<PAGE> 1
As filed with the Securities and Exchange Commission on November 10, 1999
Registration No. 333-89153
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 1
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
NEOTHERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 8731 93-0979187
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
157 Technology Drive, Irvine, California 92618
(949) 788-6700
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Alvin J. Glasky, Ph.D., Chairman, Chief Executive Officer and President
NeoTherapeutics, Inc.,
157 Technology Drive, Irvine, California 92618,
(949) 788-6700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
C. Craig Carlson, Esq.
Robert E. Rich, Esq.
Stradling Yocca Carlson & Rauth,
a Professional Corporation
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
(949) 725-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
Pursuant to Rule 429 under the Securities Act of 1933, the prospectus
included as part of this registration statement may be used in connection with
the securities covered by the registration statement on Form SB-2 (File No.
333-52331).
----------------
<PAGE> 2
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
Proposed
Maximum
Amount to Offering Proposed Maximum Amount of
Title of Each be Price Per Aggregate Registration
Class of Securities to be Registered Registered Share Offering Price Fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.001 par value per share)..... 810,868 $11.1875(1) $9,071,586 $2,521.90(4)
- ---------------------------------------------------------------------------------------------------------------
Common Stock ($.001 par value per share)..... 89,132(2) $11.1875 $ 997,164 (2)
- ---------------------------------------------------------------------------------------------------------------
Common Stock ($.001 par value per share)
issuable upon exercise of a Warrant.......... 25,000(2) $11.61875(3) $ 290,469 (2)
- ---------------------------------------------------------------------------------------------------------------
TOTALS:......... 925,000 $2,521.90(4)
===============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act on the basis of the average
of the high and low reported sale prices of the Registrant's common stock on
October 14, 1999 as reported on the Nasdaq National Market.
(2) These shares were previously registered under Registration Statement on Form
SB-2 (Registration No. 333-52331) and are included herein pursuant to Rule
429(b) under the Securities Act. The filing fee of $323.43 associated with
such shares was previously paid with the previous Registration Statement.
(3) The exercise price of the Warrant used for the purpose of calculating the
amount of the registration fee in accordance with Rule 457(g) under the
Securities Act.
(4) Previously paid.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 3
PROSPECTUS
NEOTHERAPEUTICS, INC.
925,000 SHARES
COMMON STOCK
This prospectus may be used by the selling stockholder named herein,
Kingsbridge Capital Limited, to resell to the public up to 925,000 shares of
common stock of NeoTherapeutics, Inc. The shares being offered for resale
include: (1) up to 900,000 shares of common stock which may be purchased by
Kingsbridge from NeoTherapeutics pursuant to a Private Equity Line of Credit
Agreement dated March 27, 1998, and (2) up to 25,000 shares of common stock
which may be purchased by Kingsbridge upon exercise of a currently outstanding
warrant held by Kingsbridge. The shares covered by this prospectus may be sold
from time to time by Kingsbridge for its own account. NeoTherapeutics will not
receive any of the proceeds from the sales of the shares by Kingsbridge.
Shares purchased by Kingsbridge pursuant to the terms of the Equity Line
Agreement will be at a purchase price equal to 88% of the market price, as
defined in the Equity Line Agreement, on the date of purchase.
Kingsbridge may offer and sell shares pursuant to this prospectus from
time to time in transactions on the Nasdaq National Market, in negotiated
transactions, or otherwise. Kingsbridge may effect these transactions by selling
the shares to or through broker-dealers, who may receive compensation in the
form of discounts or commissions from Kingsbridge or from the purchasers of the
shares for whom the broker-dealers may act as an agent or to whom they may sell
as a principal, or both. Kingsbridge is an "underwriter" within the meaning of
the Security Act of 1933 in connection with sales of the shares offered pursuant
to this prospectus. See "Plan of Distribution" beginning on page 61.
Our common stock is listed on the Nasdaq National Market under the
symbol "NEOT." On November 9, 1999, the last reported sale price for the common
stock on the Nasdaq National Market was $11.125 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is November 10, 1999
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary ...................................................... 3
Risk Factors ............................................................ 7
Special Note Regarding Forward-Looking Statements ....................... 17
The Equity Line Agreement ............................................... 18
Use of Proceeds ......................................................... 19
Market Price of Common Stock ............................................ 20
Dividend Policy ......................................................... 20
Capitalization .......................................................... 21
Selected Consolidated Financial Data .................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................ 23
Business ................................................................ 29
Management .............................................................. 43
Certain Relationships and Related Transactions .......................... 52
Security Ownership of Certain Beneficial Owners and Management .......... 54
Selling Stockholder ..................................................... 56
Description of Capital Stock ............................................ 57
Plan of Distribution .................................................... 61
Legal Matters ........................................................... 62
Experts ................................................................. 62
Index to Financial Statements ........................................... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholder may offer to sell, and
seek offers to buy, shares of our common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or any sale of our common stock.
WHERE YOU CAN FIND MORE INFORMATION
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock registered
for resale hereby. This prospectus, which constitutes a part of the registration
statement, does not contain all the information set forth in the registration
statement and the exhibits and schedules thereto. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the registration statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified by such reference.
For further information with respect to us and the common stock offered hereby,
reference is made to the registration statement and to the exhibits and
schedules filed therewith.
A copy of the registration statement may be inspected without charge at
the public reference facilities of the Commission located at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the regional offices of the Commission
located at Seven World Trade Center, Suite 1300, New York, New York 10048, and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or
any part of the registration statement may be obtained at the prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and its public reference facilities in New York, New York
and Chicago, Illinois, upon the payment of the fees prescribed by the
Commission. The registration statement is also available through the
Commission's web site on the world wide web at http://www.sec.gov.
AVAILABLE INFORMATION
We are subject to the information requirements of the Exchange Act, as
amended, and in accordance therewith file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W. Washington, D.C. 20549;
at the regional officers of the Commission located at Seven World Trade Center,
13th Floor, New York, New York 10048 and Citicorp Center 500 West Madison
Street, Suite 1400, Chicago Illinois 60661; and though the Commission's website
on the world wide web at the following address: http://www.sec.gov.
2
<PAGE> 5
PROSPECTUS SUMMARY
To fully understand this offering and its consequences to you, you
should read the following summary together with the more detailed information
and financial statements and notes thereto appearing elsewhere in this
prospectus. Throughout this prospectus we refer to NeoTherapeutics, Inc. as
"NeoTherapeutics", "we" "our" and "us".
NEOTHERAPEUTICS, INC.
We are a development-stage biopharmaceutical company engaged in the
discovery and development of novel therapeutic drugs intended to treat
neurological diseases and conditions. Through our research, we develop small
synthetic molecules that are administered orally or by injection and are capable
of passing through the blood-brain barrier to act rapidly upon specific target
cells in selected locations in the central nervous system, including the brain.
Using these molecules, we intend to develop improved treatments for a variety of
neurological diseases and disorders, such as memory deficits associated with
Alzheimer's disease and dementia, spinal cord injury, stroke, Parkinson's
disease, migraine, depression and obesity.
PRODUCTS IN DEVELOPMENT
Our lead product candidate, Neotrofin(TM) (AIT-082, leteprinim
potassium), is designed to treat memory deficits and neurodegeneration
associated with Alzheimer's disease. The Alzheimer's Association has estimated
that the overall care costs required for the treatment and care of the
approximately four million Alzheimer's disease patients in the United States is
$100 billion per year. The table below summarizes the primary or possible
indications and development status for Neotrofin(TM) and certain other of our
current research and development programs.
<TABLE>
<CAPTION>
POSSIBLE
PRODUCT INDICATIONS DEVELOPMENT STATUS
- ------- ----------- ------------------
<S> <C> <C>
Neotrofin(TM) Alzheimer's Phase 1: Four clinical trials completed, two in
(AIT-082) Disease progress and additional studies to be
conducted in 1999
Phase 2: One clinical trial completed, three in
progress and an additional study to be
initiated in 1999
Spinal Cord Injury Clinical trial planned for 2000
Stroke Preclinical
AIT-034 Severe Dementia Investigational New Drug Application in 2000
AIT-202 Depression; Preclinical
Obesity
AIT-203 Parkinson's Preclinical
Disease
AIT-297 Migraine Preclinical
</TABLE>
We currently do not sell any products and do not expect to have any
products commercially available for at least two years.
3
<PAGE> 6
STRATEGY
Our strategy is to become a leading supplier of new drugs for the
treatment of neurodegenerative and neurological diseases based upon our
proprietary small-molecule technology and complementary technologies we acquire
from others. Our strategy includes the following key elements:
- Focus on development of new drugs that treat neurological diseases and
conditions
- Design and refine processes to synthesize our proprietary compounds
- Maintain our associations with the National Institutes of Health (NIH)
and the NIH's National Institute on Aging and National Institute of
Mental Health
- Conduct preclinical tests and human clinical trials of the safety and
efficacy of our potential products according to established U.S. and
international regulatory guidelines
- Collaborate on specific research with expert academic researchers
- Outsource certain specific elements of our development program, such
as manufacturing, toxicity testing and clinical trial management
- Acquire complementary technology platforms from leading academic
institutions
- Seek strategic alliances and licenses with multinational or large
regional pharmaceutical companies as partners for the development,
financing, manufacture and marketing of certain of our compounds
ABOUT US
NeoTherapeutics, Inc. was incorporated in Colorado in December 1987 and
reincorporated in Delaware in June 1997. Our wholly-owned subsidiary, Advanced
ImmunoTherapeutics, Inc., was incorporated in California in June 1987. In April
1997, we established NeoTherapeutics GmbH as a wholly-owned subsidiary in
Switzerland. Our executive offices are located at 157 Technology Drive, Irvine,
California 92618. Our telephone number is (949) 788-6700. Our web site address
is www.neotherapeutics.com. Information contained in our web site does not
constitute part of this prospectus.
4
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Shares offered by the selling stockholder........ Up to 925,000 shares
Shares outstanding as of September 14, 1999...... 7,952,898 shares
Nasdaq National Market symbol.................... NEOT
</TABLE>
The number of shares outstanding as of September 14, 1999 does not
include:
- 3,339,459 shares of common stock; issuable upon exercise of warrants
outstanding as of September 14, 1999;
- 1,169,323 shares of common stock issuable upon exercise of stock
options outstanding as of September 14, 1999;
- 200,000 shares of common stock underlying warrants that are issuable
upon exercise of certain warrants outstanding as of September 14,
1999;
- shares issuable to the selling stockholder pursuant to the Equity Line
Agreement; and
- shares of common stock issuable upon conversion of outstanding shares
of Series A preferred stock which have an aggregate stated value of
$2.5 million as of September 14, 1999.
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues from grants ............... $ 236 $ 125 $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------
Operating expenses:
Research and development ........ 287 306 615 4,508 8,542
General and administrative ...... 221 667 660 2,342 3,123
---------- ---------- ---------- ---------- ----------
Loss from operations ............... (272) (848) (1,275) (6,850) (11,665)
Other income (expense) ............. (40) (47) 236 688 60
---------- ---------- ---------- ---------- ----------
Net loss ........................... $ (312) $ (895) $ (1,039) $ (6,162) $ (11,605)
========== ========== ========== ========== ==========
Basic and diluted loss per share ... $ (0.13) $ (0.36) $ (0.32) $ (1.14) $ (2.07)
========== ========== ========== ========== ==========
Number of shares used in
computing loss per share ........ 2,447,727 2,466,234 3,292,663 5,405,831 5,615,449
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
SIX MONTHS ENDED (INCEPTION)
JUNE 30, THROUGH
---------------------------- JUNE 30,
1998 1999 1999
---------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues from grants ............... $ -- $ -- $ 497
---------- ---------- --------
Operating expenses:
Research and development ........ 3,674 6,565 22,582
General and administrative ...... 1,498 1,845 10,738
---------- ---------- --------
Loss from operations ............... (5,172) (8,410) (32,823)
Other income (expense) ............. 82 (65) 527
---------- ---------- --------
Net loss ........................... $ (5,090) $ (8,475) $(32,296)
========== ========== ========
Basic and diluted loss per share ... $ (0.93) $ (1.40)
========== ==========
Number of shares used in
computing loss per share ........ 5,482,487 6,036,187
========== ==========
</TABLE>
5
<PAGE> 8
The "as adjusted" column below reflects:
- the receipt of net proceeds of approximately $8.7 million from the
sale of 1,150,000 shares of our common stock to the public on July
30, 1999; and
- the receipt of proceeds from the exercise of employee stock options
for 300 shares of our common stock.
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, 199
DECEMBER 31, --------------------
--------------------------------------------------------- AS
1994 1995 1996 1997 1998 ACTUAL ADJUSTED
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents
and marketable securities ..... $ 6 $ 1 $ 17,444 $ 9,132 $ 2,867 $ 3,473 $ 12,098
Property and equipment, net ..... 10 9 133 3,475 3,252 3,313 3,313
Total assets .................... 18 11 17,979 13,198 6,826 7,484 16,109
Total long-term debt ............ 558 558 -- 177 1,126 849 849
Stockholder's equity
(deficit) ..................... (1,021) (1,253) 16,622 10,543 3,290 3,707 12,310
</TABLE>
6
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other information
contained in this prospectus before deciding to invest in our common stock. If
any of the following risks actually occur, our business, financial condition and
operating results would be harmed. As a result, the trading price of our common
stock could decline, and you could lose a part or all of your investment.
WE HAVE INCURRED LOSSES IN EVERY YEAR SINCE OUR INCEPTION AND EXPECT TO CONTINUE
INCURRING LOSSES FOR THE NEXT SEVERAL YEARS AS WE SEEK TO BRING OUR INITIAL DRUG
PRODUCT TO MARKET.
We are considered a development stage company because we have not yet
generated revenues from sales. From our inception in 1987 through June 30, 1999,
we have incurred cumulative losses of approximately $32.3 million, almost all of
which consisted of research and development and general and administrative
expenses. Our losses have been increasing. We lost approximately $6.2 million in
1997, $11.6 million in 1998, and $8.5 million in the six months ending June 30,
1999. We expect our losses to increase in the future as we expand our clinical
trials and increase our research and development activities. It is possible that
we may never achieve significant revenues or become profitable. Even if we
eventually generate revenues from sales, we nevertheless expect to incur
significant operating losses over the next several years. Our ability to become
profitable and to achieve long-term success will depend on:
- the time and expense necessary to develop our proposed products;
- whether and how quickly we can obtain regulatory approvals for such
products; and
- our success in bringing these products to market.
See "Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
THE SCIENTIFIC AND MEDICAL CHALLENGES ASSOCIATED WITH DEVELOPING OUR DRUG
PRODUCTS MAY MAKE IT IMPOSSIBLE FOR US TO DEVELOP PRODUCTS THAT CAN PASS
REGULATORY SCRUTINY AND BE SOLD FOR A PROFIT. IF WE FAIL TO DEVELOP SUCCESSFUL
PRODUCTS WE WILL NEVER GENERATE REVENUES.
Our proposed products are in an early stage of development. They will
require additional research and development, clinical testing and regulatory
clearances. We currently do not sell any products and do not expect to have any
products commercially available for at least two 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:
- could be ineffective or toxic;
- may fail to receive necessary regulatory clearances;
- will be uneconomical to manufacture or market;
- may not be sold because of patent or other rights of third parties;
or
- becomes unmarketable because a third party introduces an equivalent
or superior product.
As a result, we are unable to predict whether our research and development
activities will result in any commercially viable products or applications.
Disorders of the central nervous system, our primary area of
7
<PAGE> 10
therapeutic focus, are not thoroughly understood by the scientific and medical
community and are the subject of continuing research. We cannot be certain that
our proposed products will prove to be safe or effective in treating such
disorders or any other diseases. In our industry, the majority of compounds fail
to enter clinical studies, and the majority of products entering clinical
studies after achieving promising preclinical results are not commercialized
successfully. See "Business."
WE WILL NEED MORE THAN $90 MILLION OF ADDITIONAL FUNDS TO SUCCESSFULLY DEVELOP
OUR LEAD DRUG CANDIDATE AND IT MAY BE IMPOSSIBLE TO OBTAIN SUCH FUNDING ON TERMS
ACCEPTABLE TO US. WITHOUT SUCH FUNDING WE WILL NOT DEVELOP SUCCESSFUL DRUG
CANDIDATES AND WILL NEVER GENERATE REVENUES.
We will require substantial additional capital to further develop our
proposed products and to commercialize any products that are developed. Our
capital requirements will depend on many factors, including:
- the progress of our research and development program;
- the progress of preclinical and clinical testing;
- the time and cost involved in obtaining regulatory approvals;
- the cost of filing, prosecuting, defending and enforcing patent
claims and other intellectual property rights;
- competing technological and market developments; and
- our ability to establish collaborative and other arrangements with
third parties, such as licensing and manufacturing agreements.
We currently are spending cash at a rate of approximately $2.0 million
per month, and we expect this rate of spending to continue for approximately the
next 12 months.
We expect that we will need a minimum of $90 million to complete
development and clinical trials of Neotrofin(TM), our lead drug candidate,
before we will be able to submit it to the Food and Drug Administration for
approval for commercial sale. We believe that our existing cash and capital
resources will allow us to satisfy our current and projected funding
requirements for approximately the next 8 months. Thereafter, we will require
substantial additional funds in order to complete the research and development
activities currently contemplated and to commercialize our proposed products.
We expect that we will seek such additional funding through public or
private financings or collaborative or other arrangements with third parties. We
cannot be certain that additional funds will be available on acceptable terms,
if at all. Any future equity financing will decrease the percentage ownership of
existing stockholders and may, depending on the price at which we are able to
sell the equity securities, result in substantial economic dilution to our
existing stockholders. 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.
If adequate funds are not available, we may have to delay, scale back or
eliminate one or more of our development programs. Any failure to obtain
adequate funding, or any unfavorable arrangement regarding our products or
technology, would limit our ability to develop or commercialize our products and
could harm our business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
8
<PAGE> 11
WE DEPEND ON THIRD PARTIES FOR CLINICAL TESTING, MANUFACTURING AND MARKETING OF
OUR PROPOSED DRUG PRODUCTS. IF WE ARE UNABLE TO OBTAIN SUCH SERVICES ON TERMS
ACCEPTABLE TO US, WE MAY FAIL TO DEVELOP SUCCESSFUL DRUG PRODUCTS AND TO
GENERATE REVENUES.
Except with respect to our Neotrofin(TM) compound, we currently do not
intend to 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 currently are seeking larger pharmaceutical companies as
partners to conduct such activities as well as to market and distribute our
products. However, 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 guarantee that we will be able to enter into any such
partnering arrangements on this or any other basis. In addition, we cannot
guarantee 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. See "Business -- Business
Strategy."
EXTENSIVE AND COSTLY CLINICAL TRIALS WILL BE NECESSARY TO ASSESS THE SAFETY AND
EFFICACY OF OUR POTENTIAL DRUG PRODUCTS. IF WE ARE UNABLE TO IMPLEMENT CLINICAL
TRIALS SUCCESSFULLY, OR IF THE TRIALS SHOW THAT OUR DRUG CANDIDATES ARE
INSUFFICIENTLY SAFE OR EFFECTIVE, WE WILL BE UNABLE TO SELL OUR DRUG PRODUCTS
AND WILL NOT GENERATE REVENUES.
The rate of completion of clinical trials depends on, among other
factors, the type, novelty and complexity of the product and the rate of patient
enrollment. Patient enrollment is a function of many factors, including:
- the nature of the clinical trial protocols;
- existence of competing protocols;
- size of the patient population;
- proximity of patients to clinical sites; and
- eligibility criteria for the study.
Delays in patient enrollment will increase costs and delay the
introduction of our potential products, thereby harming our business and
financial condition.
Many pharmaceutical companies are conducting clinical trials in patients
with Alzheimer's disease. As a result, we must compete with them for clinical
sites, physicians and the limited number of patients with Alzheimer's disease
who fulfill the stringent requirements for participation in clinical trials.
This competition could delay completion of clinical trials and/or result in
increased costs.
Even if we successfully enroll patients in our clinical trials, we
cannot guarantee they will respond to our potential products. We think it is
prudent to expect setbacks. If we do not comply with the U.S. Food and Drug
Administration regulations applicable to such testing, our clinical trials could
be delayed, suspended or cancelled, or the FDA might not accept the results of
such testing. The FDA may suspend clinical trials at any time if it concludes
that the subjects participating in such trials are being exposed to unacceptable
health risks.
9
<PAGE> 12
Further, we cannot assure you that human clinical testing will show any current
or future product candidate to be safe and effective or that data derived
therefrom will be suitable for submission to the FDA.
OUR MANAGEMENT HAS LIMITED MANUFACTURING AND MARKETING EXPERIENCE AND MAY HAVE
DIFFICULTY MANAGING OUR GROWTH. IF WE ARE UNABLE TO MANAGE GROWTH AND MAKE THE
TRANSITION FROM A COMPANY FOCUSED EXCLUSIVELY ON RESEARCH AND DEVELOPMENT TO A
COMMERCIAL ENTERPRISE WE MAY HAVE TO LICENSE OUR PRODUCTS TO THIRD PARTIES OR
SELL OUR ASSETS OR ENTIRE BUSINESS FOR PRICES THAT ARE LESS THAN WE BELIEVE TO
BE THEIR LONG-TERM VALUE.
We cannot guarantee that we will be able to develop manufacturing or
marketing capabilities successfully, either on our own or through third parties,
or that we will be able to manage the expansion of our operations successfully.
To date, we have engaged exclusively in the development of pharmaceutical
technology and products. Our management has substantial experience in
pharmaceutical company operations, but has limited experience in manufacturing
or procuring products in commercial quantities or in marketing pharmaceutical
products. Our management has only limited experience in negotiating,
establishing 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 engage successfully in any
of these activities with respect to any products which we attempt to
commercialize. If we decide to establish a commercial-scale manufacturing
facility for our lead product candidate Neotrofin(TM), we will require
substantial additional funds and personnel and will be required to comply with
extensive regulations applicable to such a facility. This growth may strain our
management and operations. Our ability to manage such growth depends upon the
ability of our officers and key employees to:
- broaden our management team and to attract, hire and retain skilled
employees;
- implement and improve our operational, management information and
financial control systems;
- expand, train and manage our employee base; and
- develop additional expertise among existing management personnel.
WE NEED TO COMPLY WITH EXTENSIVE GOVERNMENTAL REGULATION TO OBTAIN PRODUCT
APPROVALS AND TO MARKET PRODUCTS AFTER APPROVALS. IF WE FAIL TO COMPLY WITH SUCH
REGULATIONS, WE MIGHT NOT BE PERMITTED TO SELL OUR PRODUCTS OR COULD BE SUBJECT
TO CRIMINAL OR CIVIL PENALTIES.
Various agencies in the United States and abroad regulate the testing,
manufacturing, labeling, distribution, marketing and advertising of proposed
products and ongoing research and development activities. The U.S. Food and Drug
Administration and comparable agencies in foreign countries impose many
requirements on the introduction of new pharmaceutical products through lengthy
and detailed clinical testing procedures, and other costly and time consuming
compliance procedures. These requirements make it difficult to estimate when
Neotrofin(TM) or any other potential product will be available commercially, if
at all.
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, we cannot guarantee that FDA or
other regulatory approvals will be granted on a timely basis, if at all.
10
<PAGE> 13
If we are delayed or fail to obtain such approvals, our business may be
damaged. If we fail to comply with regulatory requirements, either prior to
approval or in marketing our products after approval, 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; and
- enhanced exposure to product liabilities.
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 products in those
countries. See "Business -- Drug Approval Process and Other Government
Regulation."
IF THIRD-PARTY PAYORS SET REIMBURSEMENT LEVELS FOR OUR DRUG PRODUCTS THAT DO NOT
ADEQUATELY COMPENSATE THOSE USING OUR DRUG PRODUCTS, DEMAND FOR OUR PRODUCTS MAY
FAIL TO GROW OR COULD DECLINE.
Our commercial success will depend heavily on the extent to which
third-party payors, including government authorities (such as Medicare), managed
care providers and private health insurers will reimburse users for the costs of
our products and any related treatments. If those who buy or use our products
are not adequately reimbursed, they may forego or reduce such use.
Governmental authorities and private third-party payors are engaged in
ongoing efforts to contain or reduce the costs of pharmaceutical products. In
the United States, an increasing emphasis on managed care and consolidation of
hospital purchasing has and will continue to place pressure on pharmaceutical
prices, and may reduce the prices we can charge for our potential products. In
many major foreign markets, pricing approval is required before sales can
commence and prices are often set by governmental authorities. These private and
public price controls are subject to change at unpredictable times. Market
acceptance of our potential products will be curtailed severely if adequate
coverage and reimbursement levels are not provided by governmental authorities
and private third-party payors. This includes developments in countries where
any of our potential collaborative partners operate.
THE LOSS OF KEY RESEARCHERS OR MANAGERS OR THE INABILITY TO HIRE NECESSARY
PERSONNEL COULD HINDER OUR DRUG DEVELOPMENT PROCESS SIGNIFICANTLY AND MIGHT
CAUSE OUR BUSINESS TO FAIL.
Our success depends upon the contributions of our key management and
scientific personnel. 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, our Chief Executive
Officer and Chief Scientific Officer, in the face amount of $2 million, the loss
of Dr. Glasky's services could substantially damage our business.
We also will need substantial additional expertise in such areas as
finance and marketing, among others, in order to achieve our business
objectives. 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.
11
<PAGE> 14
IF WE ARE UNABLE TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS
ADEQUATELY, THE VALUE OF OUR RESEARCH COULD DECLINE AS OUR COMPETITORS
APPROPRIATE PORTIONS OF OUR RESEARCH.
We actively pursue patent protection for our proprietary products and
technologies. We hold three U.S. patents and currently have five U.S. patent
applications pending. In addition, we have numerous foreign patents issued and
patent applications pending corresponding to our U.S. patents. However, our
patents may not protect us against our competitors. We may 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. Others could
develop substantially equivalent proprietary information or gain access to our
trade secrets.
We have a policy requiring that our 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.
INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BROUGHT AGAINST US COULD BE TIME
CONSUMING AND EXPENSIVE TO DEFEND AND MAY HARM OUR BUSINESS.
Other could assert claims against us based on their patents. Such claims
could seek damages as well as an injunction prohibiting clinical testing,
manufacturing and marketing of the product at issue. 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. See "Business -- Patents and Proprietary Rights."
WE ARE A SMALL COMPANY RELATIVE TO OUR PRINCIPAL COMPETITORS AND OUR LIMITED
FINANCIAL AND RESEARCH RESOURCES MAY LIMIT OUR ABILITY TO DEVELOP AND MARKET NEW
PRODUCTS.
Competition in the pharmaceuticals market is intense. Many companies,
both public and private, including well-known pharmaceutical companies, are
developing products to treat Alzheimer's disease and certain of the other
applications we are pursuing. Most of these companies have substantially greater
financial, research and development, manufacturing and marketing experience and
resources than we do. These competitors may develop pharmaceutical products that
are more effective or less costly than any products which we may develop. To
date, only one product, donepezil (Aricept(R), Pfizer, Inc.), is being marketed
actively in the U.S. for the treatment of Alzheimer's disease.
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 likely will 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 technology may give us a competitive
12
<PAGE> 15
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 may fail to achieve one or more of these goals. See "Business -- Products and
Development" and "-- Competition."
HOLDERS OF OUR SERIES A PREFERRED STOCK COULD ENGAGE IN SHORT SELLING TO REDUCE
THE CONVERSION PRICE APPLICABLE TO THEIR SHARES. IF THIS OCCURS, THE MARKET
PRICE OF OUR COMMON STOCK MAY DECLINE.
As of September 14, 1999, a total of 250 shares of our Series A
preferred stock were outstanding. Each share of Series A preferred stock has a
stated value of $10,000 and is convertible into shares of our common stock at
the option of the holder of the Series A shares. The Series A preferred stock is
convertible at a conversion price equal to the lesser of $13.06 per share of
common stock or 101% of the average of the 10 lowest closing bid prices of the
common stock occurring in the 30 trading days preceding the particular
conversion. A decrease in the price of our common stock below the $13.06 maximum
conversion price could result in the Series A preferred stock being convertible
into more shares of common stock. Increased sales volume of our common stock
could put downward pressure on the market price of the shares. This fact could
encourage holders of Series A preferred stock to sell short our common stock
prior to conversion of the Series A preferred stock, thereby potentially causing
the market price to decline. The Series A selling stockholder could then convert
their Series A preferred stock and use the shares of common stock received upon
conversion to cover their short position. The Series A selling stockholder could
thereby profit by the decline in the market price of the common stock caused by
their short selling.
13
<PAGE> 16
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE MARKET PRICE OF OUR COMMON
STOCK TO FALL.
A substantial number of shares of our common stock are eligible for
future sale in the public market. These include 7,952,898 shares that are
outstanding as of September 14, 1999, as well as shares that may be issued upon
exercise of outstanding stock options and warrants or upon conversion of our
outstanding shares of Series A preferred stock. As of September 14, 1999,
security holders held options and warrants which, if exercised, would obligate
us to issue up to an additional 4,708,782 shares of common stock. A substantial
number of those shares, when issued upon exercise, will be available for
immediate resale in the public market. In addition, we are permitted to issue up
to an additional $10.5 million of our common stock under the Equity Line
Agreement during the remainder of its term. The shares of common stock issuable
upon conversion of the Series A preferred stock and the shares we sell under the
Equity Line Agreement will be available for resale in the public market. The
market price of our common stock could fall as a result of such resales.
THE ISSUANCE OF STOCK PURSUANT TO THE EQUITY LINE AGREEMENT MAY CAUSE DILUTION
TO OUR CURRENT STOCKHOLDERS.
The sale of shares of common stock pursuant to the Equity Line Agreement
may have a dilutive impact on our current stockholders because it will be issued
at a discount to the then-prevailing market price of our common stock. These
discounted sales could cause the market price of our common stock to drop.
PATIENTS MAY ASSERT PRODUCT LIABILITY CLAIMS AGAINST US AND MAY SUE US FOR
FAILURES OF OUR POTENTIAL DRUG PRODUCTS.
Although we currently carry product liability insurance with coverage
limits of $5.0 million, 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, or at all, for our clinical and commercial activities or that such
additional insurance would be sufficient to cover any potential product
liability claim or recall. Any imposition of liability that is not covered by
insurance or is in excess of our insurance coverage could damage our business.
THE USE OF HAZARDOUS MATERIALS IN OUR RESEARCH AND DEVELOPMENT EFFORTS IMPOSES
CERTAIN COMPLIANCE COSTS ON US AND MAY SUBJECT US TO LIABILITY FOR CLAIMS
ARISING FROM THE USE OR MISUSE OF THESE 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 were 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. See "Business -- Drug Approval Process and Other Government
Regulation."
OUR SHARES HAVE EXPERIENCED SIGNIFICANT PRICE AND VOLUME FLUCTUATIONS WHICH
COULD RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL INVESTORS.
Our common stock has experienced significant fluctuations in market
price and trading volume and is likely to continue to fluctuate in the future.
Factors that may cause the market price and trading volume of our common stock
to fluctuate include:
- timing and announcements of the results of our clinical trials, our
technological innovations or new products, or those of our
competitors;
14
<PAGE> 17
- fluctuations in our results of operations;
- 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;
- failure of our results of operations to meet the expectations of
stock market analysts and investors;
- increases in the number of outstanding shares of our common stock
resulting from sales of new shares, the conversion of shares of our
Series A preferred stock, or the exercise of warrants or stock
options;
- changes in investors' perception of the pharmaceutical industry
generally; and
- general stock market conditions.
In addition, 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.
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SUBSTANTIAL PERCENTAGE OF OUR COMMON
STOCK. THEIR OWNERSHIP COULD ALLOW THEM TO EXERCISE SIGNIFICANT CONTROL OVER
CORPORATE DECISIONS AND TO IMPLEMENT CORPORATE ACTS THAT ARE NOT IN THE BEST
INTERESTS OF OUR STOCKHOLDERS AS A GROUP.
Our directors and executive officers beneficially own approximately
22.3% of our outstanding common stock as of September 14, 1999. These
stockholders, if they acted together, could exert substantial control over
matters requiring approval by our stockholders. These matters would include the
election of directors and the approval of mergers or other business combination
transactions. This concentration of ownership may discourage or prevent someone
from acquiring our business. See "Security Ownership of Certain Beneficial
Owners and Management."
PROVISIONS IN OUR CHARTER AND BYLAWS MAY DISCOURAGE MERGERS AND OTHER
TRANSACTIONS.
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. See "Description of Capital Stock."
OUR BUSINESS AND THE BUSINESS OF OUR SUPPLIERS COULD BE HARMED BY COMPUTER
ERRORS OR FAILURES ASSOCIATED WITH THE YEAR 2000 PROBLEM.
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 processing time and to save storage space. Therefore, when
dates in the year 2000 and beyond are indicated and computer programs read the
date
15
<PAGE> 18
"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 system applications (including voice
and data systems);
- internal non-information technology 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. The
cost to remediate Year 2000 issues with regard to these systems is not 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.
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
resolve successfully 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 harm our business
significantly 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 inflict significant damage on our business or business
prospects.
16
<PAGE> 19
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve a
number of risks and uncertainties. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "intends," "plans," "should," "seeks," "pro forma,"
"anticipates," "estimates," "continues," or other variations thereof (including
their use in the negative), or by discussions of strategies, plans or
intentions. Such statements include but are not limited to statements under the
captions "Risk Factors," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus. A number of factors could cause results to differ
materially from those anticipated by such forward-looking statements, including
those discussed under "Risk Factors" and "Business."
In addition, such forward-looking statements are necessarily dependent
upon assumptions and estimates that may prove to be incorrect. Although we
believe that the assumptions and estimates reflected in such forward-looking
statements are reasonable, we cannot guarantee that our plans, intentions or
expectations will be achieved. The information contained in this prospectus,
including the section discussing risk factors, identifies important factors that
could cause such differences.
The cautionary statements made in this prospectus are intended to be
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements or to update the reasons why actual results could differ materially
from those anticipated in such forward-looking statements.
THE COMPANY
NeoTherapeutics was incorporated in Colorado in December 1987. On August
7, 1996, we changed our name from Americus Funding Corporation to
NeoTherapeutics, Inc. In June 1997, the stockholders approved the
reincorporation of NeoTherapeutics, Inc. as a Delaware corporation. Our
wholly-owned subsidiary, Advanced ImmunoTherapeutics, Inc., was incorporated as
a California corporation in June 1987. In July 1989, in a transaction accounted
for as a reverse acquisition, all of the shareholders of AIT exchanged all of
their shares of AIT common stock for shares of NeoTherapeutics common stock, and
AIT became a wholly-owned subsidiary of NeoTherapeutics. In April 1997, we
established NeoTherapeutics 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
"NeoTherapeutics," "we," "our" or the "Company" refer to NeoTherapeutics, Inc.,
a Delaware corporation, Advanced ImmunoTherapeutics and NeoTherapeutics GmbH as
a consolidated entity.
17
<PAGE> 20
THE EQUITY LINE AGREEMENT
On March 27, 1998, we entered into the Private Equity Line of Credit
Agreement with Kingsbridge Capital Limited, a private investor, pursuant to
which we may issue and sell, from time to time, shares of our common stock for
cash consideration up to an aggregate of $15 million. Pursuant to the
requirements of the Equity Line Agreement, we have filed a registration
statement, of which this prospectus forms a part, in order to permit Kingsbridge
to resell to the public any shares that it acquires pursuant to the Equity Line
Agreement. Until February 13, 2001, we may from time to time at our sole
discretion, and subject to specific restrictions set forth in the Equity Line
Agreement, sell ("put") shares of our common stock to Kingsbridge at a price
equal to 88 percent of the then current average market price of our common
stock, as determined under the Equity Line Agreement. Puts can be made every 15
days in amounts ranging from a minimum of $250,000 to a maximum of $2,000,000,
depending on the trading volume and the market price of the common stock at the
time of each put. We are required to put at least $1,000,000 of our common stock
to Kingsbridge over the life of the Equity Line Agreement and have fulfilled
this obligation. As of the date of this prospectus, 615,868 shares of common
stock have been issued under the Equity Line Agreement for an aggregate
consideration of $4.5 million.
Under the Equity Line Agreement, the average market price of our common
stock for purposes of calculating the purchase price to be paid by Kingsbridge
will be calculated as the average of the lowest trade prices of the common stock
(as reported by Nasdaq) on each of the five days on which the Nasdaq National
Market is open for business (a "trading day"), during the period which includes
the two trading days preceding the day on which we deliver notice to Kingsbridge
that we are exercising a put, the trading day on which the put notice is
delivered, and the two trading days following the trading day on which the put
notice is delivered.
The Equity Line Agreement provides that we may not put shares of our
common stock to Kingsbridge unless the following conditions are satisfied (none
of which are within the control of Kingsbridge):
- the registration statement of which this prospectus forms a part
shall have been declared effective by the Commission,
- the representations and warranties made by us in the Equity Line
Agreement must be accurate as of the date of each put,
- we shall have performed and complied with all obligations under the
Equity Line Agreement and the Registration Rights Agreement entered
into between us and Kingsbridge in connection with the Equity Line
Agreement that are required to be performed as of the date of each
put,
- no statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits or directly and adversely
affects any of the transactions contemplated by the Equity Line
Agreement,
- at the time of a put, there must have been no material adverse change
in our business, operations, properties, prospects or financial
condition since the date of filing of our most recent periodic report
filed with the Commission pursuant to the Securities Exchange Act of
1934,
- our common stock must not have been delisted from the Nasdaq National
Market nor suspended from trading,
18
<PAGE> 21
- the number of shares to be put to Kingsbridge, together with any
shares then held by Kingsbridge, shall not exceed 9.9% of all shares
of our common stock that would be outstanding upon completion of the
put,
- our common stock must have a minimum bid price of $3.00 per share at
the time of the put, and
- the average trading volume of our common stock for 26 of the 30
consecutive trading days immediately preceding a put must be at least
10,000 shares per day.
In connection with the Equity Line Agreement, we issued a warrant to
Kingsbridge on March 27, 1998. The warrant entitles the holder to purchase
25,000 shares of our common stock at a purchase price of $11.61875 per share.
The warrant is exercisable at any time until September 24, 2001. The warrant
contains provisions that protect the holder against dilution by adjustment of
the exercise price and the number of shares issuable pursuant to the warrant
upon the occurrence of a stock split, reverse stock split, stock dividend,
recaptilization, merger or similar transaction affecting our common stock. The
exercise price of the warrant is payable either (1) in cash or (2) by a
"cashless exercise," in which that number of shares of common stock underlying
the warrant having an aggregate fair market value at the time of exercise equal
to the aggregate exercise price are cancelled as payment of the exercise price.
USE OF PROCEEDS
The proceeds from the sale of shares by Kingsbridge pursuant to this
prospectus will be received directly by Kingsbridge. We will not receive any of
the proceeds from the sale of the shares offered hereby.
However, we will receive the put price paid pursuant to the Equity Line
Agreement if and to the extent we sell common stock pursuant to the Equity Line
Agreement. The put price equals 88 percent of the then current average market
price of our common stock, as determined under the Equity Line Agreement. We
will also receive the proceeds from the sale of shares to Kingsbridge if it
exercises the warrant. The exercise price of the warrant is $11.61875 per share.
See "The Equity Line Agreement."
19
<PAGE> 22
MARKET PRICE OF COMMON STOCK
Our common stock is listed on the Nasdaq National Market under the
symbol "NEOT." The following table sets forth for the periods indicated the
range of high and low closing sale prices of our common stock.
<TABLE>
<CAPTION>
HIGH LOW
-------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1997
First Quarter Ended March 31, 1997................. $ 6 3/4 $ 3 7/8
Second Quarter Ended June 30, 1997................. 16 3/8 4 7/8
Third Quarter Ended September 30, 1997............. 15 7/8 11 1/2
Fourth Quarter Ended December 31, 1997............. 14 1/2 7
YEAR ENDED DECEMBER 31, 1998
First Quarter Ended March 31, 1998................. 10 1/2 8 1/8
Second Quarter Ended June 30, 1998................. 21 6 7/8
Third Quarter Ended September 30, 1998............. 14 1/2 5 5/8
Fourth Quarter Ended December 31, 1998............. 14 1/4 4 11/16
YEAR ENDED DECEMBER 31, 1999
First Quarter Ended March 31, 1999................. 13 3/4 7 3/8
Second Quarter Ended June 30, 1999................. 14 8 1/4
Third Quarter Ended September 30, 1999............. 15 3/4 9 5/16
Fourth Quarter (through November 9, 1999).......... 13 10 11/16
</TABLE>
On November 9, 1999, the closing sale price of our common stock as
reported by the Nasdaq National Market was $11.125 per share. As of September
14, 1999, there were 281 holders of record of our common stock and we estimate
that there were approximately 4,400 total holders of our common stock, including
those holding their shares in street name.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently
anticipate that we will retain earnings, if any, to support operations and to
finance the growth and development of our business and do not anticipate paying
cash dividends in the foreseeable future. Moreover, we may not pay any dividends
on our common stock unless all accrued dividends on our Series A preferred stock
have been paid.
20
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999,
and as adjusted to give effect to:
- the issuance of 54,390 shares of our common stock upon the conversion
of 70 shares of our Series A preferred stock on July 13, 1999;
- the issuance and sale of 1,150,000 shares of our common stock on July
30, 1999; and
- the exercise of outstanding options resulting in the issuance of 300
shares of our common stock.
This table excludes:
- 3,339,459 shares of common stock issuable upon exercise of warrants
outstanding as of September 14, 1999;
- 1,169,323 shares of common stock issuable upon exercise of stock
options outstanding as of September 14, 1999;
- 200,000 shares of common stock underlying warrants that are issuable
upon exercise of certain warrants outstanding as of September 14,
1999; and
- shares of common stock issuable upon conversion of outstanding shares
of Series A preferred stock which have an aggregate stated value of
$2.5 million as of September 14, 1999.
<TABLE>
<CAPTION>
JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-Term Debt, including current portion and note payable to
related party .................................................... $ 1,905 $ 1,905
-------- --------
Stockholders' Equity:
Preferred Stock, $.001 par value, 5,000,000 shares authorized;
issued and outstanding: 5% Series A Preferred Stock with
Conversion Features, 320 shares, liquidation preference
$3.2 million, actual, and 250 shares, liquidation
preference $2.5 million, as adjusted ......................... 2,547 1,902
Common Stock, $.001 par value, 25,000,000 shares authorized;
6,748,207 shares issued and outstanding, actual, and
7,952,898 shares issued and outstanding, as adjusted ......... 33,960 43,208
Unrealized gains on available-for-sale securities ................ 27 27
Accumulated deficit .............................................. (32,827) (32,827)
-------- --------
Total stockholders' equity ..................................... 3,707 12,310
-------- --------
Total capitalization ......................................... $ 7,484 $ 14,215
======== ========
</TABLE>
21
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data for the years
ended December 31, 1996, 1997 and 1998 and the selected consolidated balance
sheet data as of December 31, 1997 and 1998 are derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated statement of operations data for the years ended December
31, 1994 and 1995 and the selected consolidated balance sheet data as of
December 31, 1994, 1995 and 1996 are derived from our audited consolidated
financial statements not included in this prospectus. The selected consolidated
statement of operations data for the six months ended June 30, 1998 and 1999,
and for the period from June 15, 1987 (inception) through June 30, 1999, and the
selected consolidated balance sheet data as of June 30, 1999 are unaudited. In
the opinion of management, unaudited data includes all adjustments, consisting
principally of normal recurring adjustments, necessary for a fair presentation
of such information when read in conjunction with our audited financial
statements. Historical results are not necessarily indicative of the results of
operations for future periods and the results of interim periods are not
necessarily indicative of the results for a full year. The following data is
qualified in its entirety by and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues from grants ............... $ 236 $ 125 $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Operating expenses:
Research and development ........ 287 306 615 4,508 8,542
General and administrative ...... 221 667 660 2,342 3,123
----------- ----------- ----------- ----------- -----------
Loss from operations ............... (272) (848) (1,275) (6,850) (11,665)
Other income (expense) ............. (40) (47) 236 688 60
----------- ----------- ----------- ----------- -----------
Net loss ........................... $ (312) $ (895) $ (1,039) $ (6,162) $ (11,605)
=========== =========== =========== =========== ===========
Basic and diluted loss per share ... $ (0.13) $ (0.36) $ (0.32) $ (1.14) $ (2.07)
=========== =========== =========== =========== ===========
Number of shares used in
computing loss per share ........ 2,447,727 2,466,234 3,292,663 5,405,831 5,615,449
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PERIOD
FROM
SIX MONTHS ENDED JUNE 15, 1987
JUNE 30, (INCEPTION)
--------------------------- THROUGH JUNE 30,
1998 1999 1999
----------- ----------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues from grants ............... $ -- $ -- $ 497
----------- ----------- --------
Operating expenses:
Research and development ........ 3,674 6,565 22,582
General and administrative ...... 1,498 1,845 10,738
----------- ----------- --------
Loss from operations ............... (5,172) (8,410) (32,823)
Other income (expense) ............. 82 (65) 527
----------- ----------- --------
Net loss ........................... $ (5,090) $ (8,475) $(32,296)
=========== =========== ========
Basic and diluted loss per share ... $ (0.93) $ (1.40)
=========== ===========
Number of shares used in
computing loss per share ........ 5,482,487 6,036,187
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, JUNE 30,
------------------------------------------------------- --------
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities ........... $ 6 $ 1 $ 17,444 $ 9,132 $2,867 $3,473
Property and equipment, net ........ 10 9 133 3,475 3,252 3,313
Total assets ....................... 18 11 17,979 13,198 6,826 7,484
Total long-term debt ............... 558 558 -- 177 1,126 849
Stockholder's equity (deficit) ..... (1,021) (1,253) 16,622 10,543 3,290 3,707
</TABLE>
22
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and Notes included elsewhere in this prospectus. This prospectus contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The cautionary
statements made in this prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this prospectus. Our
actual results could differ materially from those discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below and in "Risk Factors" and "Business"
as well as those discussed elsewhere herein. See "Forward-Looking Statements."
RESULTS OF OPERATIONS
Overview
From our inception in June 1987 through June 30, 1999, we devoted our
resources primarily to fund research and development, and incurred a cumulative
net loss of approximately $32.3 million. During this period, we had only limited
revenues from grants, and had no revenues from the sale of products or other
sources. We expect our operating expenses to increase over the next several
years as we expand our research and development and commercialization activities
and operations. We expect to incur significant additional operating losses for
at least the next several years unless such operating losses are offset, if at
all, by licensing revenues under strategic alliances with larger pharmaceutical
companies which we currently are seeking.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
There were no revenues during the three months ended June 30, 1999 or
the six months ended June 30, 1998.
Research and development expenses for the six months ended June 30, 1999
increased approximately $2,891,000 or 79% over the same period in 1998. Current
period increases were due primarily to costs and expenses associated with the
conduct of clinical and preclinical trials as we continued the acceleration of
our program to commercialize our lead compound, Neotrofin(TM) (AIT-082,
leteprinim potassium). These costs and expenses were attributable primarily to
increases in the number and duration of outside clinical and preclinical trials,
as well as the costs of manufacturing and formulation by our contract
manufacturer of Neotrofin(TM) and other compounds used in our research and
testing programs. In the same period in 1998, we had not yet commenced our Phase
2 clinical trials or any of our major long-term preclinical trials. We expect
our research and development expenses to continue to increase as we expand our
laboratories and increase our internal product development and external
preclinical and clinical trial activities.
General and administrative expenses increased approximately $347,000 or
23% from the same period in 1998 due primarily to professional fees, investor
and public relations fees, travel and printing costs. We expect general and
administrative expenses to increase in future periods in support of the expected
increases in research and development activities as well as sales and marketing
activities should we successfully bring one or more of our products to market.
Net interest expense increased by approximately $160,000 due to the use of
invested funds in operations and increased interest expense on higher levels of
borrowings. We expect our net interest expense to decline over the next quarter
due to the equity financing obtained in July 1999 and the reduction of debt
levels due to principal repayments on our outstanding loans.
23
<PAGE> 26
Year ended December 31, 1998 compared to year ended December 31, 1997
We had no revenues for the twelve month periods ended December 31, 1998
or 1997.
Research and development expenses for the twelve months ended December
31, 1998 increased by approximately $4.0 million, or 90% over the previous year.
This increase was due primarily to the costs and expenses associated with the
conduct of clinical and preclinical trials as we accelerated our program to
develop Neotrofin(TM). These costs and expenses were attributable primarily to
the increased number and length of clinical trials, contract manufacturing and
formulation of drug compounds, outside preclinical testing, rent and salaries
due to additional personnel.
General and administrative expenses increased approximately $0.8
million, or 33%, for the year ended December 31, 1998 over the year ended
December 31, 1997. General and administrative expenses for 1998 reflect
increased expenses related to additional personnel, insurance, professional and
consulting fees, commissions, facilities rent and travel. We expect general and
administrative expenses to continue to increase in future periods due to
expected increases in both research and development and sales and marketing
activities associated with our attempts to bring one or more of our potential
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.
Year ended December 31, 1997, compared to year ended December 31, 1996
We 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
we expanded our 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, we 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 investment of proceeds from the
September 1996 initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
From inception through June 30, 1999, we financed our operations
primarily through government grants, sales of equity securities, borrowings and
deferred payment of salaries and other expenses due to related parties. During
September and October 1996, we sold a total of 2,700,000 units of our common
stock and attached warrants in our initial public offering. Each unit consisted
of one share of common stock and one five-year warrant to purchase one share of
common stock at an exercise price of $11.40 per share. We realized net cash
proceeds of approximately $18.2 million from the sale.
24
<PAGE> 27
On March 27, 1998, we entered into an agreement with a private investor
(the "Equity Line Agreement") which allows us, at our sole discretion and
subject to certain restrictions, to sell ("put") to the investor up to $15.0
million of our common stock. The Equity Line Agreement expires in February 2001
and, among other things, provides for minimum and maximum puts ranging from
$250,000 to $2.0 million, depending on our stock price and trading volume. Puts
cannot occur more frequently than every 15 days, and are subject to a discount
of 12% from the then current average market price of our common stock, as
determined under the Equity Line Agreement. In addition, we issued to the
investor five-year warrants to purchase 25,000 shares of common stock at $11.62
per share. Through June 30, 1999, we had received gross proceeds of $4.5 million
from sales of a total of 615,868 shares of common stock under the Equity Line
Agreement. As of June 30, 1999, an additional $10.5 million remains available
under the Equity Line Agreement.
On January 29, 1999, we entered into a financing transaction to sell to
two private investors up to $6.0 million of preferred stock in two tranches. The
first tranche of $4.0 million of our Series A preferred stock was sold on
January 29, 1999, and is convertible into common stock at the lesser of $13.06
per share or at a price equal to 101% of the average market price of our common
stock for the 10 lowest of the 30 trading days immediately preceding the
conversion date. In no event can the Series A preferred stock be converted into
more than 1,450,000 shares. Our option to sell the second tranche of $2.0
million of preferred stock to the investors expired on September 16, 1999
without being exercised. Dividends on the preferred stock are payable in cash or
in common stock, at our option, at the annual rate of 5%. Additional features of
the preferred stock include, among other things, a redemption feature at our
option if the common stock trades below a floor of $5.00 per share or above a
ceiling of $20.00 per share. In connection with this financing, we issued to the
investors five-year warrants to purchase a total of 75,000 shares of common
stock at $12.98 per share. On June 18, 1999, the holders of the preferred shares
exercised their conversion right and exchanged 80 preferred shares for 68,434
shares of common stock. On July 13, 1999, 70 preferred shares were converted
into 54,390 shares of common stock.
On May 11, 1999, we completed a private placement of a total of 400,000
shares of common stock, and five-year warrants to purchase 80,000 shares of
common stock at an exercise price of $15.00 per share, for total cash
consideration of $4.0 million. The shares of common stock sold to the investors,
and the shares issuable upon exercise of the warrants, may be resold in
compliance with the provisions of Rule 144 under the Securities Act of 1933.
At June 30, 1999, our current assets exceeded our current liabilities by
approximately $1.2 million, which included cash and cash equivalents of
approximately $1.5 million and marketable securities and short-term investments
of approximately $2.0 million.
Through June 30, 1999, we spent (principally in 1997) approximately $4.3
million for capital equipment and leasehold improvements, of which $1.5 million
was borrowed from a finance company pursuant to a $2.0 million equipment line of
credit agreement. Over the next 12 months, we intend to spend approximately $1.0
million for additional equipment as we expand our research and development
laboratories. These additional capital equipment acquisitions will be financed
partially by utilizing the $0.5 million remaining under our existing equipment
line of credit agreement. We have pledged substantially all of our tangible
assets as collateral for this borrowing. We also have granted to the finance
company a warrant to purchase up to 13,459 shares of common stock at $7.43 per
share.
On July 30, 1999, pursuant to a registration statement filed with the
Securities and Exchange Commission on June 3, 1999, as amended, we sold
1,150,000 shares of our common stock to the public, including the underwriters'
15% overallotment, at a price of $9.375 per share, before deducting
underwriters' discounts and commissions. We realized net proceeds of
approximately $8.7 million from this offering.
25
<PAGE> 28
Effective June 1997, we entered into a non-cancelable long-term
operating lease with a major real-estate 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 2004 are approximately
$483,100 (1999), $500,500 (2000 and 2001), $538,100 (2002), $554,200 (2003) and
$285,400 (2004). In addition to minimum rents, we are obligated under the lease
to pay real property taxes, insurance and maintenance.
We currently are funding a major clinical trial involving approximately
400 patients which is being conducted by an independent contract research
organization in three foreign countries. The agreement with the contract
research organization, which is cancelable by either party on 30 days notice, is
expected to be completed by December 1999. We will spend between $4.0 and $5.0
million on this clinical trial, of which approximately $2.5 million has been
expended through June 30, 1999. During June 1999, we committed, on a nonbinding
basis, to fund an additional clinical trial to take place in the United States
using the same independent research organization. Preliminary work on this
additional trial commenced in June 1999. This additional clinical trial, which
also involves the testing of approximately 400 patients, is expected to cost us
between $7.0 and $8.0 million, of which approximately $0.2 million has been
expended through June 30, 1999.
As of June 30, 1999, we have committed, on a non-binding basis, to
provide a total of approximately $570,000 through the year 2000 for scientific
research grants and fellowships to a number of universities and not-for-profit
research organizations. In September 1999, we entered into a collaborative
agreement with the University of California, Irvine under which we have
committed, on a non-binding basis, to provide research funding support in the
amount of $2.0 million over a period of three years.
Since our inception, we have been in the development stage and therefore
devote substantially all of our efforts to research and development. We have
incurred cumulative losses of approximately $32.3 million through June 30, 1999,
and expect to incur substantial losses over the next several years. Our future
capital requirements and availability of capital will depend upon many factors,
including continued scientific progress in research and development programs,
the scope and results of preclinical studies and clinical trials, the time and
costs involved in obtaining regulatory approvals, the cost involved in filing,
prosecuting and enforcing patent claims, competing technological developments,
the cost of manufacturing scale-up, the cost of commercialization activities and
other factors which may not be within our control. We believe that our existing
cash and capital resources will be adequate to fund our capital needs for
approximately 8 months of operations. Thereafter, we will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize our proposed products. If we are
successful in obtaining additional funding, our existing stockholders could
experience substantial dilution to their shares of stock.
Without additional funding, we may be required to delay, reduce the
scope of or eliminate one or more of our research and development projects, or
obtain funds through arrangements with collaborative partners or others which
may require us to relinquish rights to certain technologies, product candidates
or products that we would otherwise seek to develop or commercialize on our own,
and which could be on terms unfavorable to us.
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 in computers arises from the common industry
practice of using two digits to represent a date in computer software code and
databases to enhance processing time and to 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
26
<PAGE> 29
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 developed a multi-phase program for Year 2000 issues that
consists of the following: (i) assessment of our corporate systems and
operations 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. We have focused our Year 2000 compliance
assessment program on four principal areas: (a) our internal information
technology system applications, including voice and data systems ("IT Systems"),
(b) 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 ("Facilities
Systems"), (c) embedded and external software contained in laboratory and other
equipment ("Equipment"), and (d) Year 2000 compliance by third parties with
which we have a material relationship, such as significant vendors, financial
institutions and insurers.
We have completed an inventory and risk assessment of our internal IT
Systems, Facilities Systems, and Equipment that we believe could be adversely
affected by the Year 2000 issue, and believe that our own 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. The cost to remediate the Year 2000 issues with regard to our
IT and Facility Systems and Equipment is not 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 the risk
assessment of our outside vendors and are currently reviewing their compliance.
We cannot determine or be assured that such vendors will achieve adequate
remediation of the Year 2000 issue. Furthermore, we cannot determine or be
assured that third parties upon which our vendors are dependent, will accomplish
adequate remediation of their Year 2000 issues. Except for our public utility
service vendors, who have indicated that they are now in compliance, 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 IT Systems, Facilities Systems,
Equipment and third parties, will not be material. In the event we fail to
implement successfully our solutions to the 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative Disclosures
We are exposed to certain market risks associated with interest rate
fluctuations on our marketable securities and borrowing arrangements. All
investments in marketable securities and borrowing arrangements are entered into
for purposes other than trading. We are not subject to risks from currency rate
fluctuations. In addition, we do not utilize hedging contracts or similar
instruments.
Our exposure to interest rate risk arises from financial instruments
entered into in the normal course of business. Certain of our financial
instruments are fixed rate, short-term investments in government and
27
<PAGE> 30
corporate notes and bonds, which are available for sale (and have been marked to
market in the accompanying financial statements). Changes in interest rates
generally affect the fair value of these investments, however, because these
financial instruments are considered "available for sale," all such changes are
reflected in the financial statements in the period affected.
Our borrowings bear interest at fixed annual rates. Changes in interest
rates generally affect the fair value of such debt, but do not have an impact on
earnings or cash flows. Because of the relatively short-term nature of our
borrowings, fluctuations in fair value are not deemed to be material.
Qualitative Disclosures
Our primary exposures relate to (1) interest rate risk on our
borrowings, (2) our ability to pay or refinance our borrowings at maturity at
market rates, (3) interest rate risk on the value of our investment portfolio
and rate of return, (4) the impact of interest rate movements on our ability to
obtain adequate financing to fund future cash requirements. We manage interest
rate risk on our investment portfolio by matching scheduled investment
maturities with our cash requirements. We manage interest rate risk on our
outstanding borrowings by using fixed rate debt. While we cannot predict or
manage our ability to refinance existing borrowings and investment portfolio,
management evaluates our financial position on an ongoing basis.
28
<PAGE> 31
BUSINESS
GENERAL
NeoTherapeutics, Inc. is a development-stage biopharmaceutical company
engaged in the discovery and development of novel therapeutic drugs intended to
treat neurological diseases and conditions, such as memory deficits associated
with Alzheimer's disease and dementia, spinal cord injury, stroke, Parkinson's
disease, migraine, depression and obesity. Our lead product candidate,
Neotrofin(TM) (AIT-082, leteprinim potassium), and other compounds under
development, are based on our patented technology. This technology uses small
synthetic molecules to create non-toxic compounds, intended to be administered
orally or by injection, that are capable of passing through the blood-brain
barrier to rapidly act upon specific target cells in specific locations in the
central nervous system, including the brain. Animal and laboratory tests have
shown that our Neotrofin(TM) compound appears to selectively increase the
production in animals of certain neurotrophic factors, a type of large protein,
in selected areas of the brain and in the spinal cord. These neurotrophic
factors regulate nerve cell growth and function. Our technology has been
developed to capitalize on the beneficial effects of these proteins, which have
been widely acknowledged to be closely involved in the early formation and
maturation of the central nervous system. We believe that Neotrofin(TM) could
have therapeutic and regenerative effects.
Our developmental activities to date have benefited from a close
association with the National Institutes of Health ("NIH"). The NIH's National
Institute on Aging ("NIA") has contracted for and funded a portion of the
preclinical studies on our Neotrofin(TM) compound, including toxicity studies.
The NIA has committed to fund and conduct two Phase 1 clinical trials under the
auspices of its Alzheimer's Disease Cooperative Study ("ADCS"), a consortium of
approximately 35 highly regarded clinical centers throughout the United States.
One Phase 1 clinical trial has been completed and the second trial is in
progress. The NIH's National Institute for Mental Health ("NIMH") also supported
our development efforts by contracting for and providing funds, along with the
NIA, for the production of sufficient quantities of the Neotrofin(TM) compound
to conduct some preclinical toxicity testing and the two Phase 1 human clinical
trials conducted by the ADCS.
In June 1997, an Investigational New Drug Application ("IND") for
Neotrofin(TM) was approved by the U.S. Food and Drug Administration ("FDA") and
Phase I human clinical testing in the United States for the treatment of
Alzheimer's disease began. In addition, Neotrofin(TM) received a physician's IND
in Canada in March 1997, where a Phase 1 clinical trial for the treatment of
Alzheimer's disease was completed. We also have received regulatory approvals to
conduct clinical trials using Neotrofin(TM) on Alzheimer's patients in the
Republic of South Africa and Australia. We also have received regulatory
approvals to conduct clinical trials using Neotrofin(TM) on Alzheimer's patients
in the Republic of South Africa and Australia. We believe that Neotrofin(TM) is
the first orally active drug to enter human clinical trials that is specifically
designed to address the issue of nerve regeneration. In preclinical studies with
animals, Neotrofin(TM) has been shown to induce the production of multiple
neurotrophic factors in the brain and spinal cord. These factors have been
reported to induce the multiplication and functional maturation, in the brain,
of cholinergic neurons, those neurons known to die in patients with Alzheimer's
disease. The Company believes that Neotrofin(TM) is the only compound in human
clinical trials that has activated, in animals, multiple genes to produce
multiple neurotrophic factors in specific areas of the brain and spinal cord.
Including the clinical trials described above, a total of four Phase 1
clinical trials on Neotrofin(TM) for the treatment of Alzheimer's disease have
been completed, and two additional Phase 1 clinical trials are in progress. In
addition, we have completed one Phase 2 clinical trial and three additional
Phase 2 clinical trials are in progress. In clinical trials completed to date,
Neotrofin(TM) has demonstrated positive effects on memory and behavioral
function in patients with Alzheimer's disease.
In September 1999, we entered into a Collaborative Research and
Technology Development Agreement with the University of California, Irvine. This
agreement grants us access to all technology
29
<PAGE> 32
developed by Dr. Oliver Civelli through his research into functional genomics
and orphan receptors. Dr. Civelli's research and technology complement our own
research and development efforts and may enable us to offer a greater number of
drugs that more effectively address a broad array of neurological diseases and
conditions.
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 occurs when chemical "messengers" known as
neurotransmitters, which are chemicals 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 the body reaches maturity. Currently
available drugs for the treatment of such significant neurological disorders as
Alzheimer's and Parkinson's diseases act by increasing or replacing supplies of
critical neurotransmitters, but provide time-limited benefits at best. These
benefits are limited because the eventual loss of neuronal cells without
regeneration means there are eventually few nerve cells for those
neurotransmitters to activate.
Much of neuroscience-oriented biotechnology research has focused on the
investigation of certain proteins, known as neurotrophic factors, which are
necessary for 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 be orally absorbed or 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 for large protein molecules. One approach is to
introduce the protein molecules by direct injection into the brain through a
catheter inserted into a hole drilled into the skull. While this method,
utilizing nerve growth factor, 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 we have taken, is to find small molecules
which can pass through the blood-brain barrier and which can be administered
orally or through injection into the bloodstream. Our small-molecule approach,
if successful, could lead to the development of compounds which can mimic the
actions of larger molecules within the brain and spinal cord, after
administration either orally or through
30
<PAGE> 33
injection. We believe that such a development could represent a major advance in
the treatment of neurological disorders.
NEOTHERAPEUTICS' DRUG DEVELOPMENT STRATEGY
We are engaged in research that has primarily focused on the development
of new drugs that act on the nervous system to treat neurological diseases and
conditions, such as memory deficits associated with Alzheimer's disease and
dementia, spinal cord injury, stroke, Parkinson's disease, migraine, depression
and obesity.
Our technical strategy is to synthesize proprietary chemical molecules
that modify specific biological processes in the body. The methods by which the
molecules are synthesized are proprietary and we have patented specific
molecules and their methods of use. Our drug design methods are based upon the
use of hypoxanthine, a natural non-toxic purine compound which is contained in
the genetic material of all living matter. Hypoxanthine is chemically linked to
a variety of other molecules in order to produce our proprietary series of
compounds. The various molecules that are linked to hypoxanthine are selected
from known drugs that have established therapeutic activity, producing
potentially bi-functional compounds. 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 us reason to believe that this
compound synthesis and selection process increases the probability that our new
compounds will retain the actions exhibited by their "parent" drugs.
We synthesize and conduct early testing to establish the therapeutic
potential necessary to obtain patents on new compounds. We have conducted
preclinical testing of the safety and efficacy of certain of our compounds and
intend to file an IND for each such compound which shows therapeutic potential.
With respect to our Neotrofin(TM) compound, some clinical trials have been
completed, others are in progress, and we intend to conduct additional clinical
trials. We intend to seek out large pharmaceutical companies as partners for the
development, manufacture and marketing of certain of our other compounds.
PRODUCTS IN DEVELOPMENT
The table below summarizes the primary or possible indications and
development status for some of our current research and development programs.
<TABLE>
<CAPTION>
POSSIBLE
PRODUCT INDICATIONS DEVELOPMENT STATUS
- ------- ----------- ------------------
<S> <C> <C>
Neotrofin(TM) Alzheimer's Disease Phase 1: Four clinical trials completed, two in
(AIT-082) progress and additional studies to be conducted
in 1999
Phase 2: One clinical trial completed, three in
progress and an additional study to be initiated
in 1999
Spinal Cord Injury Clinical trial planned for 2000
Stroke Preclinical
AIT-034 Severe Dementia Investigational New Drug Application in 2000
AIT-202 Depression; Obesity Preclinical
AIT-203 Parkinson's Disease Preclinical
AIT-297 Migraine Preclinical
</TABLE>
We cannot guarantee that any of our compounds will effectively treat the
indicated diseases or conditions or any other diseases or conditions, or that
any such compounds will receive FDA approval.
31
<PAGE> 34
NEOTROFIN(TM)
Our Neotrofin(TM) compound is the most extensively studied compound in
the AIT series and has been the primary focus of our research efforts.
Neotrofin(TM) has been shown in animal studies to enhance working (or recent)
memory, the type of memory which is deficient in patients suffering from
Alzheimer's disease. In addition, we believe that Neotrofin(TM) may help treat
memory impairments in the aged and stroke patients. Neotrofin(TM) may also help
treat patients with nerve damage such as stroke and spinal cord injury.
Preclinical testing involving laboratory animals has indicated that
Neotrofin(TM) exhibits the following properties and/or effects:
- Shown to reduce, delay and prevent memory deficits in aged animals;
shown to enhance memory function in young and aged animals.
- Shown to protect brain cells against neurotoxic injury.
- Shown to be non-toxic at the highest testable oral dosage in dogs
(1,000 mg/kg) and rats (3,000 mg/kg) after up to 90 days of
administration.
- 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 seven days in
mice.
- Active both orally and through injection.
Until completion of the entire human clinical trial process, there can
be no assurance that these properties and/or effects can be replicated in
humans.
We have shown that when administered to neurons in tissue culture,
Neotrofin(TM) can induce the same neurite outgrowth effects as NGF (nerve growth
factor). We have also shown that Neotrofin(TM) causes the production of mRNA
(messenger ribonucleic acid) for multiple neurotrophic factors in tissue
culture. In addition, we have demonstrated that oral administration of
Neotrofin(TM) increases the levels of mRNA 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 for neurodegenerative conditions than the
administration of a single factor. We believe that Neotrofin(TM)'s mechanism of
action involves activating the genes that lead to the production of a number of
different neurotrophic factors. Neurotrophic factors themselves are not orally
active and do not pass the blood-brain barrier. Therefore, should oral
Neotrofin(TM) prove to be an effective treatment for neurological disorders, it
could have two distinct practical advantages over neurotrophic factors
administered alone directly into the brain as a treatment for such disorders:
(i) it can be administered orally; and (ii) it induces the production of
multiple neurotrophic factors in those areas of the brain associated with
memory.
The NIA and the NIMH have contracted for and completed production of
sufficient quantities of Neotrofin(TM) to conduct subchronic animal toxicity
studies and early human clinical trials and have provided the funding for these
contracts. An IND was approved for Neotrofin(TM) by the FDA in June 1997.
The ADCS has committed to conduct two single-dose Phase 1 clinical
trials of Neotrofin(TM). The first trial began in July 1997 and was completed in
1998. The second trial commenced in October 1998 and is expected to be completed
in 1999.
32
<PAGE> 35
In addition, the Geriatric Research Group and Memory Clinic, McMaster
University, Hamilton, Ontario, Canada, completed a two-part single-dose Phase 1
clinical trial of Neotrofin(TM) in September 1997. In 1998, we completed a
multiple-dose Phase 1 trial (7 days of dosing).
The results from the limited number of patients in the four Phase 1
clinical trials which have been completed indicate that Neotrofin(TM) is
absorbed rapidly after oral administration and produces no serious side effects
at high doses.
The first Phase 2 trial of Neotrofin(TM) (28 days of dosing) was
initiated in July 1998 and completed in the first quarter of 1999. The results
from this study confirmed the observations seen in the Phase 1 trials, and also
indicated improved memory and behavioral function. In the first quarter of 1999,
we initiated a larger Phase 2 clinical trial (90 days of dosing) in Canada,
Australia and the Republic of South Africa. A similar large Phase 2b clinical
trial was initiated in the United States in September 1999. A fourth Phase 2
clinical trial has been initiated in the United States to study the effects of
Neotrofin(TM) in the brain using PET (Positron Emission Tomography) imaging
technology.
We expect that we will have to fund additional animal and human studies
that may include an additional Phase 2 trial and possibly two Phase 3 human
clinical trials prior to submitting Neotrofin(TM) to the FDA for marketing
approval. We cannot guarantee, however, that ongoing or future clinical trials
of Neotrofin(TM) will be successful, that the marketing of Neotrofin(TM) will be
approved by the FDA, or that Neotrofin(TM) can be marketed successfully to its
targeted population. See "Drug Approval Process and Government Regulation."
OTHER COMPOUNDS IN DEVELOPMENT
Due to the historically limited resources available to us and our
decision to focus those resources on the development of Neotrofin(TM), our other
compounds are in earlier stages of development. These compounds include:
AIT-034: AIT-034 is a distinct chemical analog of hypoxanthine and
pyrollidone that has been demonstrated in animal studies to enhance memory and
to reverse memory deficits in severely impaired animals that do not respond to
Neotrofin(TM). AIT-034 does not induce the production of NGF, and its mechanism
of action is therefore believed to be different than Neotrofin(TM). We believe
that AIT-034 could complement Neotrofin(TM) as a treatment for Alzheimer's
disease or dementia. We expect initial toxicity studies on AIT-034 to commence
in 1999 and to file an IND in 2000.
AIT-202: AIT-202 is a derivative of hypoxanthine and serotonin and has
the potential for use in treatment of depression and obesity. We anticipate
expanding preclinical testing of AIT-202 in 1999.
AIT-203: AIT-203 is a derivative of hypoxanthine and dopamine. With
further development, AIT-203 might be used to treat Parkinson's disease. We plan
to expand preclinical testing on AIT-203 in 1999.
AIT-297: AIT-297 is a derivative of hypoxanthine and epinephrine which
has shown, in preliminary studies, potential to treat migraine and hypertension.
We anticipate expanding preclinical testing on AIT-297 in 1999.
Until extensive further development and testing is completed, the
therapeutic and other effects of these compounds cannot be established.
33
<PAGE> 36
PRIMARY THERAPEUTIC TARGETS
Alzheimer's Disease. Alzheimer's disease is a neurodegenerative brain
disorder that leads to progressive memory loss and dementia. Alzheimer's disease
generally follows a course of deterioration over eight years or more, with the
earliest symptom being impairment of short-term memory. Alzheimer's disease is
now recognized as the most common cause of severe intellectual impairment in
persons over the age of 65 in the United States, with approximately four million
Americans diagnosed as suffering from Alzheimer's disease. The number of
patients with Alzheimer's disease is expected to reach 14 million by 2050.
Alzheimer's disease is the fourth leading cause of death in the United States
with approximately 100,000 deaths per year. The Alzheimer's Association has
estimated that the overall care costs required for the treatment and care of the
estimated four million U.S. patients with Alzheimer's disease is $100 billion
per year. The only drug presently marketed in the U.S. for the treatment of
Alzheimer's disease is donepezil (Aricept(R), Pfizer, Inc.), which has market
sales of approximately $500 million per year. We have two compounds in
development, Neotrofin(TM) and AIT-034, which have shown potential to treat
Alzheimer's disease.
Dementia and Memory Impairment Associated with Aging. Because the
populations of developed countries are aging, the costs and social burden of
medical care and housing of aged persons suffering from mentally deteriorative
diseases are increasing. The availability of a drug to reduce the memory
impairments associated with aging would not only have a significant economic
impact but would also greatly improve the quality of life for the elderly
population. Both Neotrofin(TM) and AIT-034 have shown to be effective in
ameliorating memory loss associated with aging in mice. Clinical trials indicate
that Neotrofin(TM) also improves memory performance in patients with Alzheimer's
disease.
Spinal Cord Injury. There are an estimated 200,000 severely disabled
survivors of spinal cord trauma in the United States with approximately 10,000
new injuries each year. The cost of care and services for these individuals is
estimated to exceed $10 billion per year. Significant research efforts currently
are being focused on the neurotrophic factors that can initiate and support new
cell development, guide new or damaged nerves to appropriate targets and
maintain neuronal function. Animal studies have shown that functional
restorations are possible with appropriate neurotrophic factors. A major
obstacle to the effective use of these neurotrophic factors is the delivery of
the appropriate neurotrophic factors to the site of damage. Neotrofin(TM) has
been shown in mice to cause the production of several neurotrophic factors in
the spinal cord after oral administration, demonstrating that it can effectively
penetrate the blood-brain barrier. We believe that Neotrofin(TM) potentially
could be used to stimulate the regeneration of nerves damaged by spinal cord
injury. We have paid $50,000 and have committed an additional $50,000 to
establish a NeoTherapeutics Fellowship as part of the Reeve-Irvine Research
Center for spinal cord injury at the University of California, Irvine.
Stroke. Among older Americans, stroke ranks as the third leading cause
of death. An estimated 500,000 people in the United States suffer strokes each
year. The costs associated with the treatment and care of stroke patients are
estimated to be approximately $25 billion per year. Most therapeutic approaches
to treating stroke are directed towards correcting the circulatory deficit or to
blocking the toxic effects of chemicals released in the brain at the time of the
stroke. Since Neotrofin(TM) has the potential to be neuroprotective in addition
to enhancing nerve regeneration, we believe that Neotrofin(TM) may prove useful
in treating stroke.
Functional Genomics. Under the auspices of the Human Genome Project of
the National Institute of Health, it is projected that the entire sequence of
the human genetic blueprint will be completely deciphered by 2003. However,
knowing the sequence of a gene does not tell what the function of that gene is
in the body. Understanding the function of genes in the body is a process called
"functional genomics." To date, the functions of only 10,000 of the estimated
100,000 genes in the body are understood. The Human Genome Project has
identified about 1,000 genes that belong to the G-protein-coupled receptor
family, or GPCR.
34
<PAGE> 37
Functions have been elucidated for about 860 of these genes, leaving 140 genes
which control the as yet unidentified functions of these "orphan receptor"
genes.
Using genetic engineering techniques, it has been possible to deduce the
function of certain orphan receptor genes, but the process is difficult, labor
intensive and expensive. Of the 10 orphan receptor genes whose functions have
been established, three have been the result of research conducted by Dr. Oliver
Civelli. Among them is the MCH receptor, which is associated with obesity
control, and Urotensin II, a potent controller of blood pressure.
In September 1999, we entered into a collaborative agreement with the
University of California, Irvine and Dr. Civelli whereby we will have access to
all technology and products developed by Dr. Civelli and his colleagues in
exchange for research funding support in the amount of $2.0 million over three
years. While it may be several years before therapeutic product candidates are
identified, this technology platform complements our current technology base and
product pipeline and should provide us with the next generation of potential
products.
BUSINESS STRATEGY
Marketing and Sales
We do not currently sell any products and therefore have no marketing,
sales, or distribution organization. We intend to complete a series of strategic
alliances with multinational or large regional pharmaceutical companies having
substantial financial capacity, marketing capability and clinical development
expertise, who can assist us in the development, marketing and sale of
Neotrofin(TM) and our other potential products. However, we will seek to retain
rights to co-market the product in the United States.
We believe the support of the National Institutes of Health's National
Institute on Aging ("NIA") and the National Institutes of Health's National
Institute for Mental Health, along with the Alzheimer's Disease Cooperative
Study Consortium, the clinical arm of the NIA's research on Alzheimer's disease,
could contribute significantly to the future marketing and educational efforts
directed to physicians who treat Alzheimer's disease patients. We believe that
this exposure to the leaders in the field of neurodegenerative diseases may
reduce the time and marketing costs required to introduce our potential products
if and when they are approved by the FDA.
Strategic Alliances
We believe that our patented technology platform provides a major
commercial opportunity for developing strategic alliances with larger
pharmaceutical companies. We believe that any such alliance would enable us to
focus on our inherent strength; namely, exploitation of the technology platform
to develop additional novel therapies.
The most common phase in which industry collaborations are completed is
the discovery stage, since a license for early stage discoveries generally cost
a large pharmaceutical company much less than licensing later stage products. We
chose to postpone the structuring of a corporate-sponsored licensing agreement
for Neotrofin(TM), in favor of an early stage, government-assisted development
program. By completing strategic alliances later in the development cycle, we
hope to increase value for our shareholders that may be reflected in the
enhanced terms of any licensing agreement.
From time to time, we engage in licensing discussions with one or more
multinational or regional pharmaceutical companies. We anticipate that the terms
of any strategic alliance agreement that we enter into for our lead compound,
Neotrofin(TM), will include an up-front payment, milestone payments, royalties
on
35
<PAGE> 38
product sales, and agreements requiring the licensee to purchase the drug
compound from us. We cannot guarantee that any such discussions will result in a
commercial transaction on acceptable terms.
With regard to the functional genomics project with University of
California, Irvine, we may enter into strategic partnerships with larger
pharmaceutical companies to create drugs from portions of the research and
development program conducted by UC Irvine and NeoTherapeutics.
Research Collaborations
We currently have several proprietary compounds in various stages of
preclinical development. From time to time, we evaluate these compounds for
efficacy in specialized assays or test models. We locate expert academic
researchers to perform the desired tests and provide them, through their
respective academic institutions, with grants and/or contracts to perform the
designated tests while we maintain proprietary rights to the compounds. These
studies are performed to the highest research standards.
Production
We currently have our compounds manufactured in large scale by a third
party vendor and have no current plans to establish our own manufacturing
facilities. In connection with any licensing arrangements we may enter into, we
intend to retain the rights to control the manufacturing and sale of our
compounds to our licensees. Preliminary estimates indicate that Neotrofin(TM)
can be manufactured cost effectively.
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The production and marketing of our products and our research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. The U.S. Federal Food, Drug and Cosmetics Act, as well as other
federal and state statutes and regulations, govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of our proposed products. Product
development and approval within this regulatory framework can 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 the FDA and comply with FDA requirements. 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 manufacturers must also comply with GMP and
pass periodic inspection by the FDA and by their countries' regulatory
authorities.
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 preclinical 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 many 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 maximize the
potential therapeutic properties of the lead compound. After a compound emerges
from the above process, it
36
<PAGE> 39
is subjected to additional 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 side effects of the compound,
and if the results indicate acceptable toxicity findings, the compound emerges
from the basic research mode and moves into the preclinical phase.
Preclinical Testing. During the preclinical testing stage, researchers
evaluate the compound for safety, and conduct laboratory and animal studies to
show biological activity of the compound against the targeted disease. These
tests can take up to three years or more to complete.
Investigational New Drug Application (IND). After preclinical testing,
an IND is submitted to the FDA for approval to begin human testing of the drug.
The IND becomes effective if the FDA does not put a clinical hold on the
proposed investigations 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 body, and any toxic effects of the compound found in the animal
studies. In addition, the IND clinical protocol must be reviewed and approved by
an Institutional Review Board comprised of physicians and lay people at the
hospital or clinic where the proposed human trials will be conducted. Progress
reports detailing the results of the clinical trials must be submitted at least
annually to the FDA. In addition, IND safety reports of adverse experiences
associated with use of the investigational drug must be submitted to the FDA as
the IND sponsor receives the information.
Phase 1 Clinical Trials. After an IND becomes effective, Phase 1 human
clinical trials can begin. These trials, involving usually between 20 and 80
healthy volunteers, can take up to one year or more to complete. The trials
determine a drug's safety profile, including the safe dosage range. The Phase 1
clinical trials also determine how a drug is absorbed, distributed, metabolized
and excreted by the body, as well as the duration of its presence in the body.
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 trials 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 in 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 and evaluate the patients to
determine efficacy and to observe and report any adverse reactions that may
result from longer 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 applicant believes that 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. However, there is no guarantee that any specific
NDA will be reviewed and approved within this time frame, if at all.
Fast Track Review. In September 1998, the FDA clarified procedures for
accelerating the approval of drugs to be marketed for serious diseases for which
the manufacturer can demonstrate the potential to address unmet medical needs.
We are unsure if Neotrofin(TM) will fulfill this requirement for the treatment
of Alzheimer's disease because there are drugs currently approved and available
for such treatment. However, Neotrofin(TM) might qualify for "fast track"
classification in a different disease indication such as treatment of traumatic
spinal cord injury. At this time, we have not requested fast track designation
for Neotrofin(TM).
37
<PAGE> 40
The FDA also has made provisions for priority review of drugs. A drug
will qualify for priority review if it provides a significant improvement
compared to marketed products in the treatment, diagnosis or prevention of a
disease regardless if the indication is serious or life-threatening. We believe
that Neotrofin(TM) may qualify for priority review.
Approval. If the FDA approves the NDA, the drug becomes available for
physicians to prescribe. We must continue to submit periodic reports to the FDA,
including descriptions of any adverse reactions reported. For certain drugs
which are administered on a long-term basis, the FDA may request additional
clinical studies (Phase 4) after the drug has begun to be marketed to evaluate
side effects after long-term use. The marketing of a drug after FDA approval is
subject to substantial continuing regulation by the FDA, including regulation of
manufacturing practices and the advertising and promotion of the drug.
In addition to regulations enforced by the FDA, we are also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
Our research and development activities involves the controlled use of hazardous
materials, chemicals, viruses and various radioactive compounds. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result, and any such liability could exceed our resources.
For marketing outside the United States, we or our prospective licensees
are subject to foreign regulatory requirements governing human clinical trials
and marketing approval for drugs and devices in the respective countries. The
requirements governing the conduct of clinical trials, product licensing,
pricing and reimbursement vary widely from country to country.
RESEARCH AND DEVELOPMENT
Since our inception, we have devoted substantially all of our efforts to
research and development. Research and development expenditures were $615,485 in
1996, $4,508,255 in 1997, $8,542,034 in 1998, and $6,565,188 for the six months
ended June 30, 1999.
PATENTS AND PROPRIETARY RIGHTS
Patents and other proprietary rights are vital to our business. Our
policy is to seek patent protection for our proprietary compounds and
technology, and we intend to protect our technology, inventions and improvements
to inventions that are commercially important to the development of our
business. We also intend to rely on trade secrets, know-how, continuing
technology innovations and licensing arrangements to develop and maintain our
competitive position. In addition, we have applied for registration of several
trademarks, including the name of the Company, NeoTherapeutics(TM), and our
potential products.
On February 25, 1992, a United States patent (No. 5,091,432) was issued
to Dr. Alvin Glasky. This patent establishes proprietary rights for a series of
compounds whose chemistry is based upon the 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
agents 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.
38
<PAGE> 41
On September 5, 1995, a second United States patent (No. 5,447,939) was
issued to Dr. Glasky which covers the treatment of neurological and
neurodegenerative diseases through modification of certain biochemical processes
in cells. This patent expires on July 25, 2014. This second patent also
incorporates certain technology developed under the auspices of, and belonging
to, McMaster University in Ontario, Canada.
On September 1, 1998, Dr. Glasky was issued a third United States patent
(No. 5,801,184) which relates to the control of neural activity and the
treatment of neurological disorders by controllably inducing the in vivo genetic
expression of naturally occurring protein molecules including neurotrophic
factors. This patent expires on September 1, 2015. This third patent
incorporates certain technology developed under the auspices of, and belonging
to, McMaster University in Ontario, Canada.
All three patents have been assigned to NeoTherapeutics by Dr. Glasky.
In connection with these assignments, Dr. Glasky has been granted a royalty of
two percent of all revenues derived by the Company from use and sale 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 we terminate Dr. Glasky's employment without cause, the royalty rate
shall be increased to five percent, and in the event Dr. Glasky dies, his estate
or family shall be entitled to continue to receive royalties at the rate of two
percent.
With respect to the second United States patent, we have entered into a
license agreement whereby McMaster University has licensed to us all patent
rights belonging to McMaster University contained in such patent. This agreement
calls for minimum payments of $25,000 per year to McMaster University, with the
first payment due in July of 1997, and for a royalty of five percent of the net
sales of all products we sell which incorporate the patent rights licensed to us
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, we also currently
have 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 our patent applications will
not be significantly reduced prior to a patent being issued.
The patent positions of pharmaceutical and drug development companies
are generally uncertain and involve complex legal and factual issues. There can
be no assurance that third parties will not assert patent or other intellectual
property infringement claims against us with respect to their products or
technology or other matters. There may be third-party patents and other
intellectual property relevant to our products and technology of which we are
unaware.
Patent litigation is becoming more common in the biopharmaceutical
industry. Litigation may be necessary to defend against or assert claims of
infringement, to enforce our patents, to protect trade secrets we own or to
determine the scope and validity of proprietary rights of third parties.
Although no third party has asserted that we are infringing upon their patent
rights or other intellectual property, there can be no assurance that litigation
asserting such claims will not be initiated, that we would prevail in any such
litigation or that we would be able to obtain any necessary licenses on
reasonable terms, if at all. Any such claims against us, whether meritorious or
not, as well as claims initiated by us against third parties, can be time
consuming and expensive to defend or prosecute and to resolve. If our
competitors prepare and file patent applications in the United States that claim
technology we also claim, we may have to participate in interference proceedings
declared by the Patent and Trademark Office to determine priority of invention,
which could result in substantial costs, even if we ultimately prevailed. The
results of such proceedings are highly unpredictable and, as a result of such
proceedings, we may have to obtain licenses in order to continue to conduct
clinical
39
<PAGE> 42
trials and manufacture or market certain of our products. No assurance can be
made that we will be able to obtain any such licenses on favorable terms, if at
all.
We also rely upon unpatented trade secrets and improvements, unpatented
know-how and continuing technological innovation to develop and maintain our
competitive position. We protect such information, with confidentiality
agreements with our employees and consultants and with corporate partners and/or
collaborators as such relationships are formed 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. Agreements with employees provide that all inventions conceived
by the individual while employed by NeoTherapeutics are our exclusive property.
We cannot guarantee that these agreements will be honored, that we will have
adequate remedies for breach, or that our trade secrets will not otherwise
become known or be independently discovered by competitors.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including a
number of large pharmaceutical companies as well as several specialized
biotechnology companies, are engaged in activities similar to that of
NeoTherapeutics. Our competitors include Amgen, Inc., Bayer AG, Eli Lilly and
Co., Novartis, Bristol-Myers Squibb Company, Glaxo Wellcome PLC, Regeneron
Pharmaceuticals, Inc., Vertex Pharmaceuticals, Inc., Guilford Pharmaceuticals,
Inc., Cephalon, Inc., Warner-Lambert Co., 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 directly compete with our technologies. These companies and
institutions also compete with us in recruiting highly qualified scientific
personnel. Many of our competitors have substantially greater financial,
research and development, human and other resources than we do. Furthermore,
large pharmaceutical companies have significantly more experience than we do in
preclinical testing, human clinical trials and regulatory approval procedures.
Although we have begun clinical trials with respect to Neotrofin(TM), we
have not conducted clinical trials with respect to any of our other compounds
under development nor have we sought FDA approval for any product based on such
compounds. Furthermore, if we are permitted to commence commercial sales of
products based on compounds we develop, including Neotrofin(TM), and decide to
manufacture and sell such products ourselves, then we will also compete with
respect to manufacturing efficiency and marketing capabilities, areas in which
we have no prior experience.
Any product for which we obtain FDA approval also must 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 currently are approved for the treatment
of Alzheimer's disease in the United States: tacrine (Cognex(R)), formerly
marketed by Warner-Lambert Co. and CoCensys, Inc., and donepezil (Aricept(R)),
marketed by Pfizer, Inc. Both of these drugs are inhibitors of the enzyme
acetylcholinesterase.
Certain technologies under development by other pharmaceutical companies
could result in treatments for Alzheimer's disease and other diseases and
disorders for which we are developing our own treatments. Several other
companies are engaged in research and development of compounds which use
neurotrophic factors in a manner similar to that of our compounds. In the event
that one or more of these programs are successful, the market for our products
could be reduced or eliminated.
40
<PAGE> 43
We expect technological developments in the neuropharmacology field to
continue to occur at a rapid rate and expect competition will remain intense as
advances continue to be made. Although we believe, based on the preliminary test
results involving certain of our compounds, that we can continue to compete in
the discovery and early clinical development of compounds for neurological
disorders, we cannot guarantee that we will be able to do so. At present, we do
not have sufficient resources to compete with major pharmaceutical companies in
the areas of later-stage clinical testing, manufacturing and marketing.
EMPLOYEES
As of September 14, 1999, we had 41 employees, of which eight hold Ph.D.
degrees. There can be no assurance that we will be able to attract and retain
qualified personnel in sufficient numbers to meet our needs. Our employees are
not subject to any collective bargaining agreements, and we generally have good
relations with our employees.
PROPERTIES
During June 1997, we relocated our research and development and
corporate administrative offices to a new 34,000 square foot facility
constructed for us in Irvine, California. The facility is occupied under a
non-cancelable lease for seven years and contains two five year options to
renew. The 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. We also maintain a small administrative office in Zurich, Switzerland
on an expense sharing basis.
LEGAL PROCEEDINGS
On December 10, 1998, we were served with a lawsuit initiated by four of
our former employees. The lawsuit, which was filed in the Superior Court of
Orange County, California, also names Dr. Alvin J. Glasky, our 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 NeoTherapeutics and each of the former employees, pursuant to
which the employees agreed to accept an aggregate of 278,589 shares of our
common stock, subject to forfeiture provisions, in exchange for the cancellation
of indebtedness we owed to them 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 we achieved a specified revenue goal by a
specified date, as determined by our independent auditors in accordance with
generally accepted accounting principles.
Under the agreements, as amended, we were 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 we 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 were not achieved by the stated
deadline, the shares would be forfeited and the employees would be required to
return the shares to NeoTherapeutics. We did not achieve the required revenue
goals either by December 31, 1995, or by December 31, 1997. Our total revenues
from inception through December 31, 1995, were only $497,128. We 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 our cumulative revenues were or should have exceeded
$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.
41
<PAGE> 44
In March 1999, we filed a cross-complaint against the plaintiffs to seek
a determination that the plaintiffs' shares have in fact been forfeited, and to
obtain a court order requiring the plaintiffs to return their shares to us for
cancellation. The lawsuit is in the early stages of discovery and no trial date
has been set. We believe that the plaintiffs' claims are without merit and that
the resolution of this matter will not have a material adverse effect on our
financial condition or results of operations. We intend 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 in
1990 and 1993, Dr. Alvin J. Glasky and his wife, who were then and are now our
employees, also entered into agreements with NeoTherapeutics that were identical
to the plaintiffs' agreements. Pursuant to those agreements, 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 NeoTherapeutics arising from unpaid compensation and expenses in the
total amount of $755,531. Dr. and Mrs. Glasky entered into an agreement with
NeoTherapeutics on December 21, 1998, pursuant to which the Glaskys agreed to
cancel the same proportion of their restricted shares as the plaintiffs are
required to cancel based on the final resolution of the lawsuit. Until such time
as the lawsuit is finally resolved, we are accounting for all of these shares,
which we deem to be forfeited, as issued and outstanding.
We filed a trademark application with the United States Patent and
Trademark Office to register the trademark Neotrofin as the name for our AIT-082
compound. Cephalon, Inc. filed a Notice of Opposition asserting that they have
prior rights in the trademark Myotrophin, and that the use of our trademark
Neotrofin will cause a likelihood of confusion. We believe that the resolution
of this matter should not affect our ability to use the trademark Neotrofin as
the name of our pharmaceutical compound used to treat Alzheimer's disease,
spinal cord injury and stroke.
One of our former employees has advised us, through her attorney, that
she intends to file a lawsuit alleging that we wrongfully terminated her. We
believe that we had good cause to terminate her and that her claim is without
merit. If a lawsuit is filed against us, we intend to defend it vigorously.
42
<PAGE> 45
MANAGEMENT
The following table sets forth certain information as of September 14,
1999, with respect to each person who is an executive officer or a director of
NeoTherapeutics:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Alvin J. Glasky, Ph.D.................. 66 Chairman of the Board, Chief Executive Officer,
President, Chief Scientific Officer and Director
Samuel Gulko........................... 67 Chief Financial Officer, Secretary, Treasurer
and Director
Stephen Runnels........................ 50 Executive Vice President and Director
Michelle S. Glasky, Ph.D............... 40 Vice President, Scientific Affairs
Mark J. Glasky......................... 37 Director
Frank M. Meeks......................... 54 Director
Eric L. Nelson, Ph.D................... 75 Director
Carol O'Cleireacain, Ph.D.............. 53 Director
Joseph Rubinfeld, Ph.D................. 66 Director
Paul H. Silverman, Ph.D., D.Sc......... 75 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
Alvin J. Glasky, Ph.D., has been Chief Executive Officer, President,
Chief Scientific Officer and a director of Advanced ImmunoTherapeutics, Inc.
("AIT") since its inception in June 1987, and has served as the Chairman of the
Board, Chief Executive Officer, President, Chief Scientific Officer and a
director of the Company since July 1989, when AIT became a wholly-owned
subsidiary of NeoTherapeutics. From March 1986 to January 1987, Dr. Glasky was
Executive Director of the American Social Health Association, a non-profit
organization. From 1968 until March 1986, Dr. Glasky was the President and
Chairman of the Board of Newport Pharmaceuticals International, Inc., a
publicly-held pharmaceutical company that developed, manufactured and marketed
prescription medicines. From 1966 to 1968, Dr. Glasky served as Director of
Research for ICN Pharmaceutical, Inc. and as Director of the ICN-Nucleic Acid
Research Institute in Irvine, California. During that period, he was also an
assistant professor in the Pharmacology Department of the Chicago Medical
School. Dr. Glasky currently is a Regent's Professor at the University of
California, Irvine. Dr. Glasky received a B.S. degree in Pharmacy from the
University of Illinois College of Pharmacy in 1954 and a Ph.D. degree in
Biochemistry from the University of Illinois Graduate School in 1958. Dr. Glasky
was also a Post-Doctoral Fellow, National Science Foundation, in Sweden.
Samuel Gulko has served as the Chief Financial Officer of
NeoTherapeutics since October 1996 and as Secretary, Treasurer and a director
since June, 1998. From 1968 until March 1987, Mr. Gulko served as a partner in
the audit practice of Ernst & Young, LLP, Certified Public Accountants. From
April 1987 to July 1996, Mr. Gulko was self-employed as a Certified Public
Accountant and business consultant, as well as the part-time Chief Financial
Officer of several private companies. Mr. Gulko obtained his B.S. degree in
Accounting from the University of Southern California in 1958.
Stephen Runnels joined NeoTherapeutics as Executive Vice President in
April, 1997, and has been a director of NeoTherapeutics since June 1998. Prior
to joining NeoTherapeutics, Mr. Runnels held the position of Vice President,
Marketing and Business Development for Sigma-Aldrich, Inc., a Fortune 500
manufacturer of biochemicals, pharmaceuticals, and biotechnology products since
January 1992. Mr. Runnels has also held positions as Vice President -- Sales and
Marketing for Irvine Scientific, and Vice President, International Operations
for Gamma Biologicals, a manufacturer of immunological reagents. Mr. Runnels is
certified by the American Society of Clinical Pathologists as a specialist in
Immunohematology, and was an instructor of
43
<PAGE> 46
Clinical Immunology at Arizona State University. Mr. Runnels obtained a B.S. in
Cell Biology from the University of Arizona.
Michelle S. Glasky, Ph.D. joined NeoTherapeutics as Director of
Scientific Affairs in July 1996 and was promoted to Vice President, Scientific
Affairs in June 1997. Prior to joining NeoTherapeutics, Dr. M. Glasky was
employed in the Department of Pathology, University of Southern California
School of Medicine, as a Research Associate and Laboratory Administrator from
February 1991 until July 1996. Dr. M. Glasky served as a consultant to the
Company from August 1990 to July 1996. Dr. M. Glasky holds a non-salaried
research associate position at the University of California, Irvine. Dr. M.
Glasky received a B.A. degree in Microbiology from the University of California,
San Diego in 1981, and a Ph.D. degree in Biomedical Sciences from the University
of Texas Health Science Center, Houston, in 1988. Dr. M. Glasky completed a
post-doctoral fellowship at Stanford University School of Medicine.
Mark J. Glasky has been a director of NeoTherapeutics since August 1994.
Since 1982, Mr. Glasky has been employed by Bank of America in various corporate
lending positions and currently serves as Senior Vice President and Credit
Products Executive for Southern California Commercial Banking. Mr. Glasky
obtained a B.S. degree in International Finance from the University of Southern
California in 1983 and an M.B.A. degree in Corporate Finance from the University
of Texas at Austin in 1987.
Dr. Michelle S. Glasky and Mark J. Glasky are the adult daughter and
son, respectively, of Dr. Alvin Glasky.
Frank M. Meeks has been a director of NeoTherapeutics since July 1989.
Since September 1992, Mr. Meeks has been pursuing personal investments in real
estate, property management and oil and gas. Mr. Meeks was employed by
Environmental Developers, Inc., a real estate development and construction
company, from June 1979 until March 1993, first as Vice President and finally as
Financial Vice President. Mr. Meeks obtained a B.S. degree in Business
Administration from Wittenberg University in 1966, and an M.B.A. degree from
Emory University in 1967. Mr. Meeks is a non-practicing certified public
accountant and a licensed real estate broker.
Eric L. Nelson, Ph.D. has been a director of NeoTherapeutics since June
1998 and a member of our Scientific Advisory Board since 1987. Dr. Nelson has
been self-employed as a pharmaceutical research consultant since 1986. He was a
founder, and served as Chairman from 1972 until 1986, of Nelson Research and
Development Corporation, a publicly held corporation engaged in research and
development of drug receptor technology applied to the development of
pharmaceutical products and novel drug delivery systems. Prior to 1972, Dr.
Nelson spent eleven years at Allergan Pharmaceuticals, Inc., a developer of eye
care products, where as Vice President of Research he was responsible for
establishing Allergan's entire research organization. Dr. Nelson received his
doctorate degree in Microbiology from UCLA in 1951 and has authored numerous
publications. He is the inventor on various patents in the areas of
microbiology, immunology, molecular biology and pharmacology.
Carol O'Cleireacain, Ph.D., has been a director of NeoTherapeutics since
September 1996. Dr. O'Cleireacain has been self-employed as an economic and
management consultant in New York City since 1994. Since 1998, Dr. O'Cleireacain
has served as Senior Fellow (non-resident) at the Brookings Institution in
Washington D.C., where previously, from March 1996 until June 1997, as a
Visiting Fellow, Economic Studies, she authored The Orphaned Capital: Adopting
the Right Revenues for the District of Columbia. 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 Trillium Asset Management (formerly known
as Franklin Research and Development Corp.), an employee-owned investment
company in Boston. From April 1994 through April 1996,
44
<PAGE> 47
Dr. O'Cleireacain served as the first nominee of the United Steelworkers of
America and the first woman director of ACME Metals Inc. Dr. O'Cleireacain
served as the Director of the Mayor's Office of Management and Budget of the
City of New York from August 1993 until December 1993. From February 1990 until
August 1993, Dr. O'Cleireacain was the Commissioner of the New York City
Department of Finance. Dr. O'Cleireacain received a B.A., with distinction, in
Economics from the University of Michigan in 1968, an M.A. in Economics from the
University of Michigan in 1970 and a Ph.D. in Economics from the London School
of Economics in 1977.
Joseph Rubinfeld, Ph.D., has been a director of NeoTherapeutics since
June 1998. Dr. Rubinfeld is the co-founder of SuperGen, Inc., a publicly-held
pharmaceutical company focused on drugs for life-threatening diseases,
particularly cancer, and has served as the Chief Executive Officer, President
and a director of SuperGen since its inception in March 1991 and was Chief
Scientific Officer from inception until September 1997. Since May 1996, Dr.
Rubinfeld has served as a Director of 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, and as a consultant to Amgen from 1983 until 1985. From
1987 to 1990, Dr. Rubinfeld was a Senior Director at Cetus Corporation, a
biotechnology company. From 1968 to 1980, Dr. Rubinfeld was employed at
Bristol-Myers Company International Division ("Bristol-Myers") in a variety of
positions, most recently as Vice President and Director of Research and
Development. While at Bristol-Myers, Dr. Rubinfeld was instrumental in licensing
the original anticancer line of products for Bristol-Myers, including Mitomycin
and Bleomycin. Prior to that time, Dr. Rubinfeld was a research scientist with
several pharmaceutical and consumer product companies including Schering-Plough
and Colgate-Palmolive Co. Dr. Rubinfeld received his M.A. and Ph.D. in Chemistry
from Columbia University.
Paul H. Silverman, Ph.D., D.Sc., has been a director of NeoTherapeutics
and member of our Scientific Advisory Board since September 1996. Dr. Silverman
has served as a Director for the Western Center of the American Academy of Arts
and Sciences located on the University of California, Irvine campus since March
1997. Since March 1993, Dr. Silverman has also been an Adjunct Professor in the
Department of Medicine at the University of California, Irvine. From January
1994 until July 1996, Dr. Silverman served as an Associate Chancellor for the
Center for Health Sciences at the University of California, Irvine. From August
1992 until January 1994, Dr. Silverman served as the Director of Corporate and
Government Affairs at the Beckman Laser Institute and Medical Clinic in Irvine,
California. From November 1990 until December 1993, Dr. Silverman served as
Director of Scientific Affairs at Beckman Instruments, Inc. Prior to 1990, Dr.
Silverman served as the Director of the Systemwide Biotechnology Research and
Education Program for the University of California; the Director of the Donner
Laboratory and an Associate Director of the Lawrence Berkeley Laboratory at the
University of California, Berkeley; as the President of the University of Maine
at Orono; as the President of The Research Foundation of the State University of
New York, and as the head of the Department of Immunoparasitology at Glaxo, Ltd.
Dr. Silverman received his Ph.D. in Parasitology and Epidemiology and his Doctor
of Science degree from the University of Liverpool, England.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board of Directors of NeoTherapeutics currently consists of nine
directors, divided into two classes. Each Class is elected in alternate years
and serves a term of two years. The Class I directors, whose term expires at the
Annual Meeting of Stockholders in 2000, are Samuel Gulko, Frank M. Meeks, Eric
L. Nelson, Ph.D., Stephen Runnels and Paul H. Silverman, Ph.D., D.Sc. The Class
II directors, whose term expires at the Annual Meeting of Stockholders in 2001,
are Alvin J. Glasky, Ph.D., Mark J. Glasky, Carol O'Cleireacain, Ph.D. and
Joseph Rubinfeld, Ph.D. Each director serves the term for which he or she was
elected until the election and qualification of his or her successor or until
his or her earlier resignation or removal.
45
<PAGE> 48
The Board of Directors currently has two committees, a Compensation
Committee and an Audit Committee. The Compensation Committee is comprised of Dr.
Eric L. Nelson, Dr. Carol O'Cleireacain, Dr. Paul H. Silverman and Joseph
Rubinfeld, Ph.D. The Compensation Committee reviews and recommends the salaries
and bonuses of officers and certain key employees of NeoTherapeutics,
establishes compensation and incentive plans, authorizes and approves the
granting of stock options and restricted stock in accordance with our stock
option and incentive plans, and determines other fringe benefits.
The Audit Committee is comprised of Dr. Carol O'Cleireacain, Frank M.
Meeks and Dr. Eric L. Nelson. The Audit Committee recommends engagement of our
independent public accountants and is primarily responsible for approving the
services performed by our independent accountants and for reviewing and
evaluating our accounting principles and its system of internal controls.
SCIENTIFIC ADVISORY BOARD
We have established a Scientific Advisory Board consisting of
distinguished scientists whom we believe will make a contribution to the
development of NeoTherapeutics' research. The Scientific Advisory Board members
review our research and development progress, advise us of advances in their
fields and assist in identifying special product opportunities. Members are
compensated on a consulting fee basis for their services and are reimbursed for
reasonable travel expenses. All of the advisors are employed by employers other
than NeoTherapeutics and may have commitments to, or consulting or advisory
agreements with, other entities, including our potential competitors, that may
limit their availability to us. Although these advisors may contribute
significantly to our business, none is required to devote more than a small
portion of his time to us in his capacity as a member of the Scientific Advisory
Board. The members of the Scientific Advisory Board currently are as follows:
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.
Geoffrey Burnstock, D.Sc., F.A.A., M.R.C.P. (Hon), F.R.S. has been a
Professor of Anatomy in the Department of Anatomy and Developmental Biology at
the University College London since 1975 and in addition, since 1997, he has
been the director of the Autonomic Neuroscience Institute, Royal Free Hospital
School of Medicine. From 1959 through 1975, Dr. Burnstock held several positions
within the Department of Zoology at the University of Melbourne, Australia. Dr.
Burnstock received his B.Sc. degree in 1953 from Kings College, University of
London and his Ph.D. in 1957 from King's College and University College London,
University of London. Dr. Burnstock also received a D.Sc. degree in 1971 from
Melbourne University.
Olivier Civelli, Ph.D. has been the Eric L. and Lila D. Nelson Chair in
Neuropharmacology at the University of California, Irvine since 1996. From
1992-1996, Dr. Civelli was affiliated with F. Hoffmann-La Roche, AG of Basel,
Switzerland in various research positions. From 1987-1993, Dr. Civelli held
various research positions in the Department of Cell Biology and Anatomy of the
Vollum Institute for Advanced Biomedical Research at the Oregon Health Sciences
University. Dr. Civelli received his doctorate degree in Molecular Biology from
the Swiss Federal Institute of Technology in Zurich, Switzerland in 1979.
Eric L. Nelson, Ph.D. See "Executive Officers and Directors."
Paul H. Silverman, Ph.D., D.Sc. See "Executive Officers and Directors."
46
<PAGE> 49
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation of NeoTherapeutic's Chief Executive Officer and our other most
highly compensated executive officers whose total salary and bonuses for
services rendered to NeoTherapeutics and our subsidiaries in all capacities
during the fiscal year ended December 31, 1998 exceeded $100,000 (the "Named
Executive Officers"). None of our other executive officers 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.................. 1998 $165,940 -- -- 25,000
Executive Vice President 1997 $108,513(3) -- $25,107(4) 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>
- ------------
(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 $450 per month.
(3) Commenced employment in April 1997.
(4) Represents a one-time relocation allowance.
(5) Commenced employment in July 1996.
OPTION GRANTS
The following table sets forth information concerning stock options
granted during the fiscal year ended December 31, 1998, to the Named Executive
Officers:
47
<PAGE> 50
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------ --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Alvin J. Glasky.................. 25,000 8% $8.375 Feb. 11, 2008 $131,675 $333,690
40,000 13% $7.625 Dec. 17, 2008 $191,813 $486,091
Stephen Runnels.................. 10,000 3% $8.375 Feb. 11, 2008 $ 52,670 $133,476
15,000 5% $7.625 Dec. 17, 2008 $ 71,930 $182,284
Samuel Gulko..................... 10,000 3% $8.375 Feb. 11, 2008 $ 52,670 $133,476
15,000 5% $7.625 Dec. 17, 2008 $ 71,930 $182,284
</TABLE>
- ------------
(1) The 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 our common stock appreciates in
value at the stated percentage rate from the date of grant to the
expiration date. Actual gains, if any, are dependent on the future
market price of the common stock.
OPTIONS EXERCISED AND FISCAL YEAR-END VALUES
The following table sets forth information concerning stock options
exercised during the fiscal year ended December 31, 1998, by the Named Executive
Officers and the value of such officers' unexercised options at December 31,
1998:
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 IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR-END AT 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 $5,940 17,500 57,500 48,438 178,438
Samuel Gulko 10,000 11,250 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), less the
exercise price payable for such shares.
48
<PAGE> 51
EMPLOYMENT AGREEMENT
We have an employment agreement with Dr. Alvin J. Glasky, which became
effective as of July 1, 1996 and expires December 31, 1999. The agreement
provides for an annual base salary of $200,000 with annual increases and an
annual bonus to be determined by the Compensation Committee based on our
attainment of certain performance objectives. Pursuant to the employment
agreement, Dr. Glasky also 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.
We entered into a new employment agreement with Dr. Glasky on May 6,
1999. The new agreement will take effect on January 1, 2000, when the current
agreement expires, and is for a term of three years. The agreement requires Dr.
Glasky to devote his entire productive time, ability and attention to
NeoTherapeutics during the term of the agreement, and is terminable by us at any
time with or without cause, as defined in the agreement. The agreement provides
for an annual base salary of $215,000 with automatic annual cost of living
adjustments, and annual bonus and increases in base salary to be determined by
the Board of Directors or the Compensation Committee, based on an evaluation of
Dr. Glasky's performance and the performance of the Company. In addition to the
salary and any bonus, the agreement requires us to provide Dr. Glasky with an
automobile and pay for all costs associated with operating such automobile, less
costs for personal use as required by the Internal Revenue Code. The agreement
also provides for guaranteed severance payments equal to Dr. Glasky's annual
base salary over the remaining life of the agreement if we terminate his
employment without cause or if Dr. Glasky terminates his employment with good
reason. Pursuant to the employment agreement, we granted an option to Dr. Glasky
to purchase 225,000 shares of our common stock at a price per share equal to the
market price on the date of grant, vesting in three equal annual installments
commencing May 6, 2000.
COMPENSATION OF DIRECTORS
Each of our non-employee directors receives $1,000 for each Board of
Directors meeting ($500 for each telephonic meeting) and $500 for each committee
meeting attended (with the Chairperson of the Committee receiving $1,000). Each
non-employee director also receives $500 for each additional Board meeting held
on the same day. The directors are reimbursed for certain expenses incurred in
connection with attendance at Board meetings. On February 11, 1998, we granted
to each non-employee director an option to purchase 10,000 shares of common
stock at $8.375 per share. On August 31, 1998, we granted to each non-employee
director an option to purchase 10,000 shares of common stock at $5.625 per
share. On June 14, 1999, we granted to each non-employee director an option to
purchase 10,000 shares of common stock at $13.00 per share. All of the foregoing
options were granted under our 1997 Stock Incentive Plan, vest at the rate of
25% per quarter, expire 10 years from the date of grant and were granted at an
exercise price equal to the market price of our common stock on the date of the
grant.
STOCK OPTION PLANS
We have two stock option plans: the 1991 Stock Incentive Plan (the "1991
Plan") and the 1997 Stock Incentive Plan (the "1997 Plan") (the "Plans"). The
Plans were adopted by our shareholders and Board of Directors in May 1991 and
June 17, 1997, respectively.
THE 1991 STOCK INCENTIVE PLAN
The 1991 Plan, as amended, provides for grants of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), nonqualified stock options, stock appreciation rights
("SARs") and bonus stock. The 1991 Plan, as amended, authorizes for issuance up
to 401,430 shares of our common stock. Under the 1991 Plan, incentive stock
options may be granted to employees, and nonqualified stock options, SARs and
bonus stock may be granted to our employees and other
49
<PAGE> 52
persons whose participation in the 1991 Plan is determined to be in our best
interest. As of September 14, 1999, there were options to purchase 180,000
shares of common stock outstanding under the 1991 Plan.
THE 1997 STOCK INCENTIVE 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, as amended,
authorizes for issuance up to 1,250,000 shares of our common stock, subject to
adjustment in the number and kind of shares subject to the 1997 Plan and to
outstanding shares in the event of stock splits, stock dividends or certain
other similar changes in our capital structure. Under the 1997 Plan, incentive
stock options may be granted to our employees and the employees of our
subsidiaries. Nonqualified stock options and Purchase Rights may be granted to
our employees and the employees of our subsidiaries, as well as non-employee
directors and officers, consultants and other service providers. As of September
14, 1999, there were options to purchase 607,800 shares of common stock
outstanding under the 1997 Plan.
The Plans are administered by the Compensation Committee of 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 NeoTherapeutics with or into another
corporation or the sale of substantially all of our assets, 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 NeoTherapeutics, 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 NeoTherapeutics or within three months after
termination of employment (one year for termination resulting from death or
disability).
SECTION 401(K) PLAN
In January 1990, we adopted the NeoTherapeutics, Inc. 401(k) Plan (the
"401(k) Plan") covering our full-time employees located in the United States.
The 401(k) Plan is intended to qualify under Section 401(k) of the Code, so that
contributions to the 401(k) Plan by employees or by NeoTherapeutics, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) Plan, and so that we can deduct any contributions that we make, at
the time the contributions are 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 1999) and to have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits us, but does not require
us to make, additional matching contributions to the 401(k) Plan on behalf of
all participants in the 401(k) Plan. We have not made any contributions to the
401(k) Plan.
50
<PAGE> 53
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our Certificate of Incorporation and Bylaws limit the liability and
provide indemnification of directors and officers. Our Certificate of
Incorporation provides that our directors may not be held personally liable to
us or our stockholders for monetary damages arising from a breach of fiduciary
duty, except for liability:
- for breach of the director's duty of loyalty to NeoTherapeutics or
its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or knowing violation of the law;
- under Section 174 of the Delaware General Corporation Law, relating
to prohibited dividends, distributions, repurchases or redemptions of
stock; and
- for any transaction from which the director derives an improper
benefit.
In addition, our Certificate of Incorporation provides that we will indemnify
our directors to the fullest extent permitted under the Delaware General
Corporation Law.
Our Bylaws provide that we shall indemnify our directors and officers,
certain other employees and agents, and the directors and officers of other
business enterprises serving at our request, for actions taken in good faith on
our behalf, while in their official capacity as director or officer or in any
other capacity while serving as a director or officer. The Bylaws also provide
that we shall advance expenses incurred by officers, directors, employees and
agents in defending themselves for actions taken on our behalf under certain
circumstances. Finally, the Bylaws provide that directors, officers, employees,
and agents may bring suit to compel payment of claims not paid in full within
forty-five (45) days after we receive notice of such claims.
We also have entered into agreements to indemnify our directors and
executive officers, in addition to the indemnification provided for in our
Bylaws. These agreements provide, among other things, that we may establish a
trust fund in order to fund our indemnification obligation under these
agreements. These agreements also provide that the director or officer is
presumptively entitled to interim payments of expenses incurred in any defense
of a claim. However, if it is ultimately determined that such director or
officer was not entitled to indemnification under the Bylaws of the Company or
Delaware law, then such director or officer must repay us all amounts advanced
under the agreement.
We believe that these provisions and agreements are necessary to attract
and retain qualified directors and executive officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling
NeoTherapeutics pursuant to the foregoing provisions, we have been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
51
<PAGE> 54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 30, 1990, in exchange for cancellation of $503,144 of
indebtedness for unpaid compensation, we 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, we 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 we did not generate a minimum of $500,000 in total
operating revenues from inception through December 31, 1995, all shares would be
returned to us 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 NeoTherapeutics, entered into agreements with us whereby the
forfeiture date was extended from December 31, 1995 to December 31, 1997 in
exchange for increasing the minimum total operating revenues which we 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, we 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 our position and have filed a
lawsuit against us seeking a determination that they are entitled to keep their
shares. We have filed a cross-complaint against the four former employees
seeking the return and cancellation of the shares. Our Chief Executive Officer
and his wife have agreed to surrender to us 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 we
can obtain the surrender of all of these shares and the matter is fully
resolved, we are accounting for all of the stock, which we have deemed
forfeited, as issued and outstanding. See "Business -- Legal Proceedings."
On June 6, 1991, we entered into an agreement (the "1991 Patent
Agreement") with Dr. Alvin Glasky whereby he assigned to NeoTherapeutics 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 NeoTherapeutics to pay Dr. Glasky a two percent royalty on all
revenues derived by us from our use and sale of any products covered by these
patents and applications or any patents derived from them. In the event that we
terminate Dr. Glasky's employment 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, we
entered into an agreement with Dr. Glasky whereby Dr. Glasky assigned to us all
rights to the inventions covered by United States Patent No. 5,447,939 (the
"1996 Patent Agreement"). The scope of the 1996 Patent Agreement as well as its
terms and conditions are identical in all material respects to the 1991 Patent
Agreement; provided, however, that the aggregate royalty amount with respect to
any product shall be two percent (five percent in the event of termination
without cause), even if a product is based on both patents. The 1996 Patent
Agreement was also amended on July 26, 1996. Dr. Glasky will not receive any
royalties with respect to sales of products which utilize patent rights licensed
to NeoTherapeutics by McMaster University. A third patent (No. 5,801,184) which
was issued September 1, 1998, is also subject to the royalty provisions of the
1996 Patent Agreement. See "Business -- Patents and Proprietary Rights."
52
<PAGE> 55
On December 31, 1993, we issued 200,000 shares of common stock to Dr.
Glasky in exchange for cancellation of $500,000 of indebtedness for loans made
to us by Dr. Glasky. 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.
In 1988 and 1989, our wholly-owned subsidiary, Advanced
ImmunoTherapeutics, raised a total of $676,000 through the private placement of
a financial instrument called a Revenue Participation Unit ("RPU"). In July
1996, we offered, and the holders of all 75 RPU's 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. As a part of
that transaction, Dr. Alvin Glasky converted his 28 RPUs into a total of 112,000
shares of common stock. See Note 8 of Notes to Consolidated Financial
Statements.
On July 8, 1998, Stephen Runnels, our Executive Vice President, borrowed
$50,000 from us on an unsecured basis. The note bears interest at 9% per year.
The note and all accrued but unpaid interest is due on the earlier of 30 days
after termination of employment or July 8, 2000 (extended by us from July 8,
1999). On July 8, 1998, in connection with his exercise of employee stock
options to purchase 12,000 shares of our common stock, Mr. Runnels paid the
exercise price of $61,560 with a full recourse promissory note payable to us.
The note is payable, together with interest of 7% per year, on or before August
28, 2000, and is secured by a pledge agreement on the underlying 12,000 shares
of common stock.
53
<PAGE> 56
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of September 14,
1999, regarding the beneficial ownership of our common stock of: (i) each person
known by us to own beneficially more than 5% of the common stock; (ii) each of
our directors; (iii) each of the Named Executive Officers, and (iv) all of our
executive officers and directors as a group. Except as otherwise specified, the
named beneficial owner has the sole voting and investment power over the shares
listed.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME OF BENEFICIAL OWNERS BENEFICIALLY OWNED(1) SHARES OUTSTANDING
- ------------------------- --------------------- ------------------
<S> <C> <C>
Alvin J. Glasky, Ph.D.(2)............................................ 1,476,122 18.13%
157 Technology Drive
Irvine, California 92618
Samuel Gulko(3)...................................................... 51,650 *
Stephen Runnels(4)................................................... 53,250 *
Michelle S. Glasky, Ph.D.(5)(6)...................................... 39,730 *
Mark J. Glasky(7).................................................... 50,979 *
Frank M. Meeks(8).................................................... 62,960 *
Eric L. Nelson, Ph.D.(9)............................................. 59,000 *
Carol O'Cleireacain, Ph.D.(10)....................................... 42,500 *
Joseph Rubinfeld, Ph.D.(11).......................................... 12,500 *
Paul H. Silverman, Ph.D., D.Sc.(10).................................. 42,500 *
All executive officers and directors as a group
(10 persons)(12).................................................. 1,891,191 22.36%
</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 September 14, 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 88,173 shares subject to outstanding warrants, 4,000 shares
held for the benefit of Dr. Glasky by the NeoTherapeutics, Inc. 401(k)
Plan, and 130,000 shares subject to options held by Dr. Glasky which are
currently exercisable or exercisable within 60 days of September 14,
1999. Also includes 47,243 shares owned by Dr. Glasky's wife, Rosalie H.
Glasky, and 17,750 shares subject to options held by Rosalie H. Glasky.
Does not include 50,979 shares beneficially owned by Mark J. Glasky and
39,730 shares beneficially owned by Dr. Michelle S. Glasky, Dr. Glasky's
adult children, for which Dr. Glasky disclaims beneficial ownership.
Also includes 400,244 shares owned by Dr. and Mrs. Glasky which may be
subject to cancellation. See "Business -- Legal Proceedings."
(3) Includes 38,250 shares subject to options held by Mr. Gulko which are
currently exercisable or exercisable within 60 days of September 14,
1999, 1,050 shares subject to currently exercisable warrants and 1,300
shares owned by The Samuel Gulko CPA Keogh Plan, of which Mr. Gulko is
trustee.
(4) Includes 41,250 shares subject to options held by Mr. Runnels which are
currently exercisable or exercisable within 60 days of September 14,
1999.
54
<PAGE> 57
(5) Dr. Michelle S. Glasky is not one of the Named Executive Officers but
serves as our Vice President, Scientific Affairs and is the adult
daughter of Dr. Alvin J. Glasky.
(6) Includes 32,250 shares subject to options held by Dr. Michelle S. Glasky
which are currently exercisable or exercisable within 60 days of
September 14, 1999, and 500 shares subject to currently exercisable
warrants.
(7) Includes 32,500 shares subject to options held by Mr. Glasky which are
currently exercisable or exercisable within 60 days of September 14,
1999, and 1,000 shares subject to currently exercisable warrants.
(8) Includes 32,500 shares subject to options held by Mr. Meeks which are
currently exercisable or exercisable within 60 days of September 14,
1999. Also includes 460 shares beneficially owned by Mr. Meeks' wife and
20,000 shares held by JAM Holdings LLC ("JAM"). Mr. Meeks disclaims
beneficial ownership of all but 100 shares held by JAM.
(9) Includes 12,500 shares subject to options held by Dr. Nelson which are
currently exercisable or exercisable within 60 days of September 14,
1999 and 36,500 shares held in the Eric L. and Lila D. Nelson Family
Trust. Does not include 5,000 shares beneficially owned by Dr. Nelson's
wife, for which Dr. Nelson disclaims beneficial ownership.
(10) Includes 32,500 shares subject to options held by each of Drs.
O'Cleireacain and Silverman which are currently exercisable or
exercisable within 60 days of September 14, 1999.
(11) Represents 12,500 shares subject to options held by Dr. Rubinfeld which
are currently exercisable or exercisable within 60 days of September 14,
1999.
(12) Includes 90,723 shares issuable upon the exercise of outstanding
warrants, and 414,500 shares subject to options which are currently
exercisable or exercisable within 60 days of September 14, 1999.
55
<PAGE> 58
SELLING STOCKHOLDER
The following table sets forth information regarding beneficial ownership of
our common stock by Kingsbridge as of September 14, 1999. Upon the completion of
the offering and assuming the sale by Kingsbridge of all of the shares of common
stock available for resale under this prospectus, Kingsbridge will own less than
1% of our outstanding common stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
NUMBER OF NUMBER OF AFTER OFFERING
SHARES BENEFICIALLY OWNED SHARES BEING ---------------------
NAME BEFORE OFFERING OFFERED NUMBER PERCENT
- ---- ------------------------- ------------ -------- -------
<S> <C> <C> <C> <C>
Kingsbridge Capital Limited 50,000(1) 925,000(2) 25,000(3) *
3rd Floor
Barclays House
P.O. Box 3340
Wickhams Cay 1
Road Town
Tortola, British Virgin Islands
</TABLE>
- --------------
* Represents less than 1%
(1) Includes 50,000 shares of common stock which are subject to currently
exercisable warrants held by Kingsbridge.
(2) Includes 900,000 shares of common stock which may be issued to Kingsbridge
pursuant to the Equity Line Agreement and 25,000 shares subject to the
warrant issued to Kingsbridge on March 27, 1998.
(3) Assumes that all shares acquired pursuant to the Equity Line Agreement and
the warrant dated March 27, 1998 are sold pursuant to this prospectus.
Kingsbridge has not had any material relationship with NeoTherapeutics or
any of our affiliates within the past three years other than as a result of the
ownership of common stock or as a result of the negotiation and the execution of
the Equity Line Agreement. The natural person controlling Kingsbridge is
Valentine O'Donoghue.
The shares offered hereby by Kingsbridge are to be acquired pursuant to the
Equity Line Agreement between NeoTherapeutics and Kingsbridge or upon exercise
of the warrant issued to Kingsbridge on March 27, 1998. Under the Equity Line
Agreement, we agreed to file a registration statement with the SEC to permit
Kingsbridge to resell the shares from time to time in the market or in
privately-negotiated transactions. We will prepare and file such amendments to
the registration statement, of which this prospectus forms a part, and such
supplements to this prospectus as may be necessary in accordance with the rules
and regulations of the Securities Act to keep it effective until February 13,
2001.
We have agreed to pay the expenses relating to the preparation of the
registration statement of which this prospectus forms a part.
56
<PAGE> 59
DESCRIPTION OF CAPITAL STOCK
As of the date of this prospectus, our authorized capital stock consists
of 25 million shares of common stock, par value $.001 per share, and 5 million
shares of preferred stock, par value $.001 per share.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The Board of Directors is divided
into two classes, with the term of each class expiring every other year at the
annual meeting of stockholders. The number of directors is distributed between
the two classes as equally as possible. Stockholders do not have rights to
cumulate their votes in the election of directors under our Certificate of
Incorporation, or the provisions of the Delaware General Corporation Law and our
management presently does not intend to extend cumulative voting rights to
stockholders. However, under Section 2115 of the California Corporations Code,
specific provisions of the California General Corporation Law, including
mandatory cumulative voting rights of stockholders, are made applicable to
"pseudo-California" corporations incorporated under laws of other states which
meet certain tests. The tests are (i) that the average of specified property,
payroll and sales factors (generally relating to the extent of activities in
California) exceed 50% on a consolidated basis during the corporation's latest
full income year, and (ii) that more than one-half of the corporation's
outstanding voting securities are held of record by persons having addresses in
California. We do not believe we meet such tests. If we were required to
implement cumulative voting for the election of directors, the existence of a
classified Board of Directors may have the effect of delaying or preventing
changes in control or in management because a greater number of shares would be
required to elect any one director.
Subject to preferences that may be applicable to the holders of
outstanding shares of preferred stock, if any, the holders of common stock are
entitled to receive such lawful dividends as may be declared by the Board of
Directors. In the event of liquidation, dissolution or winding up of
NeoTherapeutics, and subject to the rights of the holders of outstanding shares
of Preferred Stock, if any, the holders of shares of common stock shall be
entitled to receive pro rata all of our remaining assets available for
distribution to our stockholders. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable, and shares of common stock to be issued
pursuant to this offering shall be fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue shares of preferred stock in one or more series and to
fix the rights, preferences and privileges thereof, including voting rights,
terms of redemption, redemption prices, liquidation preferences, and the number
of shares constituting any series or the designation of such series. Although we
presently have no intention to do so, the Board of Directors, without
stockholder approval, could issue preferred stock with voting and conversion
rights which could adversely affect the voting power of the holders of common
stock. This provision may be deemed to have a potential anti-takeover effect and
the issuance of preferred stock in accordance with such provision may delay or
prevent a change of control of NeoTherapeutics.
Series A Preferred Stock. We have designated 400 shares of our 5 million
authorized shares of preferred stock as "5% Series A Preferred Stock with
Conversion Features." On January 29, 1999, we entered into an agreement with two
investors whereby we issued and sold a total of 400 shares of our 5% Series A
Preferred Stock with Conversion Features and warrants to purchase 75,000 shares
of common stock, for cash consideration of $4.0 million. As of September 14,
1999, 150 shares of Series A Preferred Stock had been converted into a total of
122,824 shares of common stock.
57
<PAGE> 60
The Series A preferred stock is convertible at a conversion price equal
to the lesser of $13.06 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. Dividends at the rate of 5% per annum on the Series A
preferred stock may be paid quarterly in cash or, at our option, accrued and
paid in common stock at the time of conversion. The Certificate of Designation
governing the Series A preferred stock limits any holder thereof from converting
shares of Series A preferred stock at two different thresholds. The Certificate
of Designation limits conversion to the extent that conversion would result in
such holder beneficially owning in excess of (i) 4.999%, and (ii) 9.999%, of the
outstanding shares of common stock following such conversion. Such restriction
may be waived at each threshold by the holder of the Series A preferred stock as
to itself upon not less than 75 days' notice to us. In no event can all 400
shares of Series A preferred stock be converted into more than 1,450,000 shares
of common stock. Additional features of the preferred stock include, among other
things, a redemption feature at our option if the common stock trades below
$5.00 or above $20.00 per share.
The shares of Series A preferred stock do not have voting rights except
as required by law. However, we may not take certain actions that would
adversely affect the rights of the holders of the Series A preferred stock
without their approval. In the event of a liquidation, dissolution or winding up
of NeoTherapeutics, the holders of shares of Series A preferred stock will be
entitled to receive an amount equal to $10,000 per share plus accrued dividends
in preference to the payment of any amount to the holders of our common stock.
Effect on Holders of common stock. The issuance of common stock upon the
conversion of the Series A preferred stock will have no effect on the rights or
privileges of existing holders of common stock except that the economic
interests of each stockholder will be diluted as a result of such issuance.
Prior to conversion, holders of the Series A preferred stock will be entitled to
receive dividends and distributions upon a liquidation of NeoTherapeutics in
preference to claims of holders of the common stock.
The exact number of shares of common stock issuable upon conversion of
the Series A preferred stock, and the resulting dilution to existing holders of
common stock, currently cannot be determined, and may vary with the market price
of the common stock. The extent of such dilution depends on the future market
price of the common stock, the timing of conversion of Series A preferred stock,
whether we elect to accrue dividends on the Series A preferred stock for payment
in common stock upon conversion. The potential effects of any such dilution on
our existing stockholders include the significant dilution of the current
stockholders' economic interest in NeoTherapeutics.
CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS
Our Certificate of Incorporation and Bylaws contain certain provisions
that, together with the ownership position of the officers, directors and their
affiliates, could discourage potential takeover attempts and make it more
difficult for stockholders to change management, which could adversely affect
the market price of our common stock.
Our Certificate of Incorporation limits the personal liability of our
directors to NeoTherapeutics and our stockholders to the fullest extent
permitted by the Delaware General Corporation Law ("DGCL"). The inclusion of
this provision in our Certificate of Incorporation may reduce the likelihood of
derivative litigation against directors and may discourage or deter stockholders
or management from bringing a lawsuit against directors for breach of their duty
of care.
Our Bylaws provide that special meetings of stockholders can be called
only by the Board of Directors, the Chairman of the Board of Directors or the
Chief Executive Officer. Stockholders are not permitted to call a special
meeting and cannot require the Board of Directors to call a special meeting. Any
vacancy on the Board of Directors resulting from death, resignation, removal or
otherwise or newly created directorships resulting from any increase in the
authorized number of directors may be filled only by vote of
58
<PAGE> 61
the majority of directors then in office, or by a sole remaining director. Our
Bylaws also provide for a classified board. See "Description of Capital Stock --
Common Stock."
WARRANTS
Public Warrants. In connection with our initial public offering of
common stock in 1996, we issued 2,700,000 warrants (the "Public Warrants"). Each
Public Warrant entitles the holder to purchase one share of our common stock at
a price of $11.40 per share at any time until September 26, 2001. The Public
Warrants are redeemable 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. There were 2,750,000 Public
Warrants outstanding as of September 14, 1999, including warrants issued upon
exercise of the Unit Warrants described below.
The Public Warrants contain provisions that protect the holders against
dilution by adjustment of the exercise price upon the occurrence of a merger,
stock split or reverse stock split, stock dividend or recapitalization. The
holders of Public Warrants do not possess any rights as a stockholder until the
warrant is exercised. We are required to keep a current registration statement
in effect with respect to the Public Warrants and the shares issuable upon
exercise of the warrants.
Unit Warrants. In addition to the Public Warrants, we issued 250,000
unit warrants (the "Unit Warrants"), to the underwriters of our initial public
offering, of which 50,000 have been exercised as of September 14, 1999. Each
Unit Warrant entitles the holder thereof to purchase, at an exercise price of
$9.12, one share of common stock and one warrant to purchase an additional share
of common stock. Each warrant which can be purchased upon exercise of the Unit
Warrant is identical to the Public Warrants.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement which we entered into with
the purchasers of our Series A preferred stock, we are required to keep current
a registration statement in order to permit the holders of the Series A
preferred stock to resell to the public the shares of common stock that they
acquire upon conversion of the Series A preferred stock and upon exercise of
their warrants.
Pursuant to a Registration Rights Agreement which we entered into with
Kingsbridge Capital Limited in connection with our Equity Line Agreement, we are
required to keep current a registration statement in order to permit Kingsbridge
to resell to the public any shares of our common stock that we sell to
Kingbridge pursuant to the Equity Line Agreement, as well as shares that
Kingsbridge may acquire upon exercise of the warrant issued to Kingsbridge on
March 27, 1998. For a description of the Equity Line Agreement and the warrant,
see "The Equity Line Agreement."
We have agreed to keep current a registration statement with respect to
shares issuable upon exercise of the Public Warrants. We have also agreed to
keep current a registration statement in order to permit the resale to the
public of the shares of our common stock issuable upon exercise of the Unit
Warrants.
We issued warrants to purchase 100,000 shares of our common stock to
Joseph Charles & Assoc., Inc. and Millennium Financial Group, Inc., who acted as
representatives of the underwriters in connection with our public offering of
common stock which closed on July 30, 1999. The holders of those warrants are
entitled to demand that we file a registration statement in order to allow them
to resell the shares of common stock issuable upon exercise of the warrants, at
any time after July 30, 2000. The holders of those warrants are also entitled to
piggyback registration rights with respect to the shares issuable upon exercise
of the warrants in the event we choose to file a registration statement after
July 30, 2000.
59
<PAGE> 62
TRANSFER AGENT
U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Suite 200,
Glendale, California, serves as the transfer agent with respect to our common
stock.
60
<PAGE> 63
PLAN OF DISTRIBUTION
Kingsbridge has advised us that it may sell the shares registered by
this registration statement from time to time in transactions on the Nasdaq
National Market, in negotiated transactions, or otherwise, or by a combination
of these methods, at fixed prices which may be changed, at market prices at the
time of sale, at prices related to market prices or at negotiated prices.
Kingsbridge may effect these transactions by selling the shares to or through
broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from Kingsbridge or the purchasers of the shares for
whom the broker-dealer may act as an agent or to whom they may sell the shares
as a principal, or both. The compensation to a particular broker-dealer may
exceed customary commissions.
Kingsbridge is an "underwriter" within the meaning of the Securities Act
in connection with the sale of the shares offered hereby. Broker-dealers who act
in connection with the sale of the shares may also be deemed to be underwriters.
Profits on any resale of the shares as a principal by such broker-dealers and
any commissions received by such broker-dealers may be deemed to be underwriting
discounts and commissions under the Securities Act.
Any broker-dealer participating in such transactions as agent may
receive commissions from Kingsbridge (and, if they act as agent for the
purchaser of such shares, from such purchaser). Broker-dealers may agree with
Kingsbridge to sell a specified number of shares at a stipulated price per
share, and, to the extent such a broker-dealer is unable to do so acting as
agent for Kingsbridge, to purchase as principal any unsold shares at the price
required to fulfill the broker-dealer commitment to Kingsbridge. Broker-dealers
who acquire shares as principal may thereafter resell such shares from time to
time in transactions (which may involve crosses and block transactions and which
may involve sales to and through other broker-dealers, including transactions of
the nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
from the purchasers of such shares commissions computed as described above. To
the extent required under the Securities Act, a supplemental prospectus will be
filed, disclosing:
- the name of any such broker-dealers;
- the number of shares involved;
- the price at which such shares are to be sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable;
- that such broker-dealers did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus, as supplemented; and
- other facts material to the transaction.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of the shares may not simultaneously engage in
market making activities with respect to such securities for a period beginning
when such person becomes a distribution participant and ending upon such
person's completion of participation in a distribution, including stabilization
activities in the common stock to effect covering transactions, to impose
penalty bids or to effect passive market making bids. In addition and without
limiting the foregoing, in connection with transactions in the shares,
NeoTherapeutics and Kingsbridge will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including,
61
<PAGE> 64
without limitation, Rule 10b-5 and, insofar as NeoTherapeutics and Kingsbridge
are distribution participants, Regulation M and Rules 100, 101, 102, 103, 104
and 105 thereof. All of the foregoing may affect the marketability of the
shares.
Kingsbridge will pay all commissions and certain other expenses
associated with the sale of the shares. The shares offered hereby are being
registered pursuant to our contractual obligations, and we have paid the
expenses of the preparation of this prospectus. We have also agreed to indemnify
Kingsbridge with respect to the shares offered hereby against certain
liabilities, including, without limitation, certain liabilities under the
Securities Act, or, if such indemnity is unavailable, to contribute toward
amounts required to be paid in respect of such liabilities.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered
hereby will be passed upon for NeoTherapeutics by Stradling Yocca Carlson &
Rauth, a Professional Corporation, Newport Beach, California. Stradling Yocca
Carlson & Rauth owns 12,500 shares of our common stock and warrants to purchase
25,000 shares of our common stock at an exercise price of $11.40 per share.
Certain members of Stradling Yocca Carlson & Rauth beneficially own, in the
aggregate, 3,500 shares of our common stock and warrants to purchase 3,000
shares of our common stock at an exercise price of $11.40 per share.
EXPERTS
The consolidated financial statements included in this prospectus and
elsewhere in the registration statement to the extent and for the periods
indicated in their report have been audited by Arthur Andersen LLP, independent
public accountants, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
LIMITATION ON LIABILITY AND DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Our Bylaws provide for indemnification of our directors and officers to
the fullest extent permitted by law. Insofar as indemnification for liabilities
under the Securities Act may be permitted to directors, officers or controlling
persons of NeoTherapeutics pursuant to our Certificate of Incorporation, our
Bylaws or the Delaware General Corporation Law, we have been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable.
62
<PAGE> 65
NEOTHERAPEUTICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................ F-5
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-9
</TABLE>
F-1
<PAGE> 66
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.
ARTHUR ANDERSEN LLP
Orange County, California
February 26, 1999
F-2
<PAGE> 67
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents ........................................... $ 6,063,347 $ 1,097,341 $ 1,452,130
Restricted cash ................................................ 935,000 -- --
Marketable securities and short-term investments ............... 2,133,375 1,769,348 2,020,392
Other receivables, principally investment interest ............. 221,829 112,552 122,637
Advance deposit to clinical trial vendor ....................... -- 265,727 --
Prepaid expenses and refundable deposits ....................... 127,259 157,495 522,026
------------ ------------ ------------
Total current assets .................................. 9,480,810 3,402,463 4,117,185
------------ ------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment ...................................................... 1,952,262 2,197,253 2,503,609
Leasehold improvements ......................................... 1,803,000 1,794,794 1,802,264
Accumulated depreciation and amortization ...................... (279,913) (740,413) (992,468)
------------ ------------ ------------
Property and equipment, net .................................. 3,475,349 3,251,634 3,313,405
------------ ------------ ------------
OTHER ASSETS-- Prepaid expenses and deposits ..................... 242,314 172,066 53,841
------------ ------------ ------------
$ 13,198,473 $ 6,826,163 $ 7,484,431
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit ................................................. $ 850,000 $ -- $ --
Accounts payable and accrued expenses .......................... 975,339 1,278,954 1,715,820
Accrued payroll and related taxes .............................. -- 81,370 95,783
Note payable to related party .................................. 558,304 558,304 558,304
Current portion of long-term debt .............................. 94,886 445,297 498,096
------------ ------------ ------------
Total current liabilities ............................. 2,478,529 2,363,925 2,868,003
------------ ------------ ------------
LONG TERM DEBT, net of current portion ........................... 176,549 1,126,174 848,922
DEFERRED RENT .................................................... -- 46,308 60,714
------------ ------------ ------------
Total liabilities ..................................... 2,655,078 3,536,407 3,777,639
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $0.001 per share, 5,000,000 shares
authorized:
Issued and outstanding, none at December 31, 1997 or
1998, 320 shares 5% Series A Preferred Stock
with Conversion Features at June 30, 1999, liquidation
preference $3.2 million .................................. -- -- 2,546,994
Common Stock, par value $0.001 per share, 25,000,000 shares
authorized: Issued and outstanding, 5,465,807, 6,146,854, and
6,748,207 shares, respectively ............................ 23,188,363 27,535,329 33,960,256
Unrealized gains on available-for-sale securities .............. 20,256 24,207 26,704
Deficit accumulated during the development stage ............... (12,665,224) (24,269,780) (32,827,162)
------------ ------------ ------------
Total stockholders' equity ............................ 10,543,395 3,289,756 3,706,792
------------ ------------ ------------
$ 13,198,473 $ 6,826,163 $ 7,484,431
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 68
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED JUNE 15, 1987
YEAR ENDED DECEMBER 31, JUNE 30, (INCEPTION)
------------------------------------------- --------------------------- THROUGH
1996 1997 1998 1998 1999 JUNE 30, 1999
----------- ------------ ------------ ----------- ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES, from grants ............... $ -- $ -- $ -- $ -- $ -- $ 497,128
----------- ------------ ------------ ----------- ------------ ------------
OPERATING EXPENSES:
Research and development .......... 615,485 4,508,255 8,542,034 3,674,215 6,565,188 22,582,289
General and administrative ........ 659,895 2,341,276 3,122,506 1,497,511 1,844,643 10,737,531
----------- ------------ ------------ ----------- ------------ ------------
1,275,380 6,849,531 11,664,540 5,171,726 8,409,831 33,319,820
----------- ------------ ------------ ----------- ------------ ------------
LOSS FROM OPERATIONS ................ (1,275,380) (6,849,531) (11,664,540) (5,171,726) (8,409,831) (32,822,692)
----------- ------------ ------------ ----------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest income ................. 268,231 746,008 235,265 146,762 54,793 1,312,010
Interest expense ................ (51,769) (56,419) (156,016) (51,400) (120,033) (812,604)
Other income (expense) .......... 20,043 (1,599) (19,265) (13,414) -- 27,435
----------- ------------ ------------ ----------- ------------ ------------
Total other income (expense) .. 236,505 687,990 59,984 81,948 (65,240) 526,841
----------- ------------ ------------ ----------- ------------ ------------
NET LOSS ...................... $(1,038,875 $ (6,161,541) $(11,604,556) $(5,089,778) $ (8,475,071) $(32,295,851)
=========== ============ ============ =========== ============ ============
BASIC AND DILUTED LOSS PER SHARE .... $ (0.32) $ (1.14) $ (2.07) $ (0.93) $ (1.40)
=========== ============ ============ =========== ============
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING ..................... 3,292,663 5,405,831 5,615,449 5,482,487 6,036,187
=========== ============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 69
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
AND
REVENUE UNREALIZED
PARTICIPATION GAINS
UNITS AND COMMON STOCK (LOSSES)
PREFERRED ---------------------------- FROM
STOCK SHARES AMOUNT SECURITIES
------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
BALANCE, Inception (June 15, 1987) ......................... $ -- -- $ -- $ --
Common stock issued ...................................... -- 465,902 2,100 --
Net Loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1987 ................................. -- 465,902 2,100 --
Common stock issued ...................................... -- 499,173 2,250 --
Revenue Participation Units issuance ..................... 594,000 -- -- --
Net loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1989 ................................. 594,000 965,075 4,350 --
Revenue Participation Units issuance ..................... 82,000 -- -- --
Net effect of acquisition ................................ -- 145,000 354,316 --
Net loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1989 ................................. 676,000 1,110,075 358,666 --
Exercise of warrants ..................................... -- 31,108 136,402 --
Common stock issued in exchange for accrued
salaries on June 30 at $1.25 ........................... -- 402,518 503,144 --
Net loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1990 ................................. 676,000 1,543,701 998,212 --
Net loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1991 ............................... 676,000 1,543,701 998,212 --
Net loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1992 ................................. 676,000 1,543,701 998,212 --
Common stock issued in exchange for investment
banking services on March 18 at $1.35 .................. -- 40,000 54,000 --
Common stock issued in exchange for accrued
salaries on December 30 at $2.50 ....................... -- 255,476 638,694 --
Common stock issued in exchange for note payable
to President on December 30 at $2.50 ................... -- 200,000 500,000 --
Common stock issued in exchange for accrued
expenses on December 30 at $2.50 ....................... -- 20,842 52,104 --
Stock options issued in exchange for accrued
professional fees on December 31 at $1.35 .............. -- -- 108,000 --
Stock options issued in exchange for future
services on December 31 at $1.35 ....................... -- -- 39,750 --
Stock options issued for services ........................ -- -- -- (93,749)
Net loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1993 ................................. 676,000 2,060,019 2,390,760 (93,749)
Common stock issued for cash at $2.50 .................... -- 13,000 32,500 --
Amortization of deferred compensation .................... -- -- -- 93,749
Net loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1994 ................................. 676,000 2,073,019 2,423,260 --
Common stock issued for cash at $2.50 .................... -- 22,000 55,000 --
Common stock forfeiture .................................. -- (678,836) (1,193,943) --
Common stock reissued at $2.50 ........................... -- 678,836 1,697,090 --
Stock options issued for services at $2.50 ............... -- -- 105,000 --
Net loss ................................................. -- -- -- --
--------- ---------- ----------- --------
BALANCE, December 31, 1995 ................................. 676,000 2,095,019 3,086,407 --
Common stock issued for cash at $2.50
(net of commission) .................................... -- 266,800 633,650 --
Stock options issued for services at $2.50 ............... -- -- 103,950 --
Cash paid out for fractional shares ...................... -- (12) (25) --
Conversion of Revenue Participation Units into
common stock ........................................... (676,000) 300,000 1,125,000 --
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------ -----------
<S> <C> <C>
BALANCE, Inception (June 15, 1987) ......................... $ -- $ --
Common stock issued ...................................... -- 2,100
Net Loss ................................................. (31,875) (31,875)
----------- -----------
BALANCE, December 31, 1987 ................................. (31,875) (29,775)
Common stock issued ...................................... -- 2,250
Revenue Participation Units issuance ..................... -- 594,000
Net loss ................................................. (556,484) (556,484)
----------- -----------
BALANCE, December 31, 1989 ................................. (588,359) 9,991
Revenue Participation Units issuance ..................... -- 82,000
Net effect of acquisition ................................ -- 354,316
Net loss ................................................. (934,563) (934,563)
----------- -----------
BALANCE, December 31, 1989 ................................. (1,522,922) (488,256)
Exercise of warrants ..................................... -- 136,402
Common stock issued in exchange for accrued
salaries on June 30 at $1.25 ........................... -- 503,144
Net loss ................................................. (859,172) (859,172)
----------- -----------
BALANCE, December 31, 1990 ................................. (2,382,094) (707,882)
Net loss ................................................. (764,488) (764,488)
----------- -----------
BALANCE, December 31, 1991 ............................... (3,146,582) (1,472,370)
Net loss ................................................. (423,691) (423,691)
----------- -----------
BALANCE, December 31, 1992 ................................. (3,570,273) (1,896,061)
Common stock issued in exchange for investment
banking services on March 18 at $1.35 .................. -- 54,000
Common stock issued in exchange for accrued
salaries on December 30 at $2.50 ....................... -- 638,694
Common stock issued in exchange for note payable
to President on December 30 at $2.50 ................... -- 500,000
Common stock issued in exchange for accrued
expenses on December 30 at $2.50 ....................... -- 52,104
Stock options issued in exchange for accrued
professional fees on December 31 at $1.35 .............. -- 108,000
Stock options issued in exchange for future
services on December 31 at $1.35 ....................... -- 39,750
Stock options issued for services ........................ -- (93,749)
Net loss ................................................. (237,815) (237,815)
----------- -----------
BALANCE, December 31, 1993 ................................. (3,808,088) (835,077)
Common stock issued for cash at $2.50 .................... -- 32,500
Amortization of deferred compensation .................... -- 93,749
Net loss ................................................. (312,342) (312,342)
----------- -----------
BALANCE, December 31, 1994 ................................. (4,120,430) (1,021,170)
Common stock issued for cash at $2.50 .................... -- 55,000
Common stock forfeiture .................................. -- (1,193,943)
Common stock reissued at $2.50 ........................... -- 1,697,090
Stock options issued for services at $2.50 ............... -- 105,000
Net loss ................................................. (895,378) (895,378)
----------- -----------
BALANCE, December 31, 1995 ................................. (5,015,808) (1,253,401)
Common stock issued for cash at $2.50
(net of commission) .................................... -- 633,650
Stock options issued for services at $2.50 ............... -- 103,950
Cash paid out for fractional shares ...................... -- (25)
Conversion of Revenue Participation Units into
common stock ........................................... (449,000) --
</TABLE>
F-5
<PAGE> 70
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
AND
REVENUE UNREALIZED
PARTICIPATION GAINS
UNITS AND COMMON STOCK (LOSSES)
PREFERRED ------------------------------ FROM
STOCK SHARES AMOUNT SECURITIES
------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Common stock and warrants issued for cash at
$7.60, less commissions and costs of public
offering .............................................. $ -- 2,700,000 $ 18,176,781 $ --
Net loss ................................................. -- -- -- --
------------ ----------- ------------ --------
BALANCE, December 31, 1996 ................................. -- 5,361,807 23,125,763 --
Stock options exercised .................................. -- 104,000 2,600 --
Stock options issued for services at $2.00 ............... -- -- 60,000 --
Unrealized gains on available-for-sale securities ........ -- -- -- 20,256
Net loss ................................................. -- -- -- --
------------ ----------- ------------ --------
BALANCE, December 31, 1997 ................................. -- 5,465,807 23,188,363 20,256
Common stock and warrants issued for cash under
Line of Equity Agreement, net of issue costs ........... -- 506,049 3,451,782 --
Stock options exercised by employees, directors,
and consultants ........................................ -- 134,000 340,560 --
Exercise of underwriters' warrant ........................ -- 41,000 373,920 --
Notes receivable for exercise of stock options ........... -- -- (286,560) --
Stock options issued for services ........................ -- -- 422,264 --
Warrant to purchase common stock issued in
connection with equipment financing .................... -- -- 45,000 --
Fractional shares adjustment upon conversion of
pre-split shares ....................................... -- (2) -- --
Unrealized gains on available-for-sale securities ........ -- -- -- 3,951
Net loss ................................................. -- --
------------ ----------- ------------ --------
BALANCE, December 31, 1998 ................................. -- 6,146,854 27,535,329 24,207
Sale of 400 shares of 5% Series A Preferred
Stock, net of offering costs ........................... 3,614,505 -- -- --
Allocation of warrants to purchase common stock
granted to investment advisor .......................... (92,130) -- 92,130 --
Sales of common stock to Private Equity Line
investor, net of costs of issuance ..................... -- 109,819 947,468 --
Allocation of net proceeds of preferred stock
offering to common stock warrants issued to
investors .............................................. (252,480) -- 252,480 --
Fair value of warrants issued as compensation to
investment advisor ..................................... -- -- 204,280 --
Stock options issued for services ........................ -- -- 58,475 --
Unrealized gains on available for sale securities ........ -- -- -- 2,497
Accrued preferred stock dividend ......................... -- -- -- --
Net loss ................................................. -- -- -- --
------------ ----------- ------------ --------
Common stock issued for services ......................... -- 12,500 70,000 --
Conversion of preferred stock into common stock .......... (722,901) 68,434 722,901 --
Sale of common stock and warrants to private
investors ............................................. -- 400,000 3,985,288 --
Stock options exercised by employees ..................... -- 1,600 9,825 --
Exercise of underwriters' warrant ........................ -- 9,000 82,080 --
------------ ----------- ------------ --------
BALANCE, June 30, 1999 (unaudited) ......................... $ 2,546,994 6,748,207 $ 33,960,256 $ 26,704
============ =========== ============ ========
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------ -------------
<S> <C> <C>
Common stock and warrants issued for cash at
$7.60, less commissions and costs of public
offering .............................................. $ -- $ 18,176,781
Net loss ................................................. (1,038,875) (1,038,875)
------------ ------------
BALANCE, December 31, 1996 ................................. (6,503,683) 16,622,080
Stock options exercised .................................. -- 2,600
Stock options issued for services at $2.00 ............... -- 60,000
Unrealized gains on available-for-sale securities ........ -- 20,256
Net loss ................................................. (6,161,541) (6,161,541)
------------ ------------
BALANCE, December 31, 1997 ................................. (12,665,224) 10,543,395
Common stock and warrants issued for cash under
Line of Equity Agreement, net of issue costs ........... -- 3,451,782
Stock options exercised by employees, directors,
and consultants ........................................ -- 340,560
Exercise of underwriters' warrant ........................ -- 373,920
Notes receivable for exercise of stock options ........... -- (286,560)
Stock options issued for services ........................ -- 422,264
Warrant to purchase common stock issued in
connection with equipment financing .................... -- 45,000
Fractional shares adjustment upon conversion of
pre-split shares ....................................... -- --
Unrealized gains on available-for-sale securities ........ -- 3,951
Net loss ................................................. (11,604,556) (11,604,556)
------------ ------------
BALANCE, December 31, 1998 ................................. (24,269,780) 3,289,756
Sale of 400 shares of 5% Series A Preferred
Stock, net of offering costs ........................... -- 3,614,505
Allocation of warrants to purchase common stock
granted to investment advisor .......................... -- --
Sales of common stock to Private Equity Line
investor, net of costs of issuance ..................... -- 947,468
Allocation of net proceeds of preferred stock
offering to common stock warrants issued to
investors .............................................. -- --
Fair value of warrants issued as compensation to
investment advisor ..................................... -- 204,280
Stock options issued for services ........................ -- 58,475
Unrealized gains on available for sale securities ........ -- 2,497
Accrued preferred stock dividend ......................... (82,311) (82,311)
Net loss ................................................. (8,475,071) (8,475,071)
------------ ------------
Common stock issued for services ......................... -- 70,000
Conversion of preferred stock into common stock .......... -- --
Sale of common stock and warrants to private
investors ............................................. -- 3,985,288
Stock options exercised by employees ..................... -- 9,825
Exercise of underwriters' warrant ........................ -- 82,080
------------ ------------
BALANCE, June 30, 1999 (unaudited) ......................... $(32,827,162) $ 3,706,792
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 71
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $ (1,038,875) $ (6,161,541) $(11,604,556)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................................... 7,898 220,950 460,500
Issuance of common stock options and
warrants for compensation ...................................... 103,950 60,000 422,264
Amortization of deferred compensation ............................ -- -- --
Compensation expense for extension of debt
conversion agreements, net ..................................... -- -- --
Gain on sale of assets ........................................... -- -- --
(Increase) decrease in other receivables ......................... (163,988) (57,841) 109,277
(Increase) decrease in prepaid expenses
and refundable deposits ........................................ (238,187) (130,402) (180,715)
Increase (decrease) in accounts payable
and accrued expenses ........................................... 11,278 630,018 303,615
Increase (decrease) in accrued payroll and
related taxes .................................................. 103,388 (331,175) 81,370
Increase in deferred rent ........................................ -- -- 46,308
Increase (decrease) in accrued interest to
related parties ................................................ 979 (122,396) --
------------ ------------ ------------
Net cash used in operating activities .......................... (1,213,557) (5,892,387) (10,361,937)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................. (131,600) (3,563,790) (236,785)
Redemption (purchases) of marketable
securities and short-term investments, net........................ (7,448,546) 5,315,171 364,027
Unrealized gain (loss) on available-for
sale securities .................................................. -- 20,256 3,951
Payment of organization costs ...................................... -- -- --
Proceeds from sale of equipment .................................... -- -- --
Issuance of notes receivable ....................................... -- -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities ............ (7,580,146) 1,771,637 131,193
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
(Repayment) of notes payable to/borrowings
from related parties, net ........................................ (22,500) -- --
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
Repayment of long-term debt ........................................ -- (55,190) (199,964)
Proceeds from issuance of common stock and
warrants including:
Revenue Participation Units converted to common
stock, net of related offering costs and expenses ................. 18,810,406 -- 3,451,782
Proceeds from Preferred Stock Issuance, net of
offering costs .................................................... -- -- --
Dividends on Preferred Stock ....................................... -- -- --
Proceeds from exercise of stock options ............................ -- 2,600 714,480
Receipt of notes from officers and directors
for exercise of stock options .................................... -- -- (286,560)
Cash paid for fractional shares .................................... -- -- --
Cash at acquisition ................................................ -- -- --
------------ ------------ ------------
Net cash provided by financing activities....................... 18,787,906 189,035 5,264,738
------------ ------------ ------------
Net increase (decrease) in cash and equivalents .................... 9,994,203 (3,931,715) (4,966,006)
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
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
SIX MONTHS ENDED (INCEPTION)
JUNE 30, THROUGH
----------------------------- JUNE 30,
1998 1999 1999
----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $(5,089,778) $ (8,475,071) $(32,295,851)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................................... 224,630 252,055 1,117,957
Issuance of common stock options and
warrants for compensation ...................................... 184,382 332,143 1,023,357
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 ......................... 174,864 (10,085) (122,391)
(Increase) decrease in prepaid expenses
and refundable deposits ........................................ (11,175) 19,421 (480,864)
Increase (decrease) in accounts payable
and accrued expenses ........................................... (72,871) 436,866 1,875,920
Increase (decrease) in accrued payroll and
related taxes .................................................. 77,796 14,413 734,477
Increase in deferred rent ........................................ 23,154 14,406 60,714
Increase (decrease) in accrued interest to
related parties ................................................ -- -- 300,404
----------- ------------ ------------
Net cash used in operating activities .......................... (4,343,256) (7,415,852) (27,194,680)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................. (135,562) (313,825) (4,386,175)
Redemption (purchases) of marketable
securities and short-term investments, net........................ (132,146) (251,044) (2,020,392)
Unrealized gain (loss) on available-for
sale securities .................................................. (4,009) 2,497 26,704
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 ............ (271,717) (562,372) (6,316,291)
----------- ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
(Repayment) of notes payable to/borrowings
from related parties, net ........................................ -- -- 757,900
Proceeds from (repayment of) bank line of credit ................... (850,000) -- --
(Increase) decrease in restricted cash ............................. 935,000 -- --
Proceeds from long-term debt ....................................... -- 33,786 1,860,411
Repayment of long-term debt ........................................ (46,468) (258,239) (513,393)
Proceeds from issuance of common stock and
warrants including:
Revenue Participation Units converted to common
stock, net of related offering costs and expenses ................. 426,420 4,933,369 28,602,954
Proceeds from Preferred Stock Issuance, net of
offering costs .................................................... -- 3,614,504 3,614,504
Dividends on Preferred Stock ....................................... -- (82,312) (82,312)
Proceeds from exercise of stock options ............................ -- 91,905 808,985
Receipt of notes from officers and directors
for exercise of stock options .................................... -- -- (286,560)
Cash paid for fractional shares .................................... -- -- (25)
Cash at acquisition ................................................ -- -- 200,612
----------- ------------ ------------
Net cash provided by financing activities....................... 464,952 8,333,013 34,963,101
----------- ------------ ------------
Net increase (decrease) in cash and equivalents .................... (4,150,021) 354,789 1,452,130
Cash and equivalents, beginning of period .......................... 6,063,347 1,097,341 --
----------- ------------ ------------
Cash and equivalents, end of period ................................ $ 1,913,326 $ 1,452,130 $ 1,452,130
=========== ============ ============
</TABLE>
F-7
<PAGE> 72
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of accrued payroll into shares of
common stock ..................................................... $ -- $ -- $ --
============ ============ ============
Conversion of notes payable to related
parties into shares of common stock .............................. $ -- $ -- $ --
============ ============ ============
Conversion of accrued interest into notes
payable to related parties ....................................... $ -- $ -- $ --
============ ============ ============
Conversion of Revenue Participation Units
into shares of common stock ...................................... $ 676,000 $ -- $ --
============ ============ ============
Conversion of Preferred Stock into shares of
common stock ...................................................... $ -- $ -- $ --
============ ============ ============
Issuance of stock options and warrants for
services .......................................................... $ 103,950 $ 60,000 $ 422,264
============ ============ ============
Issuance of warrant in connection with equipment
financing ......................................................... $ -- $ -- $ 45,000
============ ============ ============
Issuance of warrants in connection with
equity and debt financings ....................................... $ -- $ -- $ --
============ ============ ============
Conversion of other accrued liabilities to
shares of common stock ........................................... $ -- $ -- $ --
============ ============ ============
Dividends on Preferred Stock payable in
shares of common stock ........................................... $ -- $ -- $ --
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
SIX MONTHS ENDED (INCEPTION)
JUNE 30, THROUGH
------------------------------ JUNE 30,
1998 1999 1999
------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
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
============ ============ ============
Conversion of Preferred Stock into shares of
common stock ...................................................... $ -- $ 722,900 $ 722,900
============ ============ ============
Issuance of stock options and warrants for
services .......................................................... $ 134,442 $ 332,143 $ 1,023,357
============ ============ ============
Issuance of warrant in connection with equipment
financing ......................................................... $ -- $ -- $ 45,000
============ ============ ============
Issuance of warrants in connection with
equity and debt financings ....................................... $ -- $ 344,610 $ 344,618
============ ============ ============
Conversion of other accrued liabilities to
shares of common stock ........................................... $ -- $ -- $ 52,104
============ ============ ============
Dividends on Preferred Stock payable in
shares of common stock ........................................... $ -- $ 82,312 $ 82,312
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 73
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 15, 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 and dementia, spinal cord injuries, stroke, Parkinson's
disease, migraine and obesity. 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.
F-9
<PAGE> 74
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.
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 benefited, or as the related services are rendered (as applicable).
MARKETABLE SECURITIES
The Company accounts for investments in marketable securities under
Statement 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:
<TABLE>
<S> <C>
Equipment 5 to 7 Years
Leasehold Improvements The shorter of useful life or
lease term
</TABLE>
F-10
<PAGE> 75
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)
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."
F-11
<PAGE> 76
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, 2000, 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%.
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.
F-12
<PAGE> 77
On July 8, 1998, Stephen Runnels, our Executive Vice President, borrowed
$50,000 from us on an unsecured basis. The note bears interest at 9% per year.
The note and all accrued but unpaid interest is due on the earlier of 30 days
after termination of employment or July 8, 2000 (extended by us from July 8,
1999).
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:
U.S. Patent No. 5,091,432 issued on February 25, 1992;
U.S. Patent No. 5,447,939 issued on September 5, 1995; and
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.
F-13
<PAGE> 78
3. MARKETABLE SECURITIES
Marketable securities at December 31, 1997 and 1998 were 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:
<TABLE>
<S> <C>
Held-to-Maturity ...................................... $ 168,992
Available-for-Sale .................................... 1,964,383
----------
$2,133,375
</TABLE>
December 31, 1998:
Marketable securities and short-term investments:
<TABLE>
<S> <C>
Available-for-Sale .................................... 1,769,348
==========
</TABLE>
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.
F-14
<PAGE> 79
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
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 using the effective interest method over the life of the note.
Future installments of debt principal are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31 AMOUNT
------------ ----------
<S> <C>
1999...................................... $ 445,297
2000...................................... 460,476
2001...................................... 437,433
2002...................................... 228,265
----------
$1,571,471
==========
</TABLE>
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.
F-15
<PAGE> 80
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:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31: AMOUNT
------------ -----------
<S> <C>
1999..................... $ 501,600
2000..................... 517,800
2001..................... 513,400
2002..................... 542,100
2003..................... 554,200
2004..................... 285,400
-----------
$ 2,914,500
===========
</TABLE>
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 the first quarter of 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
F-16
<PAGE> 81
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 a
specified revenue goal 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
results of 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.
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
F-17
<PAGE> 82
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.
REINCORPORATION
During June 1997, the stockholders of the Company approved the
reincorporation 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 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.
F-18
<PAGE> 83
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 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 Plans were vested and exercisable upon issuance. In September 1990, the
Company issued a warrant to the Chief Executive Officer of the Company to
purchase 88,173 shares of common stock at $3.75 per share. The warrant expires
August 31, 2000.
In January 1997, the Company issued to a financial consultant, 10-year
options to purchase 180,000 shares of the Company's common stock at the exercise
price of $3.875 per share, of which 30,000 options vested immediately. In
November 1998, the Company issued to the same financial consultant additional
10-
F-19
<PAGE> 84
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.
A summary of stock option activities are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES 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>
$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.
F-20
<PAGE> 85
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.
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 Neotrofin(TM) for animal and human
testing programs. The NIA also issued an additional contract to one of its
subcontractors to conduct the subchronic animal toxicity studies required by the
U.S. Food and Drug Administration as a part of an Investigational New Drug (IND)
application for Neotrofin(TM). The entire cost of these two contracts was funded
by the NIA and NIMH directly to the subcontractors.
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):
F-21
<PAGE> 86
<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
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
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. INFORMATION RELATED TO INTERIM FINANCIAL STATEMENTS AND SUBSEQUENT
EVENTS (UNAUDITED)
BASIS OF PRESENTATION
The unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These unaudited financial statements
reflect, in the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to fairly present the results of
operations, changes in cash flows and financial position as of and for the
periods presented. These unaudited financial statements should be read in
conjunction with the audited financial statements and related noted thereto,
appearing elsewhere herein. The results for the interim periods presented are
not necessarily indicative of results to be expected for a full year.
RESEARCH AND FELLOWSHIP GRANTS
The Company periodically makes non-binding commitments to various
Universities and not-for-profit research organizations to fund scientific
research and fellowship grants that may further the Company's research programs.
As of June 30, 1999, the Company had committed to pay, through December 2000,
approximately $650,000 for such grants and fellowships. Grant expense for the
six-month periods ended June 30, 1999 and 1998, amounted to $83,000 and $71,000,
respectively.
PREFERRED STOCK
On January 29, 1999, the Company entered into an agreement with two
private investors to sell up to $6 million of 5% preferred stock, with rights of
conversion into common stock. The financing consists of two tranches of
preferred stock. The first tranche of $4.0 million was sold on January 29, 1999,
and for an initial
F-22
<PAGE> 87
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 can be sold at the
Company's option 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%. At June 30, 1999, the Company accrued dividends payable of $33,425,
which are payable in cash or common stock upon conversion of the preferred
shares into common stock. The preferred stock has a liquidation preference over
the common stock equal to the stated value of $4.0 million plus any accrued
dividends. 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 Company paid cash offering expenses of approximately $367,000 for
finder's fees and legal services, which were offset against the proceeds of the
offering in the accompanying financial statements. In connection with the
financing, the Company also granted warrants to purchase an aggregate of 155,000
shares of its common stock to the preferred stock investors and others. The
warrants are exercisable for periods ranging from 3 to 5 years at prices ranging
from $11.00 to $12.98 per share. The valuation of these warrants was determined
using the Black-Scholes Option-Pricing Model with the following assumptions:
<TABLE>
<S> <C>
Expected life............... 3 to 5 years
Volatility.................. 75.26%
Risk-free interest rate..... 4.62% to 4.66%
Dividend yield.............. 0%
</TABLE>
The warrants to purchase 155,000 shares of common stock referred to
above include the following: The Company granted to an investment advisor a
warrant to purchase 40,000 shares of common stock as consideration for its
waiver of a preexisting right of first refusal. Using the valuation model
described above, this warrant had a fair value of $204,280, which is included in
the statement of operations. The Company also granted to the finder in the
preferred stock financing, a warrant to purchase 15,000 shares of common stock
having a fair value of $92,130, which was offset against the offering proceeds.
Warrants to purchase 75,000 shares of common stock were granted to the preferred
stock investors as a part of the offering. As such, $252,480 of the net offering
proceeds was allocated to the investors' warrants based upon their relative fair
value. The remaining warrant to purchase 25,000 shares of common stock was
granted to the Company's existing Equity Line investor as consideration for the
waiver of certain pre-existing anti-dilution rights that might have been
triggered by the preferred stock financing. Because common stock and common
stock equivalents are presented in the same manner, the grant of this warrant
had no impact on the presentation in the accompanying financial statements.
COMMON STOCK AND WARRANTS
During the quarter ended June 30, 1999, the Company sold to a private
investor, pursuant to its existing Equity Line Agreement, an aggregate of
109,819 shares of common stock for cash proceeds of $950,000.
On May 11, 1999, the Company completed a private placement of 400,000
shares of common stock and warrants to purchase 80,000 shares of common stock to
a group of private investors for a total purchase price of $4.0 million. Each
warrant entitles the investor to purchase one share of common stock at an
exercise
F-23
<PAGE> 88
price of $15.00 per share. The warrants expire May 10, 2004, and may be called
by the Company if the closing price of the common stock remains at $30.00 per
share or above for any 20 out of any 30 consecutive trading days. The shares of
common stock sold to the investors, and the shares issuable upon exercise of the
warrants, may be resold in compliance with the provisions of Rule 144 under the
Securities Act of 1933, including the one year holding period requirement of
said Rule.
Effective May 17, 1999, the Company issued 12,500 shares of common stock
to the law firm of Stradling Yocca Carlson & Rauth in consideration for past
legal services rendered in the amount of $70,000, and issued a five-year warrant
to purchase 25,000 shares at an exercise price of $11.40 per share in
consideration for a discount of 15% on fees for legal services rendered during
the months of March through December, 1999.
EMPLOYMENT AGREEMENT
On May 6, 1999, the Company entered into an employment agreement with
the Chief Executive Officer. The agreement will take effect on January 1, 2000,
when the Chief Executive Officer's current agreement expires, and is for a term
of three years. The agreement requires the Chief Executive Officer to devote his
entire productive time, ability and attention to the Company during the term of
the agreement, and is terminable by the Company at any time with or without
cause, as defined in the agreement. The agreement provides for an annual base
salary of $215,000 with automatic annual cost of living adjustments, and annual
bonus and increases in base salary to be determined by the Board of Directors or
the Compensation Committee, based on an evaluation of the Chief Executive
Officer's performance and the performance of the Company. In addition to the
salary and any bonus, the agreement requires the Company to provide the Chief
Executive Officer with an automobile and pay for all costs associated with
operating such automobile, less costs for personal use as required by the
Internal Revenue Code. The agreement also provides for guaranteed severance
payments equal to the Chief Executive Officer's annual base salary over the
remaining life of the agreement if the Company terminates his employment without
cause or if the Chief Executive Officer terminates his employment with good
reason. Pursuant to the employment agreement, the Company granted an option to
the Chief Executive Officer to purchase 225,000 shares of common stock at a
price per share equal to the market price on the date of grant, vesting in three
equal annual installments commencing May 6, 2000.
F-24
<PAGE> 89
================================================================================
NEOTHERAPEUTICS, INC.
925,000 SHARES
COMMON STOCK
------------
PROSPECTUS
------------
November 10, 1999
================================================================================
<PAGE> 90
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the common stock being registered hereunder. All of the amounts
shown are estimates except for the SEC registration fee.
<TABLE>
<CAPTION>
TO BE PAID BY
THE COMPANY
-------------
<S> <C>
SEC registration fee.................... $ 2,522
Printing expenses....................... 5,000
Legal fees and expenses................. 50,000
Accounting fees and expenses............ 15,000
Miscellaneous........................... 2,478
-------
Total................................. $75,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) As permitted by the Delaware General Corporation Law ("DGCL"), the
Certificate of Incorporation of the Company (Exhibit 3.1 hereto) eliminates the
liability of directors to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a directors, except to the extent otherwise
required by the DGCL.
(b) The Certificate of Incorporation provides that the Company will
indemnify each person who was or is made a party to any proceeding by reason of
the fact that such person is or was a director or officer of the Company against
all expense, liability and loss reasonably incurred or suffered by such person
in connection therewith to the fullest extent authorized by the DGCL. The
Company's Bylaws (Exhibits 3.2 and 3.3 hereto) provide for a similar indemnity
to directors and officers of the Company to the fullest extent authorized by the
DGCL.
(c) The Certificate of Incorporation also gives the Company the ability
to enter into indemnification agreements with each of its directors and
officers. The Company has entered into indemnification agreements with certain
of its directors and officers (Exhibit 10.7 hereto), which provide for the
indemnification of directors or officers of the Company against any and all
expenses, judgments, fines, penalties and amounts paid in settlement, to the
fullest extent permitted by law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the
last three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Securities Act:
1. In September 1996, the Company granted options to purchase 70,000
shares of common stock, at an exercise price of $4.50 per share, to four
non-employee directors, one employee and two consultants pursuant to its 1991
Stock Incentive Plan.
2. In January 1997, pursuant to its 1991 Stock Incentive Plan, the
Company granted to six employees incentive options to purchase a total of 19,500
shares of common stock at an exercise price of $4.50 per share, and to a
consultant in exchange for consulting services, a non-qualified option to
purchase 5,000 shares of common stock at the exercise price of $4.50 per share.
II-1
<PAGE> 91
3. In January 1997, the Company granted options to purchase 180,000
shares of common stock at an exercise price of $3.88 per share to a financial
consultant. 30,000 of the options were vested upon issuance, and the vesting of
150,000 of these options is contingent upon the performance by the consultant of
specified future services.
4. In April 1997, pursuant to its 1991 Stock Incentive Plan, the
Company granted to one employee, an incentive option to purchase 50,000 shares
of common stock at the exercise price of $7.25 per share, and a non-qualified
option to purchase 12,000 shares of common stock at the exercise price of $5.13
per share.
5. In May 1997, pursuant to its 1991 Stock Incentive Plan, the Company
granted to four employees incentive options to purchase an aggregate of 17,500
shares of common stock at the exercise price of $8.25 per share.
6. In June 1997, pursuant to its 1997 Stock Incentive Plan, the Company
granted to four outside members of the Board of Directors options to purchase an
aggregate of 40,000 shares of common stock at the exercise price of $12.88 per
share.
7. During 1998 and the first quarter of 1999, the Company sold shares
of its common stock to Kingsbridge Capital Limited ("Kingsbridge") in nine
separate transactions pursuant to a Private Equity Line of Credit Agreement
entered into between the Company and Kingsbridge on March 27, 1998 (the "Equity
Line Agreement") pursuant to which the Company may issue and sell, from time to
time, shares of its common stock for cash consideration up to an aggregate of
$15 million.
The nine separate transactions were as follows: (i) on
September 11, 1998, the Company issued and sold 41,398 shares at $6.039 per
share for a total of $250,000; (ii) on October 11, 1998, the Company sold 99,030
shares at $5.049 per share for a total of $500,000; (iii) on October 29, 1998,
the Company sold 67,042 shares at $7.458 per share for a total of $500,000; (iv)
on November 17, 1998, the Company sold 86,197 shares at $8.701 per share for a
total of $750,000; (v) on November 30, 1998, the Company sold 64,383 shares at
$7.766 per share for a total of $500,000; (vi) on December 8, 1998, the Company
sold 102,994 shares at $7.282 per share for a total of $750,000; (vii) on
December 21, 1998, the Company sold 45,005 shares at $6.666 per share for a
total of $300,000; (viii) on January 25, 1999, the Company sold 78,855 shares at
$8.877 per share for a total of $700,000; and (ix) on March 30, 1999, the
Company sold 30,964 shares at $8.074 per share for a total of $250,000. The nine
transactions totaled 615,868 shares of Company common stock for an aggregate of
$4,500,000.
8. In conjunction with the Equity Line Agreement, on March 27, 1998,
the Company issued to Kingsbridge a warrant entitling Kingsbridge to purchase
25,000 shares of common stock of the Company at a price of $11.61875 per share.
The warrant is exercisable at any time beginning on September 24, 1998 and
ending on September 24, 2001. The warrant contains provisions that protect
against dilution by adjustment of the exercise price and the number of shares
issuable thereunder upon the occurrence of certain events, such as a merger,
stock split or reverse stock split, stock dividend or recapitalization. The
exercise price of the warrant is payable either (i) in cash or (ii) by a
"cashless exercise", in which that number of shares of common stock underlying
the warrant having a fair market value at the time of exercise equal to the
aggregate exercise price are cancelled as payment of the exercise price.
9. Effective September 10, 1998, in connection with the finalization of
the Company's equipment financing with Leasing Technologies International, Inc.
("LTI"), the Company issued a warrant to LTI to purchase a maximum of 13,459
shares of the Company's common stock at an exercise price of $7.43 per share.
The warrant is exercisable at any time or from time to time up to and including
September 9, 2003.
II-2
<PAGE> 92
10. 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.
11. Effective January 25, 1999, the Company issued a warrant to Trinity
Capital Advisors, Inc. to purchase a maximum of 40,000 shares of the Company's
common stock at an exercise price of $11.00 per share in consideration for
Trinity's waiver of its rights of first refusal pursuant to the final paragraph
of the third page of that certain engagement letter agreement dated March 16,
1998 by and between the Company, and Trinity. The warrant is exercisable at any
time or from time to time up to and including January 24, 2002. Trinity may not
exercise the warrant if it would result in Trinity holding more than 9.9% of the
Company's outstanding common stock as of the date of exercise.
12. Effective January 25, 1999, the Company issued a warrant to
Kingsbridge Capital Limited to purchase a maximum of 25,000 shares of the
Company's common stock at an exercise price of $11.00 per share in consideration
for Kingsbridge waiving certain antidilution provisions under an existing
warrant held by Kingsbridge that might have been triggered as a result of the
issuance of the preferred stock and warrants described in paragraph 13 below.
The warrant is exercisable at any time or from time to time up to and including
January 24, 2002. Kingsbridge may not exercise the warrant if it would result in
Kingsbridge holding more than 9.9% of the Company's common stock on the date of
exercise.
13. On January 29, 1999 the Company entered into an agreement with
Montrose Investments Ltd. and Westover Investments L.P. to sell up to $6.0
million of 5% preferred stock (600 shares at stated value of $10,000 per share)
with rights of conversion into common stock. The financing consists of two
tranches of preferred stock. The first tranche of $4.0 million (400 shares of 5%
Series A Preferred Stock with Conversion Features) was sold on January 29, 1999,
is convertible at the lesser of a fixed price of $13.06 per share or a variable
rate of 101% of the average of the ten lowest closing bid prices of the common
stock during the thirty trading days immediately preceding the conversion date.
In no event can the first tranche be converted into more than 1,450,000 shares.
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 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.
14. Brighton Capital, Ltd., acted as a finder with respect to the
negotiation and execution of the preferred stock agreement described above. As
consideration for the services provided by Brighton in connection with the
Agreement, the Company paid Brighton a cash commission of 6% of the gross sale
proceeds realized from sale of the preferred stock, plus warrants to purchase
15,000 shares of common stock at $12.98 per share. The warrants are exercisable
over a 5 year period and may be called by the Company if the market value of the
common stock equals or exceeds $25.96 for any 10 consecutive days during the
exercise period.
15. Effective May 11, 1999, the Company issued a total of 400,000
shares of common stock, and five-year warrants to purchase a total of 80,000
shares of common stock at an exercise price of $15.00 per share, in a private
placement to 34 accredited investors for aggregate consideration of $4.0
million.
16. Effective May 17, 1999, the Company issued 12,500 shares of common
stock to the law firm of Stradling Yocca Carlson & Rauth in consideration for
past legal services rendered in the amount of $70,000, and issued a five-year
warrant to purchase 25,000 shares at an exercise price of $11.40 per share in
consideration for a discount of 15% on fees for legal services rendered during
the months of March through December, 1999.
II-3
<PAGE> 93
In the transaction described in paragraph 1, exemption from
the registration requirements of the Securities Act was claimed under Rule 701
and/or Section 4(2) of the Securities Act. In the transactions described in
paragraphs 2-16, exemption from the 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 recipients either
received adequate information about the Company or had access, through
employment or other relationships, to such information. In each of 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 and/or
"accredited" within the meaning of Rule 501 under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 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 as adopted May 8, 1997. (Filed as
Exhibit 3.2 to Registrant's Registration Statement on Form 10-K
for the year ended December 31, 1998, and incorporated herein by
reference.)
3.3 Certificate of Amendment of Bylaws adopted April 21, 1998.
(Filed as Exhibit 3.2 to Registrant's Registration Statement on
Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference.)
4.1 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.)
4.2 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.)
4.3 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.)
4.4 Form of Representatives' Warrant Agreement dated as of September
25, 1996, entered into in connection with the public offering of
the Registrant's securities on September 26, 1996. (Filed as
Exhibit 4.3 to the Registration Statement on Form SB-2 (No.
333-05342-LA), and incorporated herein by reference).
4.5 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 (No.
333-05342-LA), and incorporated herein by reference.)
4.6 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 (No.
333-05342-LA), and incorporated herein by reference.)
</TABLE>
II-4
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
4.7 Warrant Agreement entered into between Registrant 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 (No.
333-05342-LA), and incorporated herein by reference.)
4.8 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.)
4.9 Preferred Stock Purchase Agreement dated as of January 29, 1999,
by and among Registrant, Westover Investments Ltd. and Montrose
Investments L.P. (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.)
4.10 Registration Rights Agreement dated as of January 29, 1999, by
and among Registrant, Westover Investments Ltd. 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.)
4.11 Form of warrant issued by Registrant to Westover Investments
Ltd. 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).
4.12 Form of Representative's Warrant dated as of July 30, 1999,
entered into in connection with the public offering of the
Registrant's securities on July 27, 1999. (Filed as Exhibit 4.12
to the Registration Statement on Form S-1 (No. 333-79935), and
incorporated herein by reference).
5.1* Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation.
10.1 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the
Registration Statement on Form SB-2 (No. 333-05342-LA), and
incorporated herein by reference.)
10.2 Employment Agreement entered into as of July 1, 1996 between the
Registrant and Alvin J. Glasky, Ph.D. (Filed as Exhibit 10.3 to
the Registration Statement on Form SB-2 (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 (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 (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 (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 (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 (No. 333-05342-LA), and
incorporated herein by reference.)
10.8 Underwriting Agreement dated as of September 25, 1996, by and
among the Company, Paulson Investment Company, Inc. and First
Colonial Securities Group, Inc. (Filed as Exhibit 1.1 to the
</TABLE>
II-5
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
Registration Statement on Form SB-2 (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, 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
the fiscal year ended December 31, 1996, 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, 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, and incorporated herein by reference.)
10.13 Employment Agreement entered into as of May 6, 1999 between
Alvin J. Glasky, Ph.D. and NeoTherapeutics, Inc. (Filed as
Exhibit 10.14 to the Registration Statement on Form S-1 (No.
333-79935), and incorporated herein by reference.)
10.14 Form of Financial Consulting Agreement between the Registrant
and Joseph Charles & Assoc., Inc. entered into in connection
with the public offering of the Registrant's securities on July
27, 1999. (Filed as Exhibit 1.4 to the Registration Statement on
Form S-1 (No. 333-79935), and incorporated herein by reference).
21.1 Subsidiaries of Registrant. (Filed as Exhibit 21.1 to the
Registration Statement on Form S-1 (No. 333-79935), and
incorporated herein by reference).
23.1* Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in exhibit 5.1).
23.2* Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included on the signature page to this
Registration Statement -- see page II-10.)
</TABLE>
- ----------
* Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE> 96
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-7
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Irvine, State of California, on the 10th day of November, 1999.
NEOTHERAPEUTICS, INC.
By: /s/ Samuel Gulko
-------------------------------------
Samuel Gulko
Chief Financial Officer, Secretary
and Treasurer
POWER OF ATTORNEY
We, the undersigned directors and officers of NeoTherapeutics, Inc., do
hereby constitute and appoint Alvin J. Glasky, Ph.D. and Samuel Gulko, or either
of them, our true and lawful attorneys-in-fact and agents, each with full power
to sign for us or any of us in our names and in any and all capacities, any and
all amendments (including post-effective amendments) to this Registration
Statement, or any related registration statement that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and
to file the same, with all exhibits thereto and other documents required in
connection therewith, and each of them with full power to do any and all acts
and things in our names and in any and all capacities, which such
attorneys-in-fact and agents, or either of them, may deem necessary or advisable
to enable NeoTherapeutics, Inc. to comply with the Securities Act of 1933, as
amended, and any rules, regulations, and requirements of the Securities and
Exchange Commission, in connection with this Registration Statement; and we
hereby do ratify and confirm all that the such attorneys-in-fact and agents, or
either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
* Chief Executive Officer, November 10, 1999
- ---------------------------------------- President and Director
Alvin J. Glasky, Ph.D. (principal executive officer)
/s/ Samuel Gulko Chief Financial Officer, November 10, 1999
- ---------------------------------------- Secretary, Treasurer and Director
Samuel Gulko (principal financial and
accounting officer)
* Director November 10, 1999
- ----------------------------------------
Mark J. Glasky
* Director November 10, 1999
- ----------------------------------------
Frank M. Meeks
* Director November 10, 1999
- ----------------------------------------
Carol O'Cleireacain, Ph.D.
</TABLE>
II-8
<PAGE> 98
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
* Director November 10, 1999
- ----------------------------------------
Paul H. Silverman, Ph.D., D.Sc.
* Director November 10, 1999
- ----------------------------------------
Stephen Runnels
* Director November 10, 1999
- ----------------------------------------
Eric L. Nelson, Ph.D.
* Director November 10, 1999
- ----------------------------------------
Joseph Rubinfeld, Ph.D.
</TABLE>
*By: /s/ Samuel Gulko
-----------------------------------
Attorney-in-Fact
II-9
<PAGE> 99
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 as adopted May 8, 1997. (Filed as
Exhibit 3.2 to Registrant's Registration Statement on Form 10-K
for the year ended December 31, 1998, and incorporated herein by
reference.)
3.3 Certificate of Amendment of Bylaws adopted April 21, 1998.
(Filed as Exhibit 3.2 to Registrant's Registration Statement on
Form 10-K for the year ended December 31, 1998, and incorporated
herein by reference.)
4.1 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.)
4.2 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.)
4.3 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.)
4.4 Form of Representatives' Warrant Agreement dated as of September
25, 1996, entered into in connection with the public offering of
the Registrant's securities on September 26, 1996. (Filed as
Exhibit 4.3 to the Registration Statement on Form SB-2 (No.
333-05342-LA), and incorporated herein by reference).
4.5 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 (No.
333-05342-LA), and incorporated herein by reference.)
4.6 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 (No.
333-05342-LA), and incorporated herein by reference.)
4.7 Warrant Agreement entered into between Registrant 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 (No.
333-05342-LA), and incorporated herein by reference.)
4.8 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.)
</TABLE>
II-10
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
4.9 Preferred Stock Purchase Agreement dated as of January 29, 1999,
by and among Registrant, Westover Investments Ltd. and Montrose
Investments L.P. (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.)
4.10 Registration Rights Agreement dated as of January 29, 1999, by
and among Registrant, Westover Investments Ltd. 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.)
4.11 Form of warrant issued by Registrant to Westover Investments
Ltd. 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).
4.12 Form of Representative's Warrant dated as of July 30, 1999,
entered into in connection with the public offering of the
Registrant's securities on July 27, 1999. (Filed as Exhibit 4.12
to the Registration Statement on Form S-1 (No. 333-79935), and
incorporated herein by reference).
5.1* Opinion of Stradling Yocca Carlson & Rauth, a Professional
Corporation.
10.1 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the
Registration Statement on Form SB-2 (No. 333-05342-LA), and
incorporated herein by reference.)
10.2 Employment Agreement entered into as of July 1, 1996 between the
Registrant and Alvin J. Glasky, Ph.D. (Filed as Exhibit 10.3 to
the Registration Statement on Form SB-2 (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 (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 (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 (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 (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 (No. 333-05342-LA), and
incorporated herein by reference.)
10.8 Underwriting Agreement dated as of September 25, 1996, by and
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 (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, and
incorporated herein by reference.)
</TABLE>
II-11
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
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
the fiscal year ended December 31, 1996, 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, 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, and incorporated herein by reference.)
10.13 Employment Agreement entered into as of May 6, 1999 between
Alvin J. Glasky, Ph.D. and NeoTherapeutics, Inc. (Filed as
Exhibit 10.14 to the Registration Statement on Form S-1 (No.
333-79935), and incorporated herein by reference.)
10.14 Form of Financial Consulting Agreement between the Registrant
and Joseph Charles & Assoc., Inc. entered into in connection
with the public offering of the Registrant's securities on July
27, 1999. (Filed as Exhibit 1.4 to the Registration Statement on
Form S-1 (No. 333-79935), and incorporated herein by reference).
21.1 Subsidiaries of Registrant. (Filed as Exhibit 21.1 to the
Registration Statement on Form S-1 (No. 333-79935), and
incorporated herein by reference).
23.1* Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in exhibit 5.1).
23.2* Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included on the signature page to this
Registration Statement -- see page II-10.)
</TABLE>
- ----------
* Previously filed.
II-12
