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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________ .
Commission File Number 000-28782
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NEOTHERAPEUTICS, INC.
(Name of Registrant as Specified in its Charter)
DELAWARE 93-0979187
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
157 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (949) 788-6700
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Common Stock Purchase Warrants
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting common equity held by non-affiliates of
the registrant as of March 22, 2000, was $158,920,940.
As of March 22, 2000, there were 9,534,103 shares of the registrant's common
stock outstanding.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business................................................................ 3
Item 2. Properties.............................................................. 14
Item 3. Legal Proceedings....................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..................... 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters... 16
Item 6. Selected Financial Data................................................. 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 21
Item 8. Financial Statements.................................................... 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................ 42
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 43
Item 11. Executive Compensation.................................................. 47
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................................ 50
Item 13. Certain Relationships and Related Transactions.......................... 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 54
SIGNATURES ........................................................................ 58
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This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are inherently
subject to risks and uncertainties, some of which cannot be predicted or
quantified. The Company's actual results may differ materially from the results
projected in the forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "ITEM 1 -
Business," including the section therein entitled "Risk Factors," and in "ITEM 7
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations." Forward-looking statements generally can be identified by the use
of forward-looking terminology such as "believes," "may," "will," "expects,"
"intends," "estimates," "anticipates," "plans," "seeks," or "continues," or the
negative thereof or variations thereon or similar terminology.
PART I
ITEM 1. BUSINESS
GENERAL
NeoTherapeutics, Inc. is a development stage biopharmaceutical company
engaged in the discovery and development of novel therapeutic drugs intended to
treat neurological and psychiatric diseases and conditions, such as memory
deficits associated with Alzheimer's disease and aging, stroke, spinal cord
injuries, Parkinson's disease, migraine, depression and obesity. Our lead
product candidate, Neotrofin(TM) (AIT-082, leteprinim potassium), and other
compounds under development, are based on our patented technology. This
technology uses small synthetic molecules to create non-toxic compounds,
intended to be administered orally or by injection, that are capable of passing
through the blood-brain barrier to rapidly act upon specific target cells in
specific locations in the central nervous system, including the brain. Animal
and laboratory tests have shown that Neotrofin(TM) appears to selectively
increase the production of certain neurotrophic factors, a type of large
protein, in selected areas of the brain and in the spinal cord. These
neurotrophic factors regulate nerve cell growth and function. Our technology has
been developed to capitalize on the beneficial effects of these proteins, which
have been widely acknowledged to be closely involved in the early formation and
differentiation of the central nervous system. We believe that Neotrofin(TM)
could have therapeutic and regenerative effects.
Our developmental activities to date have benefited from a close
association with the National Institutes of Health ("NIH"). The NIH's National
Institute on Aging ("NIA") has contracted for, and funded a portion of, the
pre-clinical studies on our Neotrofin(TM) compound, including toxicity studies.
The NIA has committed to fund and conduct two Phase 1 clinical trials under the
auspices of its Alzheimer's Disease Cooperative Study ("ADCS"), a consortium of
approximately 35 highly regarded clinical centers throughout the United States.
One of these clinical trials has been completed and one is in progress. The
NIH's National Institute for Mental Health ("NIMH") also supported our
development efforts by contracting and providing funds, along with the NIA, for
the production of sufficient quantities of the Neotrofin(TM) compound to conduct
some preclinical toxicity testing and the two Phase 1 human clinical trials
conducted by the ADCS.
In June 1997, an Investigational New Drug Application ("IND") for
Neotrofin(TM) was approved by the U.S. Food and Drug Administration ("FDA") and
Phase 1 human clinical testing in the United States for the treatment of
Alzheimer's disease began. In addition, Neotrofin(TM) received a physician's IND
in Canada in March 1997, where a Phase 1 clinical trial to evaluate safety in
patients with Alzheimer's disease was completed. We have since received
regulatory approval to conduct human clinical trials in additional countries. We
believe that Neotrofin(TM) is the first orally active drug to enter human
clinical trials that is specifically designed to address the issue of nerve
regeneration. In preclinical studies in animals, Neotrofin(TM) has been shown to
induce the production of multiple neurotrophic factors in the brain and spinal
cord. These factors have been reported to induce the multiplication and
functional maturation, in the brain, of cholinergic neurons, those neurons known
to die in patients with Alzheimer's disease. We believe that Neotrofin(TM) is
the only compound in human clinical trials that has activated, in animals,
multiple genes to produce multiple neurotrophic factors in the specific areas of
the brain associated with memory loss or other deficits.
In September 1999, we entered into a Collaborative Research and
Technology Development Agreement with the University of California, Irvine. This
agreement grants us the exclusive right to all technology developed by Dr.
Olivier Civelli through his research into functional genomics and orphan
receptors, in exchange for royalty payments for the use of such technology. Dr.
Civelli's research and technology complement our own research and development
efforts and may enable us to offer a greater number of drugs that more
effectively address a broad array of neurological diseases and conditions.
We were incorporated in Colorado in December 1987. On August 7, 1996, we
changed our name from Americus Funding Corporation to NeoTherapeutics, Inc. In
June 1997, our stockholders approved the reincorporation of NeoTherapeutics,
Inc. as a Delaware corporation. Our wholly owned subsidiary, Advanced
ImmunoTherapeutics, Inc. ("AIT"), was incorporated as a California corporation
in June 1987. In July 1989, in a transaction accounted for as a
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reverse acquisition, all of the stockholders of AIT exchanged all of their
shares of AIT common stock for shares of the Company's common stock, and AIT
became our wholly owned subsidiary. In April 1997, we established
NeoTherapeutics GmbH ("NEOT GmbH"), as our wholly owned subsidiary in
Switzerland, for the purpose of conducting future licensing and other related
activities in the international market. Our third wholly owned subsidiary,
NeoGene Technologies, Inc. ("NeoGene") was incorporated in California in
October, 1999, for the purpose of commercializing functional genomics
technologies being developed through a joint venture with the University of
California, Irvine. Unless the context otherwise requires, all references to the
"Company", "We", "Our", "Us" and "NeoTherapeutics" refer to NeoTherapeutics,
Inc., a Delaware corporation, AIT, NEOT GmbH and NeoGene as a consolidated
entity.
INTRODUCTION TO THE CENTRAL NERVOUS SYSTEM
The human brain contains some 10 billion nerve cells, or neurons, each
of which has connections with many other neurons. Sensory, motor and cognitive
activities are all governed by this complex network of neurons, each member of
which communicates with other neurons across junctions known as "synapses."
Communication between neurons involves chemical "messengers" known as
neurotransmitters, which are released by the sending neuron, diffuse across a
small gap, and bind to corresponding receptors on the receiving neuron. Abnormal
neuronal communication has been implicated in a range of psychiatric and
neurological disorders, including memory deficits, schizophrenia, depression,
anxiety, Parkinson's disease and eating disorders.
The treatment of many diseases is facilitated by cell regeneration, a
natural component of human healing. However, in the highly complex realm of
neurological diseases, treatment is more difficult because neurons may not
naturally regenerate efficiently after maturity. Currently available drugs for
the treatment of such significant neurological disorders as Alzheimer's and
Parkinson's diseases act by increasing or replacing supplies of critical
neurotransmitters, but provide time-limited benefits at best. These benefits are
limited because the eventual loss of neuronal cells without regeneration means
there are eventually few nerve cells for those neurotransmitters to activate.
Much of neuroscience-oriented biotechnology research centers on the
investigation of certain proteins, known as neurotrophic factors, which are
necessary to the early development of neurons as well as their long-term
maintenance and survival. These substances are involved in the fundamental
formation and shaping of the nervous system. Given their role in the early
neuron development and maintenance, it has been hypothesized that these
neurotrophic factors could be used in the treatment of neurodegenerative
diseases.
Since neurons do not naturally regenerate completely following damage or
disease, substantial research has been conducted by academic researchers and by
the pharmaceutical industry in developing these factors as possible treatments
for a variety of neurological disorders. To date, the usefulness of these
factors has been limited by their inability to pass the blood-brain barrier,
which serves as a "filter" to keep molecules larger than a certain size from
leaving the bloodstream and entering the brain and spinal cord. Therefore,
neurotrophic factors, which are large protein molecules, cannot be administered
orally or through injection into the bloodstream for the treatment of diseases
of the central nervous system.
There are currently three alternative approaches to achieving
blood-brain barrier access. One approach is to introduce neurotrophic factors by
direct injection into the brain through a catheter inserted into a hole drilled
into the skull. While this treatment has achieved some success in alleviating
some of the symptoms of Alzheimer's disease, the prospect for infection, the
side effects, the inconvenience and expense of the procedure have limited its
practical usefulness to date. The second approach is to temporarily break down
the blood-brain barrier, which would allow molecules of all sizes (including
therapeutic as well as toxic or infectious agents) to enter into the central
nervous system. This approach is in the early stage of development, and its
utility has not been established.
The third approach, the one we have taken, is to find small molecules
which can pass through the blood-brain barrier and which can be administered
orally or through injection into the bloodstream. Our small-molecule approach,
if successful, could lead to the development of compounds which can either mimic
the actions of the larger molecule neurotrophic factors or stimulate the
production of such factors within the brain, after administration either orally
or through injection. We believe that such a development could represent a major
advance in the treatment of neurological disorders.
OUR DRUG DEVELOPMENT STRATEGY
We are engaged in research that has primarily focused on the development
of new drugs that act on the nervous system to treat neurological and
psychiatric diseases and conditions, such as memory deficits associated with
Alzheimer's disease and aging, stroke, spinal cord injuries and Parkinson's
disease, migraine, depression and obesity.
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Our technical strategy is the synthesis of proprietary chemical
molecules that modify specific biological processes in the body. The methods by
which the molecules are synthesized are proprietary and we have patented
specific molecules and their methods of use. Our drug design methods are based
upon the use of hypoxanthine, a natural non-toxic purine compound which is
contained in the genetic material of all living matter. Hypoxanthine is
chemically linked to a variety of other molecules in order to produce our
proprietary series of compounds. The various molecules that are linked to
hypoxanthine are selected from known drugs or naturally-occurring molecules that
have established therapeutic activity, producing a potentially bi-functional
compound. These compounds exhibit certain functional features of both
hypoxanthine and the linked therapeutic compounds. Chemical and behavioral
studies have given us reason to believe that this compound synthesis and
selection process increases the probability that our new compounds will retain
the actions exhibited by their "parent" molecules.
We synthesize new compounds and conduct the early testing to establish
therapeutic potential necessary to obtain patents on new compounds. We have
conducted preclinical testing of the safety and efficacy of certain of our
compounds and intend to file an IND for each such compound which shows
therapeutic potential. With respect to our Neotrofin(TM) compound, some clinical
trials have been completed, others are in progress, and we intend to conduct
additional clinical trials. We intend to seek out large pharmaceutical companies
as partners for the development, manufacture and marketing of certain of our
compounds.
PRODUCTS IN DEVELOPMENT
The table below summarizes the primary or possible indications and
development status for some of our current research and development programs.
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PRODUCT POSSIBLE INDICATIONS DEVELOPMENT STATUS
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Neotrofin(TM) Alzheimer's Disease Phase 1: Five clinical trials completed,
(AIT-082) two in progress and additional
Phase 1 studies to be conducted
in 2000
Phase 2: One clinical trial completed and
four in progress
Spinal Cord Injury Preclinical
Stroke Preclinical
Peripheral Neuropathy Preclinical
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AIT-034 Dementia Preclinical
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AIT-202 Depression; obesity Preclinical
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AIT-203 Parkinson's Disease Preclinical
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AIT-297 Migraine Preclinical
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We cannot guarantee that any of our compounds will effectively treat the
indicated diseases or conditions, or that any such compounds will receive FDA
approval.
Neotrofin(TM)
Our Neotrofin(TM) compound is the most extensively studied compound in
the AIT series and has been the primary focus of our research efforts.
Neotrofin(TM) has been shown in animal studies to enhance working (or recent)
memory, the type of memory which is deficient in patients suffering from
Alzheimer's disease. In addition, we believe that Neotrofin(TM) may help treat
memory impairments in the aged, in stroke patients and in patients with
traumatic brain injuries. Neotrofin(TM) may also help treat patients with nerve
damage such as stroke, spinal cord injury and peripheral neuropathy.
Preclinical testing involving laboratory animals has indicated that
Neotrofin(TM) exhibits the following properties and/or effects:
- Shown to reduce, delay and prevent memory deficits in aged
animals; shown to enhance memory function in young and aged
animals.
- Shown to protect brain cells against neurotoxic injury.
- Shown to be non-toxic at high oral dosage levels in dogs and
rats after up to nine months of administration.
- Effective over a wide range of doses in animals.
- Active both orally and through injection.
Until completion of the entire human clinical trial process, there can
be no assurance that these properties and/or
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effects can be replicated in humans.
We have shown that when administered to neurons in tissue culture,
Neotrofin(TM) can induce the same neurite outgrowth effects as NGF (nerve growth
factor). We have also shown that Neotrofin(TM) causes the production of mRNA
(messenger ribonucleic acid) for multiple neurotrophic factors in tissue
culture. In addition, we have demonstrated that oral administration of
Neotrofin(TM) increases the levels of mRNA and protein for multiple neurotrophic
factors in the central nervous systems of rats and mice. Other researchers have
shown, in animals, that administration of multiple neurotrophic factors may be
more effective as a treatment method for neurodegenerative diseases than the
administration of a single factor. We believe that Neotrofin's mechanism of
action involves activating the genes that lead to the production of a number of
different neurotrophic factors. Neurotrophic factors themselves are not orally
active and do not pass the blood-brain barrier. Therefore, should Neotrofin(TM)
prove to be an effective treatment for neurological disorders, it could have two
distinct practical advantages over neurotrophic factors administered alone
directly into the brain as a treatment for such disorders: (i) it can be
administered orally; and (ii) it induces the production of multiple neurotrophic
factors in those areas of the brain associated with a variety of deficits.
The NIA and the NIMH have contracted for, and completed production of,
sufficient quantities of Neotrofin(TM) to conduct subchronic animal toxicity
studies and early human clinical trials and have provided the funding for these
contracts. An IND was approved for Neotrofin(TM) by the U.S. FDA in June 1997.
The ADCS has committed to conduct two Phase 1 clinical trials of
Neotrofin(TM). The first trial began in July 1997 and was completed in 1998. The
second trial commenced in October 1998 and is due to be completed in the first
half of 2000. In addition, the Geriatric Research Group and Memory Clinic,
McMaster University, Hamilton, Ontario, completed a two-part single-dose Phase 1
clinical trial of Neotrofin(TM) in September 1997. Additional Phase 1 clinical
trials evaluating safety and pharmacokinetic parameters have been conducted with
Neotrofin(TM). The results from the Phase 1 clinical trials which have been
completed indicate that Neotrofin(TM) is rapidly absorbed after oral
administration and produces no serious side effects at high doses.
The first Phase 2 trial of Neotrofin(TM) (28 days of dosing) was
initiated in July 1998 and completed in the first quarter of 1999. The results
from this study confirmed the observations seen in the Phase 1 trials and also
indicated improved memory performance. In the first quarter of 1999, we
initiated a larger Phase 2 clinical trial (90 days of dosing) in Canada,
Australia and the Republic of South Africa. Two additional Phase 2 clinical
trials have been initiated in the United States. The first is to study the
effects of oral Neotrofin(TM) in the brain using PET (Positron Emission
Tomography) imaging technology. The second United States Phase 2 clinical trial,
initiated in the fourth quarter of 1999, is designed to study the effects of a
single dose level of Neotrofin(TM) compared to placebo when administered for 90
days. We have also initiated, in the first quarter of 2000, a large
multinational (excluding the United States) dose-ranging Phase 2/3 study of
Neotrofin(TM) (24 weeks of dosing). We expect that we will have to conduct and
fund additional animal and human studies that may possibly include Phase 3 human
clinical studies prior to submitting Neotrofin(TM) to the FDA, or regulatory
agencies in other countries, for marketing approval. We cannot guarantee,
however, that ongoing or future clinical trials of Neotrofin(TM) will be
successful, that the marketing of Neotrofin(TM) will be approved by regulatory
agencies, or that Neotrofin(TM) can be marketed successfully to its targeted
population. See "Drug Approval Process and Government Regulation."
Other Compounds in Development
Due to the historically limited resources available to us and our
decision to focus those resources on the development of Neotrofin(TM), our other
compounds are in earlier stages of development. These compounds include:
AIT-034: AIT-034 is a distinct chemical analog of hypoxanthine and
pyrollidone that has been demonstrated in animal studies to enhance memory and
to reverse memory deficits in severely impaired animals that do not respond to
Neotrofin(TM). AIT-034 does not induce the production of NGF, and its mechanism
of action is therefore believed to be different than Neotrofin(TM). We believe
that AIT-034 could complement Neotrofin(TM) as a treatment for Alzheimer's
disease and dementia.
AIT-202: AIT-202 is a derivative of hypoxanthine and serotonin and has
the potential for use in the treatment of depression and obesity.
AIT-203: AIT-203 is a chemical derivative of hypoxanthine and dopamine.
With further development, AIT-203 might be used to treat Parkinson's disease.
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AIT-297: AIT-297 is a derivative of hypoxanthine and norepinephrine
which has shown, in preliminary studies, potential to treat migraine and
hypertension.
Until extensive further development and testing is completed, which will
take many years, if undertaken at all, the therapeutic and other effects of
these compounds cannot be established.
PRIMARY THERAPEUTIC TARGETS
Alzheimer's Disease. Alzheimer's disease is a neurodegenerative brain
disorder that leads to progressive memory loss and dementia. Alzheimer's disease
generally follows a course of deterioration over eight years or more, with the
earliest symptom being impairment of short-term memory. Alzheimer's disease is
now recognized as the most common cause of severe intellectual impairment in
persons over the age of 65 in the United States, with approximately four million
Americans diagnosed as suffering from Alzheimer's disease. The number of
patients with Alzheimer's disease is expected to reach 14 million by 2050.
Alzheimer's disease is the fourth leading cause of death in the United States
with approximately 100,000 deaths per year. The Alzheimer's Association has
estimated that the overall care costs required for the treatment and care of the
estimated four million U.S. patients with Alzheimer's disease are $100 billion
per year. The only drug presently marketed in the U.S. for the treatment of
Alzheimer's disease is donepezil (Aricept(R), Pfizer, Inc. and Eisai), which has
market sales of approximately $1 billion per year. We have two compounds in
development, Neotrofin(TM) and AIT-034, which have shown potential to treat
Alzheimer's disease.
Dementia and Memory Impairment Associated with Aging. Because the
populations of developed countries are aging, the costs and social burden of
medical care and housing of aged persons suffering from mentally deteriorative
diseases are increasing. The availability of a drug to reduce the memory
impairments associated with aging would not only have a significant economic
impact but would also greatly improve the quality of life for the elderly
population. Both Neotrofin(TM) and AIT-034 have shown to be effective in
ameliorating memory loss associated with aging in mice. Clinical trials indicate
that Neotrofin(TM) also improves memory performance in patients with Alzheimer's
disease.
Spinal Cord Injury. There are an estimated 200,000 severely disabled
survivors of spinal cord trauma in the United States with approximately 10,000
new injuries each year. The cost of care and services for these individuals is
estimated to exceed $10 billion per year. Significant research efforts are
currently being focused on the neurotrophic factors that can initiate and
support new cell development, guide new or damaged nerves to appropriate targets
and maintain neuronal function. Animal studies have shown that functional
restorations are possible with appropriate neurotrophic factors. A major
obstacle to the effective use of these neurotrophic factors is the delivery of
the appropriate neurotrophic factors to the site of damage. Neotrofin(TM) has
been shown in mice to cause the production of several neurotrophic factors in
the spinal cord after oral administration, demonstrating that it can effectively
penetrate the blood-brain barrier. We believe that Neotrofin(TM) potentially
could be used to stimulate the regeneration of nerves damaged by spinal cord
injury. We have paid $50,000 and have committed an additional $50,000 to
establish a NeoTherapeutics Fellowship as part of the Reeve-Irvine Research
Center for spinal cord injury at the University of California, Irvine.
Stroke. Among older Americans, stroke ranks as the third leading cause
of death. An estimated 500,000 people in the United States suffer strokes each
year. The costs associated with the treatment and care of stroke patients are
estimated to be approximately $25 billion per year. Most therapeutic approaches
to treating strokes are directed towards correcting the circulatory deficit or
to blocking the toxic effects of chemicals released in the brain at the time of
the stroke. Since Neotrofin(TM) has the potential to be neuroprotective in
addition to enhancing nerve regeneration, we believe that it may prove useful in
treating stroke.
Functional Genomics. Under the auspices of the Human Genome Project of
the National Institute of Health, it is projected that the entire sequence of
the human genetic blueprint will be completely deciphered by 2003. However,
knowing the sequence of a gene does not tell what the function of that gene is
in the body. Understanding the function of genes in the body is a process called
"functional genomics." To date, the functions of only 10,000 of the estimated
100,000 genes in the body are understood. The Human Genome Project has
identified about 1,000 genes that belong to the G-protein-coupled receptor
family, or GPCR. Functions have been elucidated for about 860 of these genes,
leaving 140 genes which control the as yet unidentified functions of these
"orphan receptor" genes.
Using genetic engineering techniques, it has been possible to deduce the
function of certain orphan receptor genes, but the process is difficult, labor
intensive and expensive. Of the 10 orphan receptor genes whose functions have
been established, three have been the result of research conducted by Dr.
Olivier Civelli. Among them is the MCH receptor, which is associated with
obesity control, and Urotensin II, a potent controller of blood pressure.
In September 1999, we entered into a collaborative agreement with the
University of California, Irvine and Dr. Civelli whereby we will have access to
all technology and products developed by Dr. Civelli and his colleagues in
exchange for research funding support in the amount of $2.0 million over three
years. While it may be several years before
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therapeutic product candidates are identified, this technology platform
complements our current technology base and product pipeline and should provide
us with the next generation of potential products.
BUSINESS STRATEGY
Marketing and Sales
We do not currently sell any products and therefore have no marketing,
sales, or distribution organization. We intend to possibly complete a series of
strategic alliances with multinational or large regional pharmaceutical
companies having substantial financial capacity, marketing capability and
clinical development expertise, who can assist us in the development, marketing
and sale of Neotrofin(TM) and our potential other products. However, we may seek
to retain rights to co-market our products in the United States.
We believe the support of the National Institute of Health's National
Institute on Aging ("NIA") and the National Institute of Health's National
Institute for Mental Health ("NIMH"), along with the Alzheimer's Disease
Cooperative Study, the clinical arm of the NIA's research on Alzheimer's
disease, could contribute significantly to the future marketing and educational
efforts directed to physicians who treat Alzheimer's disease patients. We
believe that this exposure to the leaders in the field of neurodegenerative
diseases may reduce the time and marketing costs required to introduce our
potential products when and if they are approved by the FDA.
Strategic Alliances
We believe that our patented technology platforms provide a major
commercial opportunity for developing strategic alliances with larger
pharmaceutical companies. We believe that any such alliance would enable us to
focus on our inherent strength; namely exploitation of the technology platform
to develop additional novel therapies.
The most common phase in which industry collaborations are completed is
the discovery stage, since a license for early stage discoveries generally cost
a large pharmaceutical company much less than licensing later stage products. We
chose to postpone the structuring of a corporate sponsored licensing agreement
for Neotrofin(TM) in favor of an early stage, government-assisted development
program. By completing strategic alliances later in the development cycle, we
hope to increase value for our stockholders that may be reflected in the
enhanced terms of any licensing agreement.
From time to time we engage in licensing discussions with one or more
multinational or regional pharmaceutical companies. We anticipate that the terms
of any strategic alliance that we enter into for our lead compound,
Neotrofin(TM), will include an up-front payment, milestone payments, royalties
on product sales, and agreements requiring the licensee to purchase drug
compound from us. We cannot guarantee that any such discussions will result in a
commercial transaction on favorable terms.
Research Collaborations
We currently have several proprietary compounds in various stages of
preclinical development. From time to time, we evaluate these compounds for
efficacy in specialized assays or test models. We locate expert academic
researchers to perform the desired tests and provide them, through their
respective academic institutions, with grants and/or contracts to perform the
designated tests while we maintain proprietary rights to the compounds. We
monitor these studies to ensure that these studies are performed to the highest
research standards.
Production
We currently have our compounds manufactured in large scale by a third
party vendor and have no plans to establish our own manufacturing facilities. In
connection with any licensing arrangements we may enter into, we intend to
retain the rights to control the manufacturing and sale of our compounds to our
licensees. Preliminary estimates indicate that Neotrofin(TM) can be manufactured
cost effectively.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The production and marketing of our products and our research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation. The
Federal Food, Drug and Cosmetics Act, as amended, and the regulations
promulgated thereunder, as well as other federal and state statutes and
regulations, govern, among other things, the testing, manufacture, safety,
efficacy, labeling, storage, record keeping, approval, advertising and promotion
of our proposed products. Product development and approval within this
regulatory framework take a number of years and involve the expenditure of
substantial resources. In addition to obtaining FDA approval for each product,
each drug manufacturing establishment must be registered with, and approved by,
the FDA. Domestic manufacturing establishments are subject to regular
inspections by the FDA and must comply with Good Manufacturing Practices
("GMP"). To supply products for use in the United States, foreign manufacturing
establishments must also comply with GMP and are subject to
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periodic inspection by the FDA or by regulatory authorities in certain of such
countries under reciprocal agreements with the FDA. Drug product and drug
substance manufacturing establishments located in California also must be
licensed by the State of California in compliance with local regulatory
requirements.
New Drug Development and Approval. The United States system of new drug
approval is one of the most rigorous in the world. According to a February 1993
report by the Congressional Office of Technology Assessment, it costs an average
of $359 million and takes an average of 15 years from discovery of a compound to
bring a single new pharmaceutical product to market. Approximately one in 1,000
compounds that enter the pre-clinical testing stage eventually makes it to human
testing and only one-fifth of those are ultimately approved for
commercialization. In recent years, societal and governmental pressures have
created the expectation that drug discovery and development costs can be reduced
without sacrificing safety, efficacy and innovation. The need to significantly
improve or provide alternative strategies for successful pharmaceutical
discovery, research and development remains a major health care industry
challenge.
Drug Discovery. In the initial stages of drug discovery before a
compound reaches the laboratory, typically thousands of potential compounds are
randomly screened for activity in an assay assumed to be predictive of a
particular disease process. This drug discovery process can take several years.
Once a "screening lead" or starting point for drug development is found,
isolation and structural determination is initiated. Numerous chemical
modifications are made to the screening lead in an attempt to improve the drug
properties of the lead. After a compound emerges from the above process, it is
subjected to further studies on the mechanism of action, further in vitro
screening against particular disease targets and finally, in vivo animal
screening. If the compound passes these evaluation points, animal toxicology is
performed to begin to analyze the potential toxic effects of the compound, and
if the results indicate acceptable toxicity findings, the compound emerges from
the basic research mode and moves into the preclinical phase.
Preclinical Testing. During the preclinical testing stage, laboratory
and animal studies are conducted to show biological activity of the compound
against the targeted disease, and the compound is evaluated for safety. These
tests can take up to three years or more to complete.
Investigational New Drug Application (IND). After preclinical testing,
an IND is submitted to the FDA to begin human testing of the drug. The IND
becomes effective if the FDA does not reject it within 30 days. The IND must
indicate the results of previous experiments, how, where and by whom the new
studies will be conducted, how the chemical compound is manufactured, the method
by which it is believed to work in the human body, and any toxic effects of the
compound found in the animal studies. In addition, the IND clinical protocol
must be reviewed and approved by an Institutional Review Board comprised of
physicians and lay people at the hospital or clinic where the proposed studies
will be conducted. Progress reports detailing the results of the clinical trials
must be submitted at least annually to the FDA.
Phase 1 Clinical Trials. After an IND becomes effective, Phase 1 human
clinical trials can begin. These studies, involving small numbers of healthy
volunteers or patients, can take up to one year or more to complete. The studies
determine a drug's safety profile, including the safe dosage range. The Phase 1
clinical studies also determine how a drug is absorbed, distributed, metabolized
and excreted by the body. Additional Phase 1 clinical trials, which may be
conducted at any time during the clinical development of a new drug, evaluate
interactions between the test drug and drugs commonly used in the target
population and safety in patients with compromised organ systems.
Phase 2 Clinical Trials. In Phase 2 clinical trials, controlled studies
of volunteer patients with the targeted disease assess the drug's effectiveness.
These studies are designed primarily to determine the appropriate dose levels
and to evaluate the effectiveness of the drug on the volunteer patients as well
as to determine if there are any side effects on these patients. These studies
can take up to two years or more.
Phase 3 Clinical Trials. This phase can last up to three years or more
and usually involves large numbers of patients with the targeted disease. During
the Phase 3 clinical trials, physicians monitor the patients to determine
efficacy and to observe and report any adverse reactions that may result from
long-term and more widespread use of the drug.
New Drug Application (NDA). After completion of all three clinical trial
phases, the data is analyzed and, if the data indicates that the drug is safe
and effective, an NDA is filed with the FDA. The NDA must contain all of the
information on the drug that has been gathered to date, including data from the
clinical trials. NDAs are often over 100,000 pages in length. After passage of
the Prescription Drug User Fee Act, average review times for new medicine
applications dropped from nearly 30 months in 1992 to less than 18 months in
1996.
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Fast Track Review. In September 1998, the FDA clarified procedures for
accelerating the approval of drugs to be marketed for serious diseases for which
the manufacturer can demonstrate the potential to address unmet medical needs.
We do not know whether Neotrofin(TM) will fulfill this requirement for the
treatment of Alzheimer's disease as there are drugs currently approved and
available for such treatment. However, Neotrofin(TM) might qualify for "fast
track" classification in a different disease indication. At this time, we have
not requested fast track designation for Neotrofin(TM).
The FDA has also made provisions for priority review of drugs. A drug
will qualify for priority review if it provides a significant improvement
compared to marketed products in the treatment, diagnosis or prevention of a
disease regardless if the indication is serious or life-threatening. We believe
that Neotrofin(TM) may qualify for priority review.
Approval. If the FDA approves the NDA, the drug becomes available for
physicians to prescribe. We must continue to submit periodic reports to the FDA,
including descriptions of any adverse reactions reported. For certain drugs
which are administered on a long-term basis, the FDA may request additional
clinical studies (Phase 4) after the drug has begun to be marketed to evaluate
long-term effects. The marketing of a drug after FDA approval is subject to
substantial continuing regulation by the FDA, including regulation of
manufacturing practices and the advertising and promotion of the drug.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
Our research and development activities involve the controlled use of hazardous
materials, chemicals, biological materials and various radioactive compounds.
Although we believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, we could be
held liable for any damages that result, and any such liability could exceed our
resources.
For marketing outside the United States, we, or our prospective
licensees, are subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices in the respective
countries. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
RESEARCH AND DEVELOPMENT
Since our inception, we have devoted substantially all of our efforts to
research and development. Research and development expenditures were $4,508,255
in 1997, $8,542,034 in 1998 and $20,057,687 in 1999.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are vital to our business. Our
policy is to seek patent protection for our proprietary compounds and
technology, and we intend to protect our technology, inventions and improvements
to inventions that are commercially important to the development of our
business. We also intend to rely on trade secrets, know-how, continuing
technology innovations and licensing arrangements to develop and maintain our
competitive position. In addition, we have applied for registration of several
trademarks, including the name of the Company, NeoTherapeutics(TM), and our
potential products.
On February 25, 1992, Dr. Alvin Glasky was issued a United States patent
(No. 5,091,432) which establishes proprietary rights for a series of compounds
whose chemistry is based upon a purine, hypoxanthine, and for the use of these
compounds in the treatment of neuroimmunologic disorders. This patent expires on
February 25, 2009. These compounds are bi-functional drugs that combine the
ability of hypoxanthine to be absorbed rapidly into the body with the
pharmacological activity of a second molecular component. These second
components were selected to provide a wide variety of potential therapeutic
applications that act on the central nervous system to treat neurological or
psychiatric diseases or conditions associated with Alzheimer's disease,
impairment associated with aging, Parkinson's disease, stroke, spinal cord
injuries, migraine and depression.
On September 5, 1995, a second United States patent (No. 5,447,939) was
issued to Dr. Glasky which covers the treatment of neurological and
neurodegenerative diseases through modification of certain biochemical processes
in cells. This patent expires on July 25, 2014. This second patent also
incorporates certain technology developed under the auspices of, and belonging
to, McMaster University in Ontario, Canada.
On September 1, 1998, Dr. Glasky was issued a third United States patent
(No. 5,801,184) which relates to the control of neural activity and the
treatment of neurological disorders by controllably inducing the in vivo genetic
expression of naturally occurring protein molecules including neurotrophic
factors. This patent expires on September 1, 2015. This third patent also
incorporates certain technology developed under the auspices of, and belonging
to, McMaster University in Ontario, Canada.
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On February 22, 2000, a fourth United States patent (No. 6,027,936) was
issued to Dr. Glasky which covers the use of certain purine-containing compounds
to induce the production of naturally occurring neural growth factors for the
purpose of stimulating neuritogenesis, or sprouting of nerve cells. This patent
expires on July 25, 2014.
All four patents have been assigned to NeoTherapeutics by Dr. Glasky. In
connection with these assignments, Dr. Glasky has been granted a royalty of two
percent of all revenues derived by NeoTherapeutics from the use and sale by us
of any products which are covered by any of the aforementioned patents or any
subsequent derivative patents, in each case for the life of the patent. However,
Dr. Glasky will not receive any royalties with respect to sales of products
which utilize patent rights licensed to us by McMaster University. In the event
NeoTherapeutics terminates Dr. Glasky's employment without cause, the royalty
rate shall be increased to five percent, and in the event Dr. Glasky dies, his
estate or family shall be entitled to continue to receive royalties at the rate
of two percent.
With respect to the second United States patent, we have entered into a
license agreement whereby McMaster University has licensed to NeoTherapeutics
all patent rights belonging to McMaster University contained in such patent.
This agreement calls for minimum payments of $25,000 per year to McMaster
University, with the first payment due in July of 1997, and for us to pay to
McMaster University a royalty of five percent of the net sales of all products
sold by NeoTherapeutics which incorporate the patent rights licensed to us by
McMaster University. The third and fourth U.S. patents are covered under this
agreement.
In addition to a number of foreign patents which have been granted
corresponding to the first and third United States patents, we also currently
have eight additional United States patent applications and a number of
corresponding foreign patent applications on file. There can be no assurance,
however, that the scope of the coverage claimed in our patent applications will
not be significantly reduced prior to a patent being issued.
The patent positions of pharmaceutical and drug development companies
are generally uncertain and involve complex legal and factual issues. There can
be no assurance that third parties will not assert patent or other intellectual
property infringement claims against us with respect to our products or
technology or other matters. There may be third-party patents and other
intellectual property relevant to our products and technology of which we are
not aware.
Patent litigation is becoming more common in the biopharmaceutical
industry. Litigation may be necessary to defend against or assert claims of
infringement, to enforce our patents, to protect trade secrets we own or to
determine the scope and validity of proprietary rights of third parties.
Although no third party has asserted that we are infringing upon their patent
rights or other intellectual property, there can be no assurance that litigation
asserting such claims will not be initiated, that we would prevail in any such
litigation or that we would be able to obtain any necessary licenses on
reasonable terms, if at all. Any such claims against us, whether meritorious or
not, as well as claims initiated by us against third parties, can be time
consuming and expensive to defend or prosecute and to resolve. If our
competitors prepare and file patent applications in the United States that claim
technology we also claim, we may have to participate in interference proceedings
declared by the Patent and Trademark Office to determine priority of invention,
which could result in substantial costs, even if we ultimately prevailed. The
results of such proceedings are highly unpredictable and, as a result of such
proceedings, we may have to obtain licenses in order to continue to conduct
clinical trials, manufacture or market certain of our products. No assurance can
be made that we will be able to obtain any such licenses on favorable terms, if
at all.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. We protect such information with confidentiality
agreements with our employees and consultants and with corporate partners and/or
collaborators as such relationships are formed. The agreements provide that all
confidential information developed or made known to an individual during the
course of the employment or consulting relationship shall be kept confidential
and not disclosed to third parties except in specified circumstances. Agreements
with employees provide that all inventions conceived by the individual while
employed by NeoTherapeutics are our exclusive property. We cannot guarantee that
these agreements will be honored, that we will have adequate remedies for
breach, or that our trade secrets will not otherwise become known or be
independently discovered by competitors.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including a
number of large pharmaceutical companies as well as several specialized
biotechnology companies, are engaged in activities similar to that of
NeoTherapeutics. Our competitors include Amgen, Inc., Bayer AG, Eli Lilly and
Co., Novartis, Bristol-Myers Squibb Company, Glaxo Wellcome PLC, Regeneron
Pharmaceuticals, Inc., Vertex Pharmaceuticals, Inc., Guilford Pharmaceuticals,
Inc., Cephalon, Inc., Warner-Lambert Co., Aventis and Pfizer, Inc., among
others. In addition, colleges, universities, governmental agencies and other
public and private research institutions will continue to conduct research and
are becoming more active in seeking patent protection and licensing arrangements
to collect license fees, milestone payments and royalties in exchange for
license rights to technologies that
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they have developed, some of which may directly compete with our technologies.
These companies and institutions also compete with us in recruiting highly
qualified scientific personnel. Many of our competitors have substantially
greater financial, research and development, human and other resources than we
do. Furthermore, large pharmaceutical companies have significantly more
experience than we do in preclinical testing, human clinical trials and
regulatory approval procedures.
Although we have begun to conduct clinical trials with respect to
Neotrofin(TM), we have not conducted clinical trials with respect to any of our
other compounds under development nor have we sought the approval of the FDA for
any product based on such compounds. Furthermore, if we are permitted to
commence commercial sales of products based on compounds we develop, including
Neotrofin(TM), and decide to manufacture and sell such products ourselves, then
we will also be competing with respect to manufacturing efficiency and marketing
capabilities, which are areas in which we have no prior experience.
Any product for which we obtain FDA approval must also compete for
market acceptance and market share. A number of drugs intended for the treatment
of Alzheimer's disease, memory loss associated with aging, stroke and other
neurodegenerative diseases and disorders are on the market or in the later
stages of clinical testing. Two drugs are currently approved for the treatment
of Alzheimer's disease in the United States and both are cholinesterase
inhibitors: Cognex(R) (tacrine), formerly marketed by Warner-Lambert Co. and
CoCensys, Inc., and Aricept(R) (donepezil), marketed by Pfizer, Inc. and Eisai
Co., Ltd.
Certain technologies under development by other pharmaceutical companies
could result in treatments for Alzheimer's disease and other diseases and
disorders for which we are developing our own treatments. Several other
companies are engaged in research and development of compounds which use
neurotrophic factors in a manner similar to that of our compounds. In the event
that one or more of these programs are successful, the market for our products
could be reduced or eliminated.
We expect technological developments in the field of
neuropsychopharmacology to continue to occur at a rapid rate and expect
competition will remain intense as advances continue to be made. Although we
believe, based on the preliminary preclinical test results involving certain of
our compounds, that we will be able to continue to compete in the discovery and
early clinical development of compounds for neurological and psychiatric
disorders, we cannot guarantee that we will be able to do so. At present, we do
not have sufficient resources to compete with major pharmaceutical companies in
the areas of later-stage clinical testing, manufacturing and marketing.
RISK FACTORS
OUR LOSSES WILL CONTINUE TO INCREASE AS WE EXPAND OUR DEVELOPMENT EFFORTS, AND
OUR EFFORTS MAY NEVER RESULT IN PROFITABILITY.
Our cumulative losses during the period from our inception in 1987
through December 31, 1999 were approximately $49.8 million, almost all of which
consisted of research and development and general and administrative expenses.
We lost approximately $6.2 million in 1997, $11.6 million in 1998, and $26.0
million in 1999. We expect our losses to increase in the future as we expand our
clinical trials and increase our research and development activities. We
currently do not sell any products and we may never achieve significant revenues
or become profitable. Even if we eventually generate revenues from sales, we
nevertheless expect to incur significant operating losses over the next several
years.
OUR POTENTIAL DRUG PRODUCTS ARE IN AN EARLY STAGE OF CLINICAL AND PRECLINICAL
DEVELOPMENT AND MAY NOT PROVE SAFE OR EFFECTIVE ENOUGH TO OBTAIN REGULATORY
APPROVAL TO SELL ANY OF THEM.
We currently are testing our first potential drug product in human
clinical trials. Our other proposed products are in preclinical development. We
cannot be certain that our proposed products will prove to be safe or effective
in treating disorders of the central nervous system or any other diseases. All
of our potential drugs will require additional research and development, testing
and regulatory clearances before we can sell them. We do not expect to have any
products commercially available for at least two years.
IF WE ARE UNABLE TO OBTAIN SUBSTANTIAL ADDITIONAL FUNDING ON ACCEPTABLE TERMS,
WE MAY HAVE TO DELAY OR ELIMINATE ONE OR MORE OF OUR DEVELOPMENT PROGRAMS.
We currently are spending cash at a rate in excess of $3.0 million per
month, and we expect this rate of spending to continue for at least the next 12
months. We believe that our existing cash and capital resources, including the
equity and debt financings obtained of approximately $8 million in February 2000
and $10 million in April 2000, plus the investors' commitment to fund up to an
additional $20 million, subject to certain restrictions, in the form of either
convertible debentures and/or from the sale of stock issued in connection with
the exercise of redeemable warrants, will satisfy our current funding
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requirements for at least the next twelve months.
We expect that we will need a minimum of $90 million to complete
development and clinical trials of Neotrofin(TM), our lead drug candidate,
before we will be able to submit it to the Food and Drug Administration for
approval for commercial sale. Our capital requirements will depend on many
factors, including:
- the progress of preclinical and clinical testing;
- the time and cost involved in obtaining regulatory approvals;
and
- our ability to establish collaborative and other arrangements
with third parties, such as licensing and manufacturing
agreements.
We expect to seek additional funding through public or private financings or
collaborative or other arrangements with third parties. We may not obtain
additional funds on acceptable terms, if at all. If adequate funds are not
available, we will have to delay or eliminate one or more of our development
programs.
COMPETITION FOR ALZHEIMER'S PATIENTS IN CONDUCTING CLINICAL TRIALS MAY DELAY
COMPLETION OF CLINICAL TESTING OF OUR DRUG CANDIDATES AND STRAIN OUR LIMITED
FINANCIAL RESOURCES.
Many pharmaceutical companies are conducting clinical trials in patients
with Alzheimer's disease. As a result, we must compete with them for clinical
sites, physicians and the limited number of patients with Alzheimer's disease
who fulfill the stringent requirements for participation in clinical trials.
This competition may increase the costs of our clinical trials and delay the
introduction of our potential products.
THE LOSS OF KEY RESEARCHERS OR MANAGERS COULD HINDER OUR DRUG DEVELOPMENT
PROCESS SIGNIFICANTLY AND MIGHT CAUSE OUR BUSINESS TO FAIL.
Our success depends upon the contributions of our key management and
scientific personnel, especially Dr. Alvin Glasky, our Chief Executive Officer
and Chief Scientific Officer. Our loss of the services of Dr. Glasky or any
other key personnel could delay or preclude us from achieving our business
objectives. Although we currently have key-man life insurance on Dr. Alvin
Glasky in the face amount of $2 million, the loss of Dr. Glasky's services would
damage our research and development efforts substantially.
WE MAY NOT HAVE THE RESOURCES TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS ADEQUATELY.
We actively pursue patent protection for our proprietary products and
technologies. We hold four U.S. patents and currently have nine U.S. patent
applications pending. In addition, we have numerous foreign patents issued and
patent applications pending corresponding to our U.S. patents. However, our
patents may not protect us against our competitors. We may have to file suit to
protect our patents or to defend our use of our patents against infringement
claims brought by others. Because we have limited cash resources, we may not be
able to afford to pursue or defend against litigation in order to protect our
patent rights.
WE ARE A SMALL COMPANY RELATIVE TO OUR PRINCIPAL COMPETITORS AND OUR LIMITED
FINANCIAL AND RESEARCH RESOURCES MAY LIMIT OUR ABILITY TO DEVELOP AND MARKET NEW
PRODUCTS.
Many companies, both public and private, including well-known
pharmaceutical companies, are developing products to treat Alzheimer's disease.
Most of these companies have substantially greater financial, research and
development, manufacturing and marketing experience and resources than we do. As
a result, our competitors may develop additional drugs to treat Alzheimer's
disease sooner, and that are more effective or less costly than any drug we may
develop.
THERE ARE A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE
SALE IN THE PUBLIC MARKET. THE SALE OF THESE SHARES COULD CAUSE THE MARKET PRICE
OF OUR COMMON STOCK TO FALL.
There are 9,534,103 shares of our common outstanding as of March 22,
2000. In addition, security holders held options and warrants as of March 22,
2000 which, if exercised, would obligate us to issue up to an additional
4,863,237 shares of common stock. A substantial number of those shares, when we
issue them upon exercise, will be available for immediate resale in the public
market. In addition, we have the ability to sell up to approximately 637,000
additional shares of our common stock to a private investor that will be
eligible for immediate resale in the public market. Furthermore, with respect to
the convertible debenture and warrant financing that closed in April 2000,
approximately 600,000 shares will become eligible for resale upon conversion of
the convertible debenture, assuming the price of our common stock is
approximately $17 per share, which number of shares would increase if our stock
price were less. In addition, shares issued upon exercise of up to 4 million
shares which are issuable upon exercise of redeemable warrants will be eligible
for immediate resale in the public market. The market price of our common stock
could fall as a result of such resales.
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OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SUBSTANTIAL PERCENTAGE OF OUR COMMON
STOCK. THEIR OWNERSHIP COULD ALLOW THEM TO EXERCISE SIGNIFICANT CONTROL OVER
CORPORATE DECISIONS AND TO IMPLEMENT CORPORATE ACTS THAT ARE NOT IN THE BEST
INTERESTS OF OUR STOCKHOLDERS AS A GROUP.
Our directors and executive officers beneficially own approximately 18%
of our outstanding common stock as of March 22, 2000. Two of our stockholders,
Montrose Investments Ltd. and Westover Investments L.P., beneficially own
460,582 shares, or approximately 4.8%, and Strong River Investments, Inc.
beneficially own 401,969 shares, or approximately 4.2% of our outstanding common
stock as of March 26, 2000. Montrose Investments Ltd., Westover Investments L.P.
and Strong River Investments Inc. have agreed that they will vote any and all
shares of our common stock that they own as recommended by our board of
directors in any meeting of our stockholders. Therefore, our directors and
executive officers, if they acted together, could exert substantial control over
matters requiring approval by our stockholders. These matters would include the
election of directors and the approval of mergers or other business combination
transactions. This concentration of ownership and voting control may discourage
or prevent someone from acquiring our business.
DILUTIVE AND OTHER EFFECTS OF FUTURE EQUITY ISSUANCES
If we issue equity securities, such issuances may have a dilutive impact
on our other stockholders. Additionally, such issuances would cause our net
income (loss) per share to decrease (increase) in future periods. As a result,
the market price of our common stock could drop. In addition, if we issue common
stock under our Equity Line Agreement, it will be issued at a discount to its
then-prevailing market price. These discounted sales could cause the market
price of our common stock to drop.
RISK OF PRODUCT LIABILITY
Although we currently carry product liability insurance, it is possible
that the amounts of such coverage will be insufficient to protect us from future
claims. Further, we cannot be certain that we will be able to obtain or maintain
additional insurance on acceptable terms for our clinical and commercial
activities or that such additional insurance would be sufficient to cover any
potential product liability claim or recall. Failure to maintain sufficient
insurance coverage could have a material adverse effect on our business and
results of operations.
USE OF HAZARDOUS MATERIALS
Our research and development efforts involve the use of hazardous
materials. We are subject to federal, state and local laws and regulations
governing the storage, use and disposal of such materials and certain waste
products. We believe that our safety procedures for handling and disposing of
such materials comply with the standards prescribed by federal, state and local
regulations. However, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. If there was an accident, we could
be held liable for any damages that result. Such liability could exceed our
resources. We may incur substantially increased costs to comply with
environmental regulations if we develop our own commercial manufacturing
facility.
VOLATILITY OF STOCK PRICE
The stock market from time to time experiences significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may cause the market price
of our common stock to drop. In addition, the market price of our common stock
is highly volatile. Factors that may cause the market price of our common stock
to drop include fluctuations in our results of operations, timing and
announcements of our technological innovations or new products or those of our
competitors, FDA and foreign regulatory actions, developments with respect to
patents and proprietary rights, public concern as to the safety of products
developed by us or others, changes in health care policy in the United States
and in foreign countries, changes in stock market analyst recommendations
regarding our common stock, the pharmaceutical industry generally and general
market conditions. In addition, the market price of our common stock may drop if
our results of operations fail to meet the expectations of stock market analysts
and investors.
EFFECT OF CERTAIN CHARTER AND BYLAWS PROVISIONS
Certain provisions of our Certificate of Incorporation and Bylaws may
make it more difficult for someone to acquire control of us. These provisions
may make it more difficult for stockholders to take certain corporate actions
and could delay or prevent someone from acquiring our business. These provisions
could limit the price that certain investors might be willing to pay for shares
of our common stock.
ITEM 2. PROPERTIES
During June 1997, we relocated our research and development and
corporate administrative offices to a new
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34,000 square foot facility constructed for us in Irvine, California. The
facility is occupied under a non-cancelable lease for seven years and contains
two five-year options to renew. The base monthly rent for the Irvine facility is
currently $40,435, which amount is subject to minimum cost of living increases
each July, plus taxes, insurance and common area maintenance. We also maintain a
small administrative office in Zurich, Switzerland on an expense-sharing basis.
ITEM 3. LEGAL PROCEEDINGS
In December 1998, we were served with a lawsuit initiated by four of our
former employees. The lawsuit, which was filed in the Superior Court of Orange
County, California, also named Dr. Alvin J. Glasky, the Company's founder and
Chief Executive Officer, as a defendant. The lawsuit arises from a dispute
concerning the termination, as of December 31, 1997, of agreements entered into
as of June 1990 and December 1993 between the Company and each of the former
employees, pursuant to which the employees agreed to accept an aggregate of
278,590 shares of our common stock, subject to forfeiture provisions, in
exchange for the cancellation of indebtedness owed to them by the Company
arising from unpaid compensation and expenses in the total amount of $458,411.
Pursuant to these agreements, the employees were not entitled to keep the shares
unless we achieved certain revenue goals by a specified date, as determined by
our independent auditors in accordance with generally accepted accounting
principles. The revenue goals were not met and we demanded that the forfeited
shares be returned pursuant to the terms of the agreements. In the lawsuit the
plaintiffs alleged, among other things, that our cumulative revenues of the
Company were met and that the defendants fraudulently induced the plaintiffs
into entering into the agreements and the subsequent amendments to the
agreements. The lawsuit asked for damages in excess of $4,000,000 or, in the
alternative, that the forfeiture restrictions be removed and the plaintiffs be
allowed to keep their shares of common stock. The plaintiffs also sought
punitive damages and reimbursement of attorneys' fees and costs. In March 1999,
we filed a cross-complaint against the plaintiffs to seek a determination that
the plaintiffs' shares have in fact been forfeited, and to obtain a court order
requiring the plaintiffs to return their shares to the Company for cancellation.
At the same time that the plaintiffs entered into their agreement with the
Company in 1990 and 1993, Dr. Alvin J. Glasky and his wife, who were then and
are now our employees, also entered into agreements with us that were identical
to those entered into by the plaintiffs, pursuant to which Dr. and Mrs. Glasky
received an aggregate of 400,246 shares of common stock subject to identical
forfeiture provisions, in exchange for the cancellation of indebtedness owed to
them by the Company arising from unpaid compensation and expenses in the total
amount of $755,531. Dr. and Mrs. Glasky entered into an agreement with the
Company on December 21, 1998, pursuant to which they agreed to surrender for
cancellation the same proportion of their restricted shares as the plaintiffs
are required to surrender based on the final resolution of the lawsuit. Until we
settled this, we accounted for all of these shares, which we deemed to be
forfeited, as issued and outstanding.
On December 15, 1999, we entered into a settlement agreement with the
plaintiffs. The agreement provided that each of the parties pay their own legal
fees and that the plaintiffs forfeit 51%, or 142,081 of their shares of common
stock. In addition, the plaintiffs received three-year warrants to purchase an
aggregate of 6,826 shares of common stock at $13.00 per share. Pursuant to the
settlement terms of the litigation and in accordance with the terms of their
agreement with us, Dr. and Mrs. Glasky forfeited 204,125 shares of their common
stock and received identical warrants to purchase 9,806 shares of common stock.
Accordingly, of the 678,836 total number of shares in dispute, we cancelled
346,206 shares and retained as outstanding 332,630 shares of common stock. We
recorded a charge to operations in the fourth quarter of 1999 in the net amount
of $2,458,359, representing the increase from 1995, the date of the previous
reissuance of shares of common stock under this transaction, in the market value
of the shares that remained outstanding ($2,357,005) plus the value of the
warrants issued ($101,355).
We are involved in several matters of litigation and threatened
litigation that we consider normal to our business. It is our policy to accrue
for amounts related to these legal matters if it is probable that a liability
has been incurred and an amount is reasonably determinable. Although it is
impossible to predict with any certainty the ultimate outcome of any such
litigation, in the opinion of management, such litigation and threatened
litigation currently pending will not materially affect our consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
As of March 22, 2000, there were 9,534,103 shares of common stock
outstanding held of record by 316 stockholders.
MARKET FOR SECURITIES
The Company's common stock is currently listed on the Nasdaq National
Market and trades under the symbol "NEOT." For each of the calendar quarters
indicated, the high and low trades of the Company's common stock, as reported by
NASDAQ, were as follows:
High Low
------- --------
Year Ended December 31, 1998:
-----------------------------
Quarter Ended
-------------
March 31, 1998 $10-1/2 $8-1/8
June 30, 1998 $21 $6-7/8
September 30, 1998 $14-1/2 $5-5/8
December 31, 1998 $14-1/4 $4-11/16
Year Ended December 31, 1999:
-----------------------------
Quarter Ended
-------------
March 31, 1999 $13-3/4 $7-3/8
June 30, 1999 $14-1/2 $8
September 30, 1999 $16-1/4 $9-1/8
December 31, 1999 $14-1/2 $10-3/8
The foregoing bid quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
DIVIDENDS
We have never paid cash dividends on our common stock and we do not
intend to pay dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions during the quarter ended
December 31, 1999, involving sales of our securities that were not registered
under the Securities Act of 1933 (the "Securities Act").
On November 19, 1999, we sold 845,594 shares of common stock at $11.83
per share for a total of $10 million to two private investors and five-year
warrants to purchase 126,839 shares of common stock at $14.24 per share. On
March 22, 2000, pursuant to a reset formula contained in the agreement, we
issued to the investors an additional 43,383 shares. The investors agreed to
waive their rights to any future shares of common stock under the agreement as
consideration for entering into the financing agreement which closed on March
30, 2000. On December 10, 1999, we sold 101,574 shares of common stock at $9.845
per share for a total of $1,000,000 to Kingsbridge Capital Limited
("Kingsbridge") pursuant to a Private Equity Line of Credit Agreement entered
into between the Company and Kingsbridge on March 27, 1998.
On February 25, 2000 we sold to two private investors 520,324 shares of
common stock for $8.0 million. The investors also received five-year warrants to
purchase 104,000 shares of common stock at an exercise price of $21.00 per
share.
On April 6, 2000, we entered into a financing transaction with two
private investor groups who have previously invested with the Company. The
transaction consists of an initial tranche at the closing of $10 million in 5%
subordinated convertible debentures due April 6, 2005. In addition, the
investors have agreed to fund two future tranches of up to $10 million each
(subject to certain conditions) and redeemable warrants to purchase up to 4
million shares of common stock over a two-year period (the "B" warrants). The
"B" warrants can be redeemed in part by the Company as frequently as several
times per week and when called for redemption can be exercised by the investors
at 97% of the per share closing market price (i.e. a discount of 3%) and are
exercisable at the sole option of the investors at
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the price of $33.75 per share. The number of "B" warrants that are exercisable
at each redemption are subject to average daily volume restrictions.
The debentures are convertible into common stock at $20.25 per share for
the first 90 days after the closing. Thereafter, they are convertible at the
lesser of $20.25 per share or 101% of the market price of the common stock as
determined under the agreement. The two additional tranches of convertible
debentures of up to $10 million each, 5 and 10 months after the closing, are at
the option of either the Company or the investor. If at the option of the
Company, the tranches are under similar terms and conditions as the initial
tranche. If at the option of the investor, the two tranches are at the fixed
conversion price of $20 per share. The amount available under the two additional
tranches will be reduced pro-rata to the extent that the investors have
exercised or the Company has redeemed the "B" warrants to purchase common stock.
The investors also received five-year warrants to purchase up to 265,000 shares
of common stock (the "A" warrants). The "A" warrants are exercisable at $19.672
per share.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of the Company.
Certain of this financial data has been derived from the Company's audited
financial statements included in this Annual Report on Form 10-K and should be
read in conjunction with those financial statements and accompanying notes and
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operation."
Years Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues, from grants $ -- $ -- $ -- $ -- $ 125
Operating expenses:
Research and development 20,058 8,542 4,508 615 306
General and administrative 3,465 3,123 2,342 660 667
Settlement of litigation 2,458 -- -- -- --
-------- -------- -------- -------- --------
Loss from operations (25,981) (11,665) (6,850) (1,275) (848)
Other income (expense) (9) 60 688 236 (47)
-------- -------- -------- -------- --------
Net loss $(25,990) $(11,605) $ (6,162) $ (1,039) $ (895)
======== ======== ======== ======== ========
Basic and diluted loss per share $ (3.68) $ (2.07) $ (1.14) $ (0.32) $ (0.36)
======== ======== ======== ======== ========
BALANCE SHEET DATA AT DECEMBER 31:
Cash, cash equivalents and
Marketable securities $ 9,681 $ 2,867 $ 9,132 $ 17,444 $ 1
Property and equipment, net 3,161 3,252 3,475 133 9
Total assets 13,174 6,826 13,198 17,979 11
Long-term debt 637 1,126 177 -- 558
Total stockholders' equity (deficit) 7,705 3,290 10,543 16,622 (1,253)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
From our inception in June 1987 through December 31, 1999, we devoted
our resources primarily to fund research and development, and incurred a
cumulative net loss of approximately $49.8 million. During this period, we had
only limited revenues from grants, and had no revenues from the sale of products
or other sources. We expect our operating expenses to increase over the next
several years as we expand our research and development and commercialization
activities and operations. We expect to incur significant additional operating
losses for at least the next several years unless such operating losses are
offset, if at all, by licensing revenues under strategic alliances with larger
pharmaceutical companies which we are currently seeking. To obtain working
capital, we entered into an equity agreement with a private investor in March
1998 which allows us to sell to the investor over a two and one-half year
period, at our sole discretion, but subject to certain restrictions, up to $15
million of our common stock. At March 22, 2000, we had $7.5 million
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remaining on the Line of Equity. In January 1999, we sold $4 million of
preferred stock to private investors, which had all been converted into 347,334
shares of common stock by December 31, 1999. In May 1999 we sold $4 million of
common stock to private investors. In November 1999 we sold $10 million of
common stock to private investors. In July 1999, we sold, in a secondary public
offering, 1,150,000 shares of common stock for net proceeds of $8.7 million. See
- - Liquidity and Capital Resources.
Year ended December 31, 1999 compared to Year ended December 31, 1998
We had no revenues for the twelve-month periods ended December 31, 1999
or 1998.
Research and development expenses for the twelve months ended December
31, 1999 increased by approximately $11.5 million, or 135% over the previous
year. This increase was due primarily to the costs and expenses associated with
the conduct of clinical and preclinical trials as we accelerated our program to
commercialize our lead compound, Neotrofin(TM). These costs and expenses were
due primarily to the increased number and length of our clinical trials and
manufacturing and formulation of drug compound, all of which are conducted by
outside organizations. Internally, research and development expenses increased
in the categories of salaries due to additional personnel and salary increases,
research grants, professional fees due to increased patent activity, rent (due
principally to the re-allocation from general and administrative expense as a
result of research and development utilizing a higher proportion of our
facility) and depreciation of property and equipment.
General and administrative expenses increased approximately $0.3
million, or 11%, for the year ended December 31, 1999, over the year ended
December 31, 1998. General and administrative expenses for 1999 reflect
increased expenses related to increases in salaries due principally to added
personnel, investor relations, regulatory agency fees and licenses and printing,
offset by the re-allocation of rent to research and development.
We expect the above mentioned operating expenses to continue to increase
in future periods due to expected increases in both research and development,
administrative support and sales and marketing activities associated with
attempting to bring one or more of our products to market.
In 1999 the Company entered into a non-recurring, non-cash settlement of
a matter of litigation and recorded a charge to general and administrative
expense of $2,458,359.
Year ended December 31, 1998, compared to Year ended December 31, 1997
We had no revenues for the twelve-month periods ended December 31, 1998
or 1997.
Research and development expenses for the twelve months ended December
31, 1998, increased by approximately $4.0 million, or 90% over the previous
year. This increase was due primarily to the costs and expenses associated with
the conduct of clinical and preclinical trials as we accelerated our program to
commercialize our lead compound, Neotrofin(TM). These costs and expenses were
primarily in the categories of salaries due to additional personnel, rent,
contract manufacturing and formulation of drug compounds, outside preclinical
testing and the increased number and length of clinical trials.
General and administrative expenses increased approximately $0.8
million, or 33%, for the year ended December 31, 1998, over the year ended
December 31, 1997. General and administrative expenses for 1998 reflect
increased expenses related to additional personnel, insurance, professional and
consulting fees, commissions, facilities rent and travel. We expect general and
administrative expenses to continue to increase in future periods due to
expected increases in both research and development support and sales and
marketing activities associated with attempting to bring one or more of our
products to market.
Interest income decreased by approximately $0.5 million, or 68%, in 1998
over 1997 due to increased use of cash to fund current operations.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 31, 1999, we financed our operations
primarily through grants, sales of securities, borrowings and deferred payment
of salaries and other expenses from related parties. During September and
October 1996, we sold a total of 2,700,000 units of our common stock and
attached warrants to the public. Each unit consisted of one share of common
stock and one warrant to purchase one share of common stock. We realized net
cash proceeds of approximately $18.2 million from the sale.
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19
On March 27, 1998, we executed an agreement with a private investor (the
"Equity Line Agreement") which provides for us, at our sole discretion, subject
to certain restrictions, to sell ("put") to the investor up to $15 million of
our common stock. The Equity Line Agreement expires in February 2001 and, among
other things, provides for minimum and maximum puts ranging from $250,000 to
$2.0 million, depending on our stock price and trading volume. Puts cannot occur
more frequently than every 15 days, and are subject to a discount of 12% from
the then current average market price of our common stock, as determined under
the Equity Line Agreement. In addition, we issued to the investor five-year
warrants to purchase 25,000 shares of common stock at $11.62 per share. Under
the Equity Line Agreement, we received proceeds of approximately $3.55 million
from sales of 506,049 shares of common stock in 1998 and $1.95 million from
sales of 211,393 shares of common stock in 1999. We received an additional $2.0
million in January 2000 from the sale of 186,961 shares of common stock and, as
of March 22, 2000, an additional $7.5 million remains available under the Equity
Line Agreement.
We also entered into the following financing transactions from January
1, 1999 through April 11, 2000:
(1) On January 29, 1999, we sold to two private investors $4 million
of preferred stock, all of which was converted during 1999 into
347,334 shares of common stock at an average price of $11.52 per
share. The investors also received five-year warrants to
purchase 75,000 shares of common stock at an exercise price of
$12.98 per share. We chose not to exercise an option to acquire
an additional $2.0 million under similar terms. During the
period the preferred stock was outstanding, we paid dividends of
approximately $136,000 to the investors;
(2) On May 31, 1999, we sold to a group of private investors 400,000
shares of common stock for approximately $4.0 million. The
investors also received five-year warrants to purchase 80,000
shares of common stock at an exercise price of $15 per share;
(3) On July 29, 1999, we completed a secondary public offering and
sold 1,150,000 shares of common stock, realizing approximately
$8.7 million in net cash proceeds from the sale;
(4) On November 19, 1999, we sold to two private investors, one of
whom had invested in the January 1999 preferred stock
transaction, 845,594 shares of common stock for approximately
$10.0 million, and five-year warrants to purchase 126,839 shares
of common stock at $14.24 per share. On March 22, 2000, we
issued to the investors an additional 43,383 shares of common
stock for no further consideration, pursuant to a reset formula
contained in the agreement;
(5) On February 25, 2000 we sold to two private investors 520,324
shares of common stock for $8.0 million. The investors also
received five-year warrants to purchase 104,000 shares of common
stock at an exercise price of $21.00 per share; and
(6) On April 6, 2000, we entered into a financing transaction with
two private investor groups who have previously invested with
us. The transaction consists of (a) $10 million in 5%
subordinated convertible debentures due April 6, 2005, (b)
redeemable warrants to purchase up to 4 million shares of common
stock over a two-year period (the "B" warrants) and (c)
five-year warrants to purchase from 115,000 shares up to 265,000
shares of our common stock at an exercise price of $19.67 per
share. The "B" warrants can be redeemed in part by us as
frequently as several times per week and when called for
redemption can be exercised by the investors at 97% of the per
share closing market price (i.e. a discount of 3%) and are
exercisable at the sole option of the investors at the price of
$33.75 per share. The number of "B" warrants that are
exercisable at each redemption are subject to average daily
volume restrictions. To the extent the "B" warrants have not
been exercised, the investors have committed to two additional
tranches of $10 million each of 5% subordinated convertible
debentures, subject to certain restrictions, including the
following:
(i) The investors will limit their investment to 10% of our
market capitalization at the time of each additional
tranche, not to exceed $10,000,000;
(ii) The shares underlying the April 6, 2000 transaction and
the additional tranches must be successfully registered
with the SEC; and
(iii) We must maintain the continued listing requirements of
the Nasdaq Stock Market.
In the event any of these conditions cannot be met and the additional
tranches (or other financing alternatives) are not available, we may be
required to scale-back or cancel certain of our clinical development
activities.
The debentures are convertible into common stock at $20.25 per share for
the first 90 days after the closing. Thereafter, they are convertible at
the lesser of $20.25 per share or 101% of the market price of the common
stock as determined under the agreement. The two additional tranches of
convertible debentures of up to $10 million each, 5 and 10 months after
the closing, are at the option of either us or the investor. If at the
option
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of us, the tranches are under similar terms and conditions as the
initial tranche. If at the option of the investor, the two tranches are
at the fixed conversion price of $20 per share. The amount available
under the two additional tranches will be reduced pro-rata to the extent
that the investors have exercised or we have redeemed the "B" warrants
to purchase common stock.
At December 31, 1999, we had working capital of approximately $5.2
million which included cash and equivalents of approximately $6.7 million and
short-term investments of approximately $3.0 million. In comparison, at December
31, 1998, we had working capital of approximately $1.0 million which included
cash and cash equivalents of approximately $1.1 million and short-term
investments of approximately $1.8 million. The $4.2 million increase in working
capital is attributable primarily to the net proceeds of equity transactions
entered into during 1999, aggregating approximately $25.8 million, less the
funding of the $26.0 million operating loss for the year ended December 31,
1999, offset in part by the $2.5 million non-cash portion of such loss resulting
from the settlement of litigation. Through December 31, 1999, we spent
(principally in 1997) approximately $4.0 million for capital equipment and
leasehold improvements of which $1.5 million was borrowed from a finance company
in July 1998 pursuant to a $2 million equipment line of credit agreement. We
have pledged substantially all of our tangible assets as collateral for this
borrowing. We have also granted to the finance company a warrant to purchase up
to 13,459 shares of our common stock at $7.43 a share. In 2000, we intend to
spend approximately $1.5 million for additional equipment, including equipment
for our new genomics-based subsidiary, as we further expand our research and
development laboratories. We expect to partially finance these capital equipment
acquisitions by utilizing our existing equipment line of credit agreement.
Effective June 1997 we entered into a non-cancelable long-term operating
lease with a major developer. The initial lease term is seven years with two
renewal options for five years each at the then fair market value rate. Minimum
rental commitments under this lease for the four and one-half year period from
January 2000 through June 2004 are approximately $500,500 in 2000 and 2001,
$538,100 in 2002, $554,200 in 2003 and $285,400 in 2004. In addition to rentals,
we are obligated under the lease for real property taxes, insurance and
maintenance.
We have entered into a series of agreements with a contract research
organization to conduct clinical trials in the United States and other countries
involving an aggregate of approximately 2,500 patients. The agreements are all
cancelable by either party upon thirty days notice and we expect to spend an
aggregate of approximately $26 million in 2000 and $12 million in 2001 for these
trials. Through December 31, 1999, we expended approximately $13 million in
connection with these clinical trials. We have also committed to spend
approximately $874,000 in 2000 and $20,000 in 2001 to a number of universities
to conduct general scientific research programs and to provide for Fellowship
Grants. We have also committed to spend a minimum of $2.0 million over three
years to fund our functional genomics joint venture with the University of
California, Irvine. Our agreement with the University is cancelable upon thirty
days notice by either party.
Since our inception, we have been in the development stage and therefore
devote substantially all of our efforts to research and development. We have
incurred cumulative losses of approximately $49.8 million through December 31,
1999, and expect to incur substantial losses over the next several years. We
received approximately $18 million in new funding in early 2000. In addition, in
April 2000, we received commitments for additional funding of approximately $20
million, contingent on certain terms as defined in the agreement (see Note 14).
Our future capital requirements and availability of capital will depend upon
many factors, including continued scientific progress in research and
development programs, the scope and results of preclinical studies and clinical
trials, the time and costs involved in obtaining regulatory approvals, the cost
involved in filing, prosecuting and enforcing patent claims, competing
technological developments, the cost of manufacturing scale-up, the cost of
commercialization activities and other factors which may not be within our
control. Assuming that the aforementioned additional funding is available, we
believe that our existing capital resources will be adequate to fund our capital
needs for at least 12 months of operations. We also believe that if these funds
are not available, we may be required to scale-back or possibly cancel certain
clinical trial activities or obtain additional financing elsewhere. Ultimately,
we will require substantial additional funds in order to complete the research
and development activities currently contemplated and to commercialize our
proposed products. If we are successful in obtaining additional funding, our
existing stockholders could experience substantial dilution to their shares of
stock.
Without additional funding, we may be required to delay, reduce the
scope of or eliminate one or more of our research and development projects, or
obtain funds through arrangements with collaborative partners or others which
may require us to relinquish rights to certain technologies, product candidates
or products that we otherwise would seek to develop or commercialize on our own,
and which could be on terms unfavorable to us.
YEAR 2000 READINESS DISCLOSURE
Through March 22, 2000, we have not experienced any problems related to
the Year 2000 Issue which have materially impacted our operations or operating
results. Accordingly, we believe that our own internal systems are, at the
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present time, substantially compliant based upon internal systems tests,
currently available information and reasonable assurance by our equipment and
software vendors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
We are exposed to certain market risks associated with interest rate
fluctuations on our marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. We are not subject to material risks from
currency rate fluctuations, nor do we utilize hedging contracts or similar
instruments.
Our exposure to interest rate risk arises from financial instruments
entered into in the normal course of business. Certain of our financial
instruments are fixed rate, short-term investments in government and corporate
notes and bonds, which are available for sale (and have been marked to market in
the accompanying financial statements). Changes in interest rates generally
affect the fair value of these investments, however, because these financial
instruments are considered "available for sale," all such changes are reflected
in the financial statements in the period affected.
Our borrowings bear interest at fixed annual rates. Changes in interest
rates generally affect the fair value of such debt, but do not have an impact on
earnings or cash flows. Because of the relatively short-term nature of our
borrowings, fluctuations in fair value are not deemed to be material.
QUALITATIVE DISCLOSURES
Our primary exposures relate to (1) interest rate risk on borrowings,
(2) our ability to pay or refinance our borrowings at maturity at market rates,
(3) interest rate risk on the value of our investment portfolio and rate of
return, (4) the impact of interest rate movements on our ability to obtain
adequate financing to fund future cash requirements. We manage interest rate
risk on our investment portfolio by matching scheduled investment maturities
with our cash requirements. We manage interest rate risk on our outstanding
borrowings by using fixed rate debt. While we cannot predict or manage our
ability to refinance existing borrowings and investment portfolio, we evaluate
our financial position on an ongoing basis.
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ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................................. 24
Consolidated Balance Sheets............................................... 25
Consolidated Statements of Operations..................................... 26
Consolidated Statements of Stockholders' Equity (Deficit)................. 27
Consolidated Statements of Cash Flows..................................... 30
Notes to Consolidated Financial Statements................................ 32
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of NeoTherapeutics, Inc.:
We have audited the accompanying consolidated balance sheets of NeoTherapeutics,
Inc. (a Delaware corporation in the development stage) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1999 and for the period from inception
(June 15, 1987) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NeoTherapeutics, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 and for the period from inception (June 15, 1987) to December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
April 11, 2000
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------------
1998 1999
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and equivalents ................................. $ 1,097,341 $ 6,726,220
Marketable securities and short-term investments ..... 1,769,348 2,955,212
Other receivables, principally investment interest ... 112,552 148,034
Advance deposit to clinical trial vendor ............. 265,727 --
Prepaid expenses and refundable deposits ............. 157,495 130,202
------------ ------------
Total current assets .......................... 3,402,463 9,959,668
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment ............................................ 2,197,253 2,607,741
Leasehold improvements ............................... 1,794,794 1,814,167
Accumulated depreciation and amortization ............ (740,413) (1,261,220)
------------ ------------
Property and equipment, net ................... 3,251,634 3,160,688
------------ ------------
OTHER ASSETS - Prepaid expenses and deposits ........... 172,066 53,641
------------ ------------
$ 6,826,163 $ 13,173,997
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ................ $ 1,278,954 $ 3,613,680
Accrued payroll and related taxes .................... 81,370 111,822
Note payable to related party ........................ 558,304 558,304
Current portion of long-term debt .................... 445,297 472,938
------------ ------------
Total current liabilities ..................... 2,363,925 4,756,744
LONG-TERM DEBT, net of current portion ................. 1,126,174 637,308
DEFERRED RENT .......................................... 46,308 75,121
------------ ------------
Total liabilities ............................. 3,536,407 5,469,173
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.001 per share,
5,000,000 shares authorized:
Issued and outstanding, none at
December 31, 1998 and 1999 ................. -- --
Common Stock, par value $0.001 per share,
25,000,000 shares authorized:
Issued and outstanding, 6,146,854 and
8,778,370 shares, respectively ............. 27,535,329 58,139,327
Unrealized gains (losses) on available-for-sale
securities ........................................ 24,207 (38,572)
Deficit accumulated during the
development stage ................................. (24,269,780) (50,395,931)
------------ ------------
Total stockholders' equity .................... 3,289,756 7,704,824
------------ ------------
$ 6,826,163 $ 13,173,997
============ ============
The accompanying notes are an integral part of these
consolidated balance sheets.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
------------------------------------------------------ DECEMBER 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
REVENUES, from grants ................... $ -- $ -- $ -- $ 497,128
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development ....... 4,508,255 8,542,034 20,057,687 36,074,788
General and administrative ..... 2,341,276 3,122,506 3,465,443 12,358,331
Settlement of litigation ....... -- -- 2,458,359 2,458,359
------------ ------------ ------------ ------------
6,849,531 11,664,540 25,981,489 50,891,478
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS .................... (6,849,531) (11,664,540) (25,981,489) (50,394,350)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ................ 746,008 235,265 199,267 1,456,484
Interest expense ............... (56,419) (156,016) (243,410) (935,981)
Other income (expense) ......... (1,599) (19,265) 35,727 63,162
------------ ------------ ------------ ------------
Total other income (expense) 687,990 59,984 (8,416) 583,665
------------ ------------ ------------ ------------
NET LOSS ................... $ (6,161,541) $(11,604,556) $(25,989,905) $(49,810,685)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE ........ $ (1.14) $ (2.07) $ (3.68)
============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING ..... 5,405,831 5,615,449 7,105,041
============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
REVENUE DEFICIT
PARTICIPATION UNREALIZED ACCUMULATED
UNITS AND COMMON STOCK GAINS (LOSSES) DURING THE
PREFERRED ------------------------ FROM DEVELOPMENT
STOCK SHARES AMOUNT SECURITIES STAGE TOTAL
------------- ----------- ----------- -------------- ----------- -----------
BALANCE, Inception (June 15, 1987) ............. $ -- -- $ -- $ -- $ -- $ --
Common stock issued .................... -- 465,902 2,100 -- -- 2,100
Net loss ............................... -- -- -- -- (31,875) (31,875)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1987 ..................... -- 465,902 2,100 -- (31,875) (29,775)
Common stock issued .................... -- 499,173 2,250 -- -- 2,250
Revenue Participation Units issuance ... 594,000 -- -- -- -- 594,000
Net loss ............................... -- -- -- -- (556,484) (556,484)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1988 ..................... 594,000 965,075 4,350 -- (588,359) 9,991
Revenue Participation Units issuance ... 82,000 -- -- -- -- 82,000
Net effect of acquisition .............. -- 145,000 354,316 -- -- 354,316
Net loss ............................... -- -- -- -- (934,563) (934,563)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1989 ..................... 676,000 1,110,075 358,666 -- (1,522,922) (488,256)
Exercise of warrants ................... -- 31,108 136,402 -- -- 136,402
Common stock issued in exchange for
accrued salaries .................... -- 402,518 503,144 -- -- 503,144
Net loss ............................... -- -- -- -- (859,172) (859,172)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1990 ..................... 676,000 1,543,701 998,212 -- (2,382,094) (707,882)
Net Loss ............................... -- -- -- -- (764,488) (764,488)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1991 ..................... 676,000 1,543,701 998,212 -- (3,146,582) (1,472,370)
Net loss ............................... -- -- -- -- (423,691) (423,691)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1992 ..................... 676,000 1,543,701 998,212 -- (3,570,273) (1,896,061)
Common stock issued in exchange for
investment banking services .......... -- 40,000 54,000 -- -- 54,000
Common stock issued in exchange for
accrued salaries ..................... -- 255,476 638,694 -- -- 638,694
Common stock issued in exchange for note
payable to President ................. -- 200,000 500,000 -- -- 500,000
Common stock issued in exchange for
accrued expenses ..................... -- 20,842 52,104 -- -- 52,104
Stock options issued in exchange for
accrued professional fees ............ -- -- 108,000 -- -- 108,000
Stock options issued in exchange for
future services ...................... -- -- 39,750 -- -- 39,750
Stock options issued for services ...... -- -- -- (93,749) -- (93,749)
Net loss ............................... -- -- -- -- (237,815) (237,815)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1993 ..................... 676,000 2,060,019 2,390,760 (93,749) (3,808,088) (835,077)
Common stock issued for cash ........... -- 13,000 32,500 -- -- 32,500
Amortization of deferred compensation .. -- -- -- 93,749 -- 93,749
Net loss ............................... -- -- -- -- (312,342) (312,342)
----------- ----------- ----------- ----------- ----------- -----------
26
27
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
REVENUE DEFICIT
PARTICIPATION UNREALIZED ACCUMULATED
UNITS AND COMMON STOCK GAINS (LOSSES) DURING THE
PREFERRED --------------------------- FROM DEVELOPMENT
STOCK SHARES AMOUNT SECURITIES STAGE TOTAL
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1994 ........ $ 676,000 2,073,019 $ 2,423,260 $ -- $ (4,120,430) $ (1,021,170)
Common stock issued for cash .... -- 22,000 55,000 -- -- 55,000
Common stock forfeiture ......... -- (678,836) (1,193,943) -- -- (1,193,943)
Common stock reissued ........... -- 678,836 1,697,090 -- -- 1,697,090
Stock options issued for services -- -- 105,000 -- -- 105,000
Net loss ........................ -- -- -- -- (895,378) (895,378)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 ........ 676,000 2,095,019 3,086,407 -- (5,015,808) (1,253,401)
Common stock issued for cash .... -- 266,800 633,650 -- -- 633,650
Stock options issued for services -- -- 103,950 -- -- 103,950
Cash paid out for
fractional shares .............. -- (12) (25) -- -- (25)
Conversion of Revenue
Participation Units into
common stock .................. (676,000) 300,000 1,125,000 -- (449,000) --
Common stock and warrants issued
for cash, net of costs of
public offering ............... -- 2,700,000 18,176,781 -- -- 18,176,781
Net loss ........................ -- -- -- -- (1,038,875) (1,038,875)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1996 ........ -- 5,361,807 23,125,763 -- (6,503,683) 16,622,080
Stock options exercised ......... -- 104,000 2,600 -- -- 2,600
Stock options issued for services -- -- 60,000 -- -- 60,000
Unrealized gains on
available-for-sale securities . -- -- -- 20,256 -- 20,256
Net loss ........................ -- -- -- -- (6,161,541) (6,161,541)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1997 ........ -- 5,465,807 23,188,363 20,256 (12,665,224) 10,543,395
Common stock and warrants issued
for cash under Line of Equity
Agreement, net of issuance
costs ......................... -- 506,049 3,451,782 -- -- 3,451,782
Stock options exercised by
employees, directors and
consultants ................... -- 134,000 340,560 -- -- 340,560
Exercise of underwriters' warrant -- 41,000 373,920 -- -- 373,920
Notes receivable for exercise of
stock options ................. -- -- (286,560) -- -- (286,560)
Stock options issued for services -- -- 422,264 -- -- 422,264
Warrant to purchase common stock
issued in connection with
equipment financing ........... -- -- 45,000 -- -- 45,000
Fractional shares adjustment upon
conversion of pre-split shares. -- (2) -- -- -- --
Unrealized gains on
available-for-sale securities . -- -- -- 3,951 -- 3,951
Net loss ........................ -- -- -- -- (11,604,556) (11,604,556)
------------ ------------ ------------ ------------ ------------ ------------
27
28
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
REVENUE DEFICIT
PARTICIPATION UNREALIZED ACCUMULATED
UNITS AND COMMON STOCK GAINS (LOSSES) DURING THE
PREFERRED --------------------------- FROM DEVELOPMENT
STOCK SHARES AMOUNT SECURITIES STAGE TOTAL
------------- ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 ......... -- 6,146,854 27,535,329 24,207 (24,269,780) 3,289,756
Sale of common stock to
Private Equity Line investor,
net of costs of issuance ....... -- 211,393 1,918,152 -- -- 1,918,152
Sale of shares of 5%
Series A Preferred Stock,
net of offering costs
and allocated warrants ......... 3,608,788 -- -- -- -- 3,608,788
Conversion of preferred stock
into common stock .............. (3,608,788) 347,334 3,608,788 -- -- --
Common stock and warrants
issued for cash under an
exempt private sale agreement,
net of offering costs .......... -- 400,000 3,982,716 -- -- 3,982,716
Sale of common stock
pursuant to a secondary public
offering, net of offering costs -- 1,150,000 8,706,660 -- -- 8,706,660
Common stock issued to legal
counsel for services ........... -- 12,500 70,000 -- -- 70,000
Fair value of warrants issued
as compensation to
investment advisor ............. -- -- 204,280 -- -- 204,280
Exercise of underwriters'
warrant ........................ -- 9,000 82,080 -- -- 82,080
Stock options exercised
by employees ................... -- 1,900 12,489 -- -- 12,489
Stock options and warrants
issued for legal and
consulting services ............ -- -- 119,471 -- -- 119,471
Sale of common stock to
private investors .............. -- 845,594 9,441,003 -- -- 9,441,003
Common stock forfeiture
in settlement of litigation .... -- (678,836) (1,697,090) -- -- (1,697,090)
Common stock and warrants
issued in settlement of
litigation ..................... -- 332,630 4,155,449 -- -- 4,155,449
Fractional share adjustment
upon conversion of
pre-split shares ............... -- 1 -- -- -- --
Unrealized losses on
available-for-sale securities .. -- -- -- (62,779) -- (62,779)
Dividends paid on
preferred stock ................ -- -- -- -- (136,246) (136,246)
Net loss ......................... -- -- -- -- (25,989,905) (25,989,905)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1999 ......... $ -- 8,778,370 $ 58,139,327 $ (38,572) $(50,395,931) $ 7,704,824
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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29
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------------- DECEMBER 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................... $ (6,161,541) $(11,604,556) $(25,989,905) $(49,810,685)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .......... 220,950 460,500 519,875 1,385,777
Issuance of common stock options
and warrants for compensation ....... 60,000 422,264 393,751 1,084,965
Issuance of common stock in settlement
of litigation ....................... -- -- 2,458,359 2,458,359
Amortization of deferred compensation .. -- -- -- 93,749
Compensation expense for extension of
Debt Conversion Agreements, net ..... -- -- -- 503,147
Gain on sale of assets ................. -- -- -- (5,299)
Changes in assets and liabilities:
(Increase) decrease in other receivables (57,841) 109,277 (35,482) (147,788)
(Increase) decrease in prepaid expenses
and refundable deposits ............. (130,402) (180,715) 412,376 (87,909)
Increase in accounts payable
and accrued expenses ................ 630,018 303,615 2,334,726 3,773,780
(Decrease) increase in accrued payroll
and related taxes ................... (331,175) 81,370 30,452 750,516
Increase in deferred rent .............. -- 46,308 28,812 75,120
Increase (decrease) in accrued interest
to related parties .................. (122,396) -- -- 300,404
------------ ------------ ------------ ------------
Net cash used in operating
activities .................... (5,892,387) (10,361,937) (19,847,036) (39,625,864)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ........ (3,563,790) (236,785) (429,861) (4,502,211)
Redemptions (purchases) of marketable
securities and short-term investments ... 5,315,171 364,027 (1,185,864) (2,955,212)
Unrealized gain (loss) on available-for-sale
securities .............................. 20,256 3,951 (62,779) (38,572)
Payment of organization costs .............. -- -- -- (66,093)
Proceeds from sale of equipment ............ -- -- -- 29,665
Issuance of notes receivable ............... -- -- -- 100,000
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities .......... 1,771,637 131,193 (1,678,504) (7,432,423)
------------ ------------ ------------ ------------
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30
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------------- DECEMBER 31,
1997 1998 1999 1999
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from related parties, net ......... $ -- $ -- $ -- $ 757,900
Proceeds from (repayment of) bank line of
credit .................................... 850,000 (850,000) -- --
(Increase) decrease in restricted cash ....... (935,000) 935,000 -- --
Proceeds from long-term debt ................. 326,625 1,500,000 36,333 1,862,958
Repayment of long-term debt .................. (55,190) (199,964) (497,557) (752,711)
Proceeds from preferred stock issuance, net
of offering costs ......................... -- -- 3,608,788 3,608,788
Proceeds from issuance of common stock
and warrants, net of related offering
costs and expenses ........................ -- 3,451,782 24,048,532 47,042,142
Proceeds from exercise of stock options ...... 2,600 714,480 94,569 811,649
Issuance of notes to officers and directors
for exercise of stock options ............. -- (286,560) -- (286,560)
Dividends paid to preferred stockholders ..... -- -- (136,246) (136,246)
Proceeds from Revenue Participation
Units ..................................... -- -- -- 676,000
Cash paid out for fractional shares .......... -- -- -- (25)
Cash at acquisition .......................... -- -- -- 200,612
------------ ------------ ------------ ------------
Net cash provided by financing
activities ........................... 189,035 5,264,738 27,154,419 53,784,507
------------ ------------ ------------ ------------
Net (decrease) increase in cash and
equivalents .................................. (3,931,715) (4,966,006) 5,628,879 6,726,220
Cash and equivalents, beginning of period ........ 9,995,062 6,063,347 1,097,341 --
------------ ------------ ------------ ------------
Cash and equivalents, end of period .............. $ 6,063,347 $ 1,097,341 $ 6,726,220 $ 6,726,220
============ ============ ============ ============
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Conversion of accrued payroll into shares
of common stock ........................... $ -- $ -- $ -- $ 1,141,838
============ ============ ============ ============
Conversion of notes payable to related
parties into shares of common stock ....... $ -- $ -- $ -- $ 500,000
============ ============ ============ ============
Conversion of accrued interest into notes
payable to related parties ................ $ -- $ -- $ -- $ 300,404
============ ============ ============ ============
Conversion of preferred stock into shares
of common stock ........................... $ -- $ -- $ 3,608,788 $ 3,608,788
============ ============ ============ ============
Conversion of Revenue Participation
Units into shares of common stock ......... $ -- $ -- $ -- $ 676,000
============ ============ ============ ============
Issuance of stock options and warrants
for services ............................... $ 60,000 $ 422,264 $ 393,751 $ 1,084,965
============ ============ ============ ============
Issuance of common stock and warrants
in connection with settlement of litigation $ -- $ -- $ 2,458,359 $ 2,458,359
============ ============ ============ ============
Issuance of warrants in connection with
equity and debt financings ................ $ -- $ 45,000 $ 344,610 $ 389,610
============ ============ ============ ============
Conversion of other accrued liabilities to
shares of no par value common stock ....... $ -- $ -- $ -- $ 52,104
============ ============ ============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
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31
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to NeoTherapeutics, Inc. and in June 1997, the Company was
reincorporated in the state of Delaware. At December 31, 1999, the Company had
three wholly owned subsidiaries, Advanced ImmunoTherapeutics, Inc. ("AIT"),
incorporated in California in June 1987, NeoTherapeutics GmbH ("NEOT GmbH"),
incorporated in Switzerland in April 1997 and NeoGene Technologies, Inc.
("NeoGene"), a subsidiary incorporated in California in October 1999. AIT became
a wholly owned subsidiary of AFC in July 1989 in a transaction accounted for as
a reverse acquisition. All references to the "Company" hereinafter refer to the
Company, AIT, NEOT GmbH and NeoGene as a consolidated entity.
The Company is a development stage biopharmaceutical enterprise engaged
in the discovery and development of novel therapeutic drugs intended to treat
neurological and psychiatric diseases and conditions, such as memory deficits
associated with Alzheimer's disease, aging, stroke, spinal cord injuries,
Parkinson's disease, migraine, depression and obesity. The accompanying
consolidated financial statements include the results of the Company and its
subsidiaries.
Development Stage Enterprise
The Company is in the development stage and, therefore, devotes
substantially all of its efforts to research and development activities. Since
its inception, the Company has incurred cumulative losses of approximately $49.8
million through December 31, 1999, and expects to incur substantial losses over
the next several years. The Company is in the development stage and, therefore,
devotes substantially all of its efforts to research and development activities.
Since its inception, the Company has incurred cumulative losses of approximately
$49.8 million through December 31, 1999, and expects to incur substantial losses
over the next several years. The Company believes that its existing capital
resources, including (a) the $8 million sale of common stock and common stock
warrants on February 29, 2000 (b) the $10 million sale of 5% subordinated
convertible debentures and warrants on April 6, 2000, and (c) the investors'
commitment to fund up to an additional $20 million over the next ten months in
the form of either redeemable warrant exercises or the purchase of additional
tranches of 5% subordinated convertible debentures, subject to certain
restrictions (see Note 14), will be adequate to fund its capital needs for at
least 12 months of operations.
The Company also believes that, ultimately, it will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize its proposed products. The Company's
future capital requirements and availability of capital will depend upon many
factors including, but not limited to, continued scientific progress in research
and development programs, the scope and results of preclinical studies and
clinical trials, the time and costs involved in obtaining regulatory approvals,
the costs involved in filing, prosecuting and enforcing patent claims, competing
technological developments, the cost of manufacturing scale-up, the cost of
commercialization activities and other factors which may not be within the
Company's control. Without additional funding, the Company may be required to
delay, reduce the scope of or eliminate one or more of its research and
development projects, or obtain funds through arrangements with collaborative
partners or others which may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize on its own. Other factors impacting the future
success of the Company are the ability to develop products which will be safe
and effective in treating neurological and psychiatric diseases, the ability to
obtain government approval and to retain key personnel.
Principles of Consolidation
The consolidated financial statements include accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Cash and Equivalents
Cash and equivalents consist of cash and highly liquid investments of
commercial paper and
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demand notes with original maturities of 90 days or less.
Prepaid Expenses and Refundable Deposits
Prepaid expenses and refundable deposits are capitalized and amortized
over the period benefited, or as the related services are rendered (as
applicable).
Marketable Securities and Short-Term Investments
The Company accounts for investments in marketable securities under
Statements of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The statement requires
investments in debt and equity securities to be classified among three
categories as follows: held-to-maturity, trading and available-for-sale. As of
December 31, 1999, all securities held by the Company were considered as
available-for-sale. Available-for-sale securities are carried at fair value,
with unrealized gains and losses reported as a separate component of
stockholders' equity. Quoted market prices have been used in determining the
fair value of these investments. Short-term investments consist of commercial
paper and equivalent corporate obligations and are stated at amortized cost,
with respect to held-to-maturity investments, and at fair value with respect to
investments classified as available-for-sale securities.
Property and Equipment
Property and equipment are carried at cost, less accumulated
depreciation and amortization. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the accounts and any resulting gain or loss is reflected in income.
Depreciation and amortization are computed using principally the straight-line
method over the following estimated useful lives:
Equipment 5 to 7 years
Leasehold Improvements The shorter of the
estimated useful life or lease term
Research and Development
All costs related to research and development activities are expensed in
the period incurred.
Grant Revenue
Revenue consists of amounts earned from grants which are recognized in
accordance with the terms of the related agreements.
Income Taxes
The Company follows SFAS 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. A valuation allowance is provided for the Company's
net deferred tax asset.
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation" in October 1995. SFAS 123 encourages
companies to adopt a fair value approach to valuing stock options that would
require compensation cost to be recognized based on the fair value of stock
options granted. The Company has elected, as permitted by the standard, to
continue to follow its intrinsic value based method of accounting for stock
options issued to employees consistent with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
method, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the measurement date over
the exercise price.
Net Loss Per Share
Net loss per share is calculated using the weighted average number of
common shares outstanding for the period. Net loss used in the calculation of
net loss per share includes preferred stock dividends. Common stock options and
warrants are excluded from the computation as their effect would be
antidilutive. In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128 "Earnings Per Share," which requires companies to present basic
earnings per share and diluted earnings per share, instead of the
32
33
primary and fully diluted earnings per share ("EPS") as previously required. The
new standard was adopted by the Company in 1997.
New Pronouncements
In 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income" which requires that comprehensive income and its components, as defined,
be reported in the financial statements. Current accounting standards require
that certain items such as (1) foreign currency translation adjustments, (2)
unrealized gains and losses on certain investments in debt and equity
securities, and (3) unearned compensation expense related to stock issuances to
employees be presented as separate components of stockholders' equity, without
having been recognized in the determination of net income. The Company's
comprehensive loss was not materially different from the 1998 and 1999 net loss.
In 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information". SFAS No. 131 requires the disclosure of
extensive information about an entity's operating segments. In addition to
disclosure of information about multiple reporting segments, an enterprise is
required to report certain disaggregated information, even if it functions as a
single operating unit. Management believes that the Company currently operates
under a single segment.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000, although earlier implementation is allowed.
Management plans to adopt the Standard in fiscal 2000 and has not determined the
impact this statement will have on the Company's financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. RELATED PARTY TRANSACTIONS
During 1987 and 1988, the Company's Chief Executive Officer, who is also
a major stockholder of the Company, loaned a total of $270,650 to the Company
for working capital purposes, of which $250,000 plus $2,000 of accrued interest
was canceled in December 1988 in exchange for the issuance of 28 Revenue
Participation Units ("RPU's"). The RPU's, in turn, were converted into 112,000
shares of common stock (see Note 9).
From 1989 through 1993, the Company borrowed an additional $757,900 from
the Chief Executive Officer which, together with accrued interest of $300,404,
aggregated $1,058,304 on December 31, 1993, at which time the Company issued
200,000 shares of common stock to the Chief Executive Officer in exchange for
cancellation of $500,000 of loans made to the Company. The remaining $257,900 in
principal and accrued interest of $300,404 were converted to a $558,304
promissory note which, as amended from time to time, is currently unsecured, and
is payable upon demand. Interest is payable monthly at the annual rate of 9%.
In September 1990, the Company issued a warrant to the Chief Executive
Officer to purchase up to 88,173 shares of common stock of the Company at any
time between September 1, 1990 and August 31, 1995, for $3.75 per share.
Effective August 31, 1995, the expiration date of the warrant was extended to
August 31, 2000.
Assignment of Patents by Chief Executive Officer
The Chief Executive Officer of the Company has assigned all of his
rights in the following four patents to the Company:
1. U.S. Patent No. 5,091,432 issued on February 25, 1992;
2. U.S. Patent No. 5,447,939 issued on September 5, 1995;
3. U.S. Patent No. 5,801,184 issued on September 1, 1998; and
4. U.S. Patent No. 6,027,936 issued on February 22, 2000.
33
34
In connection with the assignment of these patents to the Company, the
Chief Executive Officer and the Company entered into royalty agreements, which
expire concurrently with the expiration of the underlying patents and any
patents derived therefrom. Under each of the Agreements, as amended, the Company
is obligated to pay the Chief Executive Officer a royalty of two percent (2%) of
all revenues derived by the Company from the use and sale by the Company of any
products or methods included in the patents. Further, in the event that the
Chief Executive Officer's employment is terminated by the Company without cause,
the royalty rate under each Agreement was to be increased to five percent (5%).
Finally, in the event of the Chief Executive Officer's death, the family or
estate is entitled to continue to receive under each Agreement royalties at a
rate of two percent (2%) for the duration of the respective Agreement.
McMaster University Agreement
On July 10, 1996, the Company entered into a license agreement with
McMaster University (the "University") which allows the Company use of certain
chemical compounds developed by the University covered in the patents filed
jointly by the Company and the University. Under the agreement, the Company paid
a one time licensing fee of $15,000 and is obligated to pay an annual royalty of
five percent (5%) on net sales of products containing compounds developed by the
University. The Company commenced payment of minimum annual royalties of $25,000
beginning July 1997 and has continued such annual payments through 1999. The
third and fourth patent noted above were also jointly filed by the Company and
the University and are subject to the same royalty agreement.
Employment Agreement
On May 6, 1999, the Company entered into a new employment agreement with
the Chief Executive Officer which is effective from January 1, 2000, the date of
termination of the predecessor employment agreement, through December 31, 2003.
The agreement, among other things, provides for the grant of incentive stock
options and an annual base salary with annual increases. The agreement also
provides for guaranteed severance payments upon the Chief Executive Officer's
termination of employment without cause, or upon a change of control of the
Company. In connection with entering into this agreement, the Chief Executive
Officer was granted an option to purchase 225,000 shares of common stock at the
fair market value at the date of grant ($10.25 per share). This option vests in
three equal annual increments over the life of the agreement commencing May
2000.
3. MARKETABLE SECURITIES AND SHORT-TERM INVESTMENTS
A summary of marketable securities and short-investments at December 31,
1998 and 1999 are as follows:
Gross Gross
Unrealized Unrealized Market
Type of Investment Cost Gains (Losses) Value
------------------ ---------- ---------- ---------- ----------
December 31, 1998:
Available-for-Sale:
U.S. Government Treasury
Notes and Bonds $ 894,516 $ 13,076 $ -- $ 907,592
U.S. Government
guaranteed securities 156,112 4,971 -- 161,083
Corporate Bonds 694,513 6,160 -- 700,673
---------- ---------- ---------- ----------
Total Investments $1,745,141 $ 24,207 $ -- $1,769,348
========== ========== ========== ==========
December 31, 1999:
Available-for-Sale:
U.S. Government Treasury
Notes and Bonds 403,357 -- (11,433) 391,924
U.S. Government
guaranteed securities 295,060 1,996 (503) 296,553
Corporate Bonds 2,295,367 -- (28,632) 2,266,735
---------- ---------- ---------- ----------
Total Investments $2,993,784 $ 1,996 $ (40,568) $2,955,212
========== ========== ========== ==========
For the years ended December 31, 1998 and 1999, sales of securities
aggregated $1,169,156 and $2,230,139, and net gains were $15,310 and $35,727,
respectively.
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4. DEBT
In September 1997, the Company financed the premium for a three-year
insurance policy through a borrowing from the insurer. The loan is payable
through August 2000 in monthly installments of $9,475, including principal and
8.25% interest.
In September 1998, the Company entered into a $2 million Master Note and
Security Agreement (the "Note") with a finance company affiliated with its bank.
Through December 31, 1999, the Company borrowed $1,500,000 under the Note for
equipment and computer software purchases. Borrowings are collateralized by
substantially all of the Company's assets, exclusive of its patents and other
intellectual properties. The note requires monthly repayments of $41,277, bears
interest at approximately 12% and is due March 2002, at which time a final
principal installment of $150,000 is due. The Company has also granted to the
finance company a warrant to purchase up to 13,459 shares of its common stock at
$7.43 a share which was valued at $45,000 using the Black-Scholes option-pricing
model with the following assumptions: Risk-free interest rate of 5.02 percent;
expected life of three years; expected volatility of 75.3 percent. The warrant
was recorded as a prepaid expense and is being amortized with the effective
interest method over the life of the note.
Future installments of debt principal are as follows:
Year Ending
December 31: Amount
------------ -----------
2000 $ 472,938
2001 423,431
2002 213,877
----------
$1,110,246
==========
5. REVENUE FROM GRANTS
From 1991 to 1995, the Company received funding in the form of two Small
Business Innovative Research Grants ("SBIR") from the National Institutes of
Health. A Phase 1 grant was initiated in September 1991 and a Phase 2 grant was
initiated in August 1993. In July 1995, both grants were completed and no
additional funds were due or collected. The Company has received an aggregate of
$497,128 from the two SBIR grants. No additional grants have been received.
6. PROVISION FOR INCOME TAXES
No provision for federal and state income taxes has been recorded, as
the Company has incurred net operating losses through December 31, 1999. At
December 31, 1999, the Company and its domestic subsidiaries had approximately
$33.3 million of federal net operating loss carryforwards available to offset
future United States taxable income, if any. Such carryforwards expire on
various dates beginning 2009 through 2019. The primary differences between the
tax and financial reporting basis of assets and liabilities is the
capitalization of certain start-up expenses for income tax reporting purposes
which are expensed for financial reporting purposes. Under the Tax Reform Act of
1986, the amounts of, and benefits from, net operating losses carried forward
may be impaired or limited in certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50 percent over a three year period. At December 31, 1999, the
effect of such limitation, if imposed, has not been determined. The Company's
foreign subsidiary has a loss carryforward of approximately $12.9 million at
December 31, 1999, resulting principally from the transfer of licensing rights
by the Parent to the foreign subsidiary and from the Parent Company's allocation
of research and development costs to the foreign subsidiary during the period
from April 1997 through December 1999. The Company has recognized a valuation
allowance for the full amount of the deferred tax benefit arising from these net
operating losses due to the uncertainty of their realization.
7. COMMITMENTS AND CONTINGENCIES
Facility Leases
During June 1997, the Company relocated to a new facility, which it
leases from a property developer under a non-cancelable operating lease expiring
in June 2004. The lease requires monthly rent payments ranging from $38,800 to
$47,600, plus cost of living adjustments (as defined, including certain minimum
increases) over its term, property taxes, insurance and maintenance
reimbursements. The lease contains two five-year options to renew at fair value
rates in effect at the time of renewal. In addition, the Company leases certain
office and telephone equipment under non-cancelable operating leases expiring in
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2002. Minimum lease requirements for each of the next five years and thereafter
under the aforementioned property and equipment leases are as follows:
Year ending December 31: Amount
------------------------ ----------
2000 $ 517,800
2001 513,400
2002 542,100
2003 554,200
2004 285,400
----------
$2,412,900
==========
Rent expense for the years ended December 31, 1997, 1998 and 1999
aggregated approximately $372,000, $572,400 and $601,100, respectively.
Research and Fellowship Grants
At December 31, 1999, the Company has committed to pay, principally in
the year 2000, approximately $894,000 to a number of universities to conduct
general scientific research programs. The Company also paid $50,000 and
committed an additional $50,000 to the Reeve-Irvine Research Center at the
University of California, Irvine ("UCI"), to provide for a Fellowship Grant.
Grant expense for 1997, 1998 and 1999 amounted to approximately $335,000,
$465,900 and $617,000, respectively.
Joint Venture
In September 1999, the Company entered into a three-year joint venture
agreement with UCI to assist in the marketing and commercialization of
discoveries made by certain members of its functional genomics science
department. The Company is obligated under the agreement to fund the joint
venture for three years with minimum payments of $2.0 million over the life of
the agreement. The agreement is cancelable by either party upon giving thirty
days notice. The Company has the right of first refusal to acquire the licensing
rights to any new discoveries and UCI retains ownership rights to all
discoveries under the agreement.
Major Clinical Trial
In 1998 and 1999, the Company entered into agreements with a contract
research organization and a university to conduct multiple clinical trials in a
number of countries involving approximately 2,500 patients. The agreements, all
of which are cancelable by either party upon thirty days notice, are expected to
result in aggregate expenditures ranging from approximately $35 to $38 million
over a period of approximately eighteen months through June 2001. The costs of
these clinical trials which were incurred and charged to operations for the
years 1998 and 1999 were approximately $2 million and $13 million, respectively.
Litigation
The Company is involved in several matters of litigation and threatened
litigation considered normal to our business. It is the Company's policy to
accrue for amounts related to these legal matters if it is probable that a
liability has been incurred and an amount is reasonably determinable. Management
believes that the outcome of these matters will not materially impact the
Company's financial position.
8. SETTLEMENT OF LITIGATION
During December 1999, the Company settled a lawsuit which was initiated
in December 1998 by four of its former employees. The lawsuit, which was filed
in the Superior Court of Orange County, California, also names Dr. Alvin J.
Glasky, the Company's founder and Chief Executive Officer, as a defendant. The
lawsuit arises from a dispute concerning the termination, as of December 31,
1997, of agreements entered into as of June 1990 and December 1993 between the
Company and each of the former employees, pursuant to which the employees agreed
to accept an aggregate of 278,590 shares of the Company's common stock, subject
to forfeiture provisions, in exchange for the cancellation of indebtedness owed
to them by the Company arising from unpaid compensation and expenses in the
total amount of $458,411. Pursuant to the agreements, the employees were not
entitled to keep the shares unless the Company achieved certain revenue goals by
a specified date, as determined by the Company's independent auditors in
accordance with accounting principles generally accepted in the United States.
The revenue goals were not met and the Company demanded that the forfeited
shares be returned pursuant to the terms of the agreements. In the lawsuit the
plaintiffs alleged, among other things, that the cumulative revenues of the
Company were met and that the defendants fraudulently induced the plaintiffs
into entering into the agreements and the subsequent amendments to the
agreements. The lawsuit asked for damages in excess of $4,000,000 or, in the
alternative, that the forfeiture restrictions be removed and the plaintiffs be
allowed to
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keep their shares of common stock. The plaintiffs also sought punitive damages
and reimbursement of attorneys' fees and costs. In March 1999, the Company filed
a cross-complaint against the plaintiffs to seek a determination that the
plaintiffs' shares have in fact been forfeited, and to obtain a court order
requiring the plaintiffs to return their shares to the Company for cancellation.
At the same time that the plaintiffs entered into their agreement with the
Company in 1990 and 1993, Dr. Alvin J. Glasky and his wife, who were then and
are now employees of the Company, also entered into agreements with the Company
that were identical to those entered into by the plaintiffs, pursuant to which
Dr. and Mrs. Glasky received an aggregate of 400,246 shares of common stock
subject to identical forfeiture provisions, in exchange for the cancellation of
indebtedness owed to them by the Company arising from unpaid compensation and
expenses in the total amount of $755,531. Dr. and Mrs. Glasky entered into an
agreement with the Company on December 21, 1998, pursuant to which they agreed
to surrender for cancellation the same proportion of their restricted shares as
the plaintiffs are required to surrender based on the final resolution of the
lawsuit. Until the lawsuit was settled, the Company accounted for all of these
shares as issued and outstanding.
On December 15, 1999, the Company entered into a settlement agreement
with the plaintiffs. The agreement provided that each of the parties would pay
their own legal fees and that the plaintiffs forfeit 51%, or 142,081 of their
shares of common stock. As further consideration, the plaintiffs received
three-year warrants to purchase an aggregate of 6,825 shares of common stock at
$13.00 per share. Pursuant to the settlement terms of the plaintiffs' litigation
and in accordance with the terms of their agreement with the Company, Dr. and
Mrs. Glasky forfeited 204,125 shares of their common stock and received
identical warrants to purchase 9,806 shares of common stock. Accordingly, of the
total number of shares in dispute, 678,836, the Company cancelled 346,206 shares
and retained as outstanding, 332,630 shares of common stock. In 1995 the
forfeiture clause to the agreements was extended and at that time the Company
recorded a charge to general and administrative expense amounting to $1,697,090,
representing the increase through that period in the market value of the common
stock that was subject to forfeiture. In 1999, the Company again recorded a
charge to general and administrative expense in the net amount of $2,458,359
representing the increase from 1995 to the date of settlement in the market
value of the shares of common stock retained by the plaintiffs and Dr. and Mrs.
Glasky ($2,357,004), plus the value of the warrants issued ($101,355).
9. STOCKHOLDERS' EQUITY
Revenue Participation Units
In 1988 and 1989, AIT raised private placement funds via a financial
instrument specified as a RPU. The Company raised an aggregate of $676,000 from
the issuance of seventy-five RPU's at prices ranging from $9,000 to $10,000 per
RPU. The RPU's entitled holders to cash payments based on stipulated percentages
of revenues. Holders of RPU's were entitled to convert to common stock at any
time and AIT had the option to redeem the RPU's subject to certain conditions by
paying cash or in exchange for common stock.
In July 1996, the Company offered, and all RPU holders accepted, an
option to convert each RPU unit into 4,000 shares of common stock (300,000
shares in the aggregate) in exchange for waiving all rights as an RPU holder.
Reverse Stock Split
In June 1996, the Board of Directors authorized, with stockholder
approval, a reverse split of the Company's outstanding common stock on the basis
of 1 share for each 2.5 shares of the then outstanding common stock. The Board
of Directors also authorized, with stockholder approval, an increase in the
authorized common stock from 10 million to 25 million shares and the creation of
a new class of preferred stock with the authorization to issue up to 5 million
shares of such preferred stock. All references to common stock amounts and loss
per share in the accompanying financial statements give effect to the reverse
stock split.
Re-incorporation
During June 1997, the stockholders of the Company approved the
re-incorporation of the Company as a Delaware corporation. In connection
therewith, a par value of $0.001 per share was assigned to the common stock of
the Company. The total number of authorized and issued shares remained
unchanged.
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Common Stock
During 1993, the Company issued to a financial consultant in exchange
for investment banking services, 40,000 shares of common stock at $1.35 per
share, the market value on issuance date, for an aggregate amount of $54,000.
During 1994, three investors bought 13,000 shares of restricted
(restrictions as to transferability) common stock at $2.50 per share, for an
aggregate amount of $32,500, through a private placement. During 1995, six
investors bought 22,000 shares of restricted common stock at $2.50 per share,
for an aggregate amount of $55,000, through a private placement.
From January 1, 1996, to June 20, 1996, 266,800 shares of restricted
(restrictions as to transferability) common stock were issued at $2.50 per
share, for an aggregate amount of $633,650 (net of commission), through a
private placement.
In June 1996, the Company filed a registration statement with the
Securities and Exchange Commission offering to the public 2,500,000 units (the
"Units"), each Unit consisting of one share of the Company's common stock (the
"common stock"), and one warrant to purchase one share of common stock (the
"warrants"). The registration statement became effective on September 26, 1996,
and on October 1, 1996, the Company realized $17,363,003 in net proceeds from
the sale of the 2,500,000 Units.
On October 11, 1996, the principal underwriter of the offering exercised
a portion of its overallotment option and purchased 200,000 Units for net cash
of $1,389,280. The Units separated immediately following issuance and the common
stock and warrants that made up the Units trade only as separate securities.
On March 27, 1998, the Company executed a $15 million Private Equity
Line of Credit Agreement (the "Equity Line Agreement") with a private investor.
The Equity Line Agreement can be terminated by the Company at any time prior to
its expiration in August 2001, and, among other things, provides for minimum and
maximum puts ranging from $250,000 to $2.0 million, depending on the Company's
stock price and trading volume. At the time of each put, the investor receives a
discount of 12% from the then current average market price, as determined under
the Equity Line Agreement. Pursuant to the Equity Line Agreement, the Company
also issued to the investor warrants to purchase 25,000 shares of common stock
at an exercise price of $11.62 per share. Under the Equity Line Agreement, the
Company received proceeds of approximately $3.45 million from sales of 506,049
shares of common stock in 1998 and $1.9 million from sales of 211,393 shares of
common stock in 1999. As of December 31, 1999, approximately $9.6 million
remained available under this agreement.
On August 31, 1998, certain officers and directors of the Company
exercised non-qualified stock options and purchased 62,000 shares of common
stock. The exercise price of the stock options was at $4.50 per share for 50,000
shares and $5.13 per share for 12,000 shares for an aggregate purchase price of
$286,560, represented by notes issued by the purchasers. The notes are full
recourse promissory notes bearing interest at 7% per annum, and are
collateralized by the stock issued upon the exercise of the stock options.
Interest and principal are payable two years after the issue dates. The notes
have been offset against the underlying common stock in the accompanying
financial statements.
Common stock was also sold in 1999 as follows:
On May 31, 1999, the Company sold to a group of private investors
400,000 shares of common stock for proceeds of $4.0 million. The investors also
received five-year warrants to purchase 80,000 shares of common stock at an
exercise price of $15 per share.
On July 27, 1999, the Company completed a secondary public offering and
sold 1,150,000 shares of common stock (including the underwriters
overallotment), realizing approximately $8.7 million in net cash proceeds from
the sale.
On November 30, 1999, the Company sold to two private investors, one of
whom had invested in the below mentioned preferred stock transaction, 845,594
shares of common stock, for net proceeds of $9.4 million, and warrants to
purchase 126,839 shares of common stock at $14.24 per share. Based on a reset
formula contained in the agreement, in March 2000 the Company issued to the
investors 43,383 additional shares of common stock. A second reset was waived by
the investors as consideration for entering into the April 2000 financing
transaction.
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Preferred Stock:
On January 29, 1999, the Company entered into an agreement with two
private investors to sell up to $6 million of 5% preferred stock, with rights of
conversion into common stock. The financing consisted of two tranches of
preferred stock. The first tranche of $4.0 million was sold on January 29, 1999,
and for an initial period of 120 days was convertible into common stock at a
fixed price of $13.06 per share. Thereafter, the preferred stock was convertible
at the lesser of the fixed price or a variable rate of 101% of the average of
the ten lowest closing bid prices of the common stock during the thirty days
immediately preceding the conversion date. During June, July and December, 1999,
the investors converted all of the first tranche of preferred stock into a total
of 347,334 shares of common stock at the average price of $11.52 per share. The
Company waived its option to purchase an additional $2.0 million of preferred
stock through the second tranche. During the period in 1999 in which the
preferred stock was outstanding, the Company paid to the investors cash
dividends amounting to $136,246. The investors also received five-year warrants
to purchase 75,000 shares of the Company's common stock at $12.98 per share.
10. STOCK OPTIONS AND WARRANTS
The Company has two stock option plans: the 1991 Stock Incentive Plan
(the "1991 Plan") and the 1997 Stock Incentive Plan (the "1997 Plan")
(collectively, the "Plans"). The Plans were adopted by the Company's
stockholders and Board of Directors in May 1991 and June 1997, respectively, and
provide for the granting of incentive and nonqualified stock options as well as
other stock-based compensation. The 1991 Plan, as amended, authorizes for
issuance up to 401,430 shares of the Company's common stock. Options which have
been granted under the 1991 Plan contain vesting provisions determined by the
Board of Directors which range from one to four years. The 1997 Plan, as
amended, authorizes for issuance up to 1,250,000 shares of the Company's common
stock. Under the Plans, shares of the Company's common stock may be granted to
directors, officers and employees of the Company, except that incentive stock
options may not be granted to non-employee directors.
The Plans provide for issuance of incentive stock options having
exercise prices equal to the fair market values of the stock on the date of
grant of the options or, in certain circumstances, at option prices at least
equal to 110 percent of the fair market value of the stock on the date the
options are granted. Options granted under the Plans are exercisable in such a
manner and within such period, not to exceed ten years from the date of the
grant, as shall be set forth in a stock option agreement between the director,
officer or employee and the Company.
Stock options have also been issued outside of the aforementioned plans
to various consultants. During the period from December 1993 through December
1996, the Company issued a total of 194,000 options to purchase common stock to
two scientific consultants and a financial consultant in exchange for past and
future services. The options are exercisable through December 31, 2001, at an
exercise price of $0.025 per share. As the exercise price was lower than the
fair market value of the stock on the date the options were granted,
compensation expense was recorded for the difference between the option exercise
price and the estimated fair market value of the stock as determined by the
Board of Directors on the grant date. All options and warrants issued outside of
the Plan were vested and exercisable upon issuance. In September 1990, the
Company issued a warrant to the Chief Executive Officer of the Company to
purchase 88,173 shares of common stock at $3.75 per share. The warrant expires
August 31, 2000.
In January 1997, the Company issued to a financial consultant, 10-year
options to purchase 180,000 shares of the Company's common stock at the exercise
price of $3.875 per share, of which 30,000 options vested immediately. In
November 1998, the Company issued to the same financial consultant additional
10-year options to purchase 25,000 shares of the Company's common stock at an
exercise price of $8.5625 per share, all of which vested immediately. The
Company recognized $60,000, $422,264 and $393,751 of compensation expense for
these options in 1997, 1998 and 1999, respectively. Compensation expense was
determined in accordance with SFAS No. 123, with the fair values determined
using the Black-Scholes option pricing model at the original grant dates.
Management believes that the fair value results using calculations over the
respective vesting periods of these options would not have been materially
different.
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A summary of stock option activities are as follows:
1997 1998 1999
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- -------------- ---------- --------------
Outstanding at beginning of year 447,173 $ 3.15 658,173 $ 4.66 853,873 $ 5.78
Granted 329,000 5.37 331,300 8.03 543,500 10.76
Exercised (104,000) 0.025 (134,000) 2.54 (1,900) 6.57
Forfeited (14,000) 4.29 (1,600) 8.88 (6,100) 8.08
---------- ---------- ---------- ---------- ---------- ----------
Outstanding, at end of year 658,173 $ 4.66 853,873 $ 5.78 1,389,373 $ 6.77
========== ========== ========== ========== ========== ==========
Exercisable, at end of year 363,923 $ 1.18 391,048 $ 1.95 662,823 $ 3.23
========== ========== ========== ========== ========== ==========
The following table summarizes information about stock options
outstanding at December 31, 1999:
Weighted Weighted Weighted
Range of Options Average Average Options Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/99 Life Price 12/31/99 Price
-------------- ----------- --------- -------- ----------- --------
$ 0.025 30,000 1.00 $0.025 30,000 $0.025
3.75 to 5.625 440,673 5.89 4.16 290,673 4.31
5.626 to 8.875 330,200 7.936 7.96 259,550 8.03
8.876 to 13.00 588,500 9.446 11.46 82,500 12.58
As of December 31, 1999, there were 886,200 options outstanding under
the 1997 Plan and 180,000 options outstanding under the 1991 Plan. The remaining
323,173 outstanding options were granted outside of option plans.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock options granted to employees, and does not recognize
compensation expense when the exercise price of the options equals the fair
market value of the underlying shares at the date of grant. Directors' stock
options are treated in the same manner as employee stock options for accounting
purposes. Under SFAS No. 123, the Company is required to present certain pro
forma earnings information determined as if employee stock options were
accounted for under the fair value method of that statement.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999, respectively: risk-free
interest rates of 6.37 percent (1997), 4.96 percent (1998); and 5.80 percent
(1999), zero expected dividend yields; expected lives of 5 years; expected
volatility of 50 percent in 1997, 75.26 percent in 1998, and 75.44 percent in
1999.
For purposes of the following required pro forma information, the
weighted average fair value of stock options granted in 1997, 1998 and 1999 was
$3.06, $4.96, and $7.57, respectively. The total estimated fair value is
amortized to expense over the vesting period.
1997 1998 1999
-------------- -------------- --------------
Pro forma net loss $ (6,551,287) $ (12,395,411) $ (27,414,976)
Pro forma basic and diluted
loss per share $ (1.21) $ (2.21) $ (3.82)
Warrants are typically issued by the Company to investors as part of a financing
transaction, or in connection with services rendered by outside consultants and
expire at varying dates ranging from September 2001 through November 2004. A
summary of warrant activity follows:
1997 1998 1999
------------------------ --------------------------- -----------------------------
Range of Range of Range of
Common Exercise Common Exercise Common Exercise
Shares Prices Shares Prices Shares Prices
--------- -------- --------- -------------- --------- ---------------
Outstanding, at
beginning of year 2,700,000(1) $ 11.40 2,700,000 $ 11.40 2,697,459
Granted -- -- 38,459 7.43 to 11.618 528,664 11.00 to 20.625
Exercised -- -- (41,000) 11.40 (9,000) 11.40
--------- --------- ---------
Outstanding, at
end of year 2,700,000 2,697,459 3,217,123
========= ========= =========
(1) Public warrants issued at time of initial public offering.
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11. SALARY DEFERRAL PLAN
The Company established a 401(k) Salary Deferral Plan on January 1,
1990. The Plan allows eligible employees to defer part of their income on a
tax-free basis. Contributions by the Company to the Plan are discretionary upon
approval by the Board of Directors. To date, the Company has not made any
contributions into the Plan.
12. RESEARCH ACTIVITIES
During 1995, the National Institute on Aging (NIA) and the National
Institute for Mental Health (NIMH) issued contracts to an independent
subcontractor of theirs to manufacture Neotrofin(TM) for animal and human
testing programs. The NIA also issued an additional contract to one of its
subcontractors to conduct the subchronic animal toxicity studies required by the
U.S. Food and Drug Administration as a part of an Investigational New Drug (IND)
application for Neotrofin(TM). The entire cost of these two contracts was funded
by the NIA and NIMH directly to the subcontractors.
13. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of
operations for fiscal 1999, 1998 and 1997 (in thousands except per share data):
Fiscal 1999 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues $ -- $ -- $ -- $ --
Total operating expenses 4,404 4,006 5,425 12,146
Net loss $ (4,419) $ (4,056) $ (5,329) $(12,186)
Basic and diluted loss per share $ (0.71) $ (0.63) $ (0.70) $ (1.47)
Shares used in calculation 6,204 6,444 7,583 8,387
Fiscal 1998 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues $ -- $ -- $ -- $ --
Total operating expenses 2,528 2,643 2,984 3,509
Net loss $ (2,508) $ (2,581) $ (3,000) $ (3,515)
Basic and diluted loss per share $ (0.46) $ (0.47) $ (0.54) $ (0.60)
Shares used in calculation 5,467 5,493 5,570 5,918
Fiscal 1997 March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Revenues $ -- $ -- $ -- $ --
Total operating expenses 1,048 1,406 1,977 2,419
Net loss $ (819) $ (1,212) $ (1,813) $ (2,318)
Basic and diluted loss per share $ (0.15) $ (0.23) $ (0.33) $ (0.42)
Shares used in calculation 5,362 5,365 5,433 5,466
14. DEBT AND EQUITY TRANSACTIONS SUBSEQUENT TO DECEMBER 31, 1999
The Company also entered into the following financing transactions from
January 1, 2000 through April 11, 2000:
Under the Equity Line Agreement, during January 2000, the Company
received an additional $2.0 million for the sale of 186,961 shares of its common
stock. As of March 22, 2000, $7.5 million remains available under the agreement.
On February 25, 2000 the Company sold to two private investors 520,324
shares of common stock for $8.0 million. The investors also received five-year
warrants to purchase 104,000 shares of common stock at an exercise price of
$21.00 per share.
On April 6, 2000, the Company entered into a financing transaction with
two private investor groups who have previously invested with the Company. The
transaction consists of (a) $10 million in 5% subordinated convertible
debentures due April 6, 2005, (b) redeemable warrants to purchase up to 4
million shares of common stock over a two-year period (the "B" warrants) and (c)
five-year warrants to purchase from 115,000 shares up to 265,000 shares of the
Company's common stock at an exercise price of $19.67 per share. The "B"
warrants can be redeemed in part by the Company as frequently as several times
per week and when called for redemption can be exercised by the investors at 97%
of the per share closing market price (i.e. a discount of 3%) and are
exercisable at the sole option of the investors at the price of $33.75 per
share. The number of "B" warrants that are exercisable at each redemption are
subject to average daily volume restrictions. To the extent the "B" warrants
have not been exercised, the investors have committed to
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two additional tranches of $10 million each of 5% subordinated convertible
debentures, subject to certain restrictions, including the following:
(iv) The investors will limit their investment to 10% of the
Company's market capitalization at the time of each additional
tranche, not to exceed $10,000,000;
(v) The shares underlying the April 6, 2000 transaction and the
additional tranches must be successfully registered with the
SEC; and
(vi) The Company must maintain the continued listing requirements of
the Nasdaq Stock Market.
In the event any of these conditions cannot be met and the additional
tranches (or other financing alternatives) are not available, the Company may be
required to scale-back or cancel certain of its clinical development activities.
The debentures are convertible into common stock at $20.25 per share for
the first 90 days after the closing. Thereafter, they are convertible at the
lesser of $20.25 per share or 101% of the market price of the common stock as
determined under the agreement. The two additional tranches of convertible
debentures of up to $10 million each, 5 and 10 months after the closing, are at
the option of either the Company or the investor. If at the option of the
Company, the tranches are under similar terms and conditions as the initial
tranche. If at the option of the investor, the two tranches are at the fixed
conversion price of $20 per share. The amount available under the two additional
tranches will be reduced pro-rata to the extent that the investors have
exercised or the Company has redeemed the "B" warrants to purchase common stock.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 22, 2000,
with respect to each person who is an executive officer or a director of the
Company:
Name Age Position
- ---- --- --------
Alvin J. Glasky, Ph.D........................... 66 Chairman of the Board,
Chief Executive Officer, President and Director
Samuel Gulko.................................... 68 Chief Financial Officer, Secretary and
Treasurer and Director
Stephen Runnels................................. 50 Executive Vice President and Director
Michelle S. Glasky, Ph.D. ..................... 40 Vice President Scientific Affairs
D. Scott Wieland, Ph.D., MBA.................... 40 Vice President Product Development and
Regulatory Affairs
Mark J. Glasky.................................. 38 Director
Ann C. Kessler, Ph.D............................ 56 Director
Armin M. Kessler................................ 62 Director
Frank M. Meeks.................................. 55 Director
Eric L. Nelson, Ph.D. ......................... 75 Director
Carol O'Cleireacain, Ph.D. .................... 53 Director
Joseph Rubinfeld, Ph.D. ....................... 67 Director
Paul H. Silverman, Ph.D., D.Sc. ............... 75 Director
Executive Officers and Directors
Alvin J. Glasky, Ph.D., has been Chief Executive Officer, President,
Chief Scientific Officer and a director of Advanced ImmunoTherapeutics, Inc.
("AIT") since its inception in June 1987, and has served as the Chairman of the
Board, Chief Executive Officer, President, Chief Scientific Officer and a
director of the Company since July 1989, when AIT became a wholly-owned
subsidiary of NeoTherapeutics. From March 1986 to January 1987, Dr. Glasky was
Executive Director of the American Social Health Association, a non-profit
organization. From 1968 until March 1986, Dr. Glasky was the President and
Chairman of the Board of Newport Pharmaceuticals International, Inc., a
publicly-held pharmaceutical company that developed, manufactured and marketed
prescription medicines. From 1966 to 1968, Dr. Glasky served as Director of
Research for ICN Pharmaceutical, Inc. and as Director of the ICN-Nucleic Acid
Research Institute in Irvine, California. During that period, he was also an
assistant professor in the Pharmacology Department of the Chicago Medical
School. Dr. Glasky currently is a Regent's Professor at the University of
California, Irvine. Dr. Glasky received a B.S. degree in Pharmacy from the
University of Illinois College of Pharmacy in 1954 and a Ph.D. degree in
Biochemistry from the University of Illinois Graduate School in 1958. Dr. Glasky
was also a Post-Doctoral Fellow, National Science Foundation, in Sweden.
Samuel Gulko has served as the Chief Financial Officer of
NeoTherapeutics since October 1996 and as Secretary, Treasurer and a director
since June, 1998. From 1968 until March 1987, Mr. Gulko served as a partner in
the audit practice of Ernst & Young, LLP, Certified Public Accountants. From
April 1987 to July 1996, Mr. Gulko was self-employed as a Certified Public
Accountant and business consultant, as well as the part-time Chief Financial
Officer of several private companies. Mr. Gulko obtained his B.S. degree in
Accounting from the University of Southern California in 1958.
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Stephen Runnels joined NeoTherapeutics as Executive Vice President in
April, 1997, and has been a director of NeoTherapeutics since June 1998. Prior
to joining NeoTherapeutics, Mr. Runnels held the position of Vice President,
Marketing and Business Development for Sigma-Aldrich, Inc., a Fortune 500
manufacturer of biochemicals, pharmaceuticals, and biotechnology products since
January 1992. Mr. Runnels has also held positions as Vice President -- Sales and
Marketing for Irvine Scientific, and Vice President, International Operations
for Gamma Biologicals, a manufacturer of immunological reagents. Mr. Runnels is
certified by the American Society of Clinical Pathologists as a specialist in
Immunohematology, and was an instructor of Clinical Immunology at Arizona State
University. Mr. Runnels obtained a B.S. in Cell Biology from the University of
Arizona.
Michelle S. Glasky, Ph.D., joined NeoTherapeutics as Director of
Scientific Affairs in July 1996 and was promoted to Vice President, Scientific
Affairs in June 1997. Prior to joining NeoTherapeutics, Dr. M. Glasky was
employed in the Department of Pathology, University of Southern California
School of Medicine, as a Research Associate and Laboratory Administrator from
February 1991 until July 1996. Dr. M. Glasky served as a consultant to the
Company from August 1990 to July 1996. Dr. M. Glasky holds a non-salaried
research associate position at the University of California, Irvine. Dr. M.
Glasky received a B.A. degree in Microbiology from the University of California,
San Diego in 1981, and a Ph.D. degree in Biomedical Sciences from the University
of Texas Health Science Center, Houston, in 1988. Dr. M. Glasky completed a
post-doctoral fellowship at Stanford University School of Medicine. Michelle S.
Glasky, Ph.D. is the adult daughter of Dr. Alvin J. Glasky.
D. Scott Wieland, Ph.D., MBA, joined NeoTherapeutics as Director of
Regulatory Affairs in July 1997, became Director of Drug Development and
Regulatory Affairs in 1998, and was promoted to Vice President, Product
Development and Regulatory Affairs in July 1999. Prior to joining
NeoTherapeutics, Dr. S. Wieland was employed by CoCensys from 1990-1997, a
biopharmaceutical company specializing in CNS disorders. Dr. S. Wieland received
a B.S. degree in Physiological Psychology from the University of California,
Santa Barbara in 1981, a M.A. degree in Psychology from the University of
Arizona, Tucson, Arizona in 1984, a Ph.D. in Biopsychology from the University
of Arizona in 1987, and a M.B.A. from Webster University, Irvine, California in
1998. Dr. S. Wieland completed a post-doctoral fellowship in Behavioral
Pharmacology at the University of Pennsylvania, Department of Psychiatry.
Mark J. Glasky has been a director of NeoTherapeutics since August 1994.
Since 1982, Mr. Glasky has been employed by Bank of America in various corporate
lending positions and currently serves as Senior Vice President and Credit
Products Executive for Southern California Commercial Banking. Mr. Glasky
obtained a B.S. degree in International Finance from the University of Southern
California in 1983 and an M.B.A. degree in Corporate Finance from the University
of Texas at Austin in 1987. Mark J. Glasky is the adult son of Dr. Alvin J.
Glasky.
Ann C. Kessler, Ph.D., has been a director of NeoTherapeutics since
November 12, 1999. From January 1969 until she retired in June 1995, Dr. Ann
Kessler held a number of management positions with Hoffmann-La Roche in Basel,
Switzerland and Nutley, New Jersey. Most recently, Dr. Ann Kessler was Director
of International Project Management and was responsible for global project
development decisions. Dr. Ann Kessler's previous appointments included Director
of the Division of Exploratory Research and Director of the Departments of
Pharmacology, Chemotherapy, and Biochemical Nutrition. Dr. Ann Kessler has
authored over 100 publications dealing with obesity, lipid metabolism and
appetite regulation, and has 20 patents issued concerning pharmacological
approaches to diseases. Dr. Ann Kessler obtained her B.S. degree from the
College of Notre Dame of Maryland in 1965, M.S. in Biological Sciences from
Northwestern University, Evanston, Illinois in 1967, and a Ph.D. in Biochemistry
from New York University in 1973. Dr. Ann Kessler is the wife of Armin M.
Kessler.
Armin M. Kessler has been a director of NeoTherapeutics since November
12, 1999. From 1983 until he retired in 1995, Mr. Kessler held a number of
executive management positions with Hoffmann-La Roche AG including Chief
Operating Officer, Head of the Pharmaceutical Division, Head of the Diagnostic
Division with worldwide responsibility for pharmaceuticals, diagnostics,
vitamins and chemicals and Managing Director of Roche U.K. Mr. Kessler also
served as a member of the Board of Directors and Corporate Executive Committee
of Hoffmann-La Roche AG. Until his retirement in 1995, Mr. Kessler served as a
member of the Board of Directors of Genentech Inc. from 1990 and Syntex
Corporation from 1994. During this same period, Mr. Kessler served on the
Executive Board of Pharmaceutical Partners for Better Healthcare and as
President of the European Federation of Pharmaceutical Industry Associations.
From 1961 to 1982 Mr. Kessler held a variety of positions in various countries
with Sandoz Pharmaceuticals Corporation including Director of Worldwide
Pharmaceutical Marketing, as well as Head of Patents and Licensing and President
of Sandoz Japan. Mr. Kessler received a Bachelor of Science degree in Chemistry
and Physics from the University of Pretoria, South Africa in 1957, a Bachelor of
Science Honors degree in Chemical Engineering from The University of Cape Town
in 1959, a Juris Doctorate from Seton Hall
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University in 1971, and an Honorary Doctorate of Business Administration from
University of Pretoria, South Africa in 1993. Mr. Kessler qualified as a U.S.
Patent Attorney in 1972. Mr. Armin Kessler is the husband of Dr. Ann C. Kessler.
Frank M. Meeks has been a director of NeoTherapeutics since July 1989.
Since September 1992, Mr. Meeks has been pursuing personal investments in real
estate, property management and oil and gas. Mr. Meeks was employed by
Environmental Developers, Inc., a real estate development and construction
company, from June 1979 until March 1993, first as Vice President and finally as
Financial Vice President. Mr. Meeks obtained a B.S. degree in Business
Administration from Wittenberg University in 1966, and an M.B.A. degree from
Emory University in 1967. Mr. Meeks is a non-practicing certified public
accountant and a licensed real estate broker.
Eric L. Nelson, Ph.D., has been a director of NeoTherapeutics since June
1998 and a member of our Scientific Advisory Board since 1987. Dr. Nelson has
been self-employed as a pharmaceutical research consultant since 1986. He was a
founder, and served as Chairman from 1972 until 1986, of Nelson Research and
Development Corporation, a publicly held corporation engaged in research and
development of drug receptor technology applied to the development of
pharmaceutical products and novel drug delivery systems. Prior to 1972, Dr.
Nelson spent eleven years at Allergan Pharmaceuticals, Inc., a developer of eye
care products, where as Vice President of Research he was responsible for
establishing Allergan's entire research organization. Dr. Nelson received his
doctorate degree in Microbiology from UCLA in 1951 and has authored numerous
publications. He is the inventor on various patents in the areas of
microbiology, immunology, molecular biology and pharmacology.
Carol O'Cleireacain, Ph.D., has been a director of NeoTherapeutics since
September 1996. Dr. O'Cleireacain has been self-employed as an economic and
management consultant in New York City since 1994. Since 1998, Dr. O'Cleireacain
has served as Senior Fellow (non-resident) at the Brookings Institution in
Washington D.C., where previously, from March 1996 until June 1997, as a
Visiting Fellow, Economic Studies, she authored The Orphaned Capital: Adopting
the Right Revenues for the District of Columbia. During 1998, Dr. O'Cleireacain
served as a member of the President's Commission to Study Capital Budgeting, and
during 1997, Dr. O'Cleireacain served as a member of the National Civil Aviation
Review Commission. Since May 1996, Dr. O'Cleireacain has served as a director
and member of the Executive Committee of Trillium Asset Management (formerly
known as Franklin Research and Development Corp.), an employee-owned investment
company in Boston. From April 1994 through April 1996, Dr. O'Cleireacain served
as the first nominee of the United Steelworkers of America and the first woman
director of ACME Metals Inc. Dr. O'Cleireacain served as the Director of the
Mayor's Office of Management and Budget of the City of New York from August 1993
until December 1993. From February 1990 until August 1993, Dr. O'Cleireacain was
the Commissioner of the New York City Department of Finance. Dr. O'Cleireacain
received a B.A., with distinction, in Economics from the University of Michigan
in 1968, an M.A. in Economics from the University of Michigan in 1970 and a
Ph.D. in Economics from the London School of Economics in 1977.
Joseph Rubinfeld, Ph.D., has been a director of NeoTherapeutics since
June 1998. Dr. Rubinfeld is the co-founder of SuperGen, Inc., a publicly-held
pharmaceutical company focused on drugs for life-threatening diseases,
particularly cancer, and has served as the Chief Executive Officer, President
and a director of SuperGen since its inception in March 1991 and was Chief
Scientific Officer from inception until September 1997. Since May 1996, Dr.
Rubinfeld has served as a Director of AVI Biopharma, a biopharmaceutical
company. Dr. Rubinfeld was one of the four initial founders of Amgen, Inc., a
biotechnology company, in 1980 and served as Vice President and Chief of
Operations until 1983, and as a consultant to Amgen from 1983 until 1985. From
1987 to 1990, Dr. Rubinfeld was a Senior Director at Cetus Corporation, a
biotechnology company. From 1968 to 1980, Dr. Rubinfeld was employed at
Bristol-Myers Company International Division ("Bristol-Myers") in a variety of
positions, most recently as Vice President and Director of Research and
Development. While at Bristol-Myers, Dr. Rubinfeld was instrumental in licensing
the original anticancer line of products for Bristol-Myers, including Mitomycin
and Bleomycin. Prior to that time, Dr. Rubinfeld was a research scientist with
several pharmaceutical and consumer product companies including Schering-Plough
and Colgate-Palmolive Co. Dr. Rubinfeld received his M.A. and Ph.D. in Chemistry
from Columbia University.
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Paul H. Silverman, Ph.D., D.Sc., has been a director of NeoTherapeutics
and member of our Scientific Advisory Board since September 1996. Dr. Silverman
has served as a Director for the Western Center of the American Academy of Arts
and Sciences, located on the University of California, Irvine campus since March
1997. Since March 1993, Dr. Silverman has also been an Adjunct Professor in the
Department of Medicine at the University of California, Irvine. From January
1994 until July 1996, Dr. Silverman served as an Associate Chancellor for the
Center for Health Sciences at the University of California, Irvine. From August
1992 until January 1994, Dr. Silverman served as the Director of Corporate and
Government Affairs at the Beckman Laser Institute and Medical Clinic in Irvine,
California. From November 1990 until December 1993, Dr. Silverman served as
Director of Scientific Affairs at Beckman Instruments, Inc. Prior to 1990, Dr.
Silverman served as the Director of the Systemwide Biotechnology Research and
Education Program for the University of California; the Director of the Donner
Laboratory and an Associate Director of the Lawrence Berkeley Laboratory at the
University of California, Berkeley; as the President of the University of Maine
at Orono; as the President of The Research Foundation of the State University of
New York, and as the head of the Department of Immunoparasitology at Glaxo, Ltd.
Dr. Silverman received his Ph.D. in Parasitology and Epidemiology and his Doctor
of Science degree from the University of Liverpool, England.
The Board of Directors of NeoTherapeutics currently consists of eleven
directors, divided into two classes. Each Class is elected in alternate years
and serves a term of two years. The Class I directors, whose term expires at the
Annual Meeting of Stockholders in 2000, are Samuel Gulko, Frank M. Meeks, Eric
L. Nelson, Ph.D., Stephen Runnels and Paul H. Silverman, Ph.D., D.Sc.. The Class
II directors, whose term expires at the Annual Meeting of Stockholders in 2001,
are Alvin J. Glasky, Ph.D., Mark J. Glasky, Ann C. Kessler, Ph.D., Armin M.
Kessler, Carol O'Cleireacain, Ph.D. and Joseph Rubinfeld, Ph.D. Each director
serves the term for which he or she was elected until the election and
qualification of his or her successor or until his or her earlier resignation.
The Board of Directors currently has four committees, a Compensation
Committee, an Audit Committee, a Litigation Committee formed in 1999 and a
Special Function Committee formed in March 2000.
The Compensation Committee is comprised of Dr. Eric L. Nelson, Dr. Carol
O'Cleireacain, Dr. Paul H. Silverman and Dr. Joseph Rubinfeld. The Compensation
Committee reviews and recommends the salaries and bonuses of officers and
certain key employees of NeoTherapeutics, establishes compensation and incentive
plans, authorizes and approves the granting of stock options and restricted
stock in accordance with our stock option and incentive plans, and determines
other fringe benefits.
The Audit Committee is comprised of Dr. Carol O'Cleireacain, Frank M.
Meeks and Dr. Eric L. Nelson. The Audit Committee recommends engagement of our
independent public accountants and is primarily responsible for approving the
services performed by our independent accountants and for reviewing and
evaluating our accounting principles and its system of internal controls.
The Litigation Committee is comprised of Dr. Eric L. Nelson, Stephen
Runnels and Samuel Gulko. The Litigation Committee is empowered by the Board of
Directors to enter into settlement agreements for pending litigation.
The Special Function Committee is comprised of all non-employee
directors, which includes Mark J. Glasky, Dr. Ann C. Kessler, Armin M. Kessler,
Frank M. Meeks, Dr. Eric L. Nelson, Dr. Carol O'Cleireacain, Dr. Paul H.
Silverman and Dr. Joseph Rubinfeld. Individual members of the Special Function
Committee provide services from time to time at the request of the Chairman of
the Board of Directors which are unique to that member's industry or educational
knowledge and experience and which are determined by the Chairman to be above
and beyond their normal requirements as a Board member.
SCIENTIFIC ADVISORY BOARD
We have established a Scientific Advisory Board consisting of
distinguished scientists who we believe will make a contribution to the
development of our research. The Scientific Advisory Board members review our
research and development progress, advise us of advances in their fields and
assist in identifying special product opportunities. We compensate our members
on a consulting fee basis for their services and we reimburse them for
reasonable travel expenses. All of the advisors are employed by employers other
than NeoTherapeutics and may have commitments to, or consulting or advisory
agreements with, other entities, including our potential competitors, that may
limit their availability to us. Although these advisors may contribute
significantly to our business, none is required to devote more than a small
portion of his time to us in his capacity as a member of the Scientific Advisory
Board. The members of the Scientific Advisory Board currently are as follows:
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Geoffrey Burnstock, D.Sc., F.A.A., M.R.C.P. (Hon), F.R.S., has been a
Professor of Anatomy in the Department of Anatomy and Developmental Biology at
the University College London since 1975 and since 1997, has been the director
of the Autonomic Neuroscience Institute, Royal Free Hospital School of Medicine.
From 1959 through 1975, Dr. Burnstock held several positions within the
Department of Zoology at the University of Melbourne, Australia. Dr. Burnstock
received his B.Sc. degree in 1953 from Kings College, University of London and
his Ph.D. in 1957 from Kings College and University College London, University
of London. Dr. Burnstock also received a D.Sc. degree in 1971 from the
University of Melbourne.
Olivier Civelli, Ph.D., has been the Eric L. and Lila D. Nelson Chair in
Neuropharmacology at the University of California, Irvine since 1996. From
1992-1996, Dr. Civelli was affiliated with F. Hoffmann-La Roche, AG of Basel,
Switzerland in various research positions. From 1987-1993, Dr. Civelli held
various research positions in the Department of Cell Biology and Anatomy of the
Vollum Institute for Advanced Biomedical Research at the Oregon Health Sciences
University. Dr. Civelli received his doctorate degree in Molecular Biology from
the Swiss Federal Institute of Technology in Zurich, Switzerland in 1979.
Stuart M. Krassner, Ph.D., has been affiliated with the University of
California, Irvine since 1965, currently as Professor of Biological Sciences and
formerly in several administrative positions, most recently as Associate Dean of
Research and Graduate Studies. Dr. Krassner has conducted research at both the
Rockefeller University (New York) and the Swiss Tropical Institute (Basel). Dr.
Krassner's research interests included parasitology and immunology and he has
numerous publications in those fields. Dr. Krassner received his doctorate
degree in Parasitology from Johns Hopkins University in 1961.
Eric L. Nelson, Ph.D., see "Executive Officers and Directors."
Paul H. Silverman, Ph.D., D.Sc., see "Executive Officers and Directors."
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon its review of the copies of reporting forms furnished
to the Company, and written representations that no other reports were required,
the Company believes that all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934 applicable to its directors, officers and any
persons holding 10% or more of the Company's common stock with respect to the
Company's fiscal year ended December 31, 1999, were satisfied.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth summary information concerning the
compensation of our Chief Executive Officer and the other most highly
compensated executive officers whose total salary and bonuses for services
rendered to us and our subsidiaries in all capacities during the fiscal year
ended December 31, 1999 exceeded $100,000 (the "Named Executive Officers"). No
other executive officer received compensation in 1999 in excess of $100,000.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
----------------------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS
- --------------------------- ---- --------- ----- -------- ------------
Alvin J. Glasky, Ph.D 1999 $210,954 -- $ -- 275,000
Chairman, Chief Executive Officer 1998 199,998 -- -- 65,000
and President 1997 199,992(1) -- --
Stephen Runnels 1999 167,701 -- -- 10,000
Executive Vice President 1998 165,940 -- -- 25,000
1997 108,513(3) -- $ 25,107(2) 62,000
Samuel Gulko 1999 118,165 -- -- 60,000
Chief Financial Officer, 1998 109,250 -- -- 25,000
Secretary and Treasurer 1997 78,000(4) -- -- 6,000
(1) Excludes prior years accrued salaries of $265,328 and auto allowances
and expense account reimbursements
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previously accrued aggregating $84,516, all of which were paid in 1997.
(2) Represents a one-time relocation allowance.
(3) Commenced employment in April 1997.
(4) Employed in 1997 on a part-time basis.
OPTION GRANTS
The following table sets forth information concerning stock options
granted during the fiscal year ended December 31, 1999 to the Named Executive
Officers:
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENTAGE OF ANNUAL RATES OF STOCK
TOTAL OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(2)
GRANTED(1) EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME (NO. OF SHARES) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- --------------- ----------- ---------- ------------- ---------- ----------
Alvin J. Glasky 225,000(1) 41% $ 10.25 May 6, 2009 $1,450,388 $3,675,569
50,000(2) 9% $ 12.188 Dec. 15, 2009 $ 383,248 $ 971,227
Stephen Runnels 10,000(2) 2% $ 12.188 Dec. 15, 2009 $ 76,650 $ 194,245
Samuel Gulko 35,000(3) 6% $ 10.25 May 6, 2009 $ 225,616 $ 571,755
25,000(2) 5% $ 12.188 Dec. 15, 2009 $ 191,624 $ 485,613
(1) The above options become exercisable in increments of 33.3% per year,
commencing January 2, 2001.
(2) The above options become exercisable in increments of 25% per year,
commencing one year after date of grant.
(3) The above options become exercisable as follows: 10,000 at the date of
grant and 25,000 in increments of 25% per year, commencing one year
after date of grant.
The potential realizable value is calculated from the exercise price per
share, assuming the market price of our common stock appreciates in value at the
stated percentage rate from the date of grant to the expiration date. Actual
gains, if any, are dependent on the future market price of the common stock.
OPTIONS EXERCISED AND FISCAL YEAR-END VALUES
The following table sets forth information concerning stock options
exercised during the fiscal year ended December 31, 1999, by the Named Executive
Officers and the value of such officers' unexercised options at December 31,
1999:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END(1)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
Alvin J. Glasky, Ph.D - $ -- 156,923 71,250 $953,512 $287,531
Stephen Runnels - -- 17,500 57,500 48,438 178,438
Samuel Gulko - -- 13,000 22,000 46,313 58,563
(1) Based upon the closing price of the common stock on December 31, 1999,
as reported by the NASDAQ National Market of $10.50 per share.
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EMPLOYMENT AGREEMENT
We have entered into an employment agreement with Dr. Alvin J. Glasky,
effective as of January 1, 2000. The agreement requires Dr. Glasky to devote all
of his productive time, attention, knowledge and skill to the affairs of the
Company during the term of the agreement. The agreement provides for an annual
base salary of $215,000 with annual increases and periodic bonuses as determined
by the Board of Directors. The agreement ends on December 31, 2003, and may be
terminated by us with or without cause as defined in the agreement. The
agreement also provides for guaranteed severance payments equal to Dr. Glasky's
annual base salary over the remaining life of the agreement upon the termination
of employment without cause or upon a change in control of us. In connection
with entering into this agreement, we granted to Dr. Glasky a stock option to
purchase 225,000 shares of common stock at an exercise price of $10.25 per
share, which vests in three equal annual increments.
COMPENSATION OF DIRECTORS
Each of our non-employee directors receives $1,000 for each Board of
Directors meeting and $500 for each committee meeting attended, with the
Chairperson of the Committee receiving $1,000. The directors are also reimbursed
for certain expenses in connection with attendance at Board meetings. In June
1999, we granted to each non-employee director an option to purchase 10,000
shares of common stock at $13.00 per share. In December 1999, we granted to six
of our non-employee directors an option for each to purchase 2,000 shares of
common stock at $12.188 per share. Commencing in the year 2000, non-employee
Board members who served on the Litigation and Special Function Committees will
be compensated at the rate of $150 per hour; no compensation was paid for
representation on these Committees in 1999.
STOCK OPTION PLANS
We have two stock option plans: the 1991 Stock Incentive Plan (the "1991
Plan") and the 1997 Stock Incentive Plan (the "1997 Plan") (the "Plans"). The
Plans were adopted by our stockholders and Board of Directors in May 1991 and
June 17, 1997, respectively.
The 1991 Incentive Stock Option Plan
The 1991 Plan, as amended, provides for grants of "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), nonqualified stock options, stock appreciation rights
("SARs") and bonus stock. The 1991 Plan, as amended, authorizes for issuance up
to 401,430 shares of our common stock. Under the 1991 Plan, incentive stock
options may be granted to employees, and nonqualified stock options, SARs and
bonus stock may be granted to our employees and other persons whose
participation in the 1991 Plan we determined to be in our best interest. As of
December 31, 1999, there were options to purchase 180,000 shares of common stock
outstanding under the 1991 Plan.
The 1997 Incentive Stock Option Plan
The 1997 Plan provides for grants of "incentive stock options" within
the meaning of the Code, nonqualified stock options and rights to purchase
shares of our common stock ("Purchase Rights"). The 1997 Plan authorized for
issuance up to 1,250,000 shares of our common stock, subject to adjustment in
the number and kind of shares subject to the 1997 Plan and to outstanding shares
in the event of stock splits, stock dividends or certain other similar changes
in our capital structure. Under the 1997 Plan, we may grant incentive stock
options, nonqualified stock options and Purchase Rights to our employees and
employees of our subsidiaries and affiliates. We also may grant nonqualified
stock options and Purchase Rights to our employees and employees of our
subsidiaries and affiliates and non-employee directors, consultants and other
service providers. As of December 31, 1999, there were options to purchase
756,025 shares of common stock outstanding under the 1997 Plan.
The Compensation Committee of the Board of Directors (the "Committee")
administers the Plans and has sole discretion and authority, consistent with the
provisions of the Plans, to determine which eligible participants will receive
options, the time when options will be granted, the terms of options granted and
the number of shares which will be subject to options granted under the Plans.
In the event of our merger with or into another corporation or the sale
of substantially all of our assets, any outstanding options and SARs granted
under the Plans shall be assumed or equivalent options and SARs substituted by
the successor corporation. In the event a successor corporation does not assume
or substitute the options and SARs, the exercisability of the options and SARs
under the 1991 Plan shall be accelerated. The vesting of all options outstanding
under the 1997 Plan will accelerate upon a change in control of us, regardless
of whether the options are assumed or new options are issued by the successor
corporation.
The exercise price of incentive stock options must be not less than the
fair market value of a share of common stock on the date that the option is
granted (110% with respect to optionees who own at least 10%
49
50
of the outstanding common stock). Nonqualified options shall have such exercise
price as determined by the Committee. The Committee has the authority to
determine the time or times at which options granted under the Plans become
exercisable, provided that options expire no later than ten years from the date
of grant (five years with respect to optionees who own at least 10% of the
outstanding common stock). Options are nontransferable, other than upon death,
by will and the laws of descent and distribution, and incentive stock options
may be exercised only by an employee while employed by us or within three months
after termination of employment (one year for termination resulting from death
or disability).
SECTION 401(k) PLAN
In January 1990, we adopted the AIT Cash or Deferred Profit Sharing Plan
(the "401(k) Plan") covering our full-time employees located in the United
States. The 401(k) Plan is intended to qualify under Section 401(k) of the Code,
so that contributions to the 401(k) Plan by our employees or us, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that contributions made by us, if any, will be
deductible by us when made. Pursuant to the 401(k) Plan, employees may elect to
reduce their current compensation by up to the statutorily prescribed annual
limit ($10,500 in 1999) and to have the amount of such reduction contributed to
the 401(k) Plan. The 401(k) Plan permits, but does not require, us to make
additional matching contributions to the 401(k) Plan on behalf of all
participants in the 401(k) Plan. We have not made any contributions to the
401(k) Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 22, 2000 by (i) each
person, or group of affiliated persons, who is known by us to own beneficially
5% or more of the common stock, (ii) each of our directors, (iii) each of the
Named Executive Officers, and (iv) all of our executive officers and directors
as a group. The information as to each person or entity has been furnished by
such person or entity, and unless otherwise indicated, the persons named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
SHARES PERCENT OF
BENEFICIALLY SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP(1) OWNED(1) OUTSTANDING
- -------------------------------------------- ------------ -----------
Alvin J. Glasky, Ph.D.(2) ......................... 1,358,997 13.8%
157 Technology Drive
Irvine, CA 92618
Ingalls & Snyder, L.L.C.(3) ....................... 1,701,160 17.8%
Samuel Gulko(4) ................................... 63,733 *
Stephen Runnels(5) ................................ 55,000 *
Michelle S. Glasky, Ph.D.(6)(7) ................... 43,480 *
Mark J. Glasky(8)(9) ............................ 56,479 *
Ann C. Kessler, Ph.D.(10) ......................... 2,500 *
Armin M. Kessler(10) .............................. 2,500 *
Frank M. Meeks(11) ................................ 68,460 *
Eric L. Nelson, Ph.D.(12) ......................... 64,500 *
Carol O'Cleireacain, Ph.D.(13) .................... 48,000 *
Joseph Rubinfeld, Ph.D.(12) ....................... 18,000 *
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Paul H. Silverman, Ph.D., D.Sc.(13) .............. 48,000 *
D. Scott Wieland, Ph.D., MBA(14) ................. 3,750 *
All Executive Officers and Directors
as a group (13 persons)(15) .................... 1,833,399 18%
- ---------------
* less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
subject to options and warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of March 22, 2000, are deemed
beneficially owned and outstanding for computing the percentage of the
person holding such securities, but are not considered outstanding for
computing the percentage of any other person.
(2) Includes 215,000 shares subject to options held by Dr. Alvin J. Glasky
and 19,750 shares subject to options held by Rosalie H. Glasky, which
are currently exercisable or exercisable within 60 days of March 22,
2000. Also includes 88,173 shares issuable within 60 days of March 22,
2000, upon exercise of the Glasky warrant, 4,000 shares owned by the
NeoTherapeutics, Inc. 401(k) Plan, and 23,149 shares beneficially owned
by Dr. Glasky's wife, Rosalie H. Glasky. Does not include 56,479 shares
beneficially owned by Mark J. Glasky and 43,480 shares beneficially
owned by Dr. Michelle S. Glasky, Dr. Glasky's adult children, for which
Dr. Glasky disclaims beneficial ownership.
(3) Based on a Schedule 13G filed with the Securities and Exchange
Commission on February 11, 2000, Ingalls & Synder, L.L.C. reported that
it had sole voting and dispositive power over 192,637 shares, including
29,825 shares issuable upon the exercise of warrants, and sole voting
and shared dispositive power over 1,508,523 shares, including 175,175
shares issuable upon exercise of warrants.
(4) Includes 50,033 shares subject to options held by Mr. Gulko which are
currently exercisable or exercisable within 60 days of March 22, 2000,
1050 shares subject to currently exercisable warrants and 1,300 shares
owned by the Sam Gulko CPA Defined Contribution Employee Benefit Plan.
(5) Includes 55,000 shares subject to options held by Mr. Runnels which are
currently exercisable or exercisable within 60 days of March 22, 2000.
(6) Michelle S. Glasky, Ph.D., is the adult daughter of Dr. Alvin J. Glasky.
(7) Includes 36,000 shares subject to options held by Dr. Michelle S. Glasky
which are currently exercisable or exercisable within 60 days of March
22, 2000, and 500 shares subject to currently exercisable warrants.
(8) Mark J. Glasky is the adult son of Dr. Alvin J. Glasky.
(9) Includes 38,000 shares subject to options held by Mr. Glasky which are
currently exercisable or exercisable within 60 days of March 22, 2000,
and 1,000 shares subject to currently exercisable warrants.
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(10) Includes 2,500 shares subject to options held by each of Dr. Ann Kessler
and Armin M. Kessler which are currently exercisable or exercisable
within 60 days of March 22, 2000. Dr. Ann Kessler and Armin M. Kessler
are husband and wife.
(11) Includes 38,000 shares subject to options held by Mr. Meeks which are
currently exercisable or exercisable within 60 days of March 22, 2000.
Does not include 460 shares beneficially owned by Mr. Meeks' wife, for
which Mr. Meeks disclaims beneficial ownership.
(12) Includes 18,000 shares subject to options held by each of Drs. Nelson
and Rubinfeld which are currently exercisable or exercisable within 60
days of March 22, 2000.
(13) Includes 38,000 shares subject to options held by each of Drs.
O'Cleireacain and Silverman, which are currently exercisable or
exercisable within 60 days of March 22, 2000.
(14) Includes 3,750 shares subject to options held by Dr. Wieland, which are
currently exercisable or exercisable within 60 days of March 22, 2000.
(15) Includes 88,173 shares issuable upon the exercise of the Glasky warrant,
572,833 shares subject to options which are currently exercisable or
exercisable within 60 days of March 22, 2000, and 2,550 shares subject
to currently exercisable warrants.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 1990, the Company issued a warrant to Dr. Alvin J. Glasky
(the "Glasky warrant") to purchase up to 88,173 shares of common stock of the
Company at any time between September 1, 1990, and August 31, 1995, for $3.75
per share. Effective August 31, 1995, the expiration date of the Glasky warrant
was extended to August 31, 2000.
In December 1998, we were served with a lawsuit initiated by four of our
former employees. The lawsuit, which was filed in the Superior Court of Orange
County, California, also named Dr. Alvin J. Glasky, the Company's founder and
Chief Executive Officer, as a defendant. The lawsuit arises from a dispute
concerning the termination, as of December 31, 1997, of agreements entered into
as of June 1990 and December 1993 between the Company and each of the former
employees, pursuant to which the employees agreed to accept an aggregate of
278,590 shares of our common stock, subject to forfeiture provisions, in
exchange for the cancellation of indebtedness owed to them by the Company
arising from unpaid compensation and expenses in the total amount of $458,411.
Pursuant to these agreements, the employees were not entitled to keep the shares
unless we achieved certain revenue goals by a specified date, as determined by
our independent auditors in accordance with generally accepted accounting
principles. The revenue goals were not met and we demanded that the forfeited
shares be returned pursuant to the terms of the agreements. In the lawsuit the
plaintiffs alleged, among other things, that our cumulative revenues of the
Company were met and that the defendants fraudulently induced the plaintiffs
into entering into the agreements and the subsequent amendments to the
agreements. The lawsuit asked for damages in excess of $4,000,000 or, in the
alternative, that the forfeiture restrictions be removed and the plaintiffs be
allowed to keep their shares of common stock. The plaintiffs also sought
punitive damages and reimbursement of attorneys' fees and costs. In March 1999,
we filed a cross-complaint against the plaintiffs to seek a determination that
the plaintiffs' shares have in fact been forfeited, and to obtain a court order
requiring the plaintiffs to return their shares to the Company for cancellation.
At the same time that the plaintiffs entered into their agreement with the
Company in 1990 and 1993, Dr. Alvin J. Glasky and his wife, who were then and
are now our employees, also entered into agreements with us that were identical
to those entered into by the plaintiffs, pursuant to which Dr. and Mrs. Glasky
received an aggregate of 400,246 shares of common stock subject to identical
forfeiture provisions, in exchange for the cancellation of indebtedness owed to
them by the Company arising from unpaid compensation and expenses in the total
amount of $755,531. Dr. and Mrs. Glasky entered into an agreement with the
Company on December 21, 1998, pursuant to which they agreed to surrender for
cancellation the same proportion of their restricted shares as the plaintiffs
are required to surrender based on the final resolution of the lawsuit. Until we
settled this, we accounted for all of these shares, which we deemed to be
forfeited, as issued and outstanding.
On December 15, 1999, we entered into a settlement agreement with the
plaintiffs. The agreement provided that each of the parties pay their own legal
fees and that the plaintiffs forfeit 51%, or 142,081 of their shares of common
stock. In addition, the plaintiffs received three-year warrants to purchase an
aggregate of 6,826 shares of common stock at $13.00 per share. Pursuant to the
settlement terms of the litigation and in accordance with the terms of their
agreement with us, Dr. and Mrs. Glasky forfeited 204,125 shares of their common
stock and received identical warrants to purchase 9,806 shares of common stock.
Accordingly, of the 678,836 total number of shares in dispute, we cancelled
346,206 shares and retained as
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outstanding 332,630 shares of common stock. We recorded a charge to operations
in the fourth quarter of 1999 in the net amount of $2,458,359, representing the
increase from 1995, the date of the previous reissuance of shares of common
stock under this transaction, in the market value of the shares that remained
outstanding ($2,357,005) plus the value of the warrants issued ($101,355).
On June 6, 1991, the Company entered into an agreement (the "1991 Patent
Agreement") with Dr. Alvin Glasky whereby Dr. Glasky assigned to the Company all
rights to the inventions covered by United States Patent No. 5,091,432 and any
corresponding foreign applications and patents, including all continuations,
divisions, reissues and renewals of said applications and any patents issued out
of or based upon said applications (the "Assigned Rights"). The 1991 Patent
Agreement was amended on July 26, 1996. The 1991 Patent Agreement, as amended,
calls for the Company to pay Dr. Glasky a two percent royalty on all revenues
derived by the Company from the use and sale by the Company of any products
covered by these patents and applications or any patents derived from them. In
the event that Dr. Glasky's employment is terminated by the Company without
cause, the royalty rate shall be increased to five percent and in the event that
Dr. Glasky dies during the term of the 1991 Patent Agreement, Dr. Glasky's
family or estate shall be entitled to continue to receive royalties at the rate
of two percent. The 1991 Patent Agreement terminates on the later of its ten
year anniversary or the expiration of the final patent included within the
Assigned Rights. On June 30, 1996, the Company and Dr. Glasky entered into an
agreement whereby Dr. Glasky assigned to AIT all rights to the inventions
covered by United States Patent No. 5,447,939 (the "1996 Patent Agreement"). The
scope of the 1996 Patent Agreement as well as its terms and conditions are
identical in all material respects to the 1991 Patent Agreement; provided,
however, that the aggregate royalty amount with respect to any product shall be
two percent (five percent in the event of termination without cause), even if a
product is based on both patents. The 1996 Patent Agreement was also amended on
July 26, 1996. Dr. Glasky will not receive any royalties with respect to sales
of products, which utilize patent rights licensed to the Company by McMaster
University. A third patent which was issued September 1, 1998 and a fourth
patent, issued on February 22, 2000, are also subject to the royalty provisions
of the 1996 Patent Agreement. See "ITEM 1 - Business - Patents and Proprietary
Rights."
On December 31, 1993, the Company issued 200,000 shares of common stock
to Dr. Glasky in exchange for cancellation of $500,000 of indebtedness for loans
made by Dr. Glasky to the Company. Dr. Glasky received certain registration
rights with respect to these shares. The remaining $257,900 in principal on the
loans payable and accrued interest of $300,404 due to Dr. Glasky were converted
into a $558,304 promissory note which, as amended from time to time, is
currently unsecured, bears interest at 9% per annum, and is payable upon demand.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Exhibits.
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of the Registrant, as filed on May
7, 1997. (Filed as Exhibit B to the Definitive Proxy Statement
dated May 8, 1997, for the Annual Meeting of Shareholders of
NeoTherapeutics Colorado, the predecessor to Registrant, held
on June 17, 1997, as filed with the Securities and Exchange
Commission on May 9, 1997, and incorporated herein by
reference.)
3.2 Bylaws of the Registrant, as amended on March 24, 2000.
4.1 Form of Registration Rights Agreement dated as of July 23,
1996, entered into between the Registrant and certain investors
named therein. (Filed as Exhibit 4.1 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
4.2 Form of Registration Rights Agreement dated December 30, 1993,
entered into between the Registrant and each of Alvin J.
Glasky, Sanford J. Glasky, Joanne Law, Luana M. Kruse, Rosalie
H. Glasky and John W. Baldridge. (Filed as Exhibit 4.2 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
4.3 Form of Representatives' Warrant Agreement dated as of
September 25, 1996, entered into in connection with the public
offering of the Company's securities on September 26, 1996.
(Filed as Exhibit 4.3 to the Registration Statement on Form
SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.4 Form of Stock Purchase Agreement dated December 30, 1993,
including amendment effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as
Exhibit 4.4 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.5 Form of Stock Purchase Agreement dated June 30, 1990, as
amended on May 27, 1992, June 30, 1993, and December 30, 1993,
and amendment thereto effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as
Exhibit 4.5 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.6 Warrant Agreement entered into between NeoTherapeutics, Inc.
and U.S. Stock Transfer Corporation dated as of September 25,
1996. (Filed as Exhibit 4.6 to the Registration Statement on
Form SB-2 as amended (No. 333-05342-LA), and incorporated
herein by reference.)
4.7 Private Equity Line of Credit Agreement between Registrant and
Kingsbridge Capital Limited dated as of March 27, 1998. (Filed
as Exhibit 4.1 to the Registrant's Registration Statement on
form S-3 (No. 333-52331), and incorporated herein by
reference.)
4.8 Registration Rights Agreement between Registrant and
Kingsbridge Capital Limited dated as of March 27, 1998. (Filed
as Exhibit 4.2 to the Registrant's Registration Statement on
form S-3 (No. 333-52331), and incorporated herein by
reference.)
4.9 Warrant to Purchase up to 25,000 shares of common stock of
Registrant, issued to Kingsbridge Capital Limited as of March
27, 1998. (Filed as Exhibit 4.3 to the Registrant's
Registration Statement on Form S-3 (No. 333-52331), and
incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.10 Certificate of Designation of 5% Series A Preferred Stock with
Conversion Features. (Filed as Exhibit 4.1 to Form 8-K, as
filed with the Securities and Exchange Commission on February
9, 1999, and incorporated herein by reference.)
4.11 Preferred Stock Purchase Agreement dated as of January 29,
1999, by and among Registrant, Westover Investments L.P. and
Montrose Investments Ltd. (Filed as Exhibit 4.2 to Form 8-K, as
filed with the Securities and Exchange Commission on February
9, 1999, and incorporated herein by reference.)
4.12 Registration Rights Agreement dated as of January 29, 1999, by
and among Registrant, Westover Investments L.P. and Montrose
Investments Ltd. (Filed as Exhibit 4.3 to Form 8-K, as filed
with the Securities and Exchange Commission on February 9,
1999, and incorporated herein by reference).
4.13 Form of warrant issued by Registrant to Westover Investments
L.P. and Montrose Investments Ltd. dated as of January 29,
1999. (Filed as Exhibit 4.4 to Form 8-K, as filed with the
Securities and Exchange Commission on February 9, 1999, and
incorporated herein by reference.)
4.14 Securities Purchase Agreement dated as of November 19, 1999, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on November
19, 1999, and incorporated herein by reference.)
4.15 Registration Rights Agreement dated as of November 19, 1999, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on November
19, 1999, and incorporated herein by reference.)
4.16 Closing Warrant issued by Registrant to Montrose Investments
Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to
Form 8-K as filed with the Securities and Exchange Commission
on November 19, 1999, and incorporated herein by reference.)
4.17 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of November 19, 1999. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on November 19, 1999, and incorporated
herein by reference.)
4.18 Adjustable Warrant issued by Registrant to Montrose Investments
Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to
Form 8-K as filed with the Securities and Exchange Commission
on November 19, 1999, and incorporated herein by reference.)
4.19 Adjustable Warrant issued by Registrant to Strong River
Investments, Inc., dated as of November 19, 1999. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on November 19, 1999, and incorporated
herein by reference.)
4.20 Securities Purchase Agreement dated as of February 25, 2000, by
and among Registrant, Montrose Investments Ltd. and Strong
River Investments, Inc. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on April 3,
2000, and incorporated herein by reference.)
4.21 Registration Rights Agreement dated as of February 25, 2000, by
and among Registrant, Montrose Investments Ltd. and Strong
River Investments, Inc. (Filed as Exhibit 4.2 to Form 8-K as
filed with the Securities and Exchange Commission on April 3,
2000, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.22 Closing Warrant issued by Registrant to Montrose Investments
Ltd., dated as of February 25, 2000. (Filed as Exhibit 4.3 to
Form 8-K as filed with the Securities and Exchange Commission
on April 3, 2000, and incorporated herein by reference.)
4.23 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of February 25, 2000. (Filed as
Exhibit 4.4 to Form 8-K as filed with the Securities and
Exchange Commission on April 3, 2000, and incorporated herein
by reference.)
10.1* 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.2* Employment Agreement between the Registrant and Alvin J.
Glasky, Ph.D. (Filed as Exhibit 10.3 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
10.3 Note dated June 21, 1996, between the Registrant and Alvin J.
Glasky and related Security Agreement dated August 31, 1990.
(Filed as Exhibit 10.4 to the Registration Statement on Form
SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.4 Warrant to purchase common stock of the Registrant dated August
31, 1990, held by Alvin J. Glasky. (Filed as Exhibit 10.6 to
the Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.5 Agreement dated as of June 6, 1991, as amended on July 26,
1996, by and between the Registrant and Alvin J. Glasky. (Filed
as Exhibit 10.7 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.6 Agreement dated as of June 30, 1991, as amended on July 26,
1996, by and between the Registrant and Alvin J. Glasky. (Filed
as Exhibit 10.8 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.7* Form of Indemnification Agreement between the Registrant and
each of its officers and directors. (Filed as Exhibit 10.10 to
the Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.8 Underwriting Agreement dated as of September 25, 1996, among
the Company, Paulson Investment Company, Inc. and First
Colonial Securities Group, Inc. (Filed as Exhibit 1.1 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.9 Industrial Lease Agreement dated January 16, 1997, between the
Company and the Irvine Company. (Filed as Exhibit 10.11 to the
Form 10-KSB for the fiscal year ended December 31, 1996, as
filed with the Securities and Exchange Commission on March 31,
1997, and incorporated herein by reference).
10.10 Addendum to Note dated June 21, 1996, between the Registrant
and Alvin J. Glasky. (Filed as Exhibit 10.12 to the Form 10-KSB
for fiscal year ended December 31, 1996, as filed with the
Securities and Exchange Commission on March 31, 1997, and
incorporated herein by reference).
10.11* 1997 Stock Incentive Plan. (Filed as Exhibit D to the
Definitive Proxy Statement dated May 8, 1997, for the Annual
Meeting of Shareholders of NeoTherapeutics Colorado, the
predecessor to Registrant, held on June 17, 1997, as filed with
the Securities and Exchange Commission on May 9, 1997, and
incorporated herein by reference).
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EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12 Master Note and Security Agreement between the Registrant and
Leasing Technologies, Inc. dated as of July 10, 1998. (Filed as
Exhibit 4 to Form 10-QSB for the quarter ended September 30,
1998, as filed with the Securities and Exchange Commission on
November 9, 1998, and incorporated herein by reference.)
10.13 Employment Agreement entered into as of May 6, 1999 between
Alvin J. Glasky, Ph.D. and NeoTherapeutics, Inc. (Filed as
Exhibit 10.14 to the Registration Statement on form S-1 (No.
333-79935), and incorporated herein by reference.)
10.14 Form of Financial Consulting Agreement between the Registrant
and Joseph Charles & Associates, Inc. entered into in
connection with the public offering of the Registrant's
securities on July 27, 1999. (Filed as Exhibit 1.4 to the
Registration Statement on Form S-1 (No. 333-79935), and
incorporated herein by reference.)
10.15 Underwriting Agreement between the Registrant and Joseph
Charles & Associates, Inc. entered into in connection with the
public offering of the Registrant's securities on July 27,
1999. (Filed as Exhibit 1.1 to the Registration Statement on
Form S-1, as amended (No. 333-79935), and incorporated herein
by reference.)
21 Subsidiaries of Registrant.
27 Financial Data Schedule.
- ----------------
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. The Registrant filed a Report on Form 8-K dated
January 27, 1999, to report a press releases issued to the public on January 27,
1999. The Registrant filed Reports on Form 8-K dated January 29, 1999, November
19, 1999, and April 3, 2000 to report financing transactions.
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58
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NEOTHERAPEUTICS, INC.
Date: April 12, 2000 By: /s/ Alvin J. Glasky
--------------------------------------
Alvin J. Glasky, Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Alvin J. Glasky Chairman of the Board, April 12, 2000
- -------------------------------------------------- Chief Executive Officer,
Alvin J. Glasky, Ph.D. President and Director
(Principal Executive Officer)
/s/ Samuel Gulko Chief Financial Officer, Secretary, April 12, 2000
- -------------------------------------------------- Treasurer and Director
Samuel Gulko (Principal Accounting and
Financial Officer)
/s/ Mark J. Glasky Director April 12, 2000
- --------------------------------------------------
Mark J. Glasky
/s/ Ann C. Kessler Director April 12, 2000
- --------------------------------------------------
Ann C. Kessler, Ph.D.
/s/ Armin M. Kessler Director April 12, 2000
- --------------------------------------------------
Armin M. Kessler
/s/ Frank M. Meeks Director April 12, 2000
- --------------------------------------------------
Frank M. Meeks
/s/ Carol O'Cleireacain Director April 12, 2000
- --------------------------------------------------
Carol O'Cleireacain, Ph.D.
/s/ Paul H. Silverman Director April 12, 2000
- --------------------------------------------------
Paul H. Silverman Ph.D., D.Sc.
/s/ Stephen Runnels Executive Vice President April 12, 2000
- -------------------------------------------------- and Director
Stephen Runnels
/s/ Eric L. Nelson Director April 12, 2000
- --------------------------------------------------
Eric L. Nelson, Ph.D.
/s/ Joseph Rubinfeld Director April 12, 2000
- --------------------------------------------------
Joseph Rubinfeld, Ph.D.
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Certificate of Incorporation of the Registrant, as filed on May
7, 1997. (Filed as Exhibit B to the Definitive Proxy Statement
dated May 8, 1997, for the Annual Meeting of Shareholders of
NeoTherapeutics Colorado, the predecessor to Registrant, held
on June 17, 1997, as filed with the Securities and Exchange
Commission on May 9, 1997, and incorporated herein by
reference.)
3.2 Bylaws of the Registrant, as amended on March 24, 2000.
4.1 Form of Registration Rights Agreement dated as of July 23,
1996, entered into between the Registrant and certain investors
named therein. (Filed as Exhibit 4.1 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
4.2 Form of Registration Rights Agreement dated December 30, 1993,
entered into between the Registrant and each of Alvin J.
Glasky, Sanford J. Glasky, Joanne Law, Luana M. Kruse, Rosalie
H. Glasky and John W. Baldridge. (Filed as Exhibit 4.2 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
4.3 Form of Representatives' Warrant Agreement dated as of
September 25, 1996, entered into in connection with the public
offering of the Company's securities on September 26, 1996.
(Filed as Exhibit 4.3 to the Registration Statement on Form
SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.4 Form of Stock Purchase Agreement dated December 30, 1993,
including amendment effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as
Exhibit 4.4 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.5 Form of Stock Purchase Agreement dated June 30, 1990, as
amended on May 27, 1992, June 30, 1993, and December 30, 1993,
and amendment thereto effective December 30, 1995, between the
Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne
Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as
Exhibit 4.5 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
4.6 Warrant Agreement entered into between NeoTherapeutics, Inc.
and U.S. Stock Transfer Corporation dated as of September 25,
1996. (Filed as Exhibit 4.6 to the Registration Statement on
Form SB-2 as amended (No. 333-05342-LA), and incorporated
herein by reference.)
4.7 Private Equity Line of Credit Agreement between Registrant and
Kingsbridge Capital Limited dated as of March 27, 1998. (Filed
as Exhibit 4.1 to the Registrant's Registration Statement on
form S-3 (No. 333-52331), and incorporated herein by
reference.)
4.8 Registration Rights Agreement between Registrant and
Kingsbridge Capital Limited dated as of March 27, 1998. (Filed
as Exhibit 4.2 to the Registrant's Registration Statement on
form S-3 (No. 333-52331), and incorporated herein by
reference.)
4.9 Warrant to Purchase up to 25,000 shares of common stock of
Registrant, issued to Kingsbridge Capital Limited as of March
27, 1998. (Filed as Exhibit 4.3 to the Registrant's
Registration Statement on Form S-3 (No. 333-52331), and
incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
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4.10 Certificate of Designation of 5% Series A Preferred Stock with
Conversion Features. (Filed as Exhibit 4.1 to Form 8-K, as
filed with the Securities and Exchange Commission on February
9, 1999, and incorporated herein by reference.)
4.11 Preferred Stock Purchase Agreement dated as of January 29,
1999, by and among Registrant, Westover Investments L.P. and
Montrose Investments Ltd. (Filed as Exhibit 4.2 to Form 8-K, as
filed with the Securities and Exchange Commission on February
9, 1999, and incorporated herein by reference.)
4.12 Registration Rights Agreement dated as of January 29, 1999, by
and among Registrant, Westover Investments L.P. and Montrose
Investments Ltd. (Filed as Exhibit 4.3 to Form 8-K, as filed
with the Securities and Exchange Commission on February 9,
1999, and incorporated herein by reference).
4.13 Form of warrant issued by Registrant to Westover Investments
L.P. and Montrose Investments Ltd. dated as of January 29,
1999. (Filed as Exhibit 4.4 to Form 8-K, as filed with the
Securities and Exchange Commission on February 9, 1999, and
incorporated herein by reference.)
4.14 Securities Purchase Agreement dated as of November 19, 1999, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on November
19, 1999, and incorporated herein by reference.)
4.15 Registration Rights Agreement dated as of November 19, 1999, by
and among Registrant, Strong River Investments, Inc. and
Montrose Investments Ltd. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on November
19, 1999, and incorporated herein by reference.)
4.16 Closing Warrant issued by Registrant to Montrose Investments
Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to
Form 8-K as filed with the Securities and Exchange Commission
on November 19, 1999, and incorporated herein by reference.)
4.17 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of November 19, 1999. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on November 19, 1999, and incorporated
herein by reference.)
4.18 Adjustable Warrant issued by Registrant to Montrose Investments
Ltd., dated as of November 19, 1999. (Filed as Exhibit 4.1 to
Form 8-K as filed with the Securities and Exchange Commission
on November 19, 1999, and incorporated herein by reference.)
4.19 Adjustable Warrant issued by Registrant to Strong River
Investments, Inc., dated as of November 19, 1999. (Filed as
Exhibit 4.1 to Form 8-K as filed with the Securities and
Exchange Commission on November 19, 1999, and incorporated
herein by reference.)
4.20 Securities Purchase Agreement dated as of February 25, 2000, by
and among Registrant, Montrose Investments Ltd. and Strong
River Investments, Inc. (Filed as Exhibit 4.1 to Form 8-K as
filed with the Securities and Exchange Commission on April 3,
2000, and incorporated herein by reference.)
4.21 Registration Rights Agreement dated as of February 25, 2000, by
and among Registrant, Montrose Investments Ltd. and Strong
River Investments, Inc. (Filed as Exhibit 4.2 to Form 8-K as
filed with the Securities and Exchange Commission on April 3,
2000, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
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4.22 Closing Warrant issued by Registrant to Montrose Investments
Ltd., dated as of February 25, 2000. (Filed as Exhibit 4.3 to
Form 8-K as filed with the Securities and Exchange Commission
on April 3, 2000, and incorporated herein by reference.)
4.23 Closing Warrant issued by Registrant to Strong River
Investments, Inc., dated as of February 25, 2000. (Filed as
Exhibit 4.4 to Form 8-K as filed with the Securities and
Exchange Commission on April 3, 2000, and incorporated herein
by reference.)
10.1* 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.2* Employment Agreement between the Registrant and Alvin J.
Glasky, Ph.D. (Filed as Exhibit 10.3 to the Registration
Statement on Form SB-2 as amended (No. 333-05342-LA), and
incorporated herein by reference.)
10.3 Note dated June 21, 1996, between the Registrant and Alvin J.
Glasky and related Security Agreement dated August 31, 1990.
(Filed as Exhibit 10.4 to the Registration Statement on Form
SB-2 as amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.4 Warrant to purchase common stock of the Registrant dated August
31, 1990, held by Alvin J. Glasky. (Filed as Exhibit 10.6 to
the Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.5 Agreement dated as of June 6, 1991, as amended on July 26,
1996, by and between the Registrant and Alvin J. Glasky. (Filed
as Exhibit 10.7 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.6 Agreement dated as of June 30, 1991, as amended on July 26,
1996, by and between the Registrant and Alvin J. Glasky. (Filed
as Exhibit 10.8 to the Registration Statement on Form SB-2 as
amended (No. 333-05342-LA), and incorporated herein by
reference.)
10.7* Form of Indemnification Agreement between the Registrant and
each of its officers and directors. (Filed as Exhibit 10.10 to
the Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.8 Underwriting Agreement dated as of September 25, 1996, among
the Company, Paulson Investment Company, Inc. and First
Colonial Securities Group, Inc. (Filed as Exhibit 1.1 to the
Registration Statement on Form SB-2 as amended (No.
333-05342-LA), and incorporated herein by reference.)
10.9 Industrial Lease Agreement dated January 16, 1997, between the
Company and the Irvine Company. (Filed as Exhibit 10.11 to the
Form 10-KSB for the fiscal year ended December 31, 1996, as
filed with the Securities and Exchange Commission on March 31,
1997, and incorporated herein by reference).
10.10 Addendum to Note dated June 21, 1996, between the Registrant
and Alvin J. Glasky. (Filed as Exhibit 10.12 to the Form 10-KSB
for fiscal year ended December 31, 1996, as filed with the
Securities and Exchange Commission on March 31, 1997, and
incorporated herein by reference).
10.11* 1997 Stock Incentive Plan. (Filed as Exhibit D to the
Definitive Proxy Statement dated May 8, 1997, for the Annual
Meeting of Shareholders of NeoTherapeutics Colorado, the
predecessor to Registrant, held on June 17, 1997, as filed with
the Securities and Exchange Commission on May 9, 1997, and
incorporated herein by reference).
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EXHIBIT NO. DESCRIPTION
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10.12 Master Note and Security Agreement between the Registrant and
Leasing Technologies, Inc. dated as of July 10, 1998. (Filed as
Exhibit 4 to Form 10-QSB for the quarter ended September 30,
1998, as filed with the Securities and Exchange Commission on
November 9, 1998, and incorporated herein by reference.)
10.13 Employment Agreement entered into as of May 6, 1999 between
Alvin J. Glasky, Ph.D. and NeoTherapeutics, Inc. (Filed as
Exhibit 10.14 to the Registration Statement on form S-1 (No.
333-79935), and incorporated herein by reference.)
10.14 Form of Financial Consulting Agreement between the Registrant
and Joseph Charles & Associates, Inc. entered into in
connection with the public offering of the Registrant's
securities on July 27, 1999. (Filed as Exhibit 1.4 to the
Registration Statement on Form S-1 (No. 333-79935), and
incorporated herein by reference.)
10.15 Underwriting Agreement between the Registrant and Joseph
Charles & Associates, Inc. entered into in connection with the
public offering of the Registrant's securities on July 27,
1999. (Filed as Exhibit 1.1 to the Registration Statement on
Form S-1, as amended (No. 333-79935), and incorporated herein
by reference.)
21 Subsidiaries of Registrant.
27 Financial Data Schedule.
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* Indicates a management contract or compensatory plan or arrangement.