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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, 1998
[ ] 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 16, 1999, was $43,383,538.
As of March 16, 1999, there were 6,225,709 shares of the registrant's common
stock outstanding.
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TABLE OF CONTENTS
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PART I
Item 1. Business....................................................... 3
Item 2. Properties..................................................... 18
Item 3. Legal Proceedings.............................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............ 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ..................................................... 20
Item 6. Selected Financial Data........................................ 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 26
Item 8. Financial Statements and Supplementary Data.................... 27
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant............. 46
Item 11. Executive Compensation......................................... 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... 52
Item 13. Certain Relationships and Related Transactions................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K .................................................... 55
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 neurodegenerative 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. The Company's initial
product candidate, NEOTROFIN(TM) (AIT-082, leteprinim potassium) and other
compounds under development are based on the Company's 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 the Company's AIT-082 compound appears to
selectively increase the production of certain neurotrophic factors, a type of
large protein, in the areas of the brain implicated in memory and in the spinal
cord. These neurotrophic factors regulate nerve cell growth and function. The
Company's 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. The
Company believes that AIT-082 could have therapeutic and regenerative effects.
The Company's 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 the Company's AIT-082 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. The NIH's National Institute for Mental Health ("NIMH") also
supported the Company's development efforts by contracting for and providing
funds, along with the NIA, for the production of sufficient quantities of the
AIT-082 compound to conduct some pre-clinical toxicity testing and the two Phase
1 human clinical trials conducted by the ADCS.
In June 1997, an Investigational New Drug Application ("IND") for
AIT-082 was approved by the U.S. Food and Drug Administration ("FDA") and Phase
I human clinical testing in the United States for the treatment of Alzheimer's
disease began. In addition, AIT-082 received a physician's IND in Canada in
March 1997, where a Phase 1 clinical trial for the treatment of Alzheimer's
disease was completed. The Company believes that AIT-082 is the first orally
active drug to enter human clinical trials that is specifically designed to
address the issue of nerve regeneration. In pre-clinical trials, AIT-082 has
been shown to induce the production of multiple neurotrophic factors in the
brain. 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. The Company believes that AIT-082
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.
The Company was incorporated in Colorado in December 1987. On August 7,
1996, the Company changed its name from Americus Funding Corporation to
NeoTherapeutics, Inc. In June 1997, the stockholders approved the
reincorporation of NeoTherapeutics, Inc. as a Delaware corporation. A wholly
owned subsidiary, Advanced ImmunoTherapeutics, Inc. ("AIT"), was incorporated as
a California corporation in June 1987. In July 1989, in a transaction
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accounted for as a reverse acquisition, all of the shareholders of AIT exchanged
all of their shares of AIT common stock for shares of the Company's common
stock, and AIT became a wholly owned subsidiary of the Company. In April 1997,
the Company established NeoTherapeutics GmbH ("NEOT GmbH"), a wholly owned
subsidiary in Switzerland, for the purpose of conducting future licensing and
other related activities in the international market. Unless the context
otherwise requires, all references to the "Company" and "NeoTherapeutics" refer
to NeoTherapeutics, Inc., a Delaware corporation, AIT and NEOT GmbH 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 most 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 do 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 the early neuroscience-oriented biotechnology research centered
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.
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 and 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 taken by the Company, 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. The
small-molecule approach taken by the Company, 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. The Company
believes that such a development could represent a major advance in the
treatment of neurological disorders.
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THE COMPANY'S DRUG DEVELOPMENT STRATEGY
The Company is engaged in research that has primarily focused on the
development of new drugs that act on the nervous system to treat
neurodegenerative 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.
The technical strategy employed by the Company 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
specific molecules and their methods of use have been patented by the Company.
The Company's 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 the Company's proprietary AIT series of compounds.
The various molecules that are linked to hypoxanthine are selected from known
drugs that have established therapeutic activity, producing a potentially
bi-functional compound. These compounds exhibit certain functional features of
both hypoxanthine (including its ability to possibly facilitate passage through
the blood-brain barrier) and the linked therapeutic drugs. Chemical and
behavioral studies have given the Company reason to believe that this compound
synthesis and selection process increases the probability that the new AIT
compounds will retain the actions exhibited by their "parent" drugs.
The Company conducts the synthesis and early testing to establish
therapeutic potential necessary to obtain patents on new compounds. In that
regard, the Company has conducted pre-clinical testing of the safety and
efficacy of certain of its compounds and intends to file an IND for each such
compound which shows therapeutic potential. With respect to the Company's
AIT-082 compound, some Phase I clinical trials will be conducted by the ADCS
with the support of the NIH, and the Company intends to conduct all other
clinical trials pending. The Company intends to seek out large pharmaceutical
companies as partners for the development, manufacture and marketing of certain
of its other compounds.
PRODUCTS IN DEVELOPMENT
The table below summarizes the primary or possible indications and
development status for some of NeoTherapeutics' 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: Three clinical trials completed, one in
(AIT-082) progress and additional Phase 1 studies
to be conducted in 1999
Phase 2: One clinical trial completed, one in
progress
Spinal Cord Injury Pre-IND: Clinical trial planned for 1999
Stroke Pre-IND
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AIT-034 Severe Dementia Pre-IND: IND Submission planned Q4, 1999
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AIT-202 Depression; obesity Pre-IND
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AIT-203 Parkinson's Disease Pre-IND
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AIT-297 Migraine Pre-IND
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No assurance can be made that any of the Company's compounds will prove
to be effective treatments for the indicated diseases or conditions or for any
other purposes, or that any such compounds will receive FDA approval.
NEOTROFIN(TM) (AIT-082)
The Company's AIT-082 compound is the most extensively studied compound
in the AIT series and has been the primary focus of the Company's research
efforts. AIT-082 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, the Company believes that AIT-082 has
potential as a treatment for memory impairments that are seen in the aged and
stroke patients. AIT-082 also has potential for treatment of patients with nerve
damage such as stroke and spinal cord injury.
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Pre-clinical testing involving laboratory animals conducted by the
Company and independent research institutions has indicated that AIT-082
exhibits the following properties and/or effects:
o MEMORY: Shown to reduce, delay and prevent memory deficits in aged
animals; shown to enhance memory function in young and aged animals.
o TOXICITY: Shown to be non-toxic at the highest testable oral dosage in
dogs (1,000 mg/kg) and rats (3,000 mg/kg) after at least 90 days of
administration.
o DOSAGE: Effective over a wide range of doses in animals, with
effectiveness observed at doses as low as 0.5 mg/kg and up to 60 mg/kg;
a single dose has been observed to have measurable effects for more than
seven days in mice.
o ADMINISTRATION: Active both orally and through injection.
o SIDE EFFECTS: Has no measured effect in mice on neurological parameters
such as learning rate, motivation, performance or locomotor activity.
Until completion of human clinical trials, there can be no assurance
that these properties and/or effects can be replicated in humans.
The Company has shown that when administered to neurons in tissue
culture, AIT-082 can induce the same neurite outgrowth effects as nerve growth
factor ("NGF"). The Company has also shown that AIT-082 causes the production of
messenger RNA for multiple neurotrophic factors in tissue culture. In addition,
the Company has demonstrated that oral administration of AIT-082 increases the
levels of messenger RNA for multiple neurotrophic factors and proteins 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 than the administration of a single factor. The
Company believes that AIT-082's mechanism of action (after it has passed through
the blood-brain barrier) 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 oral AIT-082 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 memory.
The NIA and the NIMH have contracted for and completed production of
sufficient quantities of AIT-082 to conduct subchronic animal toxicity studies
and early human clinical trials and have provided the funding for these
contracts. An IND was approved for AIT-082 by the U.S. FDA in June 1997.
The ADCS reviewed the Company's pre-clinical test data and approved
conducting such clinical trials with AIT-082 after FDA approval of the Company's
IND. A Phase 1 clinical study of AIT-082 in the United States began in July
1997. This study and one additional study, initiated in October 1998, will be
paid for and conducted in the United States by the ADCS. In September 1997, the
Geriatric Research Group and Memory Clinic, McMaster University, Hamilton,
Ontario, completed two Phase 1 clinical trials on AIT-082. The composite results
from the Phase 1 clinical trials completed to date confirm that AIT-082 is
rapidly absorbed after oral administration and produces no serious side effects
at high doses. In 1998 the Company completed an additional Phase 1 study (repeat
dosing) and initiated the first Phase 2 study of AIT-082 for 28 days of
treatment. In the first quarter of 1999, the Company completed one Phase 2
clinical trial (28 days of dosing) and initiated a larger, Phase 2 clinical
trial (90 days of dosing) in Canada, Australia and the Republic of South Africa.
The Company expects that it will have to fund additional animal and human
studies that may include an additional Phase 2 and possibly two Phase 3 human
clinical studies prior to submitting AIT-082 to the FDA for marketing approval.
There can be no assurance, however, that clinical trials of AIT-082 will be
successful, that the marketing of AIT-082 will be approved by the FDA, or that
AIT-082 can be successfully marketed to its targeted population. See "Drug
Approval Process and Government Regulation."
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OTHER COMPOUNDS IN DEVELOPMENT
Due to the historically limited resources available to the Company and
the Company's decision to focus those resources on the development of its
AIT-082 compound, its 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
AIT-082. AIT-034 does not induce the production of NGF, and its mechanism of
action is therefore believed to be different than AIT-082. The Company believes
that AIT-034 could be a complementary product for Alzheimer's disease. The
Company expects initial toxicity studies on AIT-034 to commence in 1999.
AIT-203: AIT-203 is a chemical derivative of hypoxanthine and dopamine.
The Company believes that AIT-203 has the potential of being developed as a
product for the treatment of Parkinson's disease. The Company plans to expand
pre-clinical testing and initiate toxicity studies on AIT-203 in 1999.
AIT-297: AIT-297 is a derivative of hypoxanthine that has shown in
preliminary studies activities which indicate its potential use for migraine and
hypertension. The Company anticipates expanding pre-clinical testing and
initiating toxicity studies on AIT-297 in 1999.
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 National Alzheimer's Association
has estimated that the overall care costs required for the treatment and care of
the estimated four million United States Alzheimer's disease patients is $100
billion per year.
The Company is testing two compounds, AIT-082 and AIT-034, which have
shown preliminary indications in animals of enhancing or restoring memory, and
have potential to be used to treat Alzheimer's disease patients.
MEMORY IMPAIRMENT ASSOCIATED WITH AGING. Because the populations of
developed countries are increasingly becoming older, 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 AIT-082 and AIT-034 have shown to be effective in
ameliorating memory loss associated with aging in mice.
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. The Company is focusing its emphasis in the treatment of strokes on
protecting the cells from injury or degeneration caused by strokes. Since
AIT-082 has the potential to enhance nerve regeneration, the Company believes
that AIT-082 may prove useful in the treatment of stroke.
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 AIT-082 has been
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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. The Company believes that AIT-082 could
potentially be used to stimulate the regeneration of nerves damaged by spinal
cord injury. The Company has paid $50,000 and has committed an additional
$50,000 for the establishment of a NeoTherapeutics Fellowship as part of the
Reeve-Irvine Research Center for spinal cord injury at the University of
California, Irvine.
BUSINESS STRATEGY
MARKETING AND SALES
The Company does not currently sell any products and therefore has no
marketing, sales, or distribution organization. However, under the terms of any
contemplated licensing agreement for developing and commercializing AIT-082 or
any of its products, the Company may retain an option to co-market the product
in the United States.
The Company believes the support of the NIA and NIMH, along with ADCS,
the clinical arm of the NIA's research on Alzheimer's disease, contributes
significantly to the future marketing and educational efforts directed to
physicians who treat Alzheimer's disease patients. The Company believes that
this exposure to the leaders in the field of neurodegenerative diseases may
reduce the time and marketing costs required to introduce the Company's products
when and if they are approved by the FDA.
PRODUCTION
The Company currently has its compounds manufactured in large scale by
third party vendors and has no plans to establish its own manufacturing
facilities. In connection with any licensing arrangements it may enter into, the
Company intends to retain the rights to control the manufacturing and sale of
its compounds to its licensees. Preliminary estimates indicate that AIT-082 can
be manufactured cost effectively.
STRATEGIC ALLIANCE
The Company believes that its patented technology platform provides a
major commercial opportunity for developing strategic alliances with larger
pharmaceutical companies. It is the intent of the Company to complete a series
of strategic alliances with multi-national or large regional pharmaceutical
companies having substantial financial capacity, marketing capability and
clinical development expertise. Any potential collaborations will enable the
Company to focus on its 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.
The Company chose to postpone the structuring of a corporate sponsored licensing
agreement for AIT-082, in favor of an early stage, government-assisted
development program. By completing strategic alliances later in the development
cycle, the Company believes this may create an improved value for its
shareholders that may be reflected in the enhanced terms of any licensing
agreement.
RESEARCH OUTSOURCING
The Company currently has several proprietary compounds in various
stages of preclinical development. From time to time, the Company evaluates
these compounds for efficacy in specialized assays or models. In these instances
the Company has chosen to locate academic researchers who are experts in
performing the desired tests and has provided the researchers, through their
respective academic institutions, with grants to perform the designated tests
while the Company maintains proprietary rights to the compounds and these
studies are performed to the highest standards.
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CONTEMPLATED LICENSING TERMS FOR AIT-082
In general, the terms of a licensing agreement anticipated by the
Company for its lead compound, AIT-082, will include an up front payment,
milestone payments, and royalties on product sales.
From time to time, the Company is engaged in licensing discussions with
one or more multinational or regional pharmaceutical companies. No assurance can
be made that any such discussions will result in a commercial transaction on
terms acceptable to the Company.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The production and marketing of the Company's products and its research
and development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the 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 the Company's 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 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 pre-clinical phase.
PRE-CLINICAL TESTING. During the pre-clinical 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 pre-clinical 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 a hospital or clinic where the proposed studies
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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 usually between 20 and 80
healthy volunteers, 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, as well as the duration of its action.
PHASE 2 CLINICAL TRIALS. In Phase 2 clinical trials, controlled studies
of approximately 100 to 300 volunteer patients with the targeted disease assess
the drug's effectiveness. These studies are designed primarily 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 1,000 to 3,000 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.
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.
Drugs designated as "fast track" must meet both these qualifications. It is
unclear at this time if AIT-082 will fulfill this requirement as there are
currently approved drugs available for the treatment of Alzheimer's disease. It
may be possible that AIT-082 would qualify for fast track classification in a
different disease indication. At this time the Company has not requested fast
track designation for AIT-082.
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. The Company
believes that AIT-082 will qualify for priority review.
APPROVAL. If the FDA approves the NDA, the drug becomes available for
physicians to prescribe. The Company 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.
In addition to regulations enforced by the FDA, the Company is 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. The Company's research and development activities involves
the controlled use of hazardous materials, chemicals, viruses and various
radioactive compounds. Although the Company believes that its safety procedures
for handling and disposing of such materials comply with the standards
prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result, and any such liability could exceed the resources of the Company.
For marketing outside the United States, the Company or its prospective
licensees will be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.
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RESEARCH AND DEVELOPMENT
Since its inception, the Company has devoted substantially all of its
efforts to research and development. Research and development expenditures were
$615,485 in 1996, $4,508,255 in 1997 and $8,542,034 in 1998.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are vital to the Company's
business. The Company's policy is to seek patent protection for its proprietary
compounds and technology, and it intends to protect its technology, inventions
and improvements to inventions that are commercially important to the
development of its business. The Company also intends to rely on trade secrets,
know-how, continuing technology innovations and licensing arrangements to
develop and maintain its competitive position.
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 neurodegenerative
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, Dr. Glasky was issued a second
United States patent (No. 5,447,939) 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
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 incorporates certain technology developed under the auspices of,
and belonging to, McMaster University in Ontario, Canada.
All three patents have been assigned to the Company by Dr. Glasky. In
connection with these assignments, Dr. Glasky has been granted a royalty of two
percent of all revenues derived by the Company from the use and sale by the
Company 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 the Company by McMaster
University. In the event the Company 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, the Company and
McMaster University have entered into a license agreement whereby McMaster
University has licensed to the Company all patent rights belonging to McMaster
University contained in such patent. This agreement calls for minimum payments
by the Company of $25,000 per year to McMaster University, with the first
payment due in July of 1997, and for the Company to pay to McMaster University a
royalty of five percent of the net sales of all products sold by the Company
which incorporate the patent rights licensed to the Company by McMaster
University. The third U.S. patent is 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, the Company also
currently has five 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 the Company's 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 the Company with respect to its products or
technology or other matters. There may be third-party patents and other
intellectual property relevant to the Company's products and technology which
are not known to the Company. Patent litigation is becoming more common in
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the biopharmaceutical industry. Litigation may be necessary to defend against or
assert claims of infringement, to enforce patents issued to the Company, to
protect trade secrets owned by the Company or to determine the scope and
validity of proprietary rights of third parties. Although no third party has
asserted that the Company is infringing such third party's patent rights or
other intellectual property, there can be no assurance that litigation asserting
such claims will not be initiated, that the Company would prevail in any such
litigation or that the Company would be able to obtain any necessary licenses on
reasonable terms, if at all. Any such claims against the Company, whether
meritorious or not, as well as claims initiated by the Company against third
parties, can be time consuming and expensive to defend or prosecute and to
resolve. If competitors of the Company prepare and file patent applications in
the United States that claim technology also claimed by the Company, the Company
may have to participate in interference proceedings declared by the Patent and
Trademark Office to determine priority of invention, which could result in
substantial cost to the Company, even if the outcome were to ultimately be
favorable to the Company. The results of such proceedings are highly
unpredictable and, as a result of such proceedings, the Company may have to
obtain licenses in order to continue to conduct clinical trials, manufacture or
market certain of its products. No assurance can be made that the Company will
be able to obtain any such licenses on favorable terms, if at all.
The Company also relies upon unpatented trade secrets and improvements,
unpatented know-how and continuing technological innovation to develop and
maintain its competitive position, which it seeks to protect in part, by
confidentiality agreements with its employees and consultants and with corporate
partners and/or collaborators as such relationships are formed in the future.
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. In the case of employees, the agreements provide that
all inventions conceived by the individual while employed by the Company shall
be the exclusive property of the Company. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for breach, or that the Company's 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 the
Company. The Company's 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., Hoechst Marion Roussel Ltd. 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 they have developed, some of
which may be directly competitive with that of the Company. These companies and
institutions also compete with the Company in recruiting highly qualified
scientific personnel. Many of the Company's competitors have substantially
greater financial, research and development, human and other resources than the
Company. Furthermore, large pharmaceutical companies have significantly more
experience than the Company in pre-clinical testing, human clinical trials and
regulatory approval procedures.
Although the Company has begun to conduct clinical trials with respect
to AIT-082, the Company has not conducted clinical trials with respect to any of
its other compounds under development nor has it sought the approval of the FDA
for any product based on such compounds. Furthermore, if the Company is
permitted to commence commercial sales of products based on compounds it
develops, including AIT-082, and decides to manufacture and sell such products
itself, then the Company will also be competing with respect to manufacturing
efficiency and marketing capabilities, which are areas in which the Company has
no prior experience.
Any product for which the Company obtains 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), licensed by Pfizer, Inc. from Eisai
Co., Ltd.
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Certain technologies under development by other pharmaceutical companies
could result in treatments for Alzheimer's disease and other diseases and
disorders for which the Company is developing its own treatments. Several other
companies are engaged in research and development of compounds which use
neurotrophic factors in a manner similar to that of the Company's compounds. In
the event that one or more of these programs are successful, the market for the
Company's products could be reduced or eliminated.
The Company expects technological developments in the neuropharmacology
field to continue to occur at a rapid rate and expects competition will remain
intense as advances continue to be made. Although the Company believes, based on
the preliminary pre-clinical test results involving certain of its compounds,
that it will be able to continue to compete in the discovery and early clinical
development of compounds for neurological disorders, there can be no assurance
that the Company will be able to do so, and the Company does not presently have
sufficient resources to compete with major pharmaceutical companies in the areas
of later-stage clinical testing, manufacturing and marketing.
EMPLOYEES
As of December 31, 1998, the Company had thirty-three full-time
employees, of which seven hold Ph.D. degrees, and one part-time employee. There
can be no assurance that the Company will be able to attract and retain
qualified personnel in sufficient numbers to meet its needs. The Company's
employees are not subject to any collective bargaining agreements, and the
Company regards its relations with its employees to be good.
RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1993 and Section 21E
of the Securities Exchange Act of 1934. In light of the important factors that
can materially affect results, including those set forth below, the inclusion of
forward-looking information herein should not be regarded as a representation by
the Company or any other person that the objectives or plans for the Company
will be achieved. Assumptions relating to budgeting, research, and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its research,
capital expenditure or other budgets, which may in turn affect the Company's
business, financial position, results of operations and cash flows. The reader
is therefore cautioned not to place undue reliance on forward-looking statements
contained herein, which speak as of the date of this Annual Report on Form 10-K.
HISTORICAL OPERATING LOSSES; EXPECTED CONTINUED LOSSES
We are considered to be a development stage company because we have not
generated revenues from sales. Moreover, even if we eventually generate revenues
from sales, we nevertheless expect to incur significant operating losses over
the next several years. From our inception in 1987 through December 31, 1998, we
have incurred cumulative losses of approximately $23.8 million, almost all of
which consisted of research and development and general and administrative
expenses. Our ability to become profitable will depend on (1) our development of
our proposed products, (2) our obtaining regulatory approvals for such products
and (3) our success in bringing these products to market. Many factors have a
bearing on our likelihood of long-term success. These include the expenses,
difficulties and delays frequently encountered in the development and
commercialization of new pharmaceutical products, competitive factors in the
marketplace and the burdensome regulatory environment in which we operate. It is
possible that we may never achieve significant revenues or become profitable.
EARLY STAGE OF PRODUCT DEVELOPMENT; RISK OF FAILURE
Our proposed products are in an early stage of development. They will
require additional research and development, clinical testing and regulatory
clearances. We do not currently sell any products and do not expect to have any
products commercially available for at least several years. Our proposed
products are subject to the risks of failure inherent in the development of
pharmaceutical products based on innovative technologies. Some of these risks
are that a proposed product (1) could be found to be ineffective or toxic,
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(2) may fail to receive necessary regulatory clearances, (3) will be
uneconomical to manufacture or market, (4) may not be sold because of patent or
other rights of third parties or (5) becomes unmarketable because a third party
introduces a superior or equivalent product. As a result, we are unable to
predict whether our research and development activities will result in any
commercially viable products or applications. Our primary area of therapeutic
focus, disorders of the central nervous system, is not thoroughly understood and
we cannot be certain that our proposed products will prove to be safe or
effective in treating such disorders or any other diseases.
NEED FOR ADDITIONAL FUNDING; UNCERTAIN ACCESS TO CAPITAL
We will require substantial additional capital to further develop our
proposed products and to commercialize any products that may be developed. Our
capital requirements will depend on many factors, including (1) the progress of
our research and development programs, (2) the progress of pre-clinical and
clinical testing, (3) the time and cost involved in obtaining regulatory
approvals, (4) the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights, (5) competing technological and
market developments and (6) our ability to establish collaborative and other
arrangements with third parties, such as licensing and manufacturing agreements.
On March 27, 1998, we entered into a Private Equity Line of Credit
Agreement with a private investor (the "Equity Line Agreement"). Under the
Equity Line Agreement we may, at our option, sell shares of our common stock to
the investor at a price equal to 88% of the market price of the common stock at
the time of such sales, subject to certain limitations contained in the Equity
Line Agreement. At December 31, 1998, we had the remaining availability of
approximately $11.5 million under the Equity Line Agreement. On January 29,
1999, we entered into an Agreement with two private investors to sell up to $6.0
million of preferred stock with conversion rights into common stock. The initial
tranche of $4.0 million was received on January 29, 1999. At our option, under
certain circumstances, we may sell to the investors an additional $2.0 million
after approximately 6 months.
We believe that our existing capital resources, including the proceeds
from any future sales of our equities under the Equity Line and Preferred Stock
Agreements, will be sufficient to satisfy our current and projected funding
requirements for the next 12 months. Thereafter, we may require substantial
additional capital. Moreover, if we experience unanticipated cash requirements
during the next 12 months, we could require additional capital sooner. We may
seek such additional funding through public or private financing or
collaborative or other arrangements with third parties. We cannot be certain
that additional funds will be available on acceptable terms, if at all. From
time to time, we may receive additional funds from the exercise of our
outstanding warrants and stock options, but we cannot be certain that these will
be exercised or that the amounts we receive will be sufficient for our purposes.
If we raise additional funds by issuing equity securities, our existing
stockholders may experience substantial dilution. We may be able to obtain
additional funds through sales of our common stock under our Equity Line
Agreement, but we may not be able to do so under certain circumstances. If
adequate funds are not available, we may be required to delay, scale back or
eliminate one or more of our development programs. Alternatively, we may obtain
funds by entering into arrangements with third parties. These arrangements may
require us to relinquish rights to certain of our products or technologies that
we would not otherwise relinquish.
DEPENDENCE ON THIRD PARTIES FOR CLINICAL TESTING, MANUFACTURING AND MARKETING
Except with respect to our NEOTROFIN(TM) (AIT-082) compound, we may not
conduct later-stage human clinical trials ourselves or to manufacture any of our
proposed products for commercial sale nor do we have the resources necessary to
do so. We intend to seek larger pharmaceutical companies as partners to conduct
such activities. In connection with our efforts to secure corporate partners, we
will seek to retain certain co-marketing rights to certain of our proposed
products, so that we may promote such products to selected medical specialists
while our corporate partner promotes these products to the medical market
generally. We cannot be certain that we will be able to enter into any such
partnering arrangements on this or any other basis. In addition, we cannot be
certain that we or our potential corporate partners can successfully introduce
our proposed products or that such proposed products will achieve acceptance by
patients, health care providers and insurance companies. Further, it is possible
that we may not be able to manufacture and market our proposed products at
prices that would permit us to make a profit.
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LACK OF OPERATING EXPERIENCE
To date, we have engaged exclusively in the development of
pharmaceutical technology and products. Our management has substantial
experience in pharmaceutical company operations, but NeoTherapeutics itself has
no experience in manufacturing or procuring products in commercial quantities or
in marketing pharmaceutical products and has only limited experience in
negotiating, setting up and maintaining strategic relationships, conducting
clinical trials and other later-stage phases of the regulatory approval process.
We cannot be certain that we will be able to successfully engage in any of these
activities with respect to any of our proposed products which we may attempt to
commercialize. If we decide to establish a commercial-scale manufacturing
facility for NEOTROFIN(TM) (AIT-082), we will require substantial additional
funds and personnel and will be required to comply with extensive regulations
applicable to such a facility. We cannot be certain that we will be able to
successfully develop manufacturing or marketing capabilities either on our own
or through third parties.
NEED TO COMPLY WITH GOVERNMENTAL REGULATION AND TO OBTAIN PRODUCT APPROVALS
Various regulatory agencies in the United States and abroad regulate the
testing, manufacturing, labeling, distribution, marketing and advertising of our
proposed products and our ongoing research and development activities. The U.S.
FDA and comparable agencies in foreign countries impose many requirements on the
introduction of new pharmaceutical products through lengthy and detailed
clinical testing procedures, sampling activities and other costly and time
consuming compliance procedures. Our proprietary compounds will require
substantial clinical trials and FDA review as new drugs. We cannot predict with
certainty when we might submit any of our proposed products currently under
development for regulatory review. Once we submit a proposed product for review,
there can be no assurance that FDA or other regulatory approvals for any of our
proposed products will be granted on a timely basis, if at all. If we are
delayed or fail to obtain such approvals, our business and results of operations
would be damaged. If we fail to comply with regulatory requirements we could be
subject to regulatory or judicial enforcement actions. These actions could
result in product recalls or seizures, injunctions, civil penalties, criminal
prosecution, refusals to approve new products and withdrawal of existing
approvals, as well as potentially enhanced product liability exposure. If we
sell our products outside the United States, we will be subject to regulatory
requirements governing such sales. These requirements vary widely from country
to country and could delay introduction of our proposed products in those
countries.
DEPENDENCE ON KEY PERSONNEL
Our success will depend largely upon the contributions of our key
management and scientific personnel. If we lose the services of any such
personnel we could be delayed in or precluded 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 could
substantially damage our business. We will need substantial additional expertise
in such areas as research, finance and marketing, among others in order to
achieve our business objective. Competition for qualified personnel among
pharmaceutical companies is intense, and the loss of key personnel, or the
inability to attract and retain the additional skilled personnel required for
the expansion of our business, could damage our business.
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
We actively pursue a policy of seeking patent protection for our
proprietary products and technologies. We hold three United States patents and
currently have five United States patent applications pending. In addition, we
have numerous foreign patents corresponding to our first patent and have
corresponding patent applications with respect to our second United States
patent and pending United States patent applications which have been filed in
various foreign jurisdictions. We cannot be certain that our patents will
protect us against our competitors. We could be required to file suit to protect
our patents, and we cannot be certain that we will have the resources necessary
to pursue such litigation or otherwise to protect our patent rights.
We also rely on trade secret protection for our unpatented proprietary
technology. However, trade secrets are difficult to protect. It is possible that
others will independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets or that
such trade secrets will be disclosed. We have a policy requiring that our
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employees and consultants execute proprietary information agreements upon
commencement of employment or consulting relationships. These agreements provide
that all confidential information developed or made known to the individual
during the course of the relationship shall be kept confidential except in
specified circumstances. However, these agreements may not successfully protect
our trade secrets or other proprietary information.
We cannot be certain that others will not assert claims against us based
on patents held by others. Such claims, if brought, could seek damages as well
as an injunction prohibiting clinical testing, manufacturing and marketing of
the product at issue. Such claims may or may not be successful. If any such
actions are successful, in addition to any potential liability for damages, we
could be required to obtain a license in order to continue to manufacture or
market the product at issue. It is possible that any license required under any
such patent would not be made available on acceptable terms, if at all. There
has been, and we believe that there will continue to be, significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights. If we become involved in any litigation, a substantial portion of our
financial and personnel resources could be consumed, regardless of the outcome
of such litigation.
COMPETITION
Competition in the pharmaceuticals market is intense. Many companies,
both public and private, including well-known pharmaceutical companies, are
engaged in the development of products for certain of the applications we are
pursuing. Most of these companies have substantially greater financial, research
and development, manufacturing and marketing experience and resources than we do
and represent significant long-term competition. In addition, numerous other
companies are in the process of developing products for the treatment of
diseases and disorders for which we are developing products. Such companies may
develop pharmaceutical products that are more effective or less costly than any
products which we may develop.
Factors affecting competition in the pharmaceutical industry vary
depending on the extent to which the competitor is able to achieve a competitive
advantage based on proprietary technology. If we are able to establish and
maintain a significant proprietary position with respect to our proposed
products, competition will likely depend primarily on the effectiveness of the
particular product and the number, gravity and severity of its unwanted side
effects as compared to alternative products or treatments.
We compete in an industry which is characterized by extensive research
and development efforts and rapid technological progress. Although we believe
that our proprietary position may give us a competitive advantage with respect
to our proposed products, new developments are expected to continue and it is
possible that discoveries by others will render our potential products
noncompetitive. Our competitive position also depends on our ability to attract
and retain qualified scientific and other personnel, develop effective
proprietary products, implement development and marketing plans, obtain patent
protection and secure adequate capital resources. We cannot be certain that we
will be able to do so.
DILUTIVE EFFECT OF CONVERSION OF SERIES A PREFERRED STOCK
As of March 16, 1999, there were outstanding a total of 400 shares of
Series A Preferred Stock. These shares presently are convertible, at any time at
the option of their holders, into an aggregate of 306,278 shares of our common
stock. After April 27, 1999, the conversion price of the Series A Preferred
Stock may decrease. After such date the conversion price of the Series A
Preferred Stock will be equal to the lesser of $13.06 per share of common stock
or 101% of the average of the ten lowest closing bid prices of the common stock
occurring in the 30 trading days preceding the particular conversion. However,
in no event can all 400 outstanding shares of Series A Preferred Stock convert
into more than 1,450,000 shares of our common stock. In the event the conversion
prices decreases, the number of shares of our common stock to be issued upon
conversion will increase proportionately. The conversion of the Series A
Preferred Stock into an increasing number of shares of common stock could cause
the market price of our common stock to drop.
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SHARES ELIGIBLE FOR FUTURE SALE
As of March 16, 1999, security holders held options and warrants which,
if exercised, would obligate us to issue 4,206,332 shares of common stock.
Substantially all of such shares, when issued upon exercise, will be available
for immediate resale in the public market. In addition, at March 16, 1999, our
Equity Line Agreement provides that we may issue common stock in exchange for up
to an additional $10.75 million. The shares of common stock which the Company
may sell under our Equity Line Agreement will be available for immediate resale
in the public market. The market price of our common stock could drop because of
such resales.
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 or 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.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers beneficially own in the aggregate
approximately 26.8% of our outstanding common stock. These stockholders, if they
acted together, would be able to 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 may discourage or prevent someone
from acquiring our business.
17
<PAGE> 18
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.
THE YEAR 2000 ISSUE
The Year 2000 issue (the "Year 2000 Issue") in computers arises from the
common industry practice of using two digits to represent a date in computer
software code and databases to enhance both processing time and save storage
space. Therefore, when dates in the year 2000 and beyond are indicated and
computer programs read the date "00," the computer may default to the year
"1900" rather than the correct "2000." This could result in incorrect
calculations, faulty data and computer shutdowns, which would cause disruptions
of operations. In addition, the year 2000 is a leap year and systems need to
recognize it as such.
We have completed an inventory and risk assessment of our internal
information technology ("IT") system applications (including voice and data
systems), our internal non-IT facilities systems (including embedded software in
environmental controls, security systems, fire protection systems, elevators and
public utility connections for gas, electric and telephone systems), and
embedded and external software contained in laboratory and other equipment that
we believe could be adversely affected by the Year 2000 Issue. We believe that
our internal systems are, at the present time, substantially compliant based
upon internal systems tests, currently available information and reasonable
assurance by our equipment and software vendors. Any costs to remediate Year
2000 Issues with regard to these systems are not anticipated to be material.
In June of 1998, we began sending questionnaires to and/or contacting
our outside vendors regarding their state of readiness with respect to
identifying and remediating their Year 2000 Issues. We have completed our risk
assessment of our outside vendors and are currently reviewing their compliance.
We cannot be certain that our vendors will adequately address their Year 2000
Issues. Furthermore, we cannot determine that third parties upon which our
vendors depend will accomplish adequate remediation of their Year 2000 Issues.
Except for our public utility service vendors, who have indicated that they
expect to be in compliance by mid-1999, we believe that, with respect to the
computer systems of our major outside vendors, should a Year 2000 Issue exist
whereby a vendor was unable to address our needs, alternative vendors have been
identified and are readily available that could furnish us with the same or
similar supplies or services that we presently receive from these vendors
without undue cost or expense.
Based on currently available information, we believe that the impact of
the Year 2000 Issue, as it relates to our internal operations, information
systems and software applications will not be material. In the event we fail to
successfully resolve our Year 2000 Issues with respect to our internal systems
in a timely manner, we believe that, while such events would be disruptive to
our operations in the short term, such circumstances would not have a material
adverse effect on our business, financial condition and results of operations
over the long term. However, failure of the major third parties, in particular
the financial institutions with which we have significant banking and investment
management relationships and our third party manufacturers, to be Year 2000
compliant could have a material adverse effect on our business, financial
condition and results of operations or business prospects.
ITEM 2. PROPERTIES
During June 1997, the Company relocated its research and development and
corporate administrative offices to a new 34,000 square foot facility
constructed for it in Irvine, California. The facility is occupied under a
non-cancellable lease for seven years and contains two five year options to
renew. The monthly rent for the Irvine facility is $38,800 plus taxes, insurance
and common area maintenance and, beginning in July 1999, minimum cost of living
increases. The Company also maintains a small administrative office in Zurich,
Switzerland on an expense sharing basis.
18
<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
On December 10, 1998, the Company was served with a lawsuit initiated by
four former employees of the Company. 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 278,589 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 generally accepted accounting principles. Under the agreements,
as amended, the Company was required to achieve total operating revenues from
the date of each agreement through December 31, 1995, in a cumulative amount of
at least $500,000. When the Company failed to achieve this goal, the agreements
were amended to extend the deadline until December 31, 1997 and increase the
revenue goal to a cumulative amount of at least $1,000,000. The agreements
provide that, if the revenue goals are not achieved by the stated deadline, the
shares will be forfeited and the employees will be required to return the shares
to the Company. The Company did not achieve the required revenue goals either by
December 31 1995, or by December 31, 1997. The Company's total revenues from
inception through December 31, 1995 were only $497,128. The Company did not
have any revenues in 1996 or 1997, and the total revenues from inception through
December 31, 1997 remained at $497,128. In the lawsuit the plaintiffs allege,
among other things, that the cumulative revenues of the Company were or should
have been in excess of $500,000 as of December 31, 1995, and that the defendants
fraudulently induced the plaintiffs into entering into the agreements and the
subsequent amendments to the agreements. The lawsuit asks 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 are also seeking 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. The lawsuit is in the early stages of
discovery and no trial date has been set. Management of the Company believes
that the plaintiffs' claims are without merit and that the resolution of this
matter will not have a material adverse effect on the financial condition or
operations of the Company. The Company intends to vigorously defend the lawsuit
and to pursue the cross-complaint for the return and cancellation of all of the
disputed shares. 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 was then and is now an employee 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
400,244 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 have 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 such time as the
lawsuit is finally resolved, the Company is accounting for all of these shares,
which it deems to be forfeited, as issued and outstanding.
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, 1998.
19
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
As of March 16, 1999, there were 6,225,709 shares of common stock
outstanding held of record by 256 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 bid quotations of the Company's common stock, as
reported by NASDAQ, were as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1997:
Quarter Ended
-------------
March 31, 1997 $6-3/4 $3-7/8
June 30, 1997 $16-3/8 $4-7/8
September 30, 1997 $15-7/8 $11-1/2
December 31, 1997 $14-1/2 $7
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
</TABLE>
The foregoing bid quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
DIVIDENDS
The Company has never paid cash dividends on its common stock and does
not intend to pay dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the
quarter ended December 31, 1998, involving sales of the Company's securities
that were not registered under the Securities Act of 1933 (the "Securities
Act.")
In November 1998, the Company granted to a financial consultant options
to purchase 25,000 shares of common stock at an exercise price of $8.5625 per
share, which were vested upon issuance and expire in five years.
During the fourth quarter of fiscal 1998, the Company sold shares of its
common stock to Kingsbridge Capital Limited ("Kingsbridge") in six separate
transactions pursuant to a Private Equity Line of Credit Agreement entered into
between the Company and Kingsbridge on March 27, 1998. The six separate
transactions were as follows: (i) on October 8, 1998, the Company sold 99,030
shares at $5.049 per share for a total of $500,000; (ii) on October 29, 1998,
the Company sold 67,042 shares at $7.458 per share for a total of $500,000;
(iii) on November 17, 1998, the Company sold 86,197 shares at $8.701 per share
for a total of $750,000; (iv) on November 30, 1998, the Company sold 64,383
shares at $7.766 per share for a total of $500,000; (v) on December 8, 1998, the
Company sold 102,994 shares at $7.282 per share for a total of $750,000; and
(vi) on December 21, 1998, the Company sold 45,005 shares at $6.666 per share
for a total of $300,000. The six transactions totaled 464,651 shares of Company
common stock for an aggregate of $3,300,000.
20
<PAGE> 21
Exemption from the registration requirements of the Securities Act was
claimed under Rule 506 and/or Section 4(2) of the Securities Act. The foregoing
transactions did not involve any public offering and the recipient either
received adequate information about the Company or had access, through
employment or other relationships, to such information. In the foregoing
transactions, the Company reasonably believed that each of the recipients was
"sophisticated" within the meaning of Section 4(2) of the Securities Act.
USE OF PROCEEDS FROM REGISTERED SECURITIES
The following information is provided pursuant to Rule 463 of the
Securities Act and Item 701(f) of Regulation S-K in connection with the
Company's Registration Statement on Form SB-2 filed under the Securities Act:
<TABLE>
<S> <C>
(1) Effective date of Registration Statement: September 26, 1996
Commission file number: 333-05342-LA
(2) Date offering commenced: September 26, 1996
(3) Offering terminated before securities sold: Not applicable
(4) Disclosures:
(i) Has Offering terminated: No
(ii) Managing underwriter(s): Paulson Investment Company, Inc.
First Colonial Securities Group, Inc.
(iii) Title of each class of securities
registered: Common Stock
Common Stock Purchase Warrants*
</TABLE>
* Each common stock purchase warrant entitles the holder to
purchase one share of common stock at an exercise price of $11.40
per share. The common stock purchase warrants expire 5 years from
September 26, 1996. Outstanding common stock purchase warrants
may be redeemed by the Company, in whole or in part, at any time
upon at least 30 days prior written notice to the registered
holders thereof, at a price of $0.25 per warrant, provided that
the closing bid price of the common stock has been at least
$22.80 for the 20 consecutive trading days immediately preceding
the date of the notice of redemption.
(iv) Information regarding each class of securities:
<TABLE>
<CAPTION>
Common Stock
Common Purchase
Stock Warrants
----------- ------------
<S> <C> <C>
Amount registered 2,875,000 2,875,000
Aggregate offering price of
amount registered $21,850,000 $ 0
Amount sold 2,700,000 2,700,000
Aggregate offering price of
amount sold $20,520,000 $ 0
(v) Expenses of offering: A* B*
----------- ------------
Underwriting discounts
and commissions $ 0 $ 1,436,400
Finders fees $ 0 $ 50,000
Expenses paid to or for
underwriters $ 0 $ 331,317
Other expenses $ 0 $ 525,502
------------
Total expenses $ 2,343,219
------------
(vi) Net offering proceeds $ 18,176,781
============
</TABLE>
21
<PAGE> 22
(vii) Use of net proceeds through December 31, 1998:
<TABLE>
<CAPTION>
A* B*
-------- -----------
<S> <C> <C>
Construction of plant, building
and facilities $ $ 1,794,794
Purchase and installation of
machinery and equipment 2,197,253
and equipment
Repayment of indebtedness 533,613 9,000
Working capital 13,642,121
-------- -----------
Total Net Proceeds Used $533,613 $17,643,168
======== ===========
</TABLE>
As of December 31, 1998, all of the net proceeds from the sale of
securities covered by the foregoing registration statement (other than
proceeds, if any, which may be received from exercise of the common stock
purchase warrants) have been applied.
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."
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, from grants $ -- $ -- $ -- $ 125 $ 236
Operating expenses:
Research and development 8,542 4,508 615 306 287
General and administrative 3,123 2,341 660 667 221
-------- -------- -------- -------- --------
Loss from operations 11,665 6,850 1,275 848 272
Other income (expense) 60 688 237 (48) (40)
-------- -------- -------- -------- --------
Net loss $(11,605) $ (6,162) $ (1,039) $ (895) $ (312)
======== ======== ======== ======== ========
Basic and diluted loss
per share $ (2.07) $ (1.14) $ (0.32) $ (0.36) $ (0.13)
======== ======== ======== ======== ========
BALANCE SHEET DATA AT DECEMBER 31:
Cash and equivalents and
marketable securities $ 2,867 $ 9,132 $17,444 $ 1 $ 6
Property and equipment, net 3,252 3,475 133 9 10
Total assets 6,826 13,198 17,979 11 18
Long-term debt 1,126 177 -- 558 558
Total stockholders' equity
(deficit) 3,290 10,543 16,622 (1,253) (1,021)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
From the Company's inception in June 1987 through December 31, 1998, the
Company devoted its resources primarily to fund research and development, and
incurred a cumulative net loss of approximately $23.8 million. During this
period, the Company had only limited revenues from grants, and had no revenues
22
<PAGE> 23
from the sale of products or other sources. The Company expects its operating
expenses to increase over the next several years as it expands its research and
development and commercialization activities and operations. The Company expects
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 the Company
currently is seeking. To obtain working capital, the Company entered into an
equity agreement with a private investor in March 1998 which allows the Company
to sell to the investor over a two and one-half year period, at the Company's
sole discretion but subject to certain restrictions, up to $15 million of its
common stock. At March 16, 1999, the Company had $10.75 million remaining on the
Line of Equity. In January 1999, the Company sold $4 million of Preferred Stock
to private investors. See - Liquidity and Capital Resources.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company 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 the Company accelerated its
program to commercialize its lead compound, NEOTROFIN(TM) (AIT-082). 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. The Company expects
general and administrative expenses to continue to increase in future periods
due to expected increases in both research and development and sales and
marketing activities associated with attempting to bring one or more of its
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. The Company
expects its interest earnings to decrease over the next year as it continues to
use its cash to fund current operations.
Year Ended December 31, 1997, Compared to Year Ended December 31, 1996
The Company had no revenues for the twelve month periods ended December
31, 1997 or 1996.
Research and development expenses for the twelve months ended December
31, 1997, increased by approximately $3.9 million, or 632%, over 1996. This
increase was due primarily to the costs and expenses associated with the
commencement of clinical trials as well as personnel additions, salary
increases, facilities rent, consulting fees, license fees and insurance costs as
the Company expanded its operations and used the proceeds from the September
1996 initial public offering of common stock.
General and administrative expenses increased approximately $1.7 million
or 255% for the year ended December 31, 1997, over the year ended December 31,
1996. General and administrative expenses for 1997 reflect increased expenses
related to additional personnel, salary increases, insurance, professional and
consulting fees, commissions, facilities rent, travel, regulatory agency and
other fees associated with being a public company which were all either
significantly higher in 1997 than in 1996 or were initially incurred in 1997. In
1996, the Company operated for a portion of the year on a rent-free basis from
the Chief Executive Officer's residence with very limited administrative and
technical staff.
Interest income increased by approximately $0.5 million or 178% in 1997
over 1996 as a result of the full year's utilization of invested and unallocated
proceeds from the September 1996 initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
From inception through December 1998, the Company financed its
operations primarily through grants, sales of securities, borrowings and
deferred payment of salaries and other expenses from related parties. During
September and October 1996, the Company effected the sale of a total of
2,700,000 units of its 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. The Company realized net cash proceeds of approximately
$18.2 million from the sale.
23
<PAGE> 24
On March 27, 1998, the Company executed an agreement with a private
investor (the "Equity Line Agreement") which provides for the Company, at its
sole discretion, subject to certain restrictions, to sell ("put") to the
investor up to $15 million of its common stock. The Equity Line Agreement
expires 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. 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 the Company's common stock, as determined under the Equity Line Agreement. In
addition, the Company issued to the investor 5-year warrants to purchase 25,000
shares of common stock at $11.62 per share. Through December 31, 1998, the
Company had received proceeds of approximately $3.5 million from sales of common
stock under the Equity Line Agreement. The Company received an additional $0.7
million in January 1999, and as of March 16, 1999, an additional $10.75 million
remains available under the Equity Line Agreement.
To supplement the Equity Line Agreement for the purpose of funding the
Company's planned larger clinical trials, on January 29, 1999, the Company
entered into a financing transaction to sell to two private investors up to $6
million of preferred stock in two tranches. The first tranche of $4.0 million
was sold on January 29, 1999, and for an initial period of 120 days is
convertible into common stock at a fixed price of $13.06 per share. Thereafter,
the preferred stock is convertible at the lesser of the fixed price or at a
variable rate of 101% of the average market price for the ten lowest of the
thirty days immediately preceding the conversion date. In no event can the first
tranche be converted into more than 1,450,000 shares. The second tranche of $2.0
million, which is at the Company's option, can be sold during the period of July
28, 1999 through September 16, 1999, subject to the satisfaction by the Company
of certain conditions. The preferred stock in the second tranche will contain
terms and conditions for conversion similar to the first tranche, except that
the fixed conversion price will be set at 125% of the average market price of
the common stock at the time of the second closing. Dividends on the preferred
stock are payable in cash or in common stock, at the option of the Company, at
the annual rate of 5%. Additional features of the preferred stock issue include,
among other things, a redemption feature at the Company's option if the common
stock trades below a floor of $5 per share or above a ceiling of $20 per share.
At December 31, 1998, the Company had working capital of approximately
$1.0 million which included cash and equivalents of approximately $1.1 million
and short-term investments of approximately $1.8 million. In comparison, at
December 31, 1997, the Company had working capital of approximately $7.0 million
which included cash and cash equivalents of approximately $7.0 million (of which
approximately $0.9 million was restricted) and short-term investments of
approximately $2.1 million. The $6.0 million decrease in working capital is
attributable primarily to the funding of the $11.6 million operating loss for
the year ended December 31, 1998, offset in part by a borrowing collateralized
by equipment ($1.5 million) and equity transactions, principally utilization of
the Equity Line Agreement, of approximately $4.0 million.
Through December 31, 1998, the Company 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 pursuant to a $2 million
equipment line of credit agreement. In 1999, the Company intends to spend
approximately $1 million for additional equipment as it further expands its
research and development laboratories, and to partially finance these capital
equipment acquisitions by utilizing the $500,000 remaining under its existing
equipment line of credit agreement. The Company has pledged substantially all of
its tangible assets as collateral for this borrowing. 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.
Effective June 1997 the Company 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 five and one-half year
period from January 1999 through June 2002 are approximately $483,100 (1999),
$500,500 (2000 and 2001), $538,100 (2002), $554,200 (2003) and $285,400 (2004).
In addition to rentals, the Company is obligated under the lease for real
property taxes, insurance and maintenance.
In October 1998 the Company entered into an agreement with a contract
research organization to conduct a clinical trial in three countries involving
approximately 400 patients. The agreement, which is cancelable by either party
upon thirty days notice, is expected to result in aggregate expenditures ranging
from $4 to $5 million over the course of one year. Through December 31, 1998,
the Company had expended approximately $360,000 in connection with this
24
<PAGE> 25
clinical trial, of which approximately $265,000 was reflected as an advance at
December 31, 1998, for services to be rendered in 1999.
The Company has committed to spend approximately $442,000 in 1999 and
$178,000 in 2000 to a number of universities to conduct general scientific
research programs and to provide for Fellowship Grants.
Since its inception, the Company has been in the development stage and
therefore devotes substantially all of its efforts to research and development.
The Company has incurred cumulative losses of approximately $23.8 million
through December 31, 1998, and expects to incur substantial losses over the next
several years. The Company's 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
the Company's control. While the Company believes that its existing capital
resources 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. If
the Company is successful in obtaining additional funding, the Company's
existing stockholders could experience substantial dilution to their shares of
stock.
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, and which could be on terms unfavorable to the
Company.
YEAR 2000 READINESS DISCLOSURE
All statements contained in the following section are "Year 2000 Readiness
Disclosures" within the meaning of the Year 2000 Information and Disclosure Act.
The Year 2000 issue (the "Year 2000 Issue") in computers arises from
the common industry practice of using two digits to represent a date in computer
software code and databases to enhance both processing time and save storage
space. Therefore, when dates in the year 2000 and beyond are indicated and
computer programs read the date "00," the computer may default to the year
"1900" rather than the correct "2000." This could result in incorrect
calculations, faulty data and computer shutdowns, which would cause disruptions
of operations. In addition, the year 2000 is a leap year and systems need to
recognize it as such.
The Company has developed a multi-phase program for Year 2000 Issues
that consists of the following: (i) assessment of the corporate systems and
operations of the Company that could be affected by the Year 2000 Issue, (ii)
remediation of non-compliant systems and components, if any, and (iii) testing
of systems and components following remediation. The Company has focused its
Year 2000 compliance assessment program on four principal areas: (a) the
Company's internal information technology system applications, including voice
and data systems ("IT Systems"), (b) the Company's internal non-IT facilities
systems, including embedded software in environmental controls, security
systems, fire protection systems, elevators and public utility connections for
gas, electric and telephone systems ("Facilities Systems"), (c) embedded and
external software contained in laboratory and other equipment ("Equipment"), and
(d) Year 2000 compliance by third parties with which the Company has a material
relationship, such as significant vendors, financial institutions and insurers.
The Company has completed an inventory and risk assessment of its own
internal IT Systems, Facilities Systems, and Equipment that it believes could be
adversely affected by the Year 2000 Issue, and believes that its own internal
systems are, at the present time, substantially compliant based upon internal
systems tests, currently available information and reasonable assurance by its
equipment and software vendors. The cost to remediate the Year 2000 Issues with
regard to the Company's IT and Facility Systems and Equipment is not material.
In June of 1998, the Company began sending questionnaires to and/or
contacting its outside vendors regarding their state of readiness with respect
to identifying and remediating their Year 2000 Issues. The Company has
25
<PAGE> 26
completed its risk assessment of its outside vendors and is currently reviewing
their compliance. It is not possible for the Company to determine or be assured
that adequate remediation of the Year 2000 Issue will be accomplished by such
vendors. Furthermore, it is not possible for the Company to determine or be
assured that third parties upon which the Company's vendors are dependent, will
accomplish adequate remediation of their Year 2000 Issues. Except for the
Company's public utility service vendors, who have indicated that they expect to
be in compliance by mid-1999, the Company believes that, with respect to the
computer systems of its major outside vendors, should a Year 2000 Issue exist
whereby a vendor was unable to address the Company's needs, alternative vendors
have been identified and are readily available that could furnish the Company
with the same or similar supplies or services that it presently receives from
these vendors without undue cost or expense.
Based on currently available information, the Company believes that
the impact of the Year 2000 Issue, as it relates to its IT Systems, Facilities
Systems, Equipment and third parties will not be material. In the event the
Company were to fail to successfully implement its solutions to the Year 2000
Issues with respect to its internal systems in a timely manner, the Company
believes that while such events would be disruptive to the Company's operations
in the short term, such circumstances would not have a material adverse effect
on the business, financial condition and results of operations of the Company
over the long term. However, failure of the major third parties, in particular
the financial institutions with which the Company has significant banking and
investment management relationships and the Company's third party manufacturers,
to be Year 2000 compliant could have a material adverse effect on the Company's
business, financial condition and results of operations or business prospects.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE DISCLOSURES
The Company is exposed to certain market risks associated with interest
rate fluctuations on its marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. The Company is not subject to risks from
currency rate fluctuations. In addition, the Company does not utilize hedging
contracts or similar instruments.
The Company's exposure to interest rate risk arises from financial
instruments entered into in the normal course of business. Certain of the
Company's 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.
The Company's 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
the Company's borrowings, fluctuations in fair value are not deemed to be
material.
QUALITATIVE DISCLOSURES
The Company's primary exposures relate to (1) interest rate risk on its
borrowings, (2) the Company's ability to pay or refinance its borrowings at
maturity at market rates, (3) interest rate risk on the value of the Company's
investment portfolio and rate of return, (4) the impact of interest rate
movements on the Company's ability to obtain adequate financing to fund future
cash requirements. The Company manages interest rate risk on its investment
portfolio by matching scheduled investment maturities with its cash
requirements. The Company manages interest rate risk on its outstanding
borrowings by using fixed rate debt. While the Company cannot predict or manage
its ability to refinance existing borrowings and investment portfolio,
management evaluates the Company's financial position on an ongoing basis.
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants............................. 28
Consolidated Balance Sheets.......................................... 29
Consolidated Statements of Operations................................ 30
Consolidated Statements of Stockholders' Equity (Deficit)............ 31
Consolidated Statements of Cash Flows................................ 33
Notes to Consolidated Financial Statements........................... 35
</TABLE>
27
<PAGE> 28
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, 1997 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, 1998 and for the period from
inception (June 15, 1987) to December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of NeoTherapeutics,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 and for the period from inception to December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Orange County, California
February 26, 1999
28
<PAGE> 29
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1997 1998
-------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents ...................................... $ 6,063,347 $ 1,097,341
Restricted cash ........................................... 935,000 --
Marketable securities and short-term
investments ............................................. 2,133,375 1,769,348
Other receivables, principally investment
interest ................................................ 221,829 112,552
Advance deposit to clinical trial vendor .................. -- 265,727
Prepaid expenses and refundable deposits .................. 127,259 157,495
------------ ------------
Total current assets .................................. 9,480,810 3,402,463
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment ................................................. 1,952,262 2,197,253
Leasehold improvements .................................... 1,803,000 1,794,794
Accumulated depreciation and amortization ................. (279,913) (740,413)
------------ ------------
Property and equipment, net ........................... 3,475,349 3,251,634
------------ ------------
OTHER ASSETS - Prepaid expenses and deposits .................. 242,314 172,066
------------ ------------
$ 13,198,473 $ 6,826,163
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ............................................ $ 850,000 $ --
Accounts payable and accrued expenses ..................... 975,339 1,278,954
Accrued payroll and related taxes ......................... -- 81,370
Note payable to related party ............................. 558,304 558,304
Current portion of long-term debt ......................... 94,886 445,297
------------ ------------
Total current liabilities ............................. 2,478,529 2,363,925
------------ ------------
LONG TERM DEBT, net of current portion ........................ 176,549 1,126,174
DEFERRED RENT ................................................. -- 46,308
------------ ------------
Total liabilities ..................................... 2,655,078 3,536,407
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, par value $0.001 per share,
25,000,000 shares authorized:
Issued and outstanding, 5,465,807 and
6,146,854 shares, respectively ..................... 23,188,363 27,535,329
Unrealized gains on available-for-sale
securities .............................................. 20,256 24,207
Deficit accumulated during the
development stage ...................................... (12,665,224) (24,269,780)
------------ ------------
Total stockholders' equity ............................ 10,543,395 3,289,756
------------ ------------
$ 13,198,473 $ 6,826,163
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
29
<PAGE> 30
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------- DECEMBER 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES, from grants ........... $ -- $ -- $ -- $ 497,128
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Research and development ... 615,485 4,508,255 8,542,034 16,017,101
General and administrative.. 659,895 2,341,276 3,122,506 8,892,888
------------ ------------ ------------ ------------
1,275,380 6,849,531 11,664,540 24,909,989
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ............ (1,275,380) (6,849,531) (11,664,540) (24,412,861)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ............ 268,231 746,008 235,265 1,257,217
Interest expense ........... (51,769) (56,419) (156,016) (692,571)
Other income (expense) ..... 20,043 (1,599) (19,265) 27,435
------------ ------------ ------------ ------------
Total other income ....... 236,505 687,990 59,984 592,081
------------ ------------ ------------ ------------
NET LOSS ................. $ (1,038,875) $ (6,161,541) $(11,604,556) $(23,820,780)
============ ============ ============ ============
BASIC AND DILUTED LOSS
PER SHARE ..................... $ (0.32) $ (1.14) $ (2.07)
============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING ................... 3,292,663 5,405,831 5,615,449
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 31
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
REVENUE COMMON STOCK DURING THE AND
PARTICIPATION ------------------------- DEVELOPMENT UNREALIZED
UNITS SHARES AMOUNT STAGE GAINS TOTAL
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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 on
June 30 at $1.25 .................. -- 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 on
March 18 at $1.35 ................. -- 40,000 54,000 -- -- 54,000
Common stock issued in exchange
for accrued salaries on
December 30 at $2.50 .............. -- 255,476 638,694 -- -- 638,694
Common stock issued in exchange
for note payable to President
on December 30 at $2.50 ........... -- 200,000 500,000 -- -- 500,000
Common stock issued in exchange
for accrued expenses on
December 30 at $2.50 .............. -- 20,842 52,104 -- -- 52,104
Stock options issued in exchange
for accrued professional fees
on December 31 at $1.35 ........... -- -- 108,000 -- -- 108,000
Stock options issued in exchange
for future services on
December 31 at $1.35 .............. -- -- 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 (3,808,088) (93,749) (835,077)
Common stock issued for cash
at $2.50 .......................... -- 13,000 32,500 -- -- 32,500
Amortization of deferred compensation -- -- -- -- 93,749 93,749
Net loss ............................ -- -- -- (312,342) -- (312,342)
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
31
<PAGE> 32
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
<TABLE>
<CAPTION>
DEFICIT DEFERRED
ACCUMULATED COMPENSATION
REVENUE COMMON STOCK DURING THE AND
PARTICIPATION -------------------------- DEVELOPMENT UNREALIZED
UNITS SHARES AMOUNT STAGE GAINS TOTAL
----------- ----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 .......... $ 676,000 2,073,019 $ 2,423,260 $ (4,120,430) $ -- $(1,021,170)
Common stock issued for cash
at $2.50...................... -- 22,000 55,000 -- -- 55,000
Common stock forfeiture ......... -- (678,836) (1,193,943) -- -- (1,193,943)
Common stock reissued at $2.50 .. -- 678,836 1,697,090 -- -- 1,697,090
Stock options issued for
services at $2.50 ............. -- -- 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
at $2.50 (net of commission) . -- 266,800 633,650 -- -- 633,650
Stock options issued for
services at $2.50 ............. -- -- 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 at $7.60, less
commissions and 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 at $2.00 ............. -- -- 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 (12,665,224) 20,256 10,543,395
Common stock and warrants
issued for cash under Line
of Equity Agreement, net of
issue 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'
warrants ...................... -- 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
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1998 .......... $ -- 6,146,854 $ 27,535,329 $(24,269,780) $ 24,207 $ 3,289,756
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------- DECEMBER 31,
1996 1997 1998 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss ................................... $ (1,038,875) $ (6,161,541) $(11,604,556) $(23,820,780)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 7,898 220,950 460,500 865,902
Issuance of common stock options
for services .......................... 103,950 60,000 422,264 691,214
Amortization of deferred compensation .... -- -- -- 93,749
Compensation expense for extension of
Debt Conversion Agreements, net ....... -- -- -- 503,147
Gain on sale of assets ................... -- -- -- (5,299)
(Increase) decrease in other receivables . (163,988) (57,841) 109,277 (112,306)
Increase in prepaid expenses and
refundable deposits ................... (238,187) (130,402) (180,715) (500,285)
Increase in accounts payable
and accrued expenses .................. 11,278 630,018 303,615 1,439,054
Increase (decrease) in accrued payroll
and related taxes ..................... 103,388 (331,175) 81,370 720,064
Increase in deferred rent ................ -- -- 46,308 46,308
Increase (decrease) in accrued interest to
related parties ....................... 979 (122,396) -- 300,404
------------ ------------ ------------ ------------
Net cash used in operating
activities ....................... (1,213,557) (5,892,387) (10,361,937) (19,778,828)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment ........ (131,600) (3,563,790) (236,785) (4,072,350)
Redemptions (purchases) of marketable
securities and short-term investments ... (7,448,546) 5,315,171 364,027 (1,769,348)
Unrealized gain on available-for-sale
securities .............................. -- 20,256 3,951 24,207
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............... (7,580,146) 1,771,637 131,193 (5,753,919)
------------ ------------ ------------ ------------
</TABLE>
33
<PAGE> 34
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
(INCEPTION)
YEARS ENDED DECEMBER 31, THROUGH
---------------------------------------------- DECEMBER 31,
1996 1997 1998 1998
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayment) of notes payable to/
borrowings from related parties, net ... $ (22,500) $ -- $ -- $ 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 1,826,625
Repayment of long-term debt ............... -- (55,190) (199,964) (255,154)
Proceeds from issuance of common stock
and warrants, net of related offering
costs and expenses ..................... 18,810,431 -- 3,451,782 22,993,610
Proceeds from exercise of stock options ... -- 2,600 714,480 717,080
Issuance of notes to officers and directors
for exercise of stock options .......... (286,560) (286,560)
Proceeds from Revenue Participation
Units .................................. -- -- -- 676,000
Cash paid out for fractional shares ....... (25) -- -- (25)
Cash at acquisition ....................... -- -- -- 200,612
------------ ------------ ------------ ------------
Net cash provided by financing
activities ........................ 18,787,906 189,035 5,264,738 26,630,088
Net increase (decrease) in cash and
equivalents ............................... 9,994,203 (3,931,715) (4,966,006) 1,097,341
Cash and equivalents, beginning of period ... 859 9,995,062 6,063,347 --
------------ ------------ ------------ ------------
Cash and equivalents, end of period ......... $ 9,995,062 $ 6,063,347 $ 1,097,341 $ 1,097,341
============ ============ ============ ============
SCHEDULE OF NONCASH 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 Revenue Participation
Units into shares of common stock ...... $ 676,000 $ -- $ -- $ 676,000
============ ============ ============ ============
Issuance of stock options for services .... $ 103,950 $ 60,000 $ 422,264 $ 691,214
============ ============ ============ ============
Issuance of warrant in connection with
equipment financing .................... $ -- $ -- $ 45,000 $ 45,000
============ ============ ============ ============
Conversion of other accrued liabilities to
shares of no par value common stock .... $ -- $ -- $ -- $ 52,104
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 35
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
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, 1998, the Company had
two wholly owned subsidiaries, Advanced ImmunoTherapeutics, Inc. ("AIT"),
incorporated in California in June 1987, and NeoTherapeutics GmbH ("NEOT GmbH"),
incorporated in Switzerland in April 1997. 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 and NEOT GmbH
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
neurodegenerative diseases and conditions, such as memory deficits associated
with Alzheimer's disease, aging, stroke, spinal cord injuries and Parkinson's
disease. The accompanying consolidated financial statements include the results
of the Company and its wholly-owned 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 $23.8
million through December 31, 1998, and expects to incur substantial losses over
the next several years. While the Company believes that its existing capital
resources (including the proceeds from its line of equity financing and the
private placement of preferred stock completed in January 1999 - see Note 13)
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 diseases, and the ability to obtain
government approval as well as dependency on key personnel.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
35
<PAGE> 36
CASH AND EQUIVALENTS
Cash and equivalents consist of cash and highly liquid investments of
commercial paper and demand notes with original maturities of 90 days or less.
At December 31, 1997, cash equivalents of $935,000 were pledged as collateral on
a bank line of credit and were classified as restricted cash on the balance
sheet. The note was repaid and the restricted cash was released during February
1998.
PREPAID EXPENSES AND ADVANCE DEPOSITS
Prepaid expenses and advance deposits are capitalized and amortized over
the period benefitted, or as the related services are rendered (as applicable).
MARKETABLE SECURITIES
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, 1998, 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. Securities held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income on investment securities. A
valuation allowance is not established to recognize temporary market value
fluctuations as the Company has the intent and ability to hold these investments
until maturity. 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 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 Statement of Financial Accounting Standards No. 109
(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)
36
<PAGE> 37
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
shares outstanding for the period. 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 primary and fully diluted earnings per share
(EPS) as previously required. The new standard was adopted by the Company in
1997. In 1996 the difference between previously reported EPS and restated EPS in
accordance with SFAS No. 128 amounted to an increased loss of $0.01 per share.
NEW PRONOUNCEMENTS
COMPREHENSIVE INCOME. Effective for fiscal years beginning after
December 15, 1997, SFAS No. 130 "Reporting Comprehensive Income" requires that
comprehensive income and its components, as defined in the statement, be
reported in a financial statement. 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. Effective for fiscal
years beginning after December 15, 1997, comprehensive income must be reported
"in a financial statement that is displayed with the same prominence as other
financial statements." While the Company adopted the provisions of SFAS No. 130
for the 1998 fiscal year, the adoption of this standard did not have a material
effect on the presentation of the Company's financial statements.
SEGMENT REPORTING. SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 replaces SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise" and several other
pronouncements that amended SFAS No. 14. 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. Adoption of SFAS No. 131 in 1998 did not materially
impact the Company's financial statement disclosures.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards 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. Statement 133 is
effective for fiscal years beginning after June 15, 1999, although earlier
implementation is allowed. Management plans to adopt the Standard in fiscal 2000
and believes that its adoption will not have a material impact on the Company.
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 8).
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%.
37
<PAGE> 38
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 three 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; and
3. U.S. Patent No. 5,801,184 issued on September 1, 1998.
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. A second payment of $25,000 was made in July 1998. The
third patent noted above was also jointly filed by the Company and the
University and is subject to the same royalty agreement.
EMPLOYMENT AGREEMENT
Effective July 1, 1996, the Company entered into an employment agreement
with the Chief Executive Officer. The agreement, among other things, provides
for the grant of incentive stock options, an annual base salary with annual
increases and an annual bonus based on the Company's attainment of certain
performance objectives. The agreement, which was originally scheduled to
terminate on June 30, 1999, was extended to December 31, 1999. 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 incentive option to purchase 75,000 shares of
common stock at 110 percent of fair market value at the date of grant ($4.13 per
share). This option vests in three equal increments over the life of the
original agreement.
38
<PAGE> 39
3 . MARKETABLE SECURITIES
A summary of marketable securities at December 31, 1997 and 1998 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Market
Type of Investment Cost Gains (Losses) Value
------------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997:
Held-to-Maturity:
Corporate Bonds $ 168,992 $ -- $ -- $ 168,992
---------- ---------- ---------- ----------
Available-for-Sale:
U.S. Government Treasury
Notes and Bonds 1,292,951 10,218 (388) 1,302,781
U.S. Government guaranteed
securities 447,900 8,770 -- 456,670
Corporate Bonds 203,276 1,656 -- 204,932
---------- ---------- ---------- ----------
Total securities available 1,944,127 20,644 (388) 1,964,383
---------- ---------- ---------- ----------
Total Investments $2,113,119 $ 20,644 $ (388) $2,133,375
========== ========== ========== ==========
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
========== ========== ========== ==========
</TABLE>
The above securities are shown in the accompanying balance sheet at
December 31, 1997 and 1998, as follows:
December 31, 1997:
Marketable securities and short-term investments:
Held-to-Maturity $ 168,992
Available-for-Sale 1,964,383
-----------
$ 2,133,375
===========
December 31, 1998:
Marketable securities and short-term investments:
Available for Sale $ 1,769,348
===========
There were no sales of securities for the year ended December 31, 1997.
For the year ended December 31, 1998, sales of securities aggregated $1,169,156,
realizing net gains of $15,310 therefrom.
4. DEBT
During August 1997, the Company established a Line of Credit Agreement
with its bank which expired August 30, 1998. At December 31, 1997, the Company
was indebted to the bank for $850,000 under the Agreement. The interest rate was
approximately 8% at December 31, 1997. Such debt was collateralized by
restricted cash equivalents in the amount of $935,000. During February 1998 the
related note was repaid and the restricted cash was released.
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, 1998, the Company borrowed $1,500,000 under the Note for
equipment and computer software purchases and has an additional $500,000
39
<PAGE> 40
available over the next year for similar 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
----------- ----------
1999 $ 445,297
2000 460,476
2001 437,433
2002 228,265
----------
$1,571,471
==========
5. REVENUE FROM GRANTS
In July 1995, a Small Business Innovative Research Grant (the SBIR
Grant) from the National Institutes of Health was completed and no additional
funds were due or collected. The Company has received an aggregate of $497,128
from the SBIR Grant.
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, 1998. At
December 31, 1998, the Company and its domestic subsidiary had approximately
$14.7 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 2018. 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, 1998, the effect
of such limitation, if imposed, has not been determined. The Company's foreign
subsidiary has a loss carryforward of approximately $5.0 million at December 31,
1998, 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 April 1997
through December 1998. 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 its realization.
7. COMMITMENTS AND CONTINGENCIES
FACILITY LEASES
During late 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
2002. Minimum lease requirements for each of the next five years and thereafter
under the aforementioned property and equipment leases follows:
40
<PAGE> 41
Years ending December 31:
1999 $ 501,600
2000 517,800
2001 513,400
2002 542,100
2003 554,200
2004 285,400
----------
$2,914,500
==========
Rent expense for the years ended December 31, 1996 and 1997 and 1998
aggregated approximately $26,800, $372,000 and $572,400 and respectively.
RESEARCH AND FELLOWSHIP GRANTS
At December 31, 1998, the Company has committed to pay approximately
$570,000 to a number of universities to conduct general scientific research
programs and $50,000 to the Reeve-Irvine Research Center at The University of
California Irvine, to provide for a Fellowship Grant. Payment of these grants
and the fellowship is anticipated to amount to approximately $442,000 and
$178,000 in 1999 and 2000, respectively. Grant expense for 1996, 1997 and 1998
amounted to approximately $60,500, $335,000 and $465,900, respectively.
MAJOR CLINICAL TRIAL
In October 1998 the Company entered into an agreement with a contract
research organization to conduct a clinical trial in three countries involving
approximately 400 patients. The agreement, which is cancelable by either party
upon thirty days notice, is expected to result in aggregate expenditures ranging
from $4 to $5 million over the course of one year. Through December 31, 1998,
the Company had expended approximately $360,000 in connection with this clinical
trial, of which approximately $265,000 was reflected as an advance at December
31, 1998, for services to be rendered in 1999.
LITIGATION
On December 10, 1998, the Company was served with a lawsuit initiated by
four former employees of the Company. 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 278,589 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 generally accepted accounting principles. Under the agreements,
as amended, the Company was required to achieve total operating revenues from
the date of each agreement through December 31, 1995, in a cumulative amount of
at least $500,000. When the Company failed to achieve this goal, the agreements
were amended to extend the deadline until December 31, 1997 and increase the
revenue goal to a cumulative amount of at least $1,000,000. The agreements
provide that, if the revenue goals are not achieved by the stated deadline, the
shares will be forfeited and the employees will be required to return the shares
to the Company. The Company did not achieve the required revenue goals either by
December 31,1995, or by December 31, 1997. The Company's total revenues from
inception through December 31, 1995, were only $497,128. The Company did not
have any revenues in 1996 or 1997, and the total revenues from inception through
December 31, 1997 remained at $497,128. In the lawsuit the plaintiffs allege,
among other things, that the cumulative revenues of the Company were or should
have been in excess of $500,000 as of December 31, 1995, and that the defendants
fraudulently induced the plaintiffs into entering into the agreements and the
subsequent amendments to the agreements. The lawsuit asks 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 are also seeking 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. The lawsuit is in the early stages of
discovery and no trial date has been set. Management of the Company believes
that the plaintiffs' claims are without merit and that the resolution of this
matter will not have a material adverse effect on the financial condition or
operations of the Company. The Company intends to vigorously defend the lawsuit
and to pursue the cross-complaint for the return and cancellation of all of the
disputed shares. 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 was then and is now an employee 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
400,244 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 have 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. Because the suit is in
its early stages, counsel for the Company is unable to opine on the merits of
the suit. However, management intends to defend the action, which it believes is
without merit, and to vigorously pursue the return and cancellation of all of
the disputed shares. Until such time as the matter is finally resolved, the
Company is continuing to account for all of the shares, which it has deemed
forfeited, as issued and outstanding.
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<PAGE> 42
8. STOCKHOLDERS' EQUITY
REVENUE PARTICIPATION UNITS
In 1988 and 1989, AIT raised private placement funds via a financial
instrument specified as a Revenue Participation Unit ("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 shareholder
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 shareholder 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.
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 "Agreement") with a private investor. The
Agreement provides for the Company, at its sole discretion, and subject to
certain restrictions, to periodically sell ("put") shares of its common stock to
the investor. Puts can be made every 15 days in amounts ranging from $250,000
42
<PAGE> 43
to $2,000,000, depending on the trading volume and the market price of the
stock at the time of each put, subject to aggregate minimum puts of $1 million
over the life of the Agreement. At the time of each put, the investor receives a
discount of 12% from the then current average market price, as determined under
the Agreement. Pursuant to the Agreement, the Company also issued to the
investor warrants to purchase 25,000 shares of common stock at $11.62 per share.
As of December 31, 1998, the Company had put a total of 506,049 shares of its
common stock to the investor pursuant to the Agreement resulting in net proceeds
of approximately $3,452,000.
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% 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.
9. STOCK OPTIONS
The Company has two stock option plans: the 1991 Stock Incentive Plan
(the "1991 Plan") and the 1997 Stock Incentive Plan (collectively, the "Plans").
The Plans were adopted by the Company's shareholders 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 authorizes for issuance up to 500,000 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 at the times 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 at the time the
options are granted. An option granted under the Plans is 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 employee
and the Company.
Stock options have also been issued outside of the aforementioned plans
to various consultants. During the period of December 1993 through December
1996, the Company issued a total of 194,000 options to purchase common stock to
two technical 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 an 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 $103,950, $60,000 and $422,264 of compensation expense for
these options in 1996, 1997 and 1998, 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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<PAGE> 44
A summary of stock option activities are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------- ------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 240,173 $0.24 447,173 $3.15 658,173 $4.66
Granted 207,000 3.39 329,000 5.37 331,300 8.03
Exercised -- -- (104,000) 0.025 (134,000) 2.54
Forfeited -- -- (14,000) 4.29 (1,600) 8.88
-------- ----- -------- ------ -------- -----
Outstanding, at end of year 447,173 $3.15 658,173 $4.66 853,873 $5.78
======== ===== ======== ====== ======== =====
Exercisable, at end of year 270,173 $0.21 363,923 $1.18 391,048 $1.95
======== ===== ======== ====== ======== =====
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/98 Life Price 12/31/98 Price
--------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.025 30,000 2.00 $0.025 30,000 $0.025
3.75 to 5.625 441,673 6.89 4.16 198,673 3.93
5.626 to 12.88 382,200 8.89 8.53 162,375 9.16
</TABLE>
As of December 31, 1998, there were 349,700 options outstanding under
the 1997 Plan and 181,000 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 1996, 1997 and 1998, respectively: risk-free
interest rates of 6.52% (1996), 6.37% (1997) and 4.96% (1998); zero expected
dividend yields; expected lives of 5 years; expected volatility of 50 percent in
1996 and 1997, and 75.26 percent in 1998.
For purposes of the following required pro forma information, the
weighted average fair value of stock options granted in 1996, 1997 and 1998 was
$2.14, $3.06 and $4.96, respectively. The total estimated fair value is
amortized to expense over the vesting period.
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Pro forma net loss $(1,218,389) $(6,551,287) $(12,395,411)
Pro forma basic and diluted
loss per share $ (0.37) $ (1.21) $ (2.21)
</TABLE>
10. 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.
44
<PAGE> 45
11. 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 AIT-082 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 AIT-082. The entire cost of these two contracts was funded by
the NIA and NIMH directly to the subcontractors.
12. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of
operations for fiscal 1998, 1997 and 1996 (in thousands except per share data):
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal 1998
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
</TABLE>
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal 1997
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
</TABLE>
<TABLE>
<CAPTION>
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Fiscal 1996
Revenues $ -- $ -- $ -- $ --
Total operating expenses 60 183 270 762
Net loss $ (73) $ (197) $ (260) $ (508)
Basic and diluted loss per share $ (0.03) $ (0.07) $ (0.09) $ (0.13)
Shares used in calculation 2,405 2,767 2,757 3,914
</TABLE>
13. EVENTS SUBSEQUENT TO DECEMBER 31, 1998
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 consists 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 is convertible into common stock at a
fixed price of $13.06 per share. Thereafter, the preferred stock is 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. In no event can the first tranche be
converted into more than 1,450,000 shares. The second tranche of $2.0 million,
which is at the Company's option, can be sold approximately 6 months after the
effective date of the Preferred Stock Agreement, subject to the satisfaction by
the Company of certain conditions. The preferred stock in the second tranche
will contain terms and conditions for conversion similar to the first tranche,
except that the fixed conversion price will be set at 125% of the average market
price of the common stock at the time of the second closing. Dividends on the
preferred stock are payable in cash or in common stock, at the option of the
Company, at the annual rate of 5%. Additional features of the preferred stock
issue include, among other things, a redemption feature at the Company's option
if the common stock trades below a floor of $5 per share or above a ceiling of
$20 per share. The investors also received warrants to purchase for a period of
5 years, 75,000 shares of the Company's common stock at $12.98 per share.
45
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 16, 1999,
with respect to each person who is an executive officer or a director of the
Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Alvin J. Glasky, Ph.D. ................. 65 Chairman of the Board,
Chief Executive Officer,
President and Director
Samuel Gulko............................. 67 Chief Financial Officer,
Secretary and
Treasurer and Director
Stephen Runnels.......................... 49 Executive Vice President
and Director
Michelle S. Glasky, Ph.D. .............. 39 Vice President Scientific Affairs
Mark J. Glasky........................... 37 Director
Frank M. Meeks........................... 54 Director
Eric L. Nelson, Ph.D. .................. 74 Director
Carol O'Cleireacain, Ph.D. ............. 52 Director
Joseph Rubinfeld, Ph.D. ................ 66 Director
Paul H. Silverman, Ph.D., D.Sc. ........ 74 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
ALVIN J. GLASKY, PH.D., has been Chief Executive Officer, President and
a director of AIT since its inception in June 1987, and has served as the
Chairman of the Board, Chief Executive Officer, President and a director of the
Company since July 1989, when AIT became a wholly owned subsidiary of the
Company. 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 the Company
since September 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
the present, Mr. Gulko has been self-employed as a Certified Public Accountant
and business consultant, as well as the part-time Chief Financial Officer of
several companies. Mr. Gulko obtained his B.S. degree in Accounting from the
University of Southern California in 1958.
46
<PAGE> 47
STEPHEN RUNNELS joined the Company as Executive Vice President in April,
1997, and has been a director of the Company since June 1998. Prior to joining
the Company, 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. 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 the Company as Director of Scientific
Affairs in July 1996 and was promoted to Vice President, Scientific Affairs in
June 1997. Prior to joining the Company, Dr. M. Glasky worked at 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
in 1988. Dr. M. Glasky completed a post-doctoral fellowship at Stanford
University School of Medicine.
MARK J. GLASKY has been a director of the Company since August 1994.
Since 1982, Mr. Glasky has been employed by Bank of America NT&SA in various
corporate lending positions and currently serves as 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 and Dr. Michelle S. Glasky are the adult son and
daughter, respectively, of Dr. Alvin Glasky.
FRANK M. MEEKS has been a director of the Company 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 the Company since June 1998
and a member of the Company's Scientific Advisory Board since 1987. Dr. Nelson
has been 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 the Company since
September 1996. Dr. O'Cleireacain has served as an independent 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. Since 1998, Dr. O'Cleireacain
has also served as an adjunct Professor of Urban Studies at Barnard College,
Columbia University. 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 Trilliumn Asset Management (formerly known
as Franklin Research and Development Corp.), an employee-owned investment
47
<PAGE> 48
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 the Company since June
1998. Dr. Rubinfeld is the co-founder of publicly held SuperGen, Inc., a
pharmaceutical company focused on drugs for life-threatening diseases,
particularly cancer, and has served as the Chief Executive Officer, President
and a director 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 Antivirals, Inc., 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. From 1987 to 1990, Dr. Rubinfeld was a Senior Director at Cetus
Corporation, a former 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 Blemycin. Prior to that time, Dr. Rubinfeld was a
research scientist with several pharmaceutical and consumer product companies
including Schering-Plough Corporate and Colgate-Palmolive Co.
PAUL H. SILVERMAN, PH.D., D.SC., has been a director of the Company
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 the Company is divided into two classes
consisting of five Class I directors and four Class II directors. Each Class is
elected in alternate years and serves a term of two years. The Class I
directors, whose term expires in 2000, include Mr. Gulko, Mr. Meeks, Dr. Nelson,
Mr. Runnels and Dr. Silverman. The Class II directors, whose term expires in
1999, include Dr. A. Glasky, Mr. M. Glasky, Dr. O'Cleireacain and Dr. Rubinfeld.
Officers are elected by, and serve at the discretion of, the Board of Directors.
The Board of Directors currently has two committees. The Compensation Committee,
which consists of Mr. Meeks, Dr. O'Cleireacain and Dr. Silverman, has been
established to recommend salaries and incentive compensation for executive
officers of the Company. The Audit Committee, which consists of Dr.
O'Cleireacain, Mr. Glasky and Mr. Meeks, has been established to review the
results and scope of the audit and other services provided by the Company's
independent public accountants.
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board consisting of
distinguished scientists whom the Company believes will make a contribution to
the development of the Company's business. The Scientific Advisory Board members
review the Company's research and development progress, advise the Company of
advances in their fields and assist in identifying special product
opportunities. Members are compensated on a consulting fee basis for their
services and are reimbursed for reasonable travel expenses.
48
<PAGE> 49
All of the advisors are employed by employers other than the Company and may
have commitments to, or consulting or advisory agreements with, other entities,
including potential competitors of the Company, that may limit their
availability to the Company. Although these advisors may contribute
significantly to the affairs of the Company, none is required to devote more
than a small portion of his time to the Company in his capacity as a member of
the Scientific Advisory Board. The members of the Scientific Advisory Board
currently are as follows:
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."
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
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, 1998, were satisfied.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth summary information concerning the
compensation of the Company's Chief Executive Officer and the other most highly
compensated executive officers of the Company whose total salary and bonuses for
services rendered to the Company in all capacities during the fiscal year ended
December 31, 1998 exceeded $100,000 (the "Named Executive Officers"). No other
executive officer of the Company received compensation in 1998 in excess of
$100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS
- --------------------------- ---- ------ ----- ----- -------
<S> <C> <C> <C> <C> <C>
Alvin J. Glasky, Ph.D 1998 199,998 $ -- $ -- 65,000
Chairman, Chief Executive 1997 199,992(1) -- -- --
Officer and President 1996 165,398(2) -- -- 75,000
Stephen Runnels(4) 1998 165,940 -- -- 25,000
Executive Vice President 1997 108,513 -- $25,107(3) 62,000
Samuel Gulko 1998 109,250 -- -- 25,000
Chief Financial Officer, 1997 78,000 -- -- 6,000
Secretary and Treasurer 1996 30,000(5) -- -- 14,000
</TABLE>
49
<PAGE> 50
- -----------------
(1) Excludes prior years accrued salaries of $265,328 and auto allowances and
expense account reimbursements previously accrued aggregating $84,516, all
of which were paid in 1997.
(2) Includes an auto allowance of $400 per month. Of the total amounts, $72,998
and $92,400 has been accrued for 1996.
(3) Represents a one-time relocation allowance.
(4) Commenced employment in April 1997.
(5) Employment commenced July 1996 on a part-time basis.
OPTION GRANTS
The following table sets forth information concerning stock options
granted during the fiscal year ended December 31, 1998, to the Named Executive
Officers:
STOCK OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENTAGE OF ANNUAL DATES OF STOCK
OPTIONS TOTAL OPTIONS PRICE APPRECIATION FOR
GRANTED(1) GRANTED TO EXERCISE OPTION TERM(2)
(NO. OF EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME SHARES) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ----------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Alvin J. Glasky 25,000 8% $7.25 Feb. 11, 2008 $113,987 $288,866
40,000 13% $7.625 Dec. 17, 2008 $191,813 $486,091
Stephen Runnels 10,000 3% $7.25 Feb. 11, 2008 $ 45,595 $115,546
15,000 5% $7.625 Dec. 17, 2008 $ 71,930 $182,284
Samuel Gulko 10,000 3% $7.25 Feb. 11, 2008 $ 45,595 $115,546
15,000 5% $7.625 Dec. 17, 2008 $ 71,930 $182,284
</TABLE>
- ------------------
(1) The above options become exercisable in 25% increments, commencing three
months from the date of grant and each three months thereafter.
(2) The potential realizable value is calculated from the exercise price per
share, assuming the market price of the Company's 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, 1998, by the Named Executive
Officers and the value of such officers' unexercised options at December 31,
1998:
50
<PAGE> 51
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
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
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alvin J. Glasky, Ph.D. -- -- 156,923 71,250 $953,512 $287,531
Stephen Runnels 12,000 -- 17,500 57,500 48,438 178,438
Samuel Gulko 10,000 -- 13,000 22,000 46,313 58,563
</TABLE>
- ----------
(1) Based upon the closing price of the common stock on December 31, 1998, as
reported by the NASDAQ National Market ($10.50 per share).
EMPLOYMENT AGREEMENT
The Company has an employment agreement with Dr. Alvin J. Glasky,
effective as of July 1, 1996. 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 $200,000 with annual increases and an annual bonus based on the
Company's attainment of certain performance objectives. The agreement, as
amended, ends on December 31, 1999, and may be terminated by the Company 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 the Company. In connection with entering into
this agreement, Dr. Glasky was granted an incentive stock option to purchase
75,000 shares of common stock at an exercise price of $4.13 per share, which
vests in three equal annual increments.
COMPENSATION OF DIRECTORS
Each of the Company's 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 February 1998, the Company granted to each non-employee director an option to
purchase 10,000 shares of common stock at $8.375 per share. In August 1998, the
Company granted to each non-employee director an option to purchase 10,000
shares of common stock at $5.625 per share.
STOCK OPTION PLANS
The Company has 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 the Company's shareholders 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 the Company's 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 employees of the Company and other persons
whose participation in the 1991 Plan is determined to be in the Company's best
interest. As of December 31, 1998, there were options to purchase 181,000 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 common stock ("Purchase Rights"). The 1997 Plan authorized for
issuance up to 500,000 shares of the Company's common stock, subject to
adjustment in the number and kind of shares subject to the 1997 Plan and
51
<PAGE> 52
to outstanding shares in the event of stock splits, stock dividends or certain
other similar changes in the capital structure of the Company. Under the 1997
Plan, incentive stock options, nonqualified stock options and Purchase Rights
may be granted to employees of the Company and its subsidiaries and affiliates.
Nonqualified stock options and Purchase Rights may be granted to employees of
the Company and its subsidiaries and affiliates, non-employee directors and
officers, consultants and other service providers. As of December 31, 1998,
there were options to purchase 349,700 shares of common stock outstanding under
the 1997 Plan.
The Plans are administered by a Compensation Committee appointed by the
Board of Directors (the "Committee"), which 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 a merger of the Company with or into another corporation
or the sale of substantially all of the assets of the Company, all 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 exercisability of options outstanding under the 1997 Plan will accelerate
upon a change in control of the Company, 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% 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 the Company or within three months after
termination of employment (one year for termination resulting from death or
disability).
SECTION 401(K) PLAN
In January 1990, the Company adopted the AIT Cash or Deferred Profit
Sharing Plan (the "401(k) Plan") covering the Company's 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
employees or by the Company, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit ($10,000 in 1998)
and to have the amount of such reduction contributed to the 401(k) Plan. The
401(k) Plan permits, but does not require, additional matching contributions to
the 401(k) Plan by the Company on behalf of all participants in the 401(k) Plan.
The Company has 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 the Company's common stock as of March 16, 1999, by (i)
each person (or group of affiliated persons) who is known by the Company to own
beneficially 5% or more of the common stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all executive
officers and directors of the Company 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.
52
<PAGE> 53
<TABLE>
<CAPTION>
SHARES PERCENT OF
BENEFICIALLY SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP(1) OWNED(1) OUTSTANDING
- ------------------------------------------- --------- -----------
<S> <C> <C>
Alvin J. Glasky, Ph.D.(2)........................ 1,432,622 22.4%
157 Technology Drive
Irvine, CA 92618
Samuel Gulko..................................... 34,150 *
Stephen Runnels.................................. 45,750 *
Michelle S. Glasky, Ph.D.(3)(4) ................. 32,230 *
Mark J. Glasky(5)(6)............................. 43,479 *
Frank M. Meeks(7)................................ 55,460 *
Eric L. Nelson, Ph.D............................. 51,500 *
Carol O'Cleireacain, Ph.D.(8).................... 35,000 *
Joseph Rubinfeld, Ph.D........................... 5,000 *
Paul H. Silverman, Ph.D., D.Sc.(8)............... 35,000 *
All Executive Officers and Directors
as a group (10 persons)(9)..................... 1,770,191 26.8%
</TABLE>
- -------------
* 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 16, 1999, 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 85,000 shares subject to options held by Dr. Alvin J. Glasky
which are currently exercisable or exercisable within 60 days of March
16, 1999, and 88,173 shares issuable within 60 days of March 16, 1999,
upon exercise of the Glasky warrant. Also includes 4,000 shares owned by
the NeoTherapeutics, Inc. 401(k) Plan, and 62,493 shares beneficially
owned by Dr. Glasky's wife, Rosalie H. Glasky. Does not include 43,479
shares beneficially owned by Mark J. Glasky and 32,230 shares
beneficially owned by Dr. Michelle S. Glasky, Dr. Glasky's adult
children, for which Dr. Glasky disclaims beneficial ownership.
(3) Michelle S. Glasky, Ph.D., is the adult daughter of Dr. Alvin J. Glasky.
(4) Includes 24,750 shares subject to options held by Dr. Michelle S. Glasky
which are currently exercisable or exercisable within 60 days of March
16, 1999, and 500 shares subject to currently exercisable warrants.
(5) Mark J. Glasky is the adult son of Dr. Alvin J. Glasky.
(6) Includes 25,000 shares subject to options held by Mr. Glasky which are
currently exercisable or exercisable within 60 days of March 16, 1999,
and 1,000 shares subject to currently exercisable warrants.
(7) Includes 25,000 shares subject to options held by Mr. Meeks which are
currently exercisable or exercisable within 60 days of March 16, 1999.
Does not include 460 shares beneficially owned by Mr. Meeks' wife, for
which Mr. Meeks disclaims beneficial ownership.
(8) Includes 25,000 shares subject to options held by each of Drs.
O'Cleireacain and Silverman which are currently exercisable or
exercisable within 60 days of March 16, 1998.
(9) Includes 88,173 shares issuable upon the exercise of the Glasky warrant,
289,500 shares subject to options which are currently exercisable or
exercisable within 60 days of March 16, 1998, and 2,550 shares subject
to currently exercisable warrants.
53
<PAGE> 54
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.
On June 30, 1990, in exchange for cancellation of $503,144 of
indebtedness for unpaid compensation, the Company issued a total of 402,517
shares of common stock in the following amounts: Dr. Alvin Glasky, 184,000
shares; Sanford Glasky (the brother of Dr. Alvin Glasky), 60,013 shares; JoAnne
Law, 24,333 shares; Luana Kruse, 19,200 shares; Rosalie Glasky (the wife of Dr.
Glasky), 28,065 shares; and John W. Baldridge, 86,906 shares (the "1990
Restricted Stock Exchange"). On December 30, 1993, in exchange for cancellation
of $690,798 of indebtedness for unpaid compensation and accrued expenses, the
Company issued a total of 276,317 shares of common stock in the following
amounts: Dr. Alvin Glasky, 169,001 shares; Sanford Glasky, 49,837 shares; JoAnne
Law, 16,559 shares; Luana Kruse, 19,800 shares; Rosalie Glasky, 19,178 shares;
and John W. Baldridge, 1,942 shares (the "1993 Restricted Stock Exchange"). Both
the 1990 Restricted Stock Exchange and the 1993 Restricted Stock Exchange
involved a risk of forfeiture whereby if the Company did not generate a minimum
of $500,000 in total operating revenues from inception through December 31,
1995, all shares would be returned to the Company with the holders forfeiting
all rights to the shares and forfeiting any claim to the previously accrued but
unpaid compensation. Effective December 31, 1995, five of the parties, all of
whom were present or past employees of the Company, entered into agreements with
the Company whereby the forfeiture date was extended from December 31, 1995 to
December 31, 1997 in exchange for increasing the minimum total operating
revenues which the Company would need to achieve in order to avoid forfeiture of
the shares from $500,000 to $1,000,000, with such revenues to be achieved by
December 31, 1997. As of December 31, 1997, when the Agreements terminated, the
Company did not achieve the revenue goals set forth in the Agreements, as
previously amended. The four former employees who are parties to the Agreements
have indicated disagreement with the Company's position and have filed a lawsuit
against the Company seeking a determination that they are entitled to keep their
shares. The Company has filed a cross-complaint against the four former
employees seeking the return and cancellation of the shares. The Company's Chief
Executive Officer and his wife have agreed to surrender to the Company for
cancellation the same proportion of their shares (a total of 400,244) as the
four former employees are required to surrender based on the final resolution of
the lawsuit. Until such time as the Company can obtain the surrender of all of
these shares and the matter is fully resolved, the Company is accounting for all
of the stock, which it has deemed forfeited, as issued and outstanding.
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
54
<PAGE> 55
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 licenses to the Company by McMaster
University. A third patent, which was issued September 1, 1998, is 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.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------
<S> <C>
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.
3.3 Certificate of Amendment of Bylaws adopted April 21, 1998.
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.)
</TABLE>
55
<PAGE> 56
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------
<S> <C>
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.)
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 L.P. (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 L.P. (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 L.P. 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.)
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.)
</TABLE>
56
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------
<S> <C>
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).
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.)
21 Subsidiaries of Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Indicates a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. The Company filed a Report on Form 8-K on
November 12, 1998, to report press releases issued to the public on November 10,
November 11 and November 12, 1998.
57
<PAGE> 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: March 29, 1999 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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Alvin J. Glasky Chairman of the Board, March 29, 1999
- --------------------------------- Chief Executive Officer,
Alvin J. Glasky, Ph.D. President and Director
(Principal Executive Officer)
/s/ Samuel Gulko Chief Financial Officer, March 29, 1999
- --------------------------------- Secretary, Treasurer and
Samuel Gulko Director (Principal Accounting
and Financial Officer)
/s/ Mark J. Glasky Director March 29, 1999
- ---------------------------------
Mark J. Glasky
/s/ Frank M. Meeks Director March 29, 1999
- ---------------------------------
Frank M. Meeks
/s/ Carol O'Cleireacain Director March 29, 1999
- ---------------------------------
Carol O'Cleireacain, Ph.D.
/s/ Paul H. Silverman Director March 29, 1999
- ---------------------------------
Paul H. Silverman Ph.D., D.Sc.
/s/ Stephen Runnels Executive Vice President March 29, 1999
- --------------------------------- and Director
Stephen Runnels
/s/ Eric L. Nelson, Ph.D. Director March 29, 1999
- ---------------------------------
Eric Nelson, Ph.D.
/s/ Joseph Rubinfeld Director March 29, 1999
- ---------------------------------
Joseph Rubinfeld, Ph.D.
</TABLE>
58
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------
<S> <C>
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.
3.3 Certificate of Amendment of Bylaws adopted April 21, 1998.
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.)
</TABLE>
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------
<S> <C>
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.)
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 L.P. (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 L.P. (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 L.P. 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.)
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.)
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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).
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.)
21 Subsidiaries of Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.
</TABLE>
- --------
* Indicates a management contract or compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
NEOTHERAPEUTICS, INC.
A DELAWARE CORPORATION
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
in the State of Delaware shall be in the City of Wilmington, County of New
Castle.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
SECTION 3. BOOKS. The books of the Corporation may be kept within or
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. All meetings of stockholders shall be held
at such place either within or without the State of Delaware as may be
designated from time to time by the Board of Directors.
SECTION 2. ANNUAL MEETINGS. Annual meetings of stockholders shall be
held at a time and date designated by the Board of Directors for the purpose of
electing directors and transacting such other business as may properly be
brought before the meeting.
SECTION 3. SPECIAL MEETINGS. Special meetings of stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Board of Directors, the
Chairman of the Board, or by the Chief Executive Officer.
SECTION 4. NOTIFICATION OF BUSINESS TO BE TRANSACTED AT MEETING. To be
properly brought before a meeting, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a stockholder entitled to vote at the meeting.
SECTION 5. NOTICE; WAIVER OF NOTICE. Whenever stockholders are required
or permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state the place, date and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by law, such notice shall be given not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
<PAGE> 2
records of the Corporation. A written waiver of any such notice signed by the
person entitled thereto, whether before or after the time stated therein, shall
be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
SECTION 6. QUORUM; ADJOURNMENT. Except as otherwise required by law, or
provided by the Certificate of Incorporation or these Bylaws, the holders of a
majority of the capital stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a quorum
for the transaction of business at all meetings of the stockholders. A meeting
at which a quorum is initially present may continue to transact business,
notwithstanding the withdrawal of enough votes to leave less than a quorum, if
any action taken is approved by at least a majority of the required quorum to
conduct that meeting. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the majority of the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting of the time and place of the adjourned meeting,
until a quorum shall be present or represented. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally noticed. If the
adjournment is for more than thirty (30) days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder entitled to vote at the meeting.
SECTION 7. VOTING; PROXIES. At all meetings of stockholders at which a
quorum is present for the election of directors a plurality of the votes cast
shall be sufficient to elect. All other questions brought before a meeting of
stockholders at which a quorum is present shall, unless otherwise provided by
law, the Certificate of Incorporation or these Bylaws, be decided by the vote of
the holders of the majority of stock represented and entitled to vote thereat.
Unless otherwise provided in the Certificate of Incorporation, each stockholder
represented at a meeting of stockholders shall be entitled to cast one vote for
each share of the capital stock entitled to vote thereat held by such
stockholder. Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy, but no such
proxy shall be voted or acted upon after three years from its date, unless the
proxy provides for a longer period. A proxy shall be irrevocable if it states
that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A stockholder may
revoke any proxy which is not irrevocable by attending the meeting and voting in
person or by filing an instrument in writing revoking the proxy or by delivering
a proxy in accordance with applicable law bearing a later date to the Secretary
of the Corporation. Elections of directors need not be by ballot unless the
Chairman of the meeting so directs or unless a stockholder demands election by
ballot at the meeting and before the voting begins.
SECTION 8. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Except as otherwise provided in the Certificate of Incorporation, any action
which may be taken at any annual or special meeting of stockholders, may be
taken without a meeting and without prior notice, if a consent in writing,
setting forth the action so taken, is signed by the holders of all of the
outstanding shares entitled to vote thereon. All such consents shall be filed
with the Secretary of the Corporation and shall be maintained in the corporate
records.
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SECTION 9. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10) days
before the date of such meeting, nor more than sixty (60) days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting. Stockholders on the record date are entitled to
notice and to vote or to receive the dividend, distribution or allotment of
rights or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after the record date,
except as otherwise provided by agreement or by applicable law.
SECTION 10. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer who has
charge of the stock ledger of the Corporation shall prepare and make, at least
ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder of the Corporation who is present.
SECTION 11. STOCK LEDGER. The stock ledger of the Corporation shall be
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 10 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 12. INSPECTORS OF ELECTION. In advance of any meeting of
stockholders, the Board of Directors may appoint one or more persons (who shall
not be candidates for office) as inspectors of election to act at the meeting or
any adjournment thereof. If an inspector or inspectors are not so appointed, or
if an appointed inspector fails to appear or fails or refuses to act at a
meeting, the Chairman of any meeting of stockholders may, and on the request of
any stockholder or his proxy shall, appoint an inspector or inspectors of
election at the meeting. The duties of such inspector(s) shall include:
determining the number of shares outstanding and the voting power of each; the
shares represented at the meeting; the existence of a quorum; the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all stockholders. In the event of any dispute between
or among the inspectors, the determination of the majority of the inspectors
shall be binding.
SECTION 13. ORGANIZATION. At each meeting of stockholders the Chairman
of the Board of Directors, if one shall have been elected, (or in his absence or
if one shall not have been elected, the Chief Executive Officer) shall act as
Chairman of the meeting. The Secretary (or in his or her absence or inability to
act, the person whom the Chairman of the meeting shall appoint Secretary of the
meeting) shall act as Secretary of the meeting and keep the minutes thereof.
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SECTION 14. ORDER OF BUSINESS. The order and manner of transacting
business at all meetings of stockholders shall be determined by the Chairman of
the meeting.
ARTICLE III
DIRECTORS
SECTION 1. POWERS. Except as otherwise required by law or provided by
the Certificate of Incorporation, the business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors.
SECTION 2. NUMBER AND ELECTION OF DIRECTORS. Subject to any limitations
in the Certificate of Incorporation, the authorized number of directors of the
Corporation shall be set at five (5). The number of directors may be changed by
an amendment to this Bylaw adopted by the affirmative vote of a majority of the
Board of Directors. Directors shall be elected at each annual meeting of
stockholders to replace directors whose terms then expire, and, subject to the
provisions of Section 3 of this Article III, each director elected shall hold
office for a term of two (2) years or until his successor is duly elected and
qualified, or until his earlier death, resignation or removal. Any director may
resign at any time effective upon giving written notice to the Board of
Directors, unless the notice specifies a later time for such resignation to
become effective. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. If the resignation of a
director is effective at a future time, the Board of Directors may elect a
successor prior to such effective time to take office when such resignation
becomes effective. Directors need not be stockholders.
SECTION 3. CLASSIFIED BOARD OF DIRECTORS. The Board of Directors shall
be divided into two classes, as nearly equal in number as possible, designated
Class I and Class II. Class I shall consist of two (2) directors, who shall hold
office for an initial term expiring at the first annual meeting of stockholders,
and Class II shall consist of three (3) directors, who shall hold office for a
full term expiring at the second annual meeting of stockholders. At each annual
meeting of stockholders held thereafter, directors shall be elected for a full
term to succeed the directors of the Class whose terms then expire.
SECTION 4. VACANCIES. Subject to the limitations in the Certificate of
Incorporation, vacancies in the Board of Directors resulting from death,
resignation, removal or otherwise and newly created directorships resulting from
any increase in the authorized number of directors may be filled by a majority
of the directors then in office, although less than a quorum, or by a sole
remaining director. Each director so selected shall hold office for the
remainder of the full term of office of the former director which such director
replaces and until his successor is duly elected and qualified, or until his
earlier death, resignation or removal. No decrease in the authorized number of
directors constituting the Board of Directors shall shorten the term of any
incumbent directors.
SECTION 5. TIME AND PLACE OF MEETINGS. The Board of Directors shall hold
its meetings at such place, either within or without the State of Delaware, and
at such time as may be determined from time to time by the Board of Directors.
SECTION 6. ANNUAL MEETING. The Board of Directors shall meet for the
purpose of organization, the election of officers and the transaction of other
business, as soon as practicable after each annual meeting of stockholders, on
the same day and at the same place where such annual meeting shall be held.
Notice of such meeting need not be given. In the event such annual meeting is
not so
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held, the annual meeting of the Board of Directors may be held at such place,
either within or without the State of Delaware, on such date and at such time as
shall be specified in a notice thereof given as hereinafter provided in Section
8 of this Article III or in a waiver of notice thereof.
SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held at such places within or without the State of Delaware at such date
and time as the Board of Directors may from time to time determine and, if so
determined by the Board of Directors, notices thereof need not be given.
SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the Chief Executive Officer, or by
any two (2) directors. Notice of the date, time and place of special meetings
shall be delivered personally or by telephone to each director or sent by
first-class mail or telegram, charges prepaid, addressed to each director at the
director's address as it is shown on the records of the Corporation. In case the
notice is mailed, it shall be deposited in the United States mail at least four
(4) days before the time of the holding of the meeting. In case the notice is
delivered personally or by telephone or telegram, it shall be delivered
personally or by telephone or to the telegraph company at least forty-eight (48)
hours before the time of the holding of the meeting. The notice need not specify
the purpose of the meeting. A written waiver of any such notice signed by the
person entitled thereto, whether before or after the time stated therein, shall
be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends
the meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
SECTION 9. QUORUM; VOTE REQUIRED FOR ACTION; ADJOURNMENT. Except as
otherwise required by law, or provided in the Certificate of Incorporation or
these Bylaws, a majority of the directors shall constitute a quorum for the
transaction of business at all meetings of the Board of Directors and the
affirmative vote of not less than a majority of the directors present at any
meeting at which there is a quorum shall be the act of the Board of Directors.
If a quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting, from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
A meeting at which a quorum is initially present may continue to transact
business, notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum to conduct that meeting.
When a meeting is adjourned to another time or place (whether or not a quorum is
present), notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the Board of Directors may transact any business which
might have been transacted at the original meeting.
SECTION 10. ACTION BY WRITTEN CONSENT. Unless otherwise restricted by
the Certificate of Incorporation, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 11. TELEPHONE MEETINGS. Unless otherwise restricted by the
Certificate of Incorporation, members of the Board of Directors of the
Corporation, or any committee designated by the Board of Directors, may
participate in a meeting of the Board of Directors or such committee, as the
case may be, by conference telephone or similar communications equipment by
means of which all
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persons participating in the meeting can hear each other. Participation in a
meeting pursuant to this Section 11 shall constitute presence in person at such
meeting.
SECTION 12. COMMITTEES. The Board of Directors may, by resolution passed
by a majority of the entire Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board of Directors may designate one or more directors as alternate members of
any such committee, who may replace any absent or disqualified member at any
meeting of the committee. In the event of absence or disqualification of a
member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the committee member or members present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
the absent or disqualified member. Any committee, to the extent allowed by law
and as provided in the resolution establishing such committee, shall have and
may exercise all the power and authority of the Board of Directors in the
management of the business and affairs of the Corporation, but no such committee
shall have the power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Each
committee shall keep regular minutes of its meetings and report to the Board of
Directors when required.
SECTION 13. COMPENSATION. The directors may be paid such compensation
for their services as the Board of Directors shall from time to time determine.
SECTION 14. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or the committee thereof
which authorizes the contract or transaction, or solely because his or their
votes are counted for such purpose if: (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the stockholders. Interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
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ARTICLE IV
OFFICERS
SECTION 1. OFFICERS. The officers of the Corporation shall be a
President, a Secretary and a Chief Financial Officer. The Corporation may also
have, at the discretion of the Board of Directors, a Chairman of the Board, a
Vice Chairman of the Board, a Chief Executive Officer, one or more Vice
Presidents, one or more Assistant Financial Officers and Treasurers, one or more
Assistant Secretaries and such other officers as may be appointed in accordance
with the provisions of Section 3 of this Article IV.
SECTION 2. APPOINTMENT OF OFFICERS. The officers of the Corporation,
except such officers as may be appointed in accordance with the provisions of
Section 3 or Section 5 of this Article IV, shall be appointed by the Board of
Directors, and each shall serve at the pleasure of the Board, subject to the
rights, if any, of an officer under any contract of employment.
SECTION 3. SUBORDINATE OFFICERS. The Board of Directors may appoint, and
may empower the Chief Executive Officer or President to appoint, such other
officers as the business of the Corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in the Bylaws or as the Board of Directors may from time to time
determine.
SECTION 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights of
an officer under any contract, any officer may be removed at any time, with or
without cause, by the Board of Directors or, except in case of an officer chosen
by the Board of Directors, by any officer upon whom such power of removal may be
conferred by the Board of Directors. Any officer may resign at any time by
giving written notice to the Corporation. Any resignation shall take effect at
the date of the receipt of that notice or at any later time specified in that
notice; and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights of the Corporation under any contract to
which the officer is a party.
SECTION 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or any other cause shall be filled
in the manner prescribed in these Bylaws for regular appointments to that
office.
SECTION 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer is elected, shall, if present, preside at meetings of the stockholders
and of the Board of Directors. He shall, in addition, perform such other
functions (if any) as may be prescribed by the Bylaws or the Board of Directors.
SECTION 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer of the
Corporation shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and the officers of
the Corporation. He shall exercise the duties usually vested in the chief
executive officer of a corporation and perform such other powers and duties as
may be assigned to him from time to time by the Board of Directors or prescribed
by the Bylaws. In the absence of the Chairman of the Board and any Vice Chairman
of the Board, the Chief Executive Officer shall preside at all meetings of the
stockholders and of the Board of Directors.
SECTION 8. PRESIDENT. The President of the Corporation shall, subject to
the control of the Board of Directors and the Chief Executive Officer of the
Corporation, if there be such an officer, have
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general powers and duties of management usually vested in the office of
president of a corporation and shall have such other powers and duties as may be
prescribed by the Board of Directors or the Bylaws or the Chief Executive
Officer of the Corporation. In the absence of the Chairman of the Board, Vice
Chairman of the Board and Chief Executive Officer, the President shall preside
at all meetings of the Board of Directors and stockholders.
SECTION 9. VICE PRESIDENT. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Directors or, if not ranked, a Vice President designated by the Board
of Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the Bylaws, and the President, or the Chairman of the
Board.
SECTION 10. SECRETARY. The Secretary shall keep or cause to be kept, at
the principal executive office or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of Directors, committees
of Directors, and stockholders, with the time and place of holding, whether
regular or special, and, if special, how authorized, the notice given, the names
of those present at Directors' meetings or committee meetings, the number of
shares present or represented at stockholders' meetings, and a summary of the
proceedings.
The Secretary shall keep, or cause to be kept, at the principal
executive office or at the office of the Corporation's transfer agent or
registrar, as determined by resolution of the Board of Directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates issued for the same, and the number and date of
cancellation of every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the Board of Directors required by the Bylaws or by
law to be given, and he shall keep or cause to be kept the seal of the
Corporation if one be adopted, in safe custody, and shall have such powers and
perform such other duties as may be prescribed by the Board of Directors or by
the Bylaws.
SECTION 11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
Corporation. The Chief Financial Officer shall deposit all moneys and other
valuables in the name and to the credit of the Corporation with such
depositories as may be designated by the Board of Directors. He shall make such
disbursements of the funds of the Corporation as are authorized and shall render
from time to time an account of all of his transactions as Chief Financial
Officer and of the financial condition of the Corporation. The Chief Financial
Officer shall also have such other powers and perform such other duties as may
be prescribed by the Board of Directors or the Bylaws.
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ARTICLE V
STOCK
SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the
Corporation shall be entitled to have a certificate signed in the name of the
Corporation by the Chairman or Vice Chairman of the Board of Directors, or the
President or a Vice President and by the Treasurer or an Assistant Treasurer, or
by the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by such stockholder in the Corporation.
SECTION 2. SIGNATURES. Any or all of the signatures on the certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
SECTION 3. LOST CERTIFICATES. The Corporation may issue a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation, alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen or destroyed. The Board of Directors may in its discretion require a bond
in such form and amount and with such surety as it may determine, before issuing
a new certificate.
SECTION 4. TRANSFERS. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these Bylaws or in any agreement with the
stockholder making the transfer. Transfers of stock shall be made on the books
of the Corporation only by the person named in the certificate or by his
attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
SECTION 5. RECORD HOLDERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the record
holder of shares to receive dividends, and to vote as such record holder, and to
hold liable for calls and assessments a person registered on its books as the
record holder of shares, and shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise required by law.
SECTION 6. TRANSFER AGENT. The Board of Directors may at its discretion
appoint one or more transfer agents, registrars and agents for making payment
upon any class of stock, bond, debenture or other security of the Corporation.
Such agents shall be located either within or outside of Delaware. They shall be
entitled to such compensation as may be agreed.
ARTICLE VI
INDEMNIFICATION
SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a director or officer of the Corporation or is or was serving at the
request of the Corporation as a director or officer of another corporation or of
a partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans (hereinafter an "indemnitee"),
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whether the basis of such proceeding is alleged action in an official capacity
as a director or officer or in any other capacity while serving as a director or
officer, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an indemnitee
who has ceased to be a director or officer and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that,
except as provided in Section 2 of this Article VI with respect to proceedings
to enforce rights to indemnification, the Corporation shall indemnify any such
indemnitee in connection with a proceeding (or part thereof) initiated by such
indemnitee only if such proceeding (or part thereof) was authorized by the Board
of Directors of the Corporation. The right to indemnification conferred in this
Section shall be a contract right and shall include the right to be paid by the
Corporation the expenses incurred in defending any such proceeding in advance of
its final disposition (hereinafter an "advancement of expenses"); provided,
however, that, if the Delaware General Corporation Law requires, an advancement
of expenses incurred by an indemnitee in his capacity as a director or officer
(and not in any other capacity in which service was or is rendered by such
indemnitee, including without limitation, service to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal that such indemnitee is not entitled to be indemnified
for such expenses under this Article VI or otherwise (hereinafter an
"undertaking").
SECTION 2. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 1
of this Article VI is not paid in full by the Corporation within forty-five (45)
days after a written claim has been received by the Corporation, the indemnitee
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim. If successful in whole or part in any such suit or
in a suit brought by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. In (i) any suit
brought by the indemnitee to enforce a right to indemnification hereunder (but
not in a suit brought by the indemnitee to enforce a right to an advancement of
expenses) it shall be a defense that, and (ii) any suit by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking the
Corporation shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met the applicable standard of conduct set forth in
the Delaware General Corporation Law. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware General Corporation Law, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified or to such advancement of expenses
under this Article VI or otherwise shall be on the Corporation.
10
<PAGE> 11
SECTION 3. NON-EXCLUSIVITY OF RIGHTS. The rights of indemnification and
to the advancement of expenses conferred in this Article VI shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the Certificate of Incorporation, Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.
SECTION 4. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
SECTION 5. INDEMNIFICATION OF EMPLOYEES OR AGENTS OF THE CORPORATION.
The Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article VI with respect to the indemnification and
advancement of expenses of directors or officers of the Corporation.
SECTION 6. INDEMNIFICATION CONTRACTS. The Board of Directors is
authorized to enter into a contract with any director, officer, employee or
agent of the Corporation, or any person serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, including employee
benefit plans, providing for indemnification rights equivalent to or, if the
Board of Directors so determines, greater than, those provided for in this
Article VI.
SECTION 7. EFFECT OF TERMINATION OF ACTION. The termination of any
action, suit or proceeding by judgment, order, settlement, or conviction or upon
a plea of nolo contendere or its equivalent shall not of itself create a
presumption that the person seeking indemnification did not act in good faith
and in the best interests of the Corporation and, with respect to any criminal
action or proceeding, had a reasonable cause to believe that his conduct was
unlawful. Entry of a judgment by a consent as part of a settlement shall not be
deemed a final adjudication of liability for negligence or misconduct in the
performance of duty, nor of any other issue or matter.
SECTION 8. EFFECT OF AMENDMENT. Any amendment, repeal or modification of
any provision of this Article VI by the stockholders or the directors of the
Corporation shall not adversely affect any right or protection of a director or
officer of the Corporation existing at the time of such amendment, repeal or
modification.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Subject to limitations contained in the General
Corporation Law of the State of Delaware and the Certificate of Incorporation,
the Board of Directors may declare and pay dividends upon the shares of capital
stock of the Corporation, which dividends may be paid either in cash, securities
of the Corporation or other property.
SECTION 2. DISBURSEMENTS. All checks or demands for money and notes of
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
11
<PAGE> 12
SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
SECTION 4. CORPORATE SEAL. The Corporation shall have a corporate seal
in such form as shall be prescribed by the Board of Directors.
SECTION 5. VOTING OF STOCK OWNED BY THE CORPORATION. The Chairman of the
Board, the Chief Executive Officer, the President and any other officer of the
Corporation authorized by the Board of Directors shall have power, on behalf of
the Corporation, to attend, vote and grant proxies to be used at any meeting of
stockholders of any corporation (except this Corporation) in which the
Corporation may hold stock.
SECTION 6. CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction and definitions in the
General Corporation Law of the State of Delaware shall govern the construction
of these Bylaws.
SECTION 7. AMENDMENTS. Subject to the General Corporation Law of the
State of Delaware, the Certificate of Incorporation and these Bylaws, the Board
of Directors may by the affirmative vote of a majority of the entire Board of
Directors amend or repeal these Bylaws, or adopt other Bylaws as in their
judgment may be advisable for the regulation of the conduct of the affairs of
the Corporation. Unless otherwise restricted by the Certificate of
Incorporation, these Bylaws may be altered, amended or repealed, and new Bylaws
may be adopted, at any annual meeting of the stockholders (or at any special
meeting thereof duly called for that purpose) by a majority of the combined
voting power of the then outstanding shares of capital stock of all classes and
series of the Corporation entitled to vote generally in the election of
directors, voting as a single class, provided that, in the notice of any such
special meeting, notice of such purpose shall be given.
12
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF THE BYLAWS
OF
NEOTHERAPEUTICS, INC.
A DELAWARE CORPORATION
I, Samuel Gulko, hereby certify that:
1. I am the duly elected and acting Secretary of NeoTherapeutics, Inc.,
a Delaware corporation; and
2. Section 2 and Section 3 of the Bylaws of this corporation were
amended by a resolution duly adopted by the Board of Directors of this
corporation on April 21, 1998, to read in their entirety as follows:
SECTION 2. NUMBER AND ELECTION OF DIRECTORS. Subject to any limitations
in the Certificate of Incorporation, the authorized number of directors of the
Corporation shall be fixed from time to time by the Board of Directors pursuant
to a resolution duly adopted by a majority of the entire Board of Directors, but
no decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director. Until changed in the foregoing
manner, the number of directors shall be nine (9). Directors shall be elected at
each annual meeting of the stockholders to replace directors whose terms then
expire, and, subject to the provisions of Section 3 of this Article III, each
director elected shall hold office for a term of two (2) years or until his or
her successor is duly elected and qualified, or until his or her earlier death,
resignation or removal. Any director may resign at any time effective upon
giving written notice to the Board of Directors, unless the notice specifies a
later time for such resignation to become effective. If the resignation of a
director is effective at a future time, the Board of Directors may elect a
successor prior to such effective time to take office when such resignation
becomes effective. Directors need not be stockholders.
SECTION 3. CLASSIFIED BOARD OF DIRECTORS. The Board of Directors shall
be divided into two (2) classes, as nearly equal in number as possible,
designated Class I and Class II. The number of directors constituting each Class
shall be fixed from time to time by a resolution duly adopted by a majority of
the entire Board of Directors. Class I directors shall hold office for an
initial term expiring at the 1998 annual meeting of stockholders. Class II
directors shall hold office for a full term expiring at the 1999 annual meeting
of stockholders. At each annual meeting of stockholders held thereafter,
directors shall be elected for a full term of office to succeed the directors of
the Class whose terms then expire.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the
seal of said corporation as of the 19th day of March, 1999.
/s/ Samuel Gulko
-----------------------------
Samuel Gulko, Secretary
<PAGE> 1
EXHIBIT 21
----------
SUBSIDIARIES OF REGISTRANT
1. Advanced ImmunoTherapeutics, Inc., a California corporation.
2. NeoTherapeutics GmbH, a Switzerland corporation.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-30321 on Form S-8, Registration Statement
File No. 333-30345 on Form S-8, Registration Statement File No. 333-05342-LA on
Form S-3, and into Registration Statement File No. 333-37585 on Form S-3.
/s/Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Orange County, California
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31,
1998 FINANCIAL STATEMENTS OF NEOTHERAPEUTICS, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-K YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,097,341
<SECURITIES> 1,769,348
<RECEIVABLES> 112,552
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,402,463
<PP&E> 3,992,047
<DEPRECIATION> 740,413
<TOTAL-ASSETS> 6,826,163
<CURRENT-LIABILITIES> 2,363,925
<BONDS> 1,126,174
0
0
<COMMON> 27,535,329
<OTHER-SE> (24,245,573)
<TOTAL-LIABILITY-AND-EQUITY> 6,826,163
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,664,540
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 156,016
<INCOME-PRETAX> (11,604,556)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,604,556)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,604,556)
<EPS-PRIMARY> (2.07)
<EPS-DILUTED> (2.07)
</TABLE>
