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                   |       |                       |       |                        |       |
| Net loss                                                                           |       | $                      | (3,872,576 | )                          | $          | (1,956,600                  | )          | $ | (44,146,869 | ) |
| Adjustments to  reconcile net loss to net cash flows used in operating activities: |       |                   |       |                       |       |                        |       |
| Depreciation and  amortization                                                     |       | 54,837                 |       | 47,459                     |       | 253,177                     |       |
| Non-cash  interest expense                                                         |       | 15,713                 |       | —                     |       | 15,845                      |       |
| Amortization of  deferred compensation                                             |       | 434,888                |       | 3,203                      |       | 455,589                     |       |
| Non-cash  research and development                                                 |       | —                 |       | —                     |       | 24,466,667                  |       |
| Settlement of  milestone payment                                                   |       | 6,000                  |       | —                     |       | 6,000                       |       |
| Loss on disposal                                                                   |       | —                 |       | —                     |       | 11,533                      |       |
| Changes in  operating assets and liabilities:                                      |       | —                 |       |                       |       |                        |       |
| Accounts  receivable                                                               |       | 21,204                 |       | (91,854                    | )          | (3,664                      | )          |
| Prepaid expenses                                                                   |       | (492,867               | )          | 281                        |       | (518,673                    | )          |
| Other assets                                                                       |       | (3,330                 | )          | (3,052                     | )          | (4,782                      | )          |
| Accounts payable                                                                   |       | (73,467                | )          | 82,387                     |       | 182,413                     |       |
| Accrued expenses                                                                   |       | 65,796                 |       | 47,983                     |       | 251,144                     |       |
| Licenses payable                                                                   |       | (9,000,000             | )          | —                     |       | (9,000,000                  | )          |
| Accrued interest  on debt                                                          |       | 148,811                |       | 142,767                    |       | 1,297,796                   |       |
|                                                                               |       |                   |       |                       |       |                        |       |
| Net cash flows  used in operating activities                                       |       | (12,694,991            | )          | (1,727,426                 | )          | (26,733,824                 | )          |
|                                                                               |       |                   |       |                       |       |                        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                   |       |                       |       |                        |       |
| Capital  expenditures                                                              |       | (27,419                | )          | (90,777                    | )          | (323,652                    | )          |
| Proceeds from  the sales of securities                                             |       | 1,000,000              |       | —                     |       | 1,000,000                   |       |
| Purchase of  securities                                                            |       | (10,375,000            | )          | —                     |       | (10,375,000                 | )          |
|                                                                               |       |                   |       |                       |       |                        |       |
| Net cash flows  used in investing activities                                       |       | (9,402,419             | )          | (90,777                    | )          | (9,698,652                  | )          |
|                                                                               |       |                   |       |                       |       |                        |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                   |       |                       |       |                        |       |
| Proceeds from  issuance of common stock and capital contributions                  |       | 29,273,676             |       | 1,783,830                  |       | 36,483,251                  |       |
| Proceeds from  issuance of notes payable                                           |       | 1,610,000              |       | —                     |       | 9,018,691                   |       |
| Proceeds from  the of grants                                                       |       | 500,000                |       | —                     |       | 500,000                     |       |
| Proceeds from  stock options exercised                                             |       | 9,879                  |       | 63                         |       | 16,442                      |       |
| Payments on  capital leases                                                        |       | (8,873                 | )          | —                     |       | (104,081                    | )          |
|                                                                               |       |                   |       |                       |       |                        |       |
| Net cash flows  provided by financing activities                                   |       | 31,384,682             |       | 1,783,893                  |       | 45,914,303                  |       |
|                                                                               |       |                   |       |                       |       |                        |       |
| NET INCREASE IN CASH                                                               |       | 9,287,272              |       | (34,310                    | )          | 9,481,827                   |       |
|                                                                               |       |                   |       |                       |       |                        |       |
| CASH—Beginning of period                                                      |       | 194,555                |       | 61,203                     |       | —                      |       |
|                                                                               |       |                   |       |                       |       |                        |       |
| CASH—End of period                                                            |       | $                      | 9,481,827  |                       | $          | 26,893                      |       | $ | 9,481,827 |   |
|                                                                               |       |                   |       |                       |       |                        |       |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                 |       |                   |       |                       |       |                        |       |
| Cash paid during  the period for interest                                          |       | $                      | 169,416    |                       | $          | —                      |       | $ | 185,647 |   |
|                                                                               |       |                   |       |                       |       |                        |       |
| SUPPLEMENTAL  DISCLOSURE OF NONCASH TRANSACTIONS:                                  |       |                   |       |                       |       |                        |       |
| Noncash  investment activity—purchases of fixed assets under capital leases   |       | $                      | —     |                       | $          | —                      |       | $ | 134,556 |   |
| Noncash  financing activity- issuance of  common  stock for licenses          |       | —                 |       | —                     |       | 9,000,000                   |       |
| Issuance of  common shares for reduction of milestone payment                      |       | 3,000,000              |       |                       |       | 3,000,000                   |       |
| Debt discount                                                                      |       | 18,925                 |       | —                     |       | 30,823                      |       |
| Deferred  financing costs                                                          |       | $                      | 15,000     |                       | $          | —                      |       | $ | 30,000 |   |

 

See notes tocondensed consolidated financial statements.

 

5

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**ADVANCEDLIFE SCIENCES HOLDINGS, INC**

**(A DEVELOPMENT STAGE COMPANY)**

**NOTESTO CONDENSED CONSOLIDATED FINANICAL STATEMENTS**

 

**1.****              Summary of Significant Accounting Policies**

 

***Natureof Business***—AdvancedLife Sciences Holdings, Inc. (the “Company”) conducts new drug researchand development in the fields of infectious disease, oncology andinflammation.  Since inception, theCompany has devoted substantially all of its efforts to activities such asfinancial planning, capital raising and product development, and has notderived significant revenues from its primary business activity.  Accordingly, the Company is in thedevelopment stage, as defined by Statement of Financial Accounting Standards (“SFAS”)No. 7, *Accounting and Reporting by Development StageEnterprises*.

 

***Basis of Presentation***— The accompanying unaudited condensedconsolidated financial statements of the Company and subsidiary have beenprepared in accordance with accounting principles generally accepted in theUnited States of America and with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the informationand footnotes required by accounting principles generally accepted in theUnited States of America for complete financial statements.   However, in the opinion of management, alladjustments, consisting only of normal recurring adjustments, unless otherwisenoted herein, necessary to present fairly the results of operations, financialposition and cash flows have been made.  Therefore,these condensed consolidated financial statements should be read in conjunctionwith the Company’s registration statement on Form S-1. The condensed consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiary Advanced Life Sciences, Inc. (“ALS Inc.”)  All significant intercompany balances andtransactions have been eliminated.  The results of operations for anyinterim period are not necessarily indicative of the results of operationsexpected for the full year.

 

***Cash and Cash Equivalents***—The Companyconsiders all highly liquid investments with original maturities of threemonths or less when purchased to be cash equivalents.

 

***Investments***— The Company has marketable debt and equity securities which areclassified as available-for-sale, the fair value of which is determined usingcurrently available market prices. Available-for-sale securities are carried atfair value, with the unrealized gains and losses, net of tax, reported as acomponent of stockholders’ equity in accumulated other comprehensive loss.   Marketable securities available for currentoperations are classified in the balance sheet as current assets; marketablesecurities held for long-term purposes are classified as noncurrent assets.Interest income and realized gains and losses on securities are included in “Interestincome” in the statements of operations. At September 30, 2005, the Company’s investments consist of auctionrate debt and equity securities.

 

***Revenue and Income Recognition***—SmallBusiness Innovation Research (“SBIR”) grant revenue is recorded as expenses areincurred and services performed in accordance with the terms of the grantagreements. Royalty revenue is earned from a license of the Company’s chemicalprocess technology.  Management fees, whichare generated from a shared services agreement with Sarawak MediChemPharmaceuticals, Inc. (“SMP”), are recognized on the cash basis as thecollectibility of such fees is not reasonably assured. Management fees derivedfrom Flavin Ventures, LLC are recorded as services are provided (see Note 4).

 

***Research and Development Expenses***—Researchand development expenses consist of internal research costs and fees paid forcontract research in conjunction with the research and development ofanti-infective, anti-cancer and anti-inflammatory therapeutic agents. All suchcosts are expensed as incurred.

 

***Stock-Based Compensation***—In December 2004,the Financial Accounting Standards Board (“FASB”) issued Statement No. 123(R),*Share-Based Payment*, that will require compensationcost related to share-based payment transactions to be recognized in thefinancial statements. Compensation cost will be measured based on thegrant-date fair value of the equity or liability instruments issued.Compensation expense will be recognized over the period that an employeeprovides service in exchange for the award.

 

Effective January 1,2004, the Company adopted the fair value method, which is considered thepreferable accounting method, of recording stock-based employee compensation ascontained in Statements of Financial Accounting Standards (“SFAS”) No. 123,*Accounting for Stock-Based Compensation.*As prescribed in SFAS No. 123(R)*,*the Company elected to use the “prospective method.” The prospective methodrequires expense to be recognized for all awards granted, modified or settledin the year of adoption. Historically, the Company applied the intrinsic methodas provided in Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*and related interpretations and accordingly, no compensation cost had beenrecognized for stock options issued to employees in prior years. As a result ofadopting the fair value method for stock compensation, all future awards willbe expensed over the stock options vesting period. The Company utilizes theBlack-Scholes option pricing model to estimate the fair value of optionsgranted.

 

6

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***Use of Estimates***—The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements. Estimates also affect the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

**2.****              Initial Public Offering**

 

In April 2005,the Board of Directors of the Company (“the Board”) authorized the Company tofile a registration statement with the Securities and Exchange Commission (“theSEC”) covering the proposed sale by the Company of its common stock to thepublic.  In June 2005, the Boardapproved the amendment and restatement of the Company’s Articles ofIncorporation to provide for an increase in the number of authorized shares ofcommon stock and preferred stock to 60,000,000 shares and 5,000,000 shares,respectively, and a 3.97-for-1 stock split of the Company’s common stock. Allreferences in the consolidated financial statements to shares of common stock,common stock options, common stock prices and per share of common stock amountshave been adjusted retroactively for all periods presented to reflect thisstock split. In August 2005, the Company completed the initial publicoffering of its common stock in which the Company sold 6,400,000 shares ofcommon stock to the public at $5.00 per share, resulting in gross proceeds of$32.0 million. The Company also completed a concurrent offering of 600,000shares to an existing stockholder in exchange for a $3.0 million reduction of amilestone payment obligation under its license agreement with thestockholder.  In September 2005, theCompany’s underwriters exercised their option to purchase 100,000 shares tocover over-allotments resulting in additional gross proceeds of $500,000. Inconnection with these offerings, the Company paid approximately $2.3 million inunderwriting discounts and incurred other offering expenses of approximately $1.5million. The net cash proceeds from the offerings were approximately $28.7million.

 

**3.****              Joint Venture**

 

Sarawak MediChemPharmaceuticals (“SMP”) is a joint venture between the State Government ofSarawak, Malaysia (the “Sarawak Government”) and the Company. The SarawakGovernment, through Craun Sdn Bhd, and ALS Inc. each maintain a 50% sharein SMP.

 

Under the jointventure agreement (the “Agreement”), the Sarawak Government has contributed$9.0 million to SMP through stock subscription payments based on the attainmentof certain milestone achievements outlined in the Agreement. The Company hascontributed certain intellectual property and has committed to make scientistsavailable to undertake the research and clinical trials, to train scientistsnominated by the Sarawak Government and to permit such scientists toparticipate in the clinical trials, manufacture, marketing and distribution ofany commercial product resulting from the research and development effort.Additionally, the Sarawak Government has provided long-term loans to SMP of$12.0 million through December 31, 2004. Accrued interest on such loanswas approximately $5.7 million and $4.7 million as of September 30, 2005and December 31, 2004, respectively.

 

The Companyaccounts for its investment in SMP under the modified equity method ofaccounting, which provides that the Company record its proportional share ofearnings once the accumulated deficit incurred by SMP has been recovered.Accordingly, as of September 30, 2005 and December 31, 2004, theCompany’s investment in SMP had a carrying value of zero.

 

According to theterms of the loan agreement with the Sarawak Government, $9.5 million ofSMP’s debt is past due and $2.5 million is due in the fourth quarter of2005. As a result of this default in payment by SMP, the Sarawak Government hasthe option under the loan agreement to take over the control and management ofthe Calanolide A project or the affairs of the joint venture until suchtime as the loan is repaid in full. To date, the Sarawak Government has notpursued collection of this debt.   On July 15,2005, the Sarawak Government exercised certain of its contractual rights bynotifying SMP of its intention to appoint its representative as an officer ofSMP for purposes of assuming control of the affairs and management of SMPeffective immediately. The Sarawak Government also expressly reserved allcontractual and legal remedies available in light of the default. Ultimately,the Company believes that in order for the joint venture to continue, the termsof the debt must be amended to extend its maturity to a date aftercommercialization of Calanolide A.

 

The Companypreviously commenced discussions with the Sarawak Government to restructure andextend the debt and determine the source of financing for Phase IIaclinical trials of Calanolide A. The Company has proposed to the SarawakGovernment that, for the first time, the Company and the Sarawak Governmentwould jointly fund the next development phase of Calanolide A throughfuture advances of debt or issuances of equity. The Company currently estimatesthat it would cost approximately $2.0 million to conduct a Phase IIaclinical trial of Calanolide A. The Company does not intend to expend anymeaningful funds advancing the development of Calanolide A unless anduntil the joint venture’s debt is restructured and the Company reaches asatisfactory agreement with the Sarawak Government to amend the joint venturerelationship and establish the parties’ respective obligations regarding thefuture funding of the next phase of developing Calanolide A. As a result,the Company is unable to predict when, or if at all, the Company will proceedwith its plans to commence Phase IIa clinical trials forCalanolide A.

 

7

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The term of thejoint venture agreement continues indefinitely unless terminated by the writtenagreement of both parties not to proceed further with the development ofCalanolide A. In the event only one of the parties wishes to discontinue developmentof Calanolide A, the other party has the right, but not the obligation, topurchase the discontinuing party’s equity interest in the joint venture for $9.0 million.If the other party does not choose to exercise its purchase right within six monthsof receiving written notice from the discontinuing party, then the jointventure is deemed mutually terminated. Upon such mutual termination, the jointventure agreement provides that any liabilities of the joint venture will besettled by the parties equally and all patents or licenses of the joint ventureshall be reassigned back to the Company, including rights to clinical trials.We believe that the equal settlement of liabilities provision in the jointventure agreement was intended to recognize the 50/50 equity ownership of thejoint venture and does not constitute the Company’s guaranty of the jointventure’s indebtedness to the Sarawak Government. Consequently, if the jointventure is mutually terminated, the joint venture partners would work togetherto monetize the joint venture’s assets for the purpose of satisfying itsliabilities, which currently are solely comprised of indebtedness to a 50%partner, the Sarawak Government. In the event the joint venture’s assets areinsufficient to settle its liabilities, the Company does not believe that theequal settlement of liabilities provision obligates it to contribute funds tothe joint venture.

 

**4.****              Related Party Transactions**

 

In 2001, theCompany initiated a management services agreement with SMP whereby the Companyprovides administrative management services to SMP. In return, the Companycharges SMP a flat monthly service fee. During 2003, management deemed that thecollectibility of the monthly management fee was not reasonably assured.Consequently, management concluded that fee revenue will be recognized on thecash basis.   Management fees recognizedas revenue under this agreement totaled $0 and $0 for the nine months ended September 30,2005 and 2004, respectively.  On acumulative basis, billed and unrecognized fees as of September 30, 2005and 2004 totaled approximately $615,000 and $483,000, respectively.

 

In January 2004,the Company initiated a management services agreement with Flavin Ventureswhereby the Company provides administrative management services to FlavinVentures and its wholly-owned subsidiaries Shamrock Structures, BioStartProperty Group and Molecular Formulations. The agreement also requires FlavinVentures and its related subsidiaries to reimburse the Company for rent andrelated facility costs based upon the actual square footage occupied by each ofthe companies. Fee income recognized related to this agreement for the ninemonths ended September 30, 2005 and 2004 totaled approximately $53,000 and$210,000, respectively.

 

The Company’scontrolling stockholder, Michael T. Flavin, has loaned to the Company$2.0 million (see Note 5).

 

The Company’s lineof credit has been guaranteed by Flavin Ventures, the controlling stockholderand his wife and the Company’s President (see Note 5).

 

The Company leasesfacilities from the BioStart Property Group, a wholly-owned subsidiary of FlavinVentures.  Lease costs were $168,000 and$168,000 for the nine months ended September 30, 2005 and 2004,respectively.

 

The Series Apreferred stock of the Company’s wholly-owned subsidiary, ALS, Inc., isheld by deCODE Genetics as a result of ALS Inc.’s spin-off from MediChem LifeSciences in January 1999, and MediChem’s subsequent acquisition by deCODEGenetics in March 2002.  deCODEprovides analytical services to the Company on an as needed basis.  Analytical related charges totaledapproximately $4,000 and $9,000 for the three and nine months ended September 30,2005, respectively.

 

**5.****              Long Term Obligations**

 

In September 2001,the Company entered into a $2.0 million promissory note with thecontrolling stockholder of the Company which bears interest at 7.75%. Accruedbut unpaid interest is added to the outstanding principal annually. Under theoriginal agreement, principal plus accrued interest was due in a lump sum on September 1,2006. On August 5, 2005, in conjunction with our initial public offering,the stockholder extended the term of the note to December 31, 2007.  No other terms were modified.  As of September 30, 2005 and December 31,2004, the Company had $2,715,787 and $2,566,603, respectively, outstandingunder the note.

 

In December 2004,the Company entered into a $3.0 million line of credit with a localfinancial institution. Interest is based upon the prime rate plus 0.75% and ispayable monthly. The principal balance is due upon demand or by December 21,2006, if no demand is made. The financial institution also received a warrantto purchase 14,887 of the Company’s common stock at an exercise price of $8.02per share, subject to certain adjustments.  The warrant was exercisable at the time the note was issued and willterminate, if not exercised, on December 21, 2009. The warrant was valued,using the Black-Scholes option pricing model, at approximately $11,900. Theamount was recorded as a discount to the related debt and is being amortized tointerest expense over the term of the note. The note is secured by the assetsof the Company and guaranteed by Flavin Ventures, the controlling stockholderand his wife and the Company’s President. The guaranty of Flavin Ventures is secured by a mortgage on the buildingleased by BioStart Property Group, a wholly-owned subsidiary of FlavinVentures, to the Company.  FlavinVentures also pledged its shares in the Company to guarantee the note.

 

8

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In May 2005the line of credit was increased to $4.0 million.  No other terms were modified.

 

In August 2005,in conjunction with the Company’s initial public offering, the maturity of theline of credit was extended to December 31, 2007 and the call feature wasremoved.  No other terms weremodified.   In addition, the exerciseprice of the warrants automatically reduced to $5.00 per share in accordance tothe terms of the warrant agreement.  As aresult of the change in exercise price, the warrant was revalued using theBlack-Scholes option pricing model at approximately $27,000.  The difference between the carrying value andfair value was recorded as a discount to long-term obligations and is being amortizedto interest expense over the remaining term of the note.

 

**6.****              Stock Option Grants**

 

In February andAugust of 2005, the Company granted stock options to purchase up to 67,290and 43,724 shares of common stock, respectively, to certain employees, scientificadvisory board and Board members. The exercise price of the options is the fairmarket price of the Company’s stock on the grant date.  As a result of the completion of the initialpublic offering, 144,542 options, which includes the February 2005 grant, immediatelyvested in accordance with their terms.  Asa result, the Company recognized compensation expense totaling approximately $272,000relating to these options in accordance with SFAS No. 123 (R), *Share based Payments*. Additionally,approximately $112,000 in compensation expense was recognized in conjunctionwith the 43,724 options granted to members of the Board in August, which vestedimmediately upon grant.

 

**7.****              Research and Development Alliance**

 

In August 2005,the Company modified the terms of its license agreement with AbbottLaboratories (“Abbott”) for the development and commercialization of  two antibiotic compounds, cethromycin and ABT-210.   Inexchange for terminating the Company’s license of ABT-210, Abbott reduced itsroyalty rights for cethromycin.  Underthe new terms, the royalty rate due on aggregate net sales of cethromycin is19% on the first $100 million, 18% once aggregate sales exceed $100 million,but are less than $200 million, and 17% on all net sales once aggregate net salesexceed $200 million.  Additionally, theCompany will pay a $2.5 million milestone once net aggregate sales ofcethromycin reach $200 million and a $5.0 million milestone once net aggregatesales reach $400 million.

 

Concurrent withthe initial public offering, the Company issued 600,000 shares of common stock toAbbott in exchange for a $3.0 million reduction of a $5.0 million milestone dueupon the earlier of the commencement of clinical trials or October 31,2005.

 

**8.****              Earnings Per Share**

 

Basic earnings pershare is computed by dividing net income by the number of weighted averagecommon shares outstanding during the reporting period.  Diluted earnings per share are calculated togive effect to all potentially dilutive common shares that were outstandingduring the reporting period.  Thecomputation of weighted average common shares outstanding for the nine monthsended September 30, 2004 gives effect to a 3.97-for-one stock splitauthorized by the Board in June 2005.  The computation of diluted shares outstandingfor the periods ended September 30, 2005 and 2004 excludes incrementalshares of 681,921 and 661,232, related to employee stock options andwarrants.  These shares are excluded dueto their anti-dilutive effect as a result of the Company’s losses for theperiods ended September 30, 2005 and 2004.

 

**9.****              Subsequent Events**

 

In October 2005,the Board approved and received a grant of 180,000 options to purchase commonstock at an exercise price of $3.96.  Ofthe 180,000 stock options, 100,000 options vested immediately upon grant, withthe remainder vesting ratably over 36 months. In addition, the Board approved 88,800 stock option grants for selectedmembers of senior management that will be granted in the fourth quarter at theprevailing market price and will vest ratably over 36 months.

 

In October 2005,the Company paid $2.0 million to Abbott Laboratories under the terms of itslicense agreement for cethromycin.

 

9

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**Item 2.****                     *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

*Youshould read the following discussion of our financial condition and results ofoperations in conjunction with our condensed consolidated financial statementsand the related notes included elsewhere in this filing. This discussioncontains forward-looking statements that involve risks and uncertainties. As aresult of many factors, including those set forth under the section entitled“Risk Factors” and elsewhere in this prospectus, our actual results may differmaterially from those anticipated in these forward-looking statements.*

 

**Overview**

 

We are abiopharmaceutical company focused on the discovery, development andcommercialization of novel drugs in the areas of infectious disease, inflammationand oncology. Using our internal discovery capabilities and our network ofpharmaceutical and academic partners, we have assembled a promising pipeline ofclinical and preclinical product candidates. Our most advanced productcandidate, cethromycin, is a novel ketolide antibiotic in Phase III clinicaldevelopment for the treatment of respiratory tract infections. We also haveproduct candidates in earlier stages of development for the treatment ofindications including HIV, inflammation-related tissue damage and malignantmelanoma.

 

None of ourproduct candidates has been approved by the FDA or any comparable foreignagencies, and we have not generated any significant revenues to date. Ourability to generate revenues in the future will depend on our ability to meetdevelopment or regulatory milestones under any license agreements that triggerpayments to us, to enter into new license agreements for other products orterritories and to receive regulatory approvals for, and successfullycommercialize, our product candidates either directly or through commercialpartners.

 

Since ourinception we have incurred net losses each year. Our net losses for the ninemonths ended September 30, 2005 and the year ended December 31, 2004were $3.9 million and $27.2 million, respectively. Our net loss for theyear ended December 31, 2004 resulted principally from $24.5 millionof in-process research and development expenses relating to our collaborationwith Abbott Laboratories for the development of cethromycin. As of September 30,2005, we had an accumulated deficit of $44.1 million. Our operations todate have been funded principally through debt and capital contributions madeby our founder and controlling stockholder and borrowings under our bank lineof credit.

 

We completed ourinitial public offering, (“the IPO”) in August of this year, selling 6.5million shares of our common stock at $5.00 per share, including the exerciseof the underwriters over-allotment option. Cash proceeds from the offering totaled $28.7 million, net ofunderwriting commissions and offering costs. In addition we completed a concurrent offering of 600,000 shares of ourcommon stock at $5.00 per share with Abbott Laboratories, in exchange for a $3.0million reduction of a $5.0 million milestone that is due upon the earlier ofthe commencement of clinical trials or October 31, 2005.

 

We expect tosignificantly increase the rate of our research and development expenditures aswe accelerate our development of cethromycin. Accordingly, our total expensesand net losses will similarly increase. If the clinical testing for our productcandidates is delayed, we could incur increased development costs and a delayin our ability to generate revenues.

 

Since thecompletion of our offerings, we have initiated the manufacture of cethromycinand comparator tablets to be used in   PhaseIII clinical trails.  Our Phase III trialswill compare cethromycin with standard of care therapies for community acquiredpneumonia in the U.S. and Europe.  Theobjective will be to establish statistical non-inferiority againstcomparators.   The trials will bedesigned to demonstrate a clinical cure rate non-inferiority endpoint using a95% confidence interval. We expect to have data from these trials in the fourthquarter of 2006.

 

If cethromycin isapproved for marketing by the FDA, we plan to sell cethromycin using acommercial partner to access the primary care physician market and to build andutilize a focused internal sales force that will market directly to earlyadopter such as, but not limited to, pulmonary medicine and infectious diseasesphysicians.

 

**Results of Operations**

 

*Threemonths ended September 30, 2005 compared to three months ended September 30,2004*

 

*Revenueand Income. *Totalrevenue and income decreased 89% to $8,500 for the three months ended September 30,2005 from $75,000 for the three months ended September 30, 2004.  The decline in revenue is attributable to areduction in management fees earned from our management agreement with FlavinVentures under which we provide administrative and management services to aseries of companies jointly owned by Flavin Ventures.  We believe this reduction in the servicelevel required by Flavin Ventures and its related companies will be permanent,and that revenue derived from this agreement will continue at the levelrecognized in the third

 

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quarter of 2005 throughout the remainder of 2005.

 

Management fee revenue derivedfrom our 50/50 joint venture, SMP, is recognized on a cash basis.  Billed and unrecognized revenue wasapproximately $33,000 and $33,000 for the three months ended September 30,2005 and 2004, respectively.

 

We did not recognize SmallBusiness Innovative Research (“SBIR”) grant revenue in either the three monthsended September 30, 2005 or the same period in 2004.  However, as a result of our regular grantsubmission process, we expect to begin work in the fourth quarter of 2005 on aPhase I grant that was awarded in August 2005.

 

*Researchand Development expense. *Totalresearch and development expenditures increased 211% to $939,000 for the threemonths ended September 30, 2005 from $302,000 for the three months ended September 30,2004.  Research and development expensesconsist of salary and benefits of our scientific staff, related facility andlaboratory operating expenses and a portion of the salary and benefits of ouradministrative staff.  Increasedexpenditures for the third quarter over the same period last year result frombonuses paid to our management team and compensation expense related to the vestingof stock options totaling $578,000.  Theremainder of the increase, approximately $59,000, is due to additionalscientific staff being hired in 2005.

 

Of the total research anddevelopment expense incurred during the three months ended September 30,2005, development costs related to our in-licensed compound, cethromycin, were approximately$441,000.  These costs consist primarilyof compensation costs for our employees who manage the development program.

 

*Generaland administrative expense.* Total general and administrativeexpenses increased 121% to approximately $1.2 million for the three monthsended September 30, 2005 from approximately $560,000 for the three monthsended September 30, 2004.  The $680,000increase is primarily attributable to costs incurred indirectly as the resultof the completing our initial public offering in August of 2005.  Our management team earned bonuses of$760,000 during the period.  Approximately $380,000 was charged to researchand development and the remainder, or $380,000, was charged to administrativeexpense.  In addition, approximately 145,000stock options were immediately vested upon the completion of the IPO, accordingto the provisions of our stock option plan, and approximately 43,700 options withimmediate vesting were granted to our Board, according to the directorcompensation plan.  As a result of the vestingand the option grant to our Board, we incurred a compensation charge ofapproximately $393,000 for the three months ended September 30, 2005.  Of this total, 50%, or $196,000, was chargedto research and development, the remainder was charged to administrativeexpense.  The remainder of the increase,approximately $104,000, was attributable to higher insurance and Board costs aswe began to operate as a public company.

 

*InterestIncome.* Interest income totaled approximately $98,000 for thethree months ended September 30, 2005 compared to $0 for the same periodlast year and was derived through investments made from our IPO proceeds.

 

*Interestexpense.*  Interestexpense increased $90,000 to $136,000 for the three months ended September 30,2005 from $46,000 for the three months ended September 30, 2004 primarily dueto the $3.9 million of outstanding borrowings under our line of credit that wassecured in December 2004.  Drawsunder our line of credit for the three months ended September 30, 2005totaled approximately $383,000.

 

*Ninemonths ended September 30, 2005 compared to nine months ended September 30,2004*

 

*Revenueand Income.* Total revenue and income decreased by 75% to$53,000 for the nine months ended September 30, 2005 from $210,000 for thenine months ended September 30, 2004. Revenue earned in 2005 was derived exclusively through our managementagreement with Flavin Ventures wherein we provide management and administrativeservices to a series of companies jointly owned by Flavin Ventures.

 

Management fee revenuederived from our 50/50 joint venture, SMP, is recognized on a cash basis.  Billed and unrecognized revenue wasapproximately $99,000 and $128,000 for the nine months ended September 30,2005 and 2004, respectively.  Cumulativebilled and unpaid revenue totaled $615,000 and $483,000 for the nine monthsended September 30, 2005 and 2004, respectively.

 

Revenue derived throughSBIR grants was $0 for the nine months ended September 30, 2005 comparedto $38,000 for the same period last year. We regularly submit grants to the National Institutes of Health andreceived approval for a Phase I grant in August 2005.  We expect to initiate work on this $100,000grant in the fourth quarter of 2005.

 

*Researchand Development expense.*Total research and developmentexpense increased 84% to approximately $1.6 million for the nine months ended September 30,2005 from $873,000 for the nine months ended September 30, 2004.  The increase in research and developmentexpenditures of approximately $732,000 resulted from bonuses paid to ourmanagement team and compensation expense related to the stock options totaling$578,000.  The remainder of the increases,approximately $154,000, represents additional scientific headcount compensationcosts.   Of the total research anddevelopment expenses incurred during the nine months ended September 30,2005, approximately $754,000 is related to our development of cethromycin,consisting primarily of compensation

 

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costs for our employees that manage the development program.  The remainder of our research and developmentexpenditures in 2005, totaling approximately $846,000, was expended under ourother earlier-stage development programs.

 

*General andadministrative expense.* General and administrative expenseincreased 73% to approximately $2.1 million for the nine months ended September 30,2005 from $1.2 million for the nine months ended September 30, 2004.  Of the $900,000 increase in administrative expenseapproximately $578,000 related to one-time bonus and stock option compensationcharges.  The remainder of the 2005increase, approximately $322,000 is attributable to incremental administrativeand regulatory costs incurred as we operate as a pubic company.

 

*Interestincome.*Interest income totaled approximately $98,000 for thenine months ended September 30, 2005 compared to $0 for the same periodlast year and was derived through investments made from our IPO proceeds.

 

*Interestexpense.*  Interestexpense increased $197,000 to $340,000 for the nine months ended September 30,2005 from $143,000 for the nine months ended September 30, 2004 andresulted from $1.6 million of borrowings under our line of credit.  Total borrowings under the line were $3.9million as of September 30, 2005.

 

**Liquidity and Capital Resources**

 

We have devotedsubstantially all of our cash resources to research and development and generaland administrative expenses. To date, we have not generated any revenues fromthe sale of products, and we do not expect to generate any such revenues for anumber of years, if at all. As a result, we have incurred an accumulateddeficit of $44.1 million and $40.3 million as of September 30,2005 and December 31, 2004, respectively, and we expect to incursignificant and increasing operating losses for the foreseeable future. Ourworking capital as of September 30, 2005 amounted to $17.5 million.Cash, cash equivalents and investments was $18.9 million as of September 30,2005. Since our inception in 1999 to August 2005, we financed ouroperations primarily through debt and capital contributions from our founderand controlling stockholder and borrowings under our bank line of credit.  In August 2005 we completed our initialpublic offering in which we raised $28.7 million net of underwriters discountand offering costs.

 

In September 2001, Dr. MichaelT. Flavin made a $2.0 million loan to us. The loan accrues interest at therate of 7.75%, compounded annually, and is due and payable inDecember, 2007.

 

In December 2004, weentered into a $3.0 million line of credit with a local financialinstitution. Interest is based upon the prime rate plus 0.75% and is payablemonthly. The principal balance is due on December 31, 2007. The line ofcredit is secured by substantially all of our assets and is guaranteed byFlavin Ventures, Dr. Flavin and his wife and John L. Flavin. FlavinVentures secured its guaranty by issuing a mortgage on our principal facilitiesand pledging the shares it owns in us. In May 2005, we increased our lineof credit to $4.0 million. In connection with this increase, Dr. Flavinentered into a subordination agreement with the bank under which he agreed tosubordinate his $2.0 million loan to us to the line of credit.

 

During the nine monthsended September 30, 2005, cash used in operating activities totaled $12.7 million,primarily due to $9.0 million in payments made to Abbott under our licenseagreement, $3.2 million for general operations and $500,000 for directors andofficer insurance. Cash used in investing activities was $9.4 million and$91,000 during the nine months ended September 30, 2005 and 2004,respectively.   Cash provided from financing activitiestotaled approximately $31.4 million during the nine months ended September 30,2005 and consisted of $29.3 million related to the sales of our common stock,$1.6 million drawn from our line of credit and a $500,000 grant from the Stateof Illinois.

 

We believe that the netproceeds from the initial public offering will be sufficient to meet ouranticipated operating requirements through 2006. We expect that we will need toraise additional capital or incur additional indebtedness to continue to fundour operations for a longer period. Our future capital uses and requirementsdepend on numerous forward-looking factors. These factors include, but are notlimited to, the following:

 

*•*progress in our research and developmentprograms, as well as the magnitude of these programs;

 

*•*the timing, receipt and amount ofmilestone and other payments, if any, from present and future collaborators;

 

*•*our ability to establish and maintainadditional collaborative arrangements;

 

*•*the resources, time and costs required tosuccessfully initiate and complete our preclinical and clinical trials, obtainregulatory approvals, protect our intellectual property and obtain and maintainlicenses to third-party intellectual property;

 

*•*the cost of preparing, filing,prosecuting, maintaining and enforcing patent claims; and

 

*•*the timing, receipt and amount of salesand royalties, if any, from our potential products.

 

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If, at any time,our prospects for financing our clinical development programs are limited, wemay decide to reduce research and development expenses by delaying,discontinuing or reducing our funding.

 

*ContractualObligations*

 

As of September 30,2005, the annual amounts of future minimum payments under debt obligations,interest, lease obligations and other long term liabilities consisting ofresearch, development and license agreements are as follows:

 
| ** **                     | ** ** | **Payments Due by December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **2005**                              | ** ** | **2006**   | ** ** | **2007**   | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-term debt                 |       | $                                     | —     |       | $          | —     |       | $ | 5,915,000 |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,915,000 |   |
| Interest                       |       | 73,406                                |       | 293,625    |       | 1,504,404  |       | — |   | — |   | — |   | 1,871,435 |   |
| Abbott license  payments       |       | 2,000,000                             |       | —     |       | 10,000,000 |       | 30,000,000 |   | — |   | — |   | 42,000,000 |   |
| Cethromycin  development costs |       | 782,184                               |       | —     |       | —     |       | — |   | — |   | — |   | 782,184 |   |
| Operating leases               |       | 55,697                                |       | 225,759    |       | 234,789    |       | 160,645 |   | — |   | — |   | 676,890 |   |
| Capital leases                 |       | 4,355                                 |       | 17,421     |       | 14,110     |       | — |   | — |   | — |   | 35,886 |   |
|                           |       |                                  |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Total                          |       | $                                     | 2,915,642  |       | $          | 536,805    |       | $ | 17,668,303 |   | $ | 30,160,645 |   | $ | — |   | $ | — |   | $ | 51,281,395 |   |

 

Under our licenseagreement with Abbott Laboratories, we paid $9.0 million to Abbott in the ninemonths ended September 30, 2005, and we were obligated to pay anadditional $2.0 million on October 31, 2005, or, if earlier, with thecommencement of clinical trials.  We madethis $2.0 million payment to Abbott in October 2005.  We will also owe Abbott $10.0 million if wesubmit an NDA for cethromycin and $30.0 million if and when the FDA approvesthe NDA, which we estimate will occur in 2007 and 2008, respectively.  Thereafter, we would owe Abbott an additional$2.5 million upon reaching $200 million in aggregate net sales of cethromycin and$5.0 million upon reaching $400 million in aggregate net sales.  The periods in which milestone obligationsbecome payable are only estimates due to uncertainties in the regulatoryapproval process.

 

Our long-term commitmentsunder operating leases shown above consist of payments relating to our facilitylease in Woodridge, Illinois, which expires in September of 2008.

 

**CriticalAccounting Policies and Estimates**

 

Our discussion andanalysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities and expenses and related disclosureof contingent assets and liabilities. We review our estimates on an ongoingbasis. We base our estimates on historical experience and on various otherassumptions that we believe to be reasonable under the circumstances. Actualresults may differ from these estimates under different assumptions orconditions. While our significant accounting policies are described in moredetail in the notes to our financial statements, we believe the followingaccounting policies to be critical to the judgments and estimates used in thepreparation of our financial statements.

 

*In-ProcessResearch and Development*

 

We recognizein-process research and development in accordance with FASB Interpretation No. 4,*Applicability of FASB Statement No. 2to Business Combinations Accounted for by the Purchase Method*.Assets to be used in research and development activities, specifically,compounds that have yet to receive new drug approval from the FDA and wouldhave no alternative use should approval not be given, are immediately chargedto income when acquired.

 

In December 2004,we incurred $24.5 million of in-process research and development expenseas a result of entering into our exclusive license with Abbott Laboratories forcethromycin. We determined to immediately expense the purchased in-processresearch and development costs because the ultimate outcome of clinical trialsfor cethromycin is unknown and, therefore, FDA approval is uncertain. If cethromycindoes not receive FDA approval then it does not have an alternative future use.As part of the consideration for the cethromycin license, we issued to Abbottshares of our common stock. In order to determine the value of the common stockissued to Abbott, we relied on the arms-length nature of the transaction,precedent market data and several internal valuation models and studies. Anindependent appraisal was also obtained to provide additional support for thevaluation methodologies utilized. By

 

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their nature, valuations involve judgments of management that rely onestimates regarding the timing and amount of cash flows and discount ratesthat, if changed, could significantly affect the conclusions as to value.

 

*VariableInterest Entities*

 

We determine consolidationof variable interest entities in accordance with FASB Interpretation 46(R*), Consolidation of Variable Interest Entities*. Our 50/50joint venture, Sarawak MediChem Pharmaceuticals, has not been included in ourconsolidated financial statements because the majority of its financial supportin the form of contributed capital and debt has been funded by our jointventure partner.

 

*RevenueRecognition*

 

We recognizerevenue relating to our collaboration agreements in accordance with the Securitiesand Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 101, *Revenue Recognition in Financial Statements*,SAB No. 104, *Revenue Recognition*,and Emerging Issues Task Force Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables*. Revenueunder collaborative arrangements may include the receipt of non-refundablelicense fees, milestone payments and research and development payments. SBIRgrant revenue is recorded as expenses are incurred and services performed inaccordance with the terms of the grant agreements. Royalty revenue is earnedfrom a license of our technology. Under the license, revenue is earned basedupon a percentage of reported net sales of MediChem Research, Inc. forservices that incorporate the licensed technology. Management fees, which aregenerated from a shared services agreement with Sarawak MediChemPharmaceuticals, are recognized on the cash basis as the collectibility of suchfees is not reasonably assured. Management fees derived from Flavin Venturesare recorded as services are provided.

 

*Stock-basedCompensation*

 

Effective January 1,2004, we adopted the fair value method, which is considered the preferableaccounting method, of recording stock-based employee compensation as containedin Statement of Financial Accounting Standards (“SFAS”) No. 123 *Accounting for Stock-Based Compensation*. As prescribed in SFASNo. 123(R) *Share-Based Payment* we elected touse the “prospective method.” The prospective method requires expense to berecognized for all awards granted, modified or settled in the year of adoption.Historically, we applied the intrinsic method as provided in AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees* and related interpretations and, accordingly, nocompensation cost had been recognized for stock options issued to employees inprior years. As a result of adopting the fair value method for stockcompensation, all future awards will be expensed over the stock options vestingperiod. We utilized the Black-Scholes option pricing model to estimate the fairvalue of options granted in 2004. The adoption did not have a significanteffect to the statement of operations in 2004.

 

**Forward-LookingStatements and Risk Factors**

 

This Quarterly Report on Form 10-Q,including Management’s Discussion and Analysis of Financial Condition andResults of Operations, contains forward-looking statements within the meaningof the Private Securities Litigation Reform Act of 1995.  Forward-lookingstatements often are proceeded by words such as “believes,” “expects,” “may,” “anticipates,”“plans,” “intends,” “assumes,” “will” or similar expressions. Forward-looking statements reflect management’s current expectations, as of thedate of this report, and involve certain risks and uncertainties.  Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of various factors.  Some of thefactors that could cause future results to materially differ from the recentresults or those projected in forward-looking statements include the “RiskFactors” described in our Registration Statement on Form S-1 (Reg. No. 333-124396).

 

**Item 3.****                     *Quantitative and Qualitative Disclosures AboutMarket Risk***

 

Our exposure tomarket risk is currently confined to our cash and cash equivalents andinvestments that have maturities of less than one year. We currently do nothedge interest rate exposure. We have not used derivative financial instrumentsfor speculation or trading purposes. Because of the short-term maturities of ourcash, cash equivalents and investments, we do not believe that an increase inmarket rates would have any significant impact on the realized value of ourinvestments, but may increase the interest expense associated with our debt.

 

Our most liquidassets are cash, cash equivalents and investments. Because of their liquidity,these assets are not directly affected by inflation. We also believe that wehave intangible assets in the value of our intellectual property. In accordancewith generally accepted accounting principles, we have not capitalized thevalue of this intellectual property on our balance sheet. Due to the nature ofthis intellectual property, we believe that these intangible assets are notaffected by inflation. Because we intend to retain and continue to use ourequipment, furniture and fixtures and leasehold improvements, we believe thatthe incremental inflation related to replacement costs of such items will notmaterially affect our operations. However, the rate of inflation affects our expenses,such as those for employee compensation and contract services, which couldincrease our level of expenses and the rate at which we use our resources.

 

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**Item 4.****                     *Controls and Procedures***

 

Our management, under thesupervision and with the participation of our Chief Executive Officer (“CEO”)and Chief Financial Officer (“CFO”), has evaluated the effectiveness of ourdisclosure controls and procedures as defined in SEC Rules 13a-15(e) and15d-15(e) asof the end of the period covered by this report. Based upon that evaluation,management has concluded that our disclosure controls and procedures areeffectively designed to ensure that information we are required to disclose inreports that we file or submit under the Securities Exchange Act of 1934 iscommunicated to management, including the CEO and CFO, as appropriate to allowtimely decisions regarding required disclosure and is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

 

**Changes in Internal Control**

 

During the period coveredby this report, there have been no significant changes in our internal controlover financial reporting that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II —OTHER INFORMATION**

 

**Item 6.****                     *Exhibits***

 

The following is a listof exhibits filed as part of this Form 10-Q:

 
| **Number** | ** ** | **Description**                                                                                                                                                |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                           |
| 31.1       |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
|       |       |                                                                                                                                                           |
| 31.2       |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
|       |       |                                                                                                                                                           |
| 32.1       |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|       |       |                                                                                                                                                           |
| 32.2       |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, The Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |     | Advanced Life  Sciences Holdings, Inc. |                               |
|--------|----------|---------------------------------------------|------------------------------------|
|   |     |                                        |                               |
|   |     |                                        |                               |
|   | By:      |                                        | /s/ Michael T.  Flavin, Ph.D. |   |   |
|   |     |                                        |                               |
|   |     | Michael T.  Flavin, Ph.D.              |                               |
|   | * * | *Chairman  of the Board, President*         | * *                           |
|   | * * | *and  Chief Executive Officer*              | * *                           |
|   |     |                                        |                               |
|   |     |                                        |                               |
|   | By:      |                                        | /s/ R. Richard Wieland  II         |   |   |
|   |     |                                        |                               |
|   |     | R. Richard  Wieland II                      |                               |
|   | * * | *Executive  Vice President and*             | * *                           |
|   | * * | *Chief  Financial Officer*                  | * *                           |
|        |          |                                             |                                    |  |  |  |  |

Dated: November 10,2005

 

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**EXHIBIT INDEX**

 
| **Number** | ** ** | **Description**                                                                                                                                                |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                           |
| 31.1       |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
|       |       |                                                                                                                                                           |
| 31.2       |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                     |
|       |       |                                                                                                                                                           |
| 32.1       |       | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|       |       |                                                                                                                                                           |
| 32.2       |       | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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