<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1999
REGISTRATION NO. 333-79935
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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:
<TABLE>
<S> <C>
C. CRAIG CARLSON, ESQ. RALPH V. DE MARTINO, ESQ.
ROBERT E. RICH, ESQ. NEIL R.E. CARR, ESQ.
STRADLING YOCCA CARLSON & RAUTH, DE MARTINO FINKELSTEIN ROSEN & VIRGA
A PROFESSIONAL CORPORATION 1818 N STREET, N.W., SUITE 400
660 NEWPORT CENTER DRIVE, SUITE 1600 WASHINGTON, D.C. 20036
NEWPORT BEACH, CALIFORNIA 92660 (202) 659-0494
(949) 725-4000
</TABLE>
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C>
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PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING
CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE
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Common Stock ($.001 par value per share)(1)....... 4,025,000 $12.44(2) $50,071,000.00
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Representatives' Warrants......................... 350,000 $.001 $350.00
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Common Stock issuable on exercise of
Warrants(3)..................................... 350,000 $12.44(4) $4,354,000.00
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Total............................................. $54,425,350.00
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<CAPTION>
<S> <C>
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TITLE OF EACH AMOUNT OF
CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE
- --------------------------------------------------------------------------------------------
Common Stock ($.001 par value per share)(1)....... $13,919.74
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Representatives' Warrants......................... $0.10
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Common Stock issuable on exercise of
Warrants(3)..................................... $1,210.41
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Total............................................. $15,130.25(5)
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</TABLE>
(1) Includes 525,000 shares of common stock which may be purchased by the
Underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the
basis of the average of the high and low reported sale prices of the
Registrant's common stock on May 26, 1999, as reported on the Nasdaq
National Market.
(3) Pursuant to Rule 416 under the Securities Act, this Registration Statement
also covers such additional number of shares of common stock as may be
issuable pursuant to anti-dilution provisions of the Representatives'
Warrants.
(4) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g) under the Securities Act of 1933, as amended, on the
basis of the average of the high and low reported sale prices of the
Registrant's common stock on May 26, 1999, as reported on the Nasdaq
National Market.
(5) 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.
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<PAGE> 2
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED JULY 21, 1999
PROSPECTUS
[NEOTHERAPEUTICS LOGO]
1,000,000 Shares
Common Stock
We are offering 1,000,000 shares. The underwriters have a 45-day option to
purchase up to 150,000 additional shares from us on the same terms as set forth
below to cover over-allotments, if any.
Our common stock is listed on the Nasdaq National Market under the symbol
"NEOT." On July 20, 1999, the last reported sale price for the common stock on
the Nasdaq National Market was $13.00 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Public offering price.................................... $ $
Underwriting discounts and commissions................... $ $
Proceeds to NeoTherapeutics.............................. $ $
</TABLE>
The underwriters are severally underwriting the shares being offered.
Joseph Charles & Assoc., Inc. expects to deliver the shares on behalf of the
underwriters on or about , 1999.
JOSEPH CHARLES & ASSOC., INC. MILLENNIUM
FINANCIAL GROUP, INC.
The date of this Prospectus is , 1999
<PAGE> 3
REGENERATING HOPE
PANEL 1 -- NORMAL BRAIN FUNCTION --
This panel contains three cells in series depicting production of
neurotransmitters at nerve endings which stimulates the next cell in sequence.
PANEL 2 -- ALZHEIMER'S DISEASE CAUSES NERVE CELLS TO DIE --
This panel contains two parallel series of three cells each. In the first
series, the center cell has been depicted as dead and interfering with
transmission of a neurotransmitter signal to the third cell. In the second
series, the third cell is depicted as damaged and unable to respond to
neurotransmitter stimulation.
PANEL 3 -- NEOTROFIN(TM) STIMULATES PRODUCTION OF NEUROTROPHIC FACTORS --
This panel contains two parallel series of cells similar to those in Panel
2 with the following exceptions. The first cell in series 1 is depicted as
having established an alternative connection to the second cell in series 2 in
response to neurotrophic factors. In addition, the third cell in series 2 has
been depicted as protected from damage by the presence of neurotrophic factors.
NORMAL BRAIN FUNCTION
The brain is made up of billions of nerve cells. The ends of each nerve
cell connect with other nerve cells. These connections make movement, sensation,
thinking and memory possible.
The area where nerve cells interact is called a synapse. A nerve impulse
travels down one nerve cell and releases a chemical called a neurotransmitter at
the synapse. The neurotransmitter crosses the small gap between nerve cells and
contacts special protein receptors on the surface of the other nerve cell. This
causes a nerve signal in the next nerve cell.
WHAT HAPPENS IN ALZHEIMER'S DISEASE?
Nerve cells die in chronic neurodegenerative disorders like Alzheimer's
disease. Recovery is more difficult in the brain than in other tissues since
very few new brain cells grow. Some compensation for loss of nerve cells can
occur if the remaining cells have more neurotransmitter. This can provide a
small measure of recovery, but it may not be sufficient to compensate for the
progressive loss of nerve cells.
The current treatment for Alzheimer's disease involves administering drugs
which mimic neurotransmitters or increase the amount of neurotransmitter at the
synapse. This approach can temporarily help the remaining nerve cells function.
However, how much neurotransmitter does one need to make a dead cell work? No
amount can make a dead cell function.
OUR NOVEL THERAPEUTIC APPROACH
Several pre-clinical animal studies have shown that Neotrofin(TM)
stimulates cells in the nervous system to produce certain proteins called
"neurotrophic factors". These proteins are critical to the nervous system
because they protect cells from several types of damage and they stimulate nerve
cells to make new connections. Phase 1 and 2a human clinical studies have shown
that Neotrofin(TM) is orally absorbed and demonstrated improvement in behavioral
and cognitive function in patients with mild to moderate Alzheimer's disease.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus. Except as otherwise specified, all information in this
prospectus assumes no exercise of the underwriters' over-allotment option or the
warrants to be issued to the representatives of the underwriters.
This prospectus contains forward-looking statements. The outcome of the
events described in these forward-looking statements is subject to risks and
actual results could differ materially. The sections entitled "Risk Factors,"
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business" contain a discussion of some of the
factors that could contribute to those differences.
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 Disease Phase 1: Four clinical trials completed, one in
(AIT-082) progress and additional studies to be
conducted in 1999
Phase 2: One clinical trial completed, two in
progress and an additional study to be
initiated in 1999
Spinal Cord Injury Clinical trial planned for late 1999
Stroke Preclinical
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AIT-034 Severe Dementia Investigational New Drug Application by early
2000
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AIT-202 Depression; Obesity Preclinical
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AIT-203 Parkinson's Disease Preclinical
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AIT-297 Migraine Preclinical
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</TABLE>
3
<PAGE> 5
We currently do not sell any products and do not expect to have any
products commercially available for at least two years.
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 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
- 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. All references to "we," "our" or "NeoTherapeutics" refer to
NeoTherapeutics, Inc. and its subsidiaries. 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> 6
THE OFFERING
Shares offered by
NeoTherapeutics...............1,000,000 shares
Shares to be outstanding after
the offering..................7,670,273 shares(1)
Use of proceeds...............For clinical and preclinical trials, research and
development, manufacturing and dosage formulation
and general corporate
purposes.
Nasdaq National Market
symbol........................NEOT
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <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 1,788 3,307
General and
administrative............ 221 667 660 2,342 3,123 740 1,097
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss from operations.......... (272) (848) (1,275) (6,850) (11,665) (2,528) (4,404)
Other income (expense)........ (40) (47) 236 688 60 20 (15)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net loss...................... $ (312) $ (895) $ (1,039) $ (6,162) $ (11,605) $ (2,508) $ (4,419)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted loss per
share....................... $ (0.13) $ (0.36) $ (0.32) $ (1.14) $ (2.07) $ (0.46) $ (0.71)
========== ========== ========== ========== ========== ========== ==========
Number of shares used in
computing loss per share.... 2,447,727 2,466,234 3,292,663 5,405,831 5,615,449 5,467,206 6,204,149
========== ========== ========== ========== ========== ========== ==========
<CAPTION>
PERIOD FROM
JUNE 15, 1987
(INCEPTION) THROUGH
MARCH 31, 1999
-------------------
<S> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues from grants.......... $ 497
--------
Operating expenses:
Research and development.... 19,325
General and
administrative............ 9,989
--------
Loss from operations.......... (28,817)
Other income (expense)........ 577
--------
Net loss...................... $(28,240)
========
Basic and diluted loss per
share.......................
Number of shares used in
computing loss per share....
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, 1999
DECEMBER 31, ---------------------
-------------------------------------------------- AS
1994 1995 1996 1997 1998 ACTUAL ADJUSTED(2)
------- ------- ------- ------- ------ ------ -----------
<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 $3,490 $18,490
Property and equipment, net........................ 10 9 133 3,475 3,252 3,340 3,340
Total assets....................................... 18 11 17,979 13,198 6,826 7,291 22,291
Total long-term debt............................... 558 558 -- 177 1,126 974 974
Stockholder's equity (deficit)..................... (1,021) (1,253) 16,622 10,543 3,290 3,609 18,609
</TABLE>
- -------------------------
(1) Based on the number of shares outstanding as of June 1, 1999. Excludes: (a)
3,248,459 shares of common stock issuable upon exercise of warrants
outstanding as of June 1, 1999; (b) 1,110,973 shares of common stock
issuable upon exercise of stock options outstanding as of June 1, 1999; (c)
209,000 shares of common stock underlying warrants that are issuable upon
exercise of certain warrants outstanding as of June 1, 1999; and (d) shares
of common stock issuable upon conversion of outstanding shares of Series A
preferred stock which have an aggregate stated value of $4.0 million as of
June 1, 1999. See "Description of Capital Stock -- Preferred Stock."
(2) Adjusted to reflect the application of (a) the estimated net proceeds of
this offering based upon an assumed public offering price of $13.00 per
share, and (b) the net proceeds from the sale on May 11, 1999 of 400,000
shares of common stock, and warrants to purchase 80,000 shares of common
stock at an exercise price of $15 per share, in a private offering to
accredited investors for aggregate consideration of $4.0 million.
5
<PAGE> 7
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. The
risks described below are not the only ones facing our company. Additional risks
not presently known to us or which we currently consider immaterial may also
adversely affect our company. If any of the following risks actually occur, our
business, financial condition and operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you could lose a part or all of your investment.
WE ARE A DEVELOPMENT STAGE COMPANY AND HAVE A HISTORY OF OPERATING LOSSES; WE
EXPECT CONTINUED LOSSES
We are considered a development stage company because we have not yet
generated revenues from sales. From our inception in 1987 through March 31,
1999, we have incurred cumulative losses of approximately $28.2 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 $4.4 million in the first
quarter ended March 31, 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."
WE ARE IN THE EARLY STAGE OF PRODUCT DEVELOPMENT AND FACE A RISK OF FAILURE
Our proposed products are in an early stage of development. They will
require additional research and development, clinical testing and regulatory
clearances. We 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.
6
<PAGE> 8
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 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 ADDITIONAL FUNDING AND OUR ACCESS TO CAPITAL IS UNCERTAIN
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 $1.5 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 $100 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 the proceeds of this offering,
together with our existing cash and capital resources, will allow us to satisfy
our current and projected funding requirements for at least the next 12 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
7
<PAGE> 9
develop or commercialize our products and could have a material adverse effect
on our business, financial condition and results of operations. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
WE DEPEND ON THIRD PARTIES FOR CLINICAL TESTING, MANUFACTURING AND MARKETING
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."
WE FACE RISKS AND UNCERTAINTIES ASSOCIATED WITH CONDUCTING CLINICAL TRIALS
Extensive and costly clinical testing will be necessary to assess the
safety and efficacy of our potential products. 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
8
<PAGE> 10
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. 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
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
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.
9
<PAGE> 11
If we are delayed or fail to obtain such approvals, our business and
results of operations would be damaged. If we fail to comply with regulatory
requirements, 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."
UNCERTAINTY REGARDING PRICING OF, AND REIMBURSEMENT FOR, PHARMACEUTICALS
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.
WE DEPEND ON KEY PERSONNEL
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
10
<PAGE> 12
personnel, or the inability to attract and retain the additional skilled
personnel required for the expansion of our business, could damage our business.
WE FACE UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
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.
Others 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 FACE INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE
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. 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. 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.
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
11
<PAGE> 13
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 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 more of these goals. See "Business -- Products and
Development" and "-- Competition."
THERE IS A RISK THAT HOLDERS OF OUR SERIES A PREFERRED STOCK COULD ENGAGE IN
SHORT SELLING TO REDUCE THEIR CONVERSION PRICE
As of June 1, 1999, a total of 400 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 such 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
selling stockholders could then convert their Series A preferred stock and use
the shares of common stock received upon conversion to cover their short
position. The selling stockholders could thereby profit by the decline in the
market price of the common stock caused by their short selling.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK
A substantial number of shares of our common stock are eligible for future
sale in the public market. These include shares that are outstanding 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. In addition, if we sell a substantial number of shares of our common
stock in the public market following this offering, or if the public perceives
that we might do so, the market price of our common stock could drop because of
such sales. Sales of shares of our common stock held by our affiliates could
have similar adverse effects on the market price of our common stock. The
issuance of shares of our
12
<PAGE> 14
common stock in the future also could have a material adverse effect on our
ability to raise equity capital. See "Description of Capital Stock" and "Shares
Eligible for Future Sale."
FUTURE EQUITY ISSUANCES MAY DILUTE OUR CURRENT STOCKHOLDERS
If we issue equity securities, such issuances may have a dilutive impact on
our other stockholders. Additionally, such issuances would cause our net income
(loss) per share to decrease in future periods. As a result, the market price of
our common stock could drop. In addition, if we issue common stock under our
private equity line agreement, it will be issued at a discount to its
then-prevailing market price. These discounted sales could cause the market
price of our common stock to drop. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
THERE IS A RISK OF PRODUCT LIABILITY CLAIMS
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. Failure to maintain sufficient insurance coverage
could have a material adverse effect on our business and results of operations.
WE USE HAZARDOUS MATERIALS IN OUR RESEARCH AND DEVELOPMENT EFFORTS
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 STOCK PRICE IS VOLATILE
The stock market from time to time experiences significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These broad market fluctuations may cause the market price of our
common stock to drop. In addition, the market price of our common stock is
highly volatile. Factors that may cause the market price of our common stock to
drop include:
- fluctuations in our results of operations;
- timing and announcements of the results of our clinical trials, our
technological innovations or new products, or those of our competitors;
- FDA and foreign regulatory actions;
13
<PAGE> 15
- 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.
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SUBSTANTIAL PERCENTAGE OF OUR COMMON
STOCK
Our directors and executive officers beneficially own approximately 25.9%
(22.7% after completion of this offering) of our outstanding common stock. 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."
CERTAIN PROVISIONS OF 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."
WE HAVE NEVER PAID DIVIDENDS
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. See "Dividend Policy."
OUR BUSINESS COULD BE ADVERSELY IMPACTED BY YEAR 2000 ISSUES
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 incorrect calculations, faulty data and computer shutdowns,
which would cause disruptions of
14
<PAGE> 16
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),
our 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. Except
for our public utility service vendors, who have indicated that they expect to
be in compliance by mid-1999, we believe that, with respect to the computer
systems of our major outside vendors, should a Year 2000 issue exist whereby a
vendor was unable to address our needs, alternative vendors have been identified
and are readily available that could furnish us with the same or similar
supplies or services that we presently receive from these vendors without undue
cost or expense.
Based on currently available information, we believe that the impact of the
Year 2000 issue, as it relates to our internal operations, information systems
and software applications, will not be material. In the event we fail to 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 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.
15
<PAGE> 17
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. A wholly-owned subsidiary,
Advanced ImmunoTherapeutics, Inc. ("AIT"), was incorporated as a California
corporation in June 1987. In July 1989, in a transaction accounted for as a
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 ("NEOT GmbH"), a wholly-owned subsidiary in
Switzerland, for the purpose of conducting future licensing and other related
activities in the international market. Unless the context otherwise requires,
all references to "NeoTherapeutics," "we," "our" or the "Company" refer to
NeoTherapeutics, Inc., a Delaware corporation, AIT and NEOT GmbH as a
consolidated entity.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds from the sale of the 1,000,000 shares of common stock
offered by us, based on an assumed public offering price of $13.00 per share,
are estimated to be approximately $11.0 million or $12.7 million if the
underwriters' over-allotment option is exercised in full, after deducting
underwriting discounts and commissions, the underwriters' non-accountable
expense allowance, a finder's fee and other estimated expenses of the offering.
The Company anticipates that the net proceeds of this offering will be used
primarily for the following purposes, in approximately the following amounts:
<TABLE>
<S> <C>
- - Efficacy clinical trials for Neotrofin(TM)............. $ 7.0 million
- - Internal research and development...................... 2.0 million
- - General and administrative and other general corporate
purposes............................................... 2.0 million
-------------
Total.................................................. $11.0 million
=============
</TABLE>
The use of proceeds is subject to change based upon many factors. Those
factors include competitive developments, our rate of progress in research and
product development, patient recruitment, the timing of regulatory approvals and
the availability of various methods of financing, our ability to establish and
maintain strategic alliances and licensing arrangements, competing technological
and marketing developments, and the costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and other proprietary
rights. We reserve the right, at the discretion of our Board of Directors, to
reallocate our use of the proceeds of this offering in response to these and
other factors. Pending the use of the net proceeds of the offering, we intend to
invest in investment-grade, interest-bearing marketable securities.
17
<PAGE> 19
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 (through July 20, 1999).................. 15 3/4 12 7/8
</TABLE>
On July 20, 1999, the closing sale price of our common stock as reported by
the Nasdaq National Market was $13.00 per share. As of June 1, 1999, there were
280 holders of record of our common stock and we estimate that there were
approximately 4,000 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.
18
<PAGE> 20
DILUTION
The pro forma net tangible book value of our common stock at March 31,
1999, was approximately $7,589,000, or $1.08 per share, after giving effect to
the issuance of 400,000 shares of our common stock, and warrants to purchase
80,000 shares of common stock at an exercise price of $15 per share, for
aggregate consideration of $4.0 million, less expenses, in a private offering to
accredited investors on May 11, 1999. "Pro forma net tangible book value" per
share represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding, and assumes that
all outstanding shares of Series A preferred stock were converted into common
stock at a conversion price of $11.00 per share. Without taking into account any
other changes in pro forma net tangible book value after March 31, 1999, other
than to give effect to our sale of the 1,000,000 shares offered hereby at an
assumed public offering price of $13.00 per share and after deduction of
estimated offering expenses, our pro forma net tangible book value at March 31,
1999 would have been approximately $18,609,000, or $2.31 per share of common
stock. This represents an immediate increase in the pro forma net tangible book
value of $1.23 per share of common stock to existing stockholders and an
immediate dilution of $10.69 per share to new investors, as illustrated by the
following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $ 13.00
Pro forma net tangible book value per share before this
offering............................................... $ 1.08
Increase per share attributable to new investors.......... 1.23
-------
Pro forma net tangible book value per share after this
offering.................................................. 2.31
-------
Dilution per share to new investors......................... $ 10.69
=======
</TABLE>
The foregoing calculations assume no exercise of outstanding options or
warrants. At June 1, 1999, 3,248,459 shares of common stock were subject to
outstanding warrants at a weighted average exercise price of $11.36 per share
and 1,110,973 shares of common stock were subject to outstanding options at a
weighted average exercise price of $5.84 per share. The foregoing calculations
also do not include warrants to purchase 209,000 shares of common stock at an
exercise price of $11.40 per share which are issuable upon exercise of certain
warrants outstanding as of June 1, 1999. To the extent outstanding options and
warrants are exercised, or the Series A preferred stock is converted into common
stock at a conversion price of less than $11.00 per share, there will be further
dilution to new investors. See "Management -- Stock Option Plans," "Certain
Relationships and Related Transactions," "Description of Capital Stock" and
Notes 9 and 13 of Notes to Consolidated Financial Statements.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999, and
as adjusted to give effect to (a) the sale of 1,000,000 shares of common stock
we are offering hereby at an assumed public offering price of $13.00 per share
and the application of the net proceeds after deducting the underwriting
discounts and commissions, the underwriters' non-accountable expense allowance
and other estimated offering expenses payable by NeoTherapeutics, and (b) the
sale of 400,000 shares of our common stock, and warrants to purchase 80,000
shares of common stock at an exercise price of $15 per share, in a private
offering to accredited investors on May 11, 1999, and the application of the net
proceeds therefrom. This table should be read in conjunction with "Selected
Consolidated Financial Data" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-Term Debt, including current portion and note
payable to related party.............................. $ 2,019 $ 2,019
-------- --------
Stockholders' Equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; issued and outstanding, 400 shares 5%
Series A Preferred Stock with Conversion Features,
liquidation preference $4.0 million................ 3,289 3,289
Common Stock, $.001 par value, 25,000,000 shares
authorized; 6,256,673 shares issued and
outstanding, actual, and 7,656,673 shares issued
and outstanding, as adjusted(1).................... 29,037 44,037
Unrealized gains on available-for-sale securities..... 5 5
Accumulated deficit................................... (28,722) (28,722)
-------- --------
Total stockholders' equity....................... 3,609 18,609
-------- --------
Total capitalization.......................... $ 5,628 $ 20,628
======== ========
</TABLE>
- -------------------------
(1) Excludes: (a) 3,248,459 shares of common stock issuable upon exercise of
warrants outstanding as of June 1, 1999; (b) 1,110,973 shares of common
stock issuable upon exercise of stock options outstanding as of June 1,
1999; (c) 209,000 shares of common stock underlying warrants that are
issuable upon exercise of certain warrants outstanding as of June 1, 1999;
and (d) shares of common stock issuable upon conversion of outstanding
shares of Series A preferred stock which have an aggregate stated value of
$4.0 million as of June 1, 1999. See "Description of Capital Stock --
Preferred Stock."
20
<PAGE> 22
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 three months ended March 31, 1998 and 1999, and for
the period from June 15, 1987 (inception) through March 31, 1999, and the
selected consolidated balance sheet data as of March 31, 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>
PERIOD
FROM
JUNE 15,
1987
THREE MONTHS (INCEPTION)
YEAR ENDED DECEMBER 31, ENDED MARCH 31, THROUGH
-------------------------------------------------------------- ----------------------- MARCH 31,
1994 1995 1996 1997 1998 1998 1999 1999
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENT OF
OPERATIONS DATA:
Revenues from
grants............. $ 236 $ 125 $ -- $ -- $ -- $ -- $ -- $ 497
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Operating expenses:
Research and
development...... 287 306 615 4,508 8,542 1,788 3,307 19,325
General and
administrative... 221 667 660 2,342 3,123 740 1,097 9,989
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Loss from
operations......... (272) (848) (1,275) (6,850) (11,665) (2,528) (4,404) (28,817)
Other income
(expense).......... (40) (47) 236 688 60 20 (15) 577
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
Net loss............. $ (312) $ (895) $ (1,039) $ (6,162) $ (11,605) $ (2,508) $ (4,419) $(28,240)
========== ========== ========== ========== ========== ========== ========== ========
Basic and diluted
loss per share..... $ (0.13) $ (0.36) $ (0.32) $ (1.14) $ (2.07) $ (0.46) $ (0.71)
========== ========== ========== ========== ========== ========== ==========
Number of shares used
in computing loss
per share.......... 2,447,727 2,466,234 3,292,663 5,405,831 5,615,449 5,467,206 6,204,149
========== ========== ========== ========== ========== ========== ==========
</TABLE>
21
<PAGE> 23
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31, 1999
---------------------------------------------- -----------------------
1994 1995 1996 1997 1998 ACTUAL AS ADJUSTED(1)
------- ------- ------- ------- ------ ------ --------------
(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 $3,490 $18,490
Property and equipment, net... 10 9 133 3,475 3,252 3,340 3,340
Total assets.................. 18 11 17,979 13,198 6,826 7,291 22,291
Total long-term debt.......... 558 558 -- 177 1,126 974 974
Stockholder's equity
(deficit)................... (1,021) (1,253) 16,622 10,543 3,290 3,609 18,609
</TABLE>
- -------------------------
(1) Adjusted to give effect to the application of the net proceeds from our sale
on May 11, 1999 of 400,000 shares of common stock, and warrants to purchase
80,000 shares of common stock at an exercise price of $15.00 per share, for
aggregate consideration of $4.0 million, and the estimated net proceeds of
this offering based upon an assumed public offering price of $13.00 per
share.
22
<PAGE> 24
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 March 31, 1999, we devoted our
resources primarily to fund research and development, and incurred a cumulative
net loss of approximately $28.2 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.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
There were no revenues during the three months ended March 31, 1999 or the
three months ended March 31, 1998.
Research and development expenses for the three months ended March 31, 1999
increased approximately $1,519,000 or 85% 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 $356,000 or 48%
from the same period in 1998 due primarily to a non-cash compensation charge of
approximately $204,000 attributed to the waiver of certain rights of first
refusal in connection with the raising of equity capital, professional fees and
investor and public relations fees. 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
23
<PAGE> 25
and marketing activities should we successfully bring one or more of our
products to market. Net interest expense increased by approximately $44,000 due
to the use of invested funds in operations and increased interest expense on
borrowings. We expect our net interest expense to continue to increase due to
the use of our funds in current operations and borrowings.
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.
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<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
From inception through March 31, 1999, we financed our operations primarily
through government grants, sales of 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.
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 March 31, 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 March 31, 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 was sold on January 29, 1999, and for an initial
period of 120 days is convertible into common stock at a fixed price of $13.06
per share. Thereafter, the preferred stock is convertible at the lesser of the
fixed price or at a variable rate of 101% of the average market price for the 10
lowest of the 30 trading days immediately preceding the conversion date. In no
event can the first tranche be converted into more than 1,450,000 shares. The
second tranche of $2.0 million, which is at our option, can be sold during the
period of July 28, 1999 through September 16, 1999, subject to our satisfying
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 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 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.
At March 31, 1999, our current assets exceeded our current liabilities by
approximately $1.2 million, which included cash and cash equivalents of
approximately $0.4 million and marketable securities and short-term investments
of approximately $3.1 million.
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<PAGE> 27
Through March 31, 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.
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 $1.3 million has been
expended through March 31, 1999.
As of March 31, 1999, we have committed, on a non-binding basis, to provide
a total of approximately $650,000 through the year 2000 for scientific research
grants and fellowships to a number of universities and not-for-profit research
organizations.
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 $28.2 million through March 31,
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. While we
believe that the proceeds from this offering, together with our existing capital
resources, will be adequate to fund our capital needs for at least 12 months of
operations, we also believe that ultimately we will require substantial
additional funds in order to complete the research and development activities
currently contemplated and to commercialize our proposed products. If we are
successful in obtaining additional funding, our existing stockholders could
experience substantial dilution to their shares of stock.
Without additional funding, we may be required to delay, reduce the scope
of or eliminate one or more of our research and development projects, or obtain
funds through arrangements with collaborative partners or others which may
require us to relinquish rights to certain technologies, product candidates or
products that we would otherwise seek to develop or commercialize on our own,
and which could be on terms unfavorable to us.
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<PAGE> 28
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 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 expect to be in compliance by mid-1999, we
believe that, with respect to the computer systems of our major outside vendors,
should a Year 2000 issue exist whereby a vendor was unable to address our needs,
alternative vendors have been identified and are readily available that could
furnish us with the same or similar supplies or services that we presently
receive from these vendors without undue cost or expense.
Based on currently available information, we believe that the impact of the
Year 2000 issue, as it relates to our 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
27
<PAGE> 29
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 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.
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<PAGE> 30
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 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. 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 a fifth
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<PAGE> 31
Phase 1 clinical trial is in progress. In addition, we have completed one Phase
2 clinical trial and two additional Phase 2 clinical trials are in progress.
INTRODUCTION TO THE CENTRAL NERVOUS SYSTEM
The human brain contains some 10 billion nerve cells, or neurons, each of
which has connections with many other neurons. Sensory, motor and cognitive
activities are all governed by this complex network of neurons, each member of
which communicates with other neurons across junctions known as "synapses."
Communication between neurons involves chemical "messengers" known as
neurotransmitters, which are 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.
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<PAGE> 32
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 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.
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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>
<S> <C> <C>
- --------------------------------------------------------------------------------
PRODUCT POSSIBLE INDICATIONS DEVELOPMENT STATUS
- --------------------------------------------------------------------------------
Alzheimer's Disease Phase 1: Four clinical trials completed,
Neotrofin(TM) one in progress and additional
studies to (AIT-082) be conducted
in 1999
Phase 2: One clinical trial completed, two
in progress and an additional study
to be initiated in 1999
Spinal Cord Injury Clinical trial planned for late 1999
Stroke Preclinical
- --------------------------------------------------------------------------------
AIT-034 Severe Dementia Investigational New Drug Application by
early 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.
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.
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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.
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 performance. In the first quarter of 1999, we initiated a larger
Phase 2 clinical trial (90 days of dosing) in Canada, Australia and the Republic
of South Africa. One additional Phase 2 clinical trial has been initiated in the
United States to study the effects of Neotrofin(TM) in the brain using PET scan
technology (Positron Emission Tomography). 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."
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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 by early 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.
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
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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.
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
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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 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.
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, and approved by, the FDA. Domestic manufacturing
establishments are subject to regular inspections by the FDA and must comply
with Good Manufacturing Practices ("GMP"). To supply products for use in the
United States, foreign manufacturers must also comply with GMP and pass periodic
inspection by the FDA and by their countries' regulatory authorities.
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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 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.
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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 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).
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
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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 $3,307,432 for the three
months ended March 31, 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.
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.
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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 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
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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
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our compounds. In the event that one or more of these programs are successful,
the market for our products could be reduced or eliminated.
We expect technological developments in the 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 June 1, 1999, we had 35 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
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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.
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.
43
<PAGE> 45
MANAGEMENT
The following table sets forth certain information as of June 1, 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. ............. 65 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. .............. 74 Director
Carol O'Cleireacain, Ph.D........... 52 Director
Joseph Rubinfeld, Ph.D. ............ 66 Director
Paul H. Silverman, Ph.D., D.Sc. .... 74 Director
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
Alvin J. Glasky, Ph.D., has been Chief Executive Officer, President, 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 biochemi-
44
<PAGE> 46
cals, pharmaceuticals, and biotechnology products since January 1992. Mr.
Runnels has also held positions as Vice President -- Sales and Marketing for
Irvine Scientific, and Vice President, International Operations for Gamma
Biologicals, a manufacturer of immunological reagents. Mr. Runnels is certified
by the American Society of Clinical Pathologists as a specialist in
Immunohematology, and was an instructor of Clinical Immunology at Arizona State
University. Mr. Runnels obtained a B.S. in Cell Biology from the University of
Arizona.
Michelle S. Glasky, Ph.D. joined NeoTherapeutics as Director of Scientific
Affairs in July 1996 and was promoted to Vice President, Scientific Affairs in
June 1997. Prior to joining NeoTherapeutics, Dr. M. Glasky was employed in the
Department of Pathology, University of Southern California School of Medicine,
as a Research Associate and Laboratory Administrator from February 1991 until
July 1996. Dr. M. Glasky served as a consultant to the Company from August 1990
to July 1996. Dr. M. Glasky holds a non-salaried research associate position at
the University of California, Irvine. Dr. M. Glasky received a B.A. degree in
Microbiology from the University of California, San Diego in 1981, and a Ph.D.
degree in Biomedical Sciences from the University of Texas Health Science
Center, Houston, in 1988. Dr. M. Glasky completed a post-doctoral fellowship at
Stanford University School of Medicine.
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.
45
<PAGE> 47
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, 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
46
<PAGE> 48
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.
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
47
<PAGE> 49
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."
48
<PAGE> 50
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 $450 per month.
(3) Commenced employment in April 1997.
(4) Represents a one-time relocation allowance.
(5) Commenced employment in July 1996.
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<PAGE> 51
OPTION GRANTS
The following table sets forth information concerning stock options granted
during the fiscal year ended December 31, 1998, to the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE VALUE AT ASSUMED
NUMBER OF OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(1) FISCAL YEAR ($/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.
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<PAGE> 52
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.
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<PAGE> 53
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 persons whose
participation in the 1991 Plan is determined to be in our best interest. As of
June 1, 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 June 1, 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).
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<PAGE> 54
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.
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.
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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.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 1, 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>
PERCENT OF
SHARES
OUTSTANDING
-------------------
SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNERS(1) BENEFICIALLY OWNED OFFERING OFFERING
---------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Alvin J. Glasky, Ph.D.(2)........................ 1,468,872 21.3% 18.6%
157 Technology Drive
Irvine, California 92618
Samuel Gulko(3).................................. 47,900 * *
Stephen Runnels(4)............................... 49,500 * *
Michelle S. Glasky, Ph.D.(5)(6).................. 35,980 * *
Mark J. Glasky(7)................................ 45,979 * *
Frank M. Meeks(8)................................ 57,960 * *
Eric L. Nelson, Ph.D.(9)......................... 54,000 * *
Carol O'Cleireacain, Ph.D.(10)................... 37,500 * *
Joseph Rubinfeld, Ph.D.(11)...................... 7,500 * *
Paul H. Silverman, Ph.D., D.Sc.(10).............. 37,500 * *
All executive officers and directors as a group
(10 persons)(12)............................... 1,842,691 25.9% 22.7%
</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 June 1, 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
120,000 shares subject to options held by Dr. Glasky which are currently
exercisable or exercisable within 60 days of June 1, 1999. Also includes
47,243 shares owned by Dr. Glasky's wife, Rosalie H. Glasky, and 16,500
shares subject to options held by Rosalie H. Glasky. Does not include
45,979 shares beneficially owned by Mark J. Glasky and 35,980 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."
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<PAGE> 57
(3) Includes 34,500 shares subject to options held by Mr. Gulko which are
currently exercisable or exercisable within 60 days of June 1, 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 37,500 shares subject to options held by Mr. Runnels which are
currently exercisable or exercisable within 60 days of June 1, 1999.
(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 28,500 shares subject to options held by Dr. Michelle S. Glasky
which are currently exercisable or exercisable within 60 days of June 1,
1999, and 500 shares subject to currently exercisable warrants.
(7) Includes 27,500 shares subject to options held by Mr. Glasky which are
currently exercisable or exercisable within 60 days of June 1, 1999, and
1,000 shares subject to currently exercisable warrants.
(8) Includes 27,500 shares subject to options held by Mr. Meeks which are
currently exercisable or exercisable within 60 days of June 1, 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 7,500 shares subject to options held by Dr. Nelson which are
currently exercisable or exercisable within 60 days of June 1, 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 27,500 shares subject to options held by each of Drs.
O'Cleireacain and Silverman which are currently exercisable or exercisable
within 60 days of June 1, 1999.
(11) Represents 7,500 shares subject to options held by Dr. Rubinfeld which are
currently exercisable or exercisable within 60 days of June 1, 1999.
(12) Includes 90,723 shares issuable upon the exercise of outstanding warrants,
and 362,000 shares subject to options which are currently exercisable or
exercisable within 60 days of June 1, 1999.
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<PAGE> 58
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
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<PAGE> 59
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."
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 August 28, 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.
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<PAGE> 60
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.
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<PAGE> 61
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. Under the agreement, we
have the option to sell 200 shares of preferred stock, to be designated as "5%
Series B Preferred Stock with Conversion Features," to the same investors for
total cash consideration of $2.0 million during the period commencing July 28,
1999 and ending September 16, 1999, subject to certain conditions contained in
the agreement and the Certificate of Designation governing the Series A
preferred stock.
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. Series A preferred stock that was not converted as of April 29, 1999
may be converted in 25% cumulative monthly increments. 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.
Series B Preferred Stock. Pursuant to the agreement with the Series A
preferred stock investors, commencing July 28, 1999 and ending September 16,
1999, we have the right to sell 200 shares of Series B preferred stock to the
investors for total cash consideration of $2.0 million. The Series B preferred
stock shall have rights, preferences and privileges substantially identical to,
and shall rank on par with, the Series A preferred stock, except that the fixed
conversion price of the Series B Preferred Stock will be set at 125% of the
average market value of the common stock for the 15 trading days preceding the
date of the issuance of the Series B preferred stock.
Effect on Holders of Common Stock. The issuance of common stock upon the
conversion of the Series A preferred stock and Series B preferred stock (if
issued) 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 and Series B preferred stock (if issued) will be entitled to
receive dividends and distributions upon a liquidation of NeoTherapeutics in
preference to claims of holders of the common stock.
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The exact number of shares of common stock issuable upon conversion of the
Series A preferred stock and Series B preferred stock (if issued), 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 and Series B preferred stock
(if issued), whether we elect to accrue dividends on the Series A preferred
stock and Series B preferred stock (if issued) 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.
The Board of Directors has the authority to issue up to five million shares
of Preferred Stock, of which 400 shares of Series A preferred stock have been
issued, and to determine the rights, preferences and privileges of such stock.
See "Description of Capital Stock - Preferred Stock." In addition, 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 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 2,741,000 Public Warrants outstanding as
of June 1, 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
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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 41,000 have been exercised as of June 1, 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
Warrants issued to the Representatives of the Underwriters of this offering
grant holders a one-time demand registration at the Company's expense, and
piggyback registration rights. The holders of such warrants are entitled to
demand registration of the shares of common stock issuable upon exercise of the
warrants at any time beginning 12 months after the closing of this offering, for
as long as the warrants are exercisable.
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.
In the event we issue shares of Series B preferred stock, we have equivalent
registration obligations as to shares of common stock issuable upon conversion
of such shares of Series B preferred stock.
Pursuant to a Registration Rights Agreement which we entered into with the
investor in connection with our Equity Line Agreement, we are required to keep
current a registration statement in order to permit the investor to resell to
the public any shares of our common stock that we sell to the investor pursuant
to the Equity Line Agreement, as well as shares that the investor may acquire
upon exercise of its warrant. For a description of the Equity Line Agreement and
the warrant, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
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.
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.
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<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering and assuming no exercise of outstanding
options and warrants to purchase common stock or conversion of shares of Series
A Preferred Stock after June 1, 1999, we will have 7,670,273 shares of common
stock outstanding (7,820,273 shares if the over-allotment option is exercised in
full). Of these shares, approximately 5,873,105 shares of common stock,
including all of the shares of common stock sold in this offering, plus any
shares sold as a result of the Underwriters' exercise of the over-allotment
option, will be freely tradable without restriction under the Securities Act.
The remaining approximately 1,797,168 shares of outstanding common stock
held by existing stockholders are "restricted securities" under Rule 144 under
the Securities Act or are subject to "lock-up" agreements. Of this amount,
400,000 shares will be eligible for resale pursuant to Rule 144 as of May 11,
2000, and 1,397,168 shares will be subject to "lock-up" agreements as described
below. "Restricted securities" as defined under Rule 144 were issued and sold by
NeoTherapeutics in reliance on exemptions from the registration requirements of
the Securities Act. These shares may be sold in the public market only if
registered or pursuant to an exemption from registration, such as Rule 144 under
the Securities Act.
All of the officers and directors have agreed, pursuant to "lock-up"
agreements, that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of the shares of common stock owned by them or
that could be purchased by them through the exercise of options to purchase
common stock of NeoTherapeutics, for 6 months following the date of this
prospectus. The lock-up agreements contain exceptions upon the prior written
consent of Joseph Charles & Assoc., Inc., and for intra-family transfers and
transfers to trusts for estate planning purposes. In addition, certain
employees, consultants, directors and attorneys who are issued options prior to
the date of this prospectus also will be required to enter into such lock-up
agreements. Upon the expiration of the lock-up agreements, approximately
1,397,168 shares of common stock held by such stockholders will be eligible for
resale immediately pursuant to Rule 144. However, Dr. Alvin J. Glasky may sell
up to 200,000 currently issued and outstanding shares pursuant to Rule 144,
during the lock-up period but commencing 90 days after date of this prospectus.
Under Rule 144 as currently in effect, a person (or persons whose shares
are aggregated) who has beneficially owned restricted securities for at least
one year, including persons who may be deemed affiliates of NeoTherapeutics,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of: (i) one percent of the number of shares of
common stock then outstanding (equal to approximately 76,700 shares upon
completion of this offering); or (ii) the average weekly trading volume of the
common stock as reported through the Nasdaq National Market during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been an affiliate of
NeoTherapeutics at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
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We have filed a registration statement which allows the holders of our
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 to purchase 75,000 shares of common stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital
Stock -- Preferred Stock; -- Registration Rights." All of the shares of common
stock issuable upon conversion of the Series A preferred stock and all of the
shares of common stock issuable upon exercise of the warrants will be freely
tradable without restriction as long as we keep the registration statement
effective, which we are required to do.
Pursuant to our Equity Line Agreement, we are required to keep a current
registration statement effective in order to permit the investor to resell to
the public the shares issuable upon exercise of warrants to purchase 25,000
shares of common stock, and any shares of common stock that we sell to the
investor pursuant to the terms of the Equity Line Agreement. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of Capital
Stock -- Registration Rights." All of the shares of common stock sold to the
investor pursuant to the Equity Line Agreement and all of the shares of common
stock issuable upon exercise of the warrants will be freely tradable without
restriction as long as we keep the registration statement effective.
We have filed previously and in the future intend to file registration
statements on Form S-8 under the Securities Act to register all shares of common
stock subject to outstanding stock options and common stock issued or issuable
pursuant to our 1991 Stock Incentive Plan and 1997 Stock Incentive Plan. The
number of shares of common stock authorized for issuance under the 1997 Stock
Incentive Plan, as amended, is 1,250,000, and the number of shares authorized
for issuance under the 1991 Stock Incentive Plan is 401,430. On June 1, 1999,
there were options outstanding under the 1991 and 1997 Plans to purchase a total
of 787,800 shares of common stock. Accordingly, shares issuable upon exercise of
these options may be resold in the public market by non-affiliates without
restriction, and by affiliates subject to Rule 144 volume limitations, except to
the extent that such shares are subject to the contractual lock-up restrictions
described above. See "Management -- Stock Option Plans." In addition, there were
options outstanding on June 1, 1999, that were not granted under either the 1991
or 1997 Plan, to purchase a total of 323,173 shares of common stock.
In addition to the shares of common stock currently outstanding, 2,741,000
shares of common stock were reserved for issuance subject to exercise of the
Public Warrants as of June 1, 1999. An additional 418,000 shares were subject to
issuance upon exercise of the Unit Warrants as of June 1, 1999. See "Description
of Capital Stock." All of the shares of common stock subject to issuance on
exercise of these warrants are registered and therefore would be freely tradable
without restriction, except that any such shares held by an affiliate of
NeoTherapeutics will be subject to the resale limitations of Rule 144 described
above.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS FOR
NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock by a
beneficial owner thereof that is a "Non-U.S. Holder." A "Non-U.S. Holder" is a
person or entity that, for U.S. federal income tax purposes, is a non-resident
alien individual, a foreign corporation, a foreign partnership, or a foreign
estate or trust.
64
<PAGE> 66
This discussion is based on the Internal Revenue Code of 1986, as amended
(the "Code"), and administrative interpretations as of the date hereof, all of
which are subject to change, including changes with retroactive effect. This
discussion does not address all aspects of U.S. federal income and estate
taxation that may be relevant to Non-U.S. Holders in light of their particular
circumstances and does not address any tax consequences arising under the laws
of any state, local or foreign jurisdiction. Prospective holders should consult
their tax advisors with respect to the particular tax consequences to them of
owning and disposing of common stock, including the consequences under the laws
of any state, local or foreign jurisdiction.
DIVIDENDS
Subject to the discussion below, dividends paid to a Non-U.S. Holder of
common stock generally will be subject to withholding tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. For purposes
of determining whether tax is to be withheld at a 30% rate or at a reduced rate
as specified by an income tax treaty, NeoTherapeutics ordinarily will presume
that dividends paid on or before December 31, 1999 to an address in a foreign
country are paid to a resident of such country absent knowledge that such
presumption is not warranted.
Under recently finalized United States Treasury Regulations, which are
applicable to dividends paid after December 31, 1999 (the "New Regulations"), to
obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder will
generally be required to provide certain forms certifying such Non-U.S. Holder's
entitlement to benefits under a treaty. The New Regulations also provide special
rules to determine whether, for purposes of determining the applicability of a
tax treaty, dividends paid to a Non-U.S. Holder that is an entity should be
treated as paid to the entity or those holding an interest in that entity.
There will be no withholding tax on dividends paid to a Non-U.S. Holder
that are effectively connected with the Non-U.S. Holder's conduct of a trade or
business within the United States if certain forms are properly filed stating
that the dividends are so connected. Instead, the effectively connected
dividends will be subject to regular U.S. income tax in the same manner as if
the Non-U.S. Holder were a U.S. resident. A non-U.S. corporation receiving
effectively connected dividends may also be subject to an additional "branch
profits tax" that is imposed, under certain circumstances, at a rate of 30% (or
such lower rate as may be specified by an applicable treaty) of the non-U.S.
corporation's effectively connected earnings and profits, subject to certain
adjustments.
Generally, NeoTherapeutics must report to the U.S. Internal Revenue Service
the amount of dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or certain other agreements, the U.S. Internal Revenue
Service may make its reports available to tax authorities in the recipient's
country of residence.
Dividends paid to a Non-U.S. Holder at an address within the United States
may be subject to backup withholding imposed at a rate of 31% if the Non-U.S.
Holder fails to establish that it is entitled to an exemption or to provide a
correct taxpayer identification number and certain other information.
Under current United States federal income tax law, backup withholding
imposed at a rate of 31% generally will not apply to dividends paid on or before
December 31, 1999 to a Non-U.S. Holder at an address outside the United States
(unless the payer has knowledge that the payee is a U.S. Person). Under the New
Regulations, however, a Non-U.S. Holder will be subject to backup withholding
unless applicable certification requirements are met.
65
<PAGE> 67
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain realized on a sale or other disposition of common stock
unless (i) the gain is effectively connected with a trade or business of such
holder in the United States, (ii) in the case of certain Non-U.S. Holders who
are non-resident alien individuals and hold the common stock as a capital asset,
such individuals are present in the United States for 183 or more days in the
taxable year of the disposition, (iii) the Non-U.S. Holder is subject to a tax
pursuant to the provisions of the Code regarding the taxation of U.S.
expatriates, or (iv) NeoTherapeutics is or has been a "U.S. real property
holding corporation" within the meaning of Section 897(c)(2) of the Code at any
time within the shorter of the five-year period preceding such disposition or
such holder's holding period. NeoTherapeutics is not, and does not anticipate
becoming, a U.S. real property holding corporation.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING ON DISPOSITION OF
COMMON STOCK
Under current United States federal income tax law, information reporting
and backup withholding imposed at a rate of 31% will apply to the proceeds of a
disposition of common stock effected by or through a U.S. office of a broker
unless the disposing holder certifies as to its non-U.S. status or otherwise
establishes an exemption. Generally, U.S. information reporting and backup
withholding will not apply to a payment of disposition proceeds where the
transaction is effected outside the United States through a non-U.S. office of a
non-U.S. broker. However, U.S. information reporting requirements (but not
backup withholding) will apply to a payment of disposition proceeds where the
transaction is effected outside the United States by or through an office
outside the United States of a broker that is either (i) a U.S. person, (ii) a
foreign person which derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States, (iii) a
"controlled foreign corporation" for U.S. federal income tax purposes or (iv) in
the case of payments made after December 31, 1999, a foreign partnership with
certain connections to the United States, unless such broker has documentary
evidence in its files of the holder's non-U.S. status and has no actual
knowledge to the contrary or unless the holder establishes an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the U.S.
Internal Revenue Service.
FEDERAL ESTATE TAX
An individual Non-U.S. Holder who is treated as the owner of, or has made
certain lifetime transfers of, an interest in the common stock will be required
to include the value thereof in his gross estate for U.S. federal estate tax
purposes, and may be subject to U.S. federal estate tax unless an applicable
estate tax treaty provides otherwise.
66
<PAGE> 68
UNDERWRITING
Under the terms and subject to the conditions of the underwriting agreement
(the "Underwriting Agreement") between the Company and the several underwriters
(the "Underwriters"), we have agreed to sell to the Underwriters named below,
for whom Joseph Charles & Assoc., Inc. and Millennium Financial Group, Inc. are
acting as Representatives, and the Underwriters have agreed severally to
purchase from us the number of shares set forth opposite their respective names:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Joseph Charles & Assoc., Inc................................
Millennium Financial Group, Inc.............................
..................................................
---------
Total............................................. 1,000,000
=========
</TABLE>
The shares of common stock are being sold on a firm commitment basis. The
Underwriting Agreement provides, however, that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriters are
committed to purchase all of the shares offered hereby, if any are purchased.
The Representatives have informed us that it does not expect sales of any shares
to be made to any account over which the Underwriters have discretionary
authority.
Millennium Financial Group, Inc. anticipates that a significant portion or
all of the shares of common stock to be underwritten by it will be sold in
Europe, primarily to institutional investors.
The Representatives have advised us that the Underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus and to selected dealers at that
price less a concession of not more than $ per share. The Underwriters may
allow, and such dealers may re-allow, a concession of not more than $ per
share on sales to certain other dealers. After the public offering of the
shares, the price to the public of the shares may be changed.
We have granted the Representatives an over-allotment option, exercisable
during the 45-day period following the date of this prospectus, to purchase up
to 150,000 additional shares of common stock at the public offering price less
the underwriting discounts and commissions. The Representatives may exercise
such option only for the purpose of covering any over-allotments incurred in
connection with the sale of the shares offered hereby.
We have agreed to indemnify the Underwriters against certain liabilities,
losses and expenses, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
We have agreed to pay the Representatives a non-accountable expense
allowance of 3% of the gross proceeds from the sale of the shares of common
stock by us including shares of common stock subject to the over-allotment
option, against which $50,000 has heretofore been paid. In addition to the
Underwriters' discounts and commissions and the non-accountable expense
allowance, we are required to pay the costs of qualifying the shares of common
stock under federal and state securities laws, together with legal and
accounting fees, printing, road show and other costs in connection with the
offering.
67
<PAGE> 69
We have agreed to retain Joseph Charles & Assoc., Inc. as a financial
consultant for a period of 18 months from the date of this prospectus for a fee
of $4,000 per month which shall be paid in full at the closing of the offering.
The following table summarizes the compensation we will pay to the
Underwriters and other fees and expenses payable by us.
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
-------------------- --------------------
PER SHARE TOTAL PER SHARE TOTAL
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Underwriters' Discounts and
Commissions............................ $ $ $ $
Non-Accountable Expense Allowance Payable
to the Representatives................. $ $ $ $
Consulting Fee Payable to Joseph Charles
& Assoc., Inc.......................... $0.01 $ 72,000 $0.01 $ 72,000
Finder's Fee(1).......................... $ $ $ $
</TABLE>
- -------------------------
(1) A finder's fee in an amount equal to 1% of the gross proceeds received by
NeoTherapeutics from the sale of the shares offered hereby, not to exceed a
fee of $150,000, is payable by NeoTherapeutics to Roccus Capital Partners,
LLC, pursuant to an existing agreement with NeoTherapeutics.
At the closing of this offering, we will sell and deliver to the
Representatives for an aggregate purchase price of $100.00, warrants to purchase
100,000 shares of common stock (the "Representatives' Warrants"). The
Representatives' Warrants are exercisable beginning one year after the effective
date of the registration of the shares offered pursuant to this prospectus, for
a period of four years, at a price equal to 165% of the public offering price of
the shares sold hereunder.
The Representatives' Warrants will contain anti-dilution provisions for
stock splits, stock dividends, combinations and reorganizations, a one-time
demand registration provision (at our expense) and piggy-back registration
rights (which will expire five years from the date of this prospectus). See
"Description of Capital Stock -- Registration Rights." The Representatives'
Warrants will be exercisable during the four (4) year period commencing one (1)
year after the date of this Prospectus. To the extent that the Representatives'
Warrants are exercised, dilution of the interests of our shareholders will
occur. Further, the terms on which we will be able to obtain additional equity
capital may be adversely affected, since the holders of the Representatives'
Warrants can be expected to exercise them at any time when we would, in all
likelihood, be able to obtain any needed capital on terms more favorable to us
than those provided in the Representatives' Warrants. Any profit realized by the
Representatives on the sale of the Representatives' Warrants or the underlying
shares of common stock may be deemed additional underwriting compensation.
Except in connection with acquisitions, pursuant to our private equity line
agreement with a private investor, upon conversion of our Series A preferred
stock, strategic partnership transactions or pursuant to the exercise of
warrants and options outstanding as of the date of this prospectus we have
agreed, for a period of six months from the closing of this offering, that we
will not issue, sell or purchase any shares of our common stock or
68
<PAGE> 70
preferred stock or issue warrants or options or other equity securities of
NeoTherapeutics without the prior written consent of Joseph Charles & Assoc.,
Inc. In addition, the officers and directors, and employees, consultants and
attorneys who are issued options after March 23, 1999 and prior to the date of
this prospectus, have agreed that they will enter into a lock-up agreement with
the Representatives pursuant to which they will agree not to offer, sell,
contract to sell, transfer, assign, contract to assign, gift, grant any option
or warrant to purchase, or right to acquire, announce an intention to sell,
pledge, exchange, contract to exchange or otherwise dispose of or contract to
dispose of, directly or indirectly, any shares of our common stock or other of
our securities owned by them for a period of at least 6 months from the closing
of this offering without the prior written consent of Joseph Charles & Assoc.,
Inc. except for transfers among existing stockholders and gifts to their
children or trusts for their children provided such persons agree to be bound by
a lock-up agreement. However, Dr. Alvin J. Glasky may sell up to 200,000
currently issued and outstanding shares pursuant to Rule 144, during the lock-up
period but commencing 90 days after date of this prospectus. Joseph Charles &
Assoc., Inc. may, in its discretion, and without notice to the public, waive
such restrictions and permit holders otherwise agreeing to restrict their shares
to sell any or all of their shares. See "Shares Eligible for Future Sale."
Certain persons participating in the offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the common stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchases, for the purpose of pegging, fixing or
maintaining the price of the common stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the
Representatives to reclaim a selling concession from a syndicate member in
connection with the offering when common stock sold by the syndicate member are
purchased in syndicate covering transactions. Such transactions may be effected
on the Nasdaq National Market system, in the over-the counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.
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. Certain legal matters in
connection with this offering will be passed upon for the Representatives by De
Martino Finkelstein Rosen & Virga, Washington, D.C. Stradling Yocca Carlson &
Rauth owns 12,500 shares of NeoTherapeutics' common stock and warrants to
purchase 25,000 shares of 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 NeoTherapeutics common stock and warrants to purchase
3,000 shares of common stock at an exercise price of $11.40 per share.
69
<PAGE> 71
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.
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 offered
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 files 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.
70
<PAGE> 72
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> 73
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> 74
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1997 1998 1999
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 6,063,347 $ 1,097,341 $ 398,400
Restricted cash........................................... 935,000 -- --
Marketable securities and short-term investments.......... 2,133,375 1,769,348 3,091,483
Other receivables, principally investment interest........ 221,829 112,552 154,162
Advance deposit to clinical trial vendor.................. -- 265,727 --
Prepaid expenses and refundable deposits.................. 127,259 157,495 242,474
----------- ------------ ------------
Total current assets............................. 9,480,810 3,402,463 3,886,519
----------- ------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Equipment................................................. 1,952,262 2,197,253 2,403,609
Leasehold improvements.................................... 1,803,000 1,794,794 1,799,270
Accumulated depreciation and amortization................. (279,913) (740,413) (862,838)
----------- ------------ ------------
Property and equipment, net............................. 3,475,349 3,251,634 3,340,041
----------- ------------ ------------
OTHER ASSETS -- Prepaid expenses and deposits............... 242,314 172,066 64,420
----------- ------------ ------------
$13,198,473 $ 6,826,163 $ 7,290,980
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit............................................ $ 850,000 $ -- $ --
Accounts payable and accrued expenses..................... 975,339 1,278,954 1,521,820
Accrued payroll and related taxes......................... -- 81,370 88,110
Note payable to related party............................. 558,304 558,304 558,304
Current portion of long-term debt......................... 94,886 445,297 486,841
----------- ------------ ------------
Total current liabilities........................ 2,478,529 2,363,925 2,655,075
----------- ------------ ------------
LONG TERM DEBT, net of current portion...................... 176,549 1,126,174 973,559
DEFERRED RENT............................................... -- 46,308 53,511
----------- ------------ ------------
Total liabilities................................ 2,655,078 3,536,407 3,682,145
----------- ------------ ------------
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, 400 shares 5% Series A Preferred Stock with
Conversion Features at March 31, 1999, liquidation
preference $4.0 million............................ -- -- 3,288,611
Common Stock, par value $0.001 per share, 25,000,000
shares authorized:
Issued and outstanding, 5,465,807, 6,146,854, and
6,256,673 shares, respectively..................... 23,188,363 27,535,329 29,036,684
Unrealized gains on available-for-sale securities......... 20,256 24,207 5,343
Deficit accumulated during the development stage.......... (12,665,224) (24,269,780) (28,721,803)
----------- ------------ ------------
Total stockholders' equity....................... 10,543,395 3,289,756 3,608,835
----------- ------------ ------------
$13,198,473 $ 6,826,163 $ 7,290,980
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 75
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED JUNE 15, 1987
YEAR ENDED DECEMBER 31, MARCH 31, (INCEPTION)
---------------------------------------- ------------------------- THROUGH
1996 1997 1998 1998 1999 MARCH 31, 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 1,787,962 3,307,432 19,324,533
General and
administrative............ 659,895 2,341,276 3,122,506 740,289 1,096,435 9,989,323
----------- ----------- ------------ ----------- ----------- ------------
1,275,380 6,849,531 11,664,540 2,528,251 4,403,867 29,313,856
----------- ----------- ------------ ----------- ----------- ------------
LOSS FROM OPERATIONS.......... (1,275,380) (6,849,531) (11,664,540) (2,528,251) (4,403,867) (28,816,728)
----------- ----------- ------------ ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income........... 268,231 746,008 235,265 28,771 46,285 1,303,502
Interest expense.......... (51,769) (56,419) (156,016) -- (61,016) (753,587)
Other income (expense).... 20,043 (1,599) (19,265) (8,811) -- 27,435
----------- ----------- ------------ ----------- ----------- ------------
Total other income
(expense)............ 236,505 687,990 59,984 19,960 (14,731) 577,350
----------- ----------- ------------ ----------- ----------- ------------
NET LOSS................ $(1,038,875) $(6,161,541) $(11,604,556) $(2,508,291) $(4,418,598) $(28,239,378)
=========== =========== ============ =========== =========== ============
BASIC AND DILUTED LOSS PER
SHARE....................... $ (0.32) $ (1.14) $ (2.07) $ (0.46) $ (0.71)
=========== =========== ============ =========== ===========
BASIC AND DILUTED WEIGHTED
AVERAGE COMMON SHARES
OUTSTANDING................. 3,292,663 5,405,831 5,615,449 5,467,206 6,204,149
=========== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 76
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
REVENUE AND DEFICIT
PARTICIPATION UNREALIZED ACCUMULATED
UNITS AND COMMON STOCK GAINS DURING THE
PREFERRED ----------------------- (LOSSES) DEVELOPMENT
STOCK SHARES AMOUNT FROM SECURITIES STAGE TOTAL
------------- --------- ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, Inception (June 15, 1987)...... $ -- -- $ -- $ -- $ -- $ --
Common stock issued................... -- 465,902 2,100 -- -- 2,100
Net Loss.............................. -- -- -- -- (31,875) (31,875)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1987.............. -- 465,902 2,100 -- (31,875) (29,775)
Common stock issued................... -- 499,173 2,250 -- -- 2,250
Revenue Participation Units
issuance............................ 594,000 -- -- -- -- 594,000
Net loss.............................. -- -- -- -- (556,484) (556,484)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1989.............. 594,000 965,075 4,350 -- (588,359) 9,991
Revenue Participation Units
issuance............................ 82,000 -- -- -- -- 82,000
Net effect of acquisition............. -- 145,000 354,316 -- -- 354,316
Net loss.............................. -- -- -- -- (934,563) (934,563)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1989.............. 676,000 1,110,075 358,666 -- (1,522,922) (488,256)
Exercise of warrants.................. -- 31,108 136,402 -- -- 136,402
Common stock issued in exchange for
accrued salaries on June 30 at
$1.25............................... -- 402,518 503,144 -- -- 503,144
Net loss.............................. -- -- -- -- (859,172) (859,172)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1990.............. 676,000 1,543,701 998,212 -- (2,382,094) (707,882)
Net loss.............................. -- -- -- -- (764,488) (764,488)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1991............ 676,000 1,543,701 998,212 -- (3,146,582) (1,472,370)
Net loss.............................. -- -- -- -- (423,691) (423,691)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1992.............. 676,000 1,543,701 998,212 -- (3,570,273) (1,896,061)
Common stock issued in exchange for
investment banking services on March
18 at $1.35......................... -- 40,000 54,000 -- -- 54,000
Common stock issued in exchange for
accrued salaries on December 30 at
$2.50............................... -- 255,476 638,694 -- -- 638,694
Common stock issued in exchange for
note payable to President on
December 30 at $2.50................ -- 200,000 500,000 -- -- 500,000
Common stock issued in exchange for
accrued expenses on December 30 at
$2.50............................... -- 20,842 52,104 -- -- 52,104
Stock options issued in exchange for
accrued professional fees on
December 31 at $1.35................ -- -- 108,000 -- -- 108,000
Stock options issued in exchange for
future services on December 31 at
$1.35............................... -- -- 39,750 -- -- 39,750
Stock options issued for services..... -- -- -- (93,749) -- (93,749)
Net loss.............................. -- -- -- -- (237,815) (237,815)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1993.............. 676,000 2,060,019 2,390,760 (93,749) (3,808,088) (835,077)
Common stock issued for cash at
$2.50............................... -- 13,000 32,500 -- -- 32,500
Amortization of deferred
compensation........................ -- -- -- (93,749) -- 93,749
Net loss.............................. -- -- -- -- (312,342) (312,342)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1994.............. 676,000 2,073,019 2,423,260 -- (4,120,430) (1,021,170)
Common stock issued for cash at
$2.50............................... -- 22,000 55,000 -- -- 55,000
Common stock forfeiture............... -- (678,836) (1,193,943) -- -- (1,193,943)
Common stock reissued at $2.50........ -- 678,836 1,697,090 -- -- 1,697,090
Stock options issued for services at
$2.50............................... -- -- 105,000 -- -- 105,000
Net loss.............................. -- -- -- -- (895,378) (895,378)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1995.............. 676,000 2,095,019 3,086,407 -- (5,015,808) (1,253,401)
Common stock issued for cash at $2.50
(net of commission)................. -- 266,800 633,650 -- -- 633,650
Stock options issued for services at
$2.50............................... -- -- 103,950 -- -- 103,950
Cash paid out for fractional shares... -- (12) (25) -- -- (25)
Conversion of Revenue Participation
Units into common stock............. (676,000) 300,000 1,125,000 -- (449,000) --
</TABLE>
F-5
<PAGE> 77
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
REVENUE AND DEFICIT
PARTICIPATION UNREALIZED ACCUMULATED
UNITS AND COMMON STOCK GAINS DURING THE
PREFERRED ----------------------- (LOSSES) DEVELOPMENT
STOCK SHARES AMOUNT FROM SECURITIES STAGE TOTAL
------------- --------- ----------- --------------- ------------ ------------
<S> <C> <C> <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 $ -- $ -- $ 18,176,781
Net loss.............................. -- -- -- -- (1,038,875) (1,038,875)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1996.............. -- 5,361,807 23,125,763 -- (6,503,683) 16,622,080
Stock options exercised............... -- 104,000 2,600 -- -- 2,600
Stock options issued for services at
$2.00............................... -- -- 60,000 -- -- 60,000
Unrealized gains on available-for-sale
securities.......................... -- -- -- 20,256 -- 20,256
Net loss.............................. -- -- -- -- (6,161,541) (6,161,541)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1997.............. -- 5,465,807 23,188,363 20,256 (12,665,224) 10,543,395
Common stock and warrants issued for
cash under Line of Equity Agreement,
net of issue costs.................. -- 506,049 3,451,782 -- -- 3,451,782
Stock options exercised by employees,
directors, and consultants.......... -- 134,000 340,560 -- -- 340,560
Exercise of underwriters' warrant..... -- 41,000 373,920 -- -- 373,920
Notes receivable for exercise of stock
options............................. -- -- (286,560) -- -- (286,560)
Stock options issued for services..... -- -- 422,264 -- -- 422,264
Warrant to purchase common stock
issued in connection with equipment
financing........................... -- -- 45,000 -- -- 45,000
Fractional shares adjustment upon
conversion of pre-split shares...... -- (2) -- -- -- --
Unrealized gains on available-for-sale
securities.......................... -- -- -- 3,951 -- 3,951
Net loss.............................. (11,604,556) (11,604,556)
---------- --------- ----------- -------- ------------ ------------
BALANCE, December 31, 1998.............. -- 6,146,854 27,535,329 24,207 (24,269,780) 3,289,756
Sale of 400 shares of 5% Series A
Preferred Stock, net of offering
costs............................... 3,633,221 -- -- -- -- 3,633,221
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......................... -- 109,819 949,387 -- -- 949,387
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 -- -- 204,280
Stock options issued for services..... -- -- 3,078 -- -- 3,078
Unrealized losses on available for
sale securities..................... -- -- -- (18,864) -- (18,864)
Accrued preferred stock dividend...... -- -- -- -- (33,425) (33,425)
Net loss.............................. -- -- -- -- (4,418,598) (4,418,598)
---------- --------- ----------- -------- ------------ ------------
BALANCE, March 31, 1999 (unaudited)..... $3,288,611 6,256,673 $29,036,684 $ 5,343 $(28,721,803) $ 3,608,835
========== ========= =========== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 78
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
THREE MONTH ENDED (INCEPTION)
YEARS ENDED DECEMBER 31, MARCH 31, THROUGH
---------------------------------------- ------------------------- MARCH 31,
1996 1997 1998 1998 1999 1999
----------- ----------- ------------ ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................. $(1,038,875) $(6,161,541) $(11,604,556) $(2,508,291) $(4,418,598) $(28,239,378)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.......... 7,898 220,950 460,500 106,735 122,425 988,327
Issuance of common stock options and
warrants for compensation............ 103,950 60,000 422,264 134,442 207,358 898,572
Amortization of deferred
compensation......................... -- -- -- -- -- 93,749
Compensation expense for extension of
debt conversion agreements, net...... -- -- -- -- -- 503,147
Gain on sale of assets................. -- -- -- -- -- (5,299)
(Increase) decrease in other
receivables.......................... (163,988) (57,841) 109,277 130,478 (41,610) (153,916)
(Increase) decrease in prepaid expenses
and refundable deposits.............. (238,187) (130,402) (180,715) (86,848) 288,394 (211,891)
Increase (decrease) in accounts payable
and accrued expenses................. 11,278 630,018 303,615 (251,308) 209,441 1,648,495
Increase (decrease) in accrued payroll
and related taxes.................... 103,388 (331,175) 81,370 79,677 6,740 726,804
Increase in deferred rent.............. -- -- 46,308 11,576 7,203 53,511
Increase (decrease) in accrued interest
to related parties................... 979 (122,396) -- -- -- 300,404
----------- ----------- ------------ ----------- ----------- ------------
Net cash used in operating
activities......................... (1,213,557) (5,892,387) (10,361,937) (2,383,539) (3,618,647) (23,397,475)
----------- ----------- ------------ ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment....... (131,600) (3,563,790) (236,785) (61,734) (210,832) (4,283,182)
Redemption (purchases) of marketable
securities and short-term investments,
net.................................... (7,448,546) 5,315,171 364,027 (58,991) (1,322,135) (3,091,483)
Unrealized gain (loss) on available-for
sale securities........................ -- 20,256 3,951 1,410 (18,864) 5,343
Payment of organization costs............ -- -- -- -- -- (66,093)
Proceeds from sale of equipment.......... -- -- -- -- -- 29,665
Issuance of notes receivable............. -- -- -- -- -- 100,000
----------- ----------- ------------ ----------- ----------- ------------
Net cash provided by (used in)
investing activities............... (7,580,146) 1,771,637 131,193 (119,315) (1,551,831) (7,305,750)
----------- ----------- ------------ ----------- ----------- ------------
CASH FLOW FROM FINANCING ACTIVITIES:
(Repayment) of notes payable
to/borrowings from related parties,
net.................................... (22,500) -- -- -- -- 757,900
Proceeds from (repayment of) bank line of
credit................................. -- 850,000 (850,000) (850,000) -- --
(Increase) decrease in restricted cash... -- (935,000) 935,000 935,000 -- --
Proceeds from long-term debt............. -- 326,625 1,500,000 -- 33,786 1,860,411
Repayment of long-term debt.............. -- (55,190) (199,964) (30,766) (144,857) (400,011)
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 55,230 949,387 24,618,972
Proceeds from Preferred Stock Issuance,
net of offering costs.................. 3,633,221 3,633,221
Proceeds from exercise of stock
options................................ -- 2,600 714,480 -- -- 717,080
</TABLE>
F-7
<PAGE> 79
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 15, 1987
THREE MONTH ENDED (INCEPTION)
YEARS ENDED DECEMBER 31, MARCH 31, THROUGH
---------------------------------------- ------------------------- MARCH 31,
1996 1997 1998 1998 1999 1999
----------- ----------- ------------ ----------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Receipt of notes from officers and
directors for exercise of stock
options................................ $ -- $ -- $ (286,560) $ -- $ -- $ (286,560)
Cash paid for fractional shares.......... -- -- -- -- -- (25)
Cash at acquisition...................... -- -- -- -- -- 200,612
----------- ----------- ------------ ----------- ----------- ------------
Net cash provided by financing
activities......................... 18,787,906 189,035 5,264,738 109,464 4,471,537 31,101,625
----------- ----------- ------------ ----------- ----------- ------------
Net increase (decrease) in cash and
equivalents............................ 9,994,203 (3,931,715) (4,966,006) (2,393,390) (698,941) 398,400
Cash and equivalents, beginning of
period................................. 859 9,995,062 6,063,347 6,063,347 1,097,341 --
----------- ----------- ------------ ----------- ----------- ------------
Cash and equivalents, end of period...... $ 9,995,062 $ 6,063,347 $ 1,097,341 $ 3,669,957 $ 398,400 $ 398,400
=========== =========== ============ =========== =========== ============
SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of accrued payroll into shares
of common stock........................ $ -- $ -- $ -- $ -- $ -- $ 1,141,838
=========== =========== ============ =========== =========== ============
Conversion of notes payable to related
parties into shares of common stock.... $ -- $ -- $ -- $ -- $ -- $ 500,000
=========== =========== ============ =========== =========== ============
Conversion of accrued interest into notes
payable to related parties............. $ -- $ -- $ -- $ -- $ -- $ 300,404
=========== =========== ============ =========== =========== ============
Conversion of Revenue Participation Units
into shares of common stock............ $ 676,000 $ -- $ -- $ -- $ -- $ 676,000
=========== =========== ============ =========== =========== ============
Issuance of stock options and warrants
for services........................... $ 103,950 $ 60,000 $ 422,264 $ 134,442 $ 207,358 $ 898,572
=========== =========== ============ =========== =========== ============
Issuance of warrant in connection with
equipment financing.................... $ -- $ -- $ 45,000 $ -- $ -- $ 45,000
=========== =========== ============ =========== =========== ============
Issuance of warrants in connection with
equity and debt financings............. $ -- $ -- $ -- $ -- $ 344,610 $ 389,610
=========== =========== ============ =========== =========== ============
Conversion of other accrued liabilities
to shares of common stock.............. $ -- $ -- $ -- $ -- $ -- $ 52,104
=========== =========== ============ =========== =========== ============
Dividends on Preferred Stock payable in
shares of common stock................. $ -- $ -- $ -- $ -- $ 33,425 $ 33,425
=========== =========== ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE> 80
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF BUSINESS
NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as
Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC
changed its name to NeoTherapeutics, Inc. and in June 1997, the Company was
reincorporated in the state of Delaware. At December 31, 1998, the Company had
two wholly owned subsidiaries, Advanced ImmunoTherapeutics, Inc. ("AIT"),
incorporated in California in June 1987, and NeoTherapeutics GmbH ("NEOT GmbH"),
incorporated in Switzerland in April 1997. AIT became a wholly owned subsidiary
of AFC in July 1989 in a transaction accounted for as a reverse acquisition. All
references to the "Company" hereinafter refer to the Company, AIT and NEOT GmbH
as a consolidated entity.
The Company is a development stage biopharmaceutical enterprise engaged in
the discovery and development of novel therapeutic drugs intended to treat
neurodegenerative diseases and conditions, such as memory deficits associated
with Alzheimer's disease 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> 81
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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> 82
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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
F-11
<PAGE> 83
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
and its components, as defined in the statement, be reported in a financial
statement. Current accounting standards require that certain items such as (1)
foreign currency translation adjustments, (2) unrealized gains and losses on
certain investments in debt and equity securities, and (3) unearned compensation
expense related to stock issuances to employees be presented as separate
components of stockholders' equity, without having been recognized in the
determination of net income. Effective for fiscal years beginning after December
15, 1997, comprehensive income must be reported "in a financial statement that
is displayed with the same prominence as other financial statements." While the
Company adopted the provisions of SFAS No. 130 for the 1998 fiscal year, the
adoption of this standard did not have a material effect on the presentation of
the Company's financial statements.
Segment Reporting. SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" is effective for financial statements for
periods beginning after December 15, 1997. SFAS No. 131 replaces SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise" and several other
pronouncements that amended SFAS No. 14. SFAS No. 131 requires the disclosure of
extensive information about an entity's operating segments. In addition to
disclosure of information about multiple reporting segments, an enterprise is
required to report certain disaggregated information, even if it functions as a
single operating unit. Management believes that the Company currently operates
under a single segment. Adoption of SFAS No. 131 in 1998 did not materially
impact the Company's financial statement disclosures.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 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.
F-12
<PAGE> 84
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
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.
F-13
<PAGE> 85
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
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
========== ======= ===== ==========
</TABLE>
F-14
<PAGE> 86
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
December 31, 1998:
<S> <C> <C> <C> <C>
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:
<TABLE>
<S> <C>
December 31, 1997:
Marketable securities and short-term investments:
Held-to-Maturity..................................... $ 168,992
Available-for-Sale................................... 1,964,383
----------
$2,133,375
==========
December 31, 1998:
Marketable securities and short-term investments:
Available for Sale................................... $1,769,348
==========
</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.
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
F-15
<PAGE> 87
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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-16
<PAGE> 88
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
F-17
<PAGE> 89
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
LITIGATION
On December 10, 1998, the Company was served with a lawsuit initiated by
four former employees of the Company. The lawsuit, which was filed in the
Superior Court of Orange County, California, also names Dr. Alvin J. Glasky, the
Company's founder and Chief Executive Officer, as a defendant. The lawsuit
arises from a dispute concerning the termination, as of December 31, 1997, of
agreements entered into as of June 1990 and December 1993 between the Company
and each of the former employees, pursuant to which the employees agreed to
accept an aggregate of 278,589 shares of the Company's common stock, subject to
forfeiture provisions, in exchange for the cancellation of indebtedness owed to
them by the Company arising from unpaid compensation and expenses in the total
amount of $458,411. Pursuant to the agreements, the employees were not entitled
to keep the shares unless the Company achieved 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
F-18
<PAGE> 90
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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
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.
F-19
<PAGE> 91
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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.
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
F-20
<PAGE> 92
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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-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
F-21
<PAGE> 93
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 240,173 $0.24 447,173 $3.15 658,173 $4.66
Granted......................... 207,000 3.39 329,000 5.37 331,300 8.03
Exercised....................... -- -- (104,000) 0.025 (134,000) 2.54
Forfeited....................... -- -- (14,000) 4.29 (1,600) 8.88
------- ----- -------- ----- -------- -----
Outstanding, at end of year..... 447,173 $3.15 658,173 $4.66 853,873 $5.78
======= ===== ======== ===== ======== =====
Exercisable, at end of year..... 270,173 $0.21 363,923 $1.18 391,048 $1.95
======= ===== ======== ===== ======== =====
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 LIFE PRICE 12/31/98 PRICE
-------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$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-22
<PAGE> 94
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
For purposes of the following required pro forma information, the weighted
average fair value of stock options granted in 1996, 1997 and 1998 was $2.14,
$3.06 and $4.96, respectively. The total estimated fair value is amortized to
expense over the vesting period.
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- ------------
<S> <C> <C> <C>
Pro forma net loss................... $(1,218,389) $(6,551,287) $(12,395,411)
Pro forma basic and diluted loss per
share.............................. $ (0.37) $ (1.21) $ (2.21)
</TABLE>
10. SALARY DEFERRAL PLAN
The Company established a 401(k) Salary Deferral Plan on January 1, 1990.
The Plan allows eligible employees to defer part of their income on a tax-free
basis. Contributions by the Company to the Plan are discretionary upon approval
by the Board of Directors. To date, the Company has not made any contributions
into the Plan.
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.
F-23
<PAGE> 95
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
12. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations
for fiscal 1998, 1997 and 1996 (in thousands except per share data):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
FISCAL 1998
Revenues........................... $ -- $ -- $ -- $ --
Total operating expenses........... 2,528 2,643 2,984 3,509
Net loss........................... $(2,508) $(2,581) $(3,000) $(3,515)
Basic and diluted loss per share..... $ (0.46) $ (0.47) $ (0.54) $ (0.60)
Shares used in calculation........... 5,467 5,493 5,570 5,918
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.
F-24
<PAGE> 96
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 March 31, 1999, the Company had committed to pay, through December 2000,
approximately $650,000 for such grants and fellowships. Grant expense for the
three-month periods ended March 31, 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 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 March 31, 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>
F-25
<PAGE> 97
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 March 31, 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 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
F-26
<PAGE> 98
NEOTHERAPEUTICS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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-27
<PAGE> 99
- ------------------------------------------------------
- ------------------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF THE COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
The Offering........................ 5
Risk Factors........................ 6
Forward-Looking Statements.......... 16
The Company......................... 16
Use of Proceeds..................... 17
Market Price of Common stock........ 18
Dividend Policy..................... 18
Dilution............................ 19
Capitalization...................... 20
Selected Consolidated Financial
Data.............................. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 23
Business............................ 29
Management.......................... 44
Security Ownership of Certain
Beneficial Owners and
Management........................ 55
Certain Relationships and Related
Transactions...................... 57
Description of Capital Stock........ 59
Shares Eligible for Future Sale..... 63
Certain United States Federal Tax
Considerations for Non-U.S.
Holders of Common Stock........... 64
Underwriting........................ 67
Legal Matters....................... 69
Experts............................. 70
Additional Information.............. 70
Available Information............... 70
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[NEOTHERAPEUTICS LOGO]
1,000,000 Shares
Common Stock
------------------------
PROSPECTUS
-----------------------
JOSEPH CHARLES & ASSOC., INC.
MILLENNIUM
FINANCIAL GROUP, INC.
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 100
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, the Nasdaq National
Market application fee and the NASD filing fee.
<TABLE>
<CAPTION>
TO BE PAID BY
THE COMPANY
-------------
<S> <C>
SEC registration fee.............................. $ 15,130.25
NASD filing fee................................... 5,942.54
Nasdaq application fee............................ 17,500.00
Printing expenses................................. 100,000.00
Legal fees and expenses........................... 225,000.00
Accounting fees and expenses...................... 60,000.00
Blue sky fees and expenses........................ 15,000.00
Miscellaneous..................................... 111,427.21
-----------
Total........................................... $550,000.00
===========
</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.
II-1
<PAGE> 101
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 January 1996, the Company sold 4,000 shares of common stock to one
investor for consideration of $10,000. The Company paid commissions of $500 in
conjunction with such sale.
2. In March 1996, the Company sold 2,000 shares of common stock to one
investor for consideration of $5,000. The Company paid commissions of $100 in
conjunction with such sale.
3. In April 1996, the Company sold 2,000 shares of common stock to one
investor for consideration of $5,000. The Company paid commissions of $250 in
conjunction with such sale.
4. In May 1996, the Company sold 178,800 shares of common stock to
twenty-seven investors for aggregate consideration of $447,000. The Company paid
commissions of $22,350 in conjunction with such sale.
5. In May 1996, the Company granted an option to purchase 30,000 shares of
common stock, at an exercise price of $0.025 per share, to a financial
consultant in exchange for certain investment banking services.
6. In June 1996, the Company sold 80,000 shares of common stock to two
investors for consideration of $200,000. The Company paid commissions of $10,000
in conjunction with such sale.
7. In July 1996, the Company granted options to purchase 95,000 shares of
common stock, at exercise prices ranging from $3.75 to $4.13 per share, to five
employees and one consultant pursuant to its 1991 Stock Incentive Plan.
8. In July 1996, the Company granted options to purchase a total of 12,000
shares of common stock, at an exercise price of $0.025 per share, to two
technical consultants in exchange for consulting services.
9. In July 1996, the Company issued 300,000 shares of common stock to seven
security holders upon the conversion of 75 Revenue Participation Units ("RPUs").
10. 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.
11. In January 1997, pursuant to its 1991 Stock Option 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.
12. 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.
13. In April 1997, pursuant to its 1991 Stock Option Plan, the Company
granted to one employee, an incentive option to purchase 50,000 shares of common
stock at the
II-2
<PAGE> 102
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. In May 1997,
pursuant to its 1991 Stock Option 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.
14. In June 1997, pursuant to its 1997 Stock Option 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. 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
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<PAGE> 103
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.
20. 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 25 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.
21. 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, and
until May 29, 1999, 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 trading 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
by the Company, at its option, during the period commencing July 28, 1999 and
ending September 16, 1999, subject to the satisfaction by the Company of certain
conditions. The preferred stock in the second tranche will contain terms and
conditions for conversion similar to the first tranche, except that the fixed
conversion price will be set at 125% of the average market price of the common
stock at the time of the second closing. Dividends on the preferred stock are
payable in cash or in common stock, at the option of the Company, at the annual
rate of 5%. Additional features of the preferred stock 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.
22. 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.
23. 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.
II-4
<PAGE> 104
24. 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.
In the transactions described in paragraphs 1 through 6, exemption from the
registration requirements of the Securities Act was claimed under Rule 504
and/or Rule 506 and/or Section 4(2) of the Securities Act. In the transactions
described in paragraphs 7, 8 and 10, 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 11-24,
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.
In the transaction described in paragraph 9, exemption from the
registration requirements of the Securities Act was claimed under Section
3(a)(9) of the Securities Act on the basis that the Company exchanged securities
with existing security holders where no commissions were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1+ Form of Underwriting Agreement.
1.2+ Form of Master Agreement Among Underwriters.
1.3+ Form of Selected Dealer Agreement.
1.4+ Form of Financial Consulting Agreement between the
Registrant and Joseph Charles & Assoc., Inc.
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 Amendments 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.)
</TABLE>
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<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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 Company'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 NeoTherapeutics, Inc.
and U.S. Stock Transfer Corporation dated as of September
25, 1996. (Filed as Exhibit 4.6 to the Registration
Statement on Form SB-2, (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.
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.)
</TABLE>
II-6
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
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.)
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 Shareholder 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.
10.14* Amended and Restated Consulting Agreement dated June 2,
1999, between NeoTherapeutics and Roccus Capital Partners,
LLC.
21.1* Subsidiaries of Registrant.
23.1 Consent of Stradling Yocca Carlson & Rauth, a Professional
Corporation (included in exhibit 5.1).
23.2+ Consent of Arthur Andersen LLP.
</TABLE>
II-7
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
24.1+ Power of Attorney (included on the signature page to this
Registration Statement -- see page II-10.)
</TABLE>
- -------------------------
* Previously filed with the Company's Registration Statement filed June 3,
1999.
** Previously filed with Amendment No. 1 to the Company's Registration Statement
filed June 18, 1999.
+ Filed herewith.
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.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
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 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.
(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.
II-8
<PAGE> 108
(4) 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.
(5) 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-9
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 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 20th day of July, 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 July 20, 1999
- ------------------------------------------------ Officer, President and
Alvin J. Glasky, Ph.D. Director (principal
executive officer)
/s/ SAMUEL GULKO Chief Financial July 20, 1999
- ------------------------------------------------ Officer, Secretary,
Samuel Gulko Treasurer and Director
(principal financial
and accounting
officer)
* Director July 20, 1999
- ------------------------------------------------
Mark J. Glasky
</TABLE>
II-10
<PAGE> 110
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director July 20, 1999
- ------------------------------------------------
Frank M. Meeks
* Director July 20, 1999
- ------------------------------------------------
Carol O'Cleireacain, Ph.D.
* Director July 20, 1999
- ------------------------------------------------
Paul H. Silverman, Ph.D., D.Sc.
* Director July 20, 1999
- ------------------------------------------------
Stephen Runnels
* Director July 20, 1999
- ------------------------------------------------
Eric L. Nelson, Ph.D.
* Director July 20, 1999
- ------------------------------------------------
Joseph Rubinfeld, Ph.D.
</TABLE>
*By: /s/ SAMUEL GULKO
---------------------------
Samuel Gulko
Attorney-in-Fact
II-11
<PAGE> 111
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1+ Form of Underwriting Agreement.
1.2+ Form of Master Agreement Among Underwriters.
1.3+ Form of Selected Dealer Agreement.
1.4+ Form of Financial Consulting Agreement between the
Registrant and Joseph Charles & Assoc., Inc.
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 Amendments 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 Company'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>
<PAGE> 112
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
4.7 Warrant Agreement entered into between NeoTherapeutics, Inc.
and U.S. Stock Transfer Corporation dated as of September
25, 1996. (Filed as Exhibit 4.6 to the Registration
Statement on Form SB-2, (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.
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.)
</TABLE>
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
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.)
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 Shareholder 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.
10.14* Amended and Restated Consulting Agreement dated June 2,
1999, between NeoTherapeutics and Roccus Capital Partners,
LLC.
21.1* Subsidiaries of Registrant.
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 with the Company's Registration Statement filed June 3,
1999.
** Previously filed with Amendment No. 1 to the Company's Registration Statement
filed June 18, 1999.
+ Filed herewith.
<PAGE> 1
EXHIBIT 1.1
NEOTHERAPEUTICS, INC.
157 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
UNDERWRITING AGREEMENT
July __, 1999
Joseph Charles & Assoc., Inc.
Millennium Financial Group, Inc.
As Representatives of the Several Underwriters
Named in Schedule I hereto
c/o Joseph Charles & Assoc., Inc.
2500 N. Military Trail
Suite 300
Boca Raton, Florida 33431
Ladies and Gentlemen:
NeoTherapeutics, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") pursuant to this Underwriting Agreement (the "Agreement"), an
aggregate of 1,000,000 shares of common stock, $.001 par value per share (the
"Firm Shares"). In addition, the Company proposes to grant to the Underwriters
the option referred to in Section 2(b) to purchase all or any part of an
aggregate of 150,000 additional Shares to be offered by the Company (the "Option
Shares").
The aggregate of 1,000,000 Firm Shares, together with all or any part
of the Option Shares which the Underwriters have the option to purchase herein
are called the "Shares" or "Securities." The common stock, $.001 par value per
share, of the Company is herein called the "Common Stock." The Common Stock is
more fully described in the Registration Statement and the Prospectus.
You have advised the Company that you desire to purchase the Shares,
and that you have been authorized to execute this Agreement as Representatives
of the Underwriters (the "Representatives"). The Company confirms the agreements
made by it with respect to the purchase of the Shares by you, as follows:
1. Representations and Warranties.
(a) The Company represents and warrants to each Underwriter,
and agrees with each Underwriter that:
<PAGE> 2
(i) A registration statement (File No. 333-79935) on Form
S-1 relating to the public offering of the Shares, including a preliminary form
of prospectus, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement also may have been filed. "Preliminary
Prospectus" shall mean each prospectus filed pursuant to Rule 430A of the Rules
and Regulations. The registration statement (including all financial schedules
and exhibits) as amended at the time it becomes effective ("Effective Date") and
the final prospectus included therein are respectively referred to as the
"Registration Statement" and the "Prospectus," except that (i) if the prospectus
first filed by the Company pursuant to Rule 424(b) or Rule 430A of the Rules and
Regulations or otherwise utilized and not required to be so filed shall differ
from said prospectus as then amended, the term "Prospectus" shall mean the
prospectus filed pursuant to Rule 424(b) or Rule 430A or so utilized from and
after the date on which it shall have been filed or utilized, and (ii) if such
Registration Statement or prospectus is amended or such prospectus is
supplemented, after the Effective Date of such Registration Statement and prior
to the Option Closing Date (as defined in Section 2(b)), the term "Registration
Statement" shall include such registration statement as so amended and any
registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations, and the term "Prospectus" shall include the prospectus as so
amended or supplemented, or both, as the case may be.
(ii) At the time the Registration Statement becomes
effective and at all times subsequent thereto up to the Option Closing Date (as
defined in Section 2(b)), (i) the Registration Statement and Prospectus will in
all material respects conform to the requirements of the Act and the Rules and
Regulations; and (ii) neither the Registration Statement nor the Prospectus will
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; provided,
however, that the Company makes no representation, warranty or agreement as to
information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by you or on behalf of any Underwriter through you
specifically for use in the preparation thereof. It is understood that the
material set forth under the heading "Underwriting" and the identity of counsel
to the Representatives under the heading "Legal Matters" constitute the only
information furnished in writing by you, or by any Underwriter through you, for
inclusion in the Registration Statement and Prospectus, as the case may be.
(iii) The Company, including each subsidiary thereof
(individually, "Subsidiary," and collectively, "Subsidiaries"), has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation and is duly qualified or licensed
to do business as a foreign corporation and is in good standing in each other
jurisdiction in which the nature of its business or the character or location of
its properties requires such qualification, except where failure to so qualify
will not have a material adverse effect on the business, business prospects, net
worth, properties or condition (financial or other) of the Company and its
Subsidiaries ("Material Adverse Effect"). The Company has the corporate power to
own,
2
<PAGE> 3
lease and operate its properties and to conduct its business as described in the
Registration Statement and to enter into and perform its obligations under this
Agreement, the Representatives' Warrants and the Financial Consulting Agreement
(as such terms are defined herein). All of the Company's Subsidiaries are listed
in Exhibit 21.1 to the Registration Statement. All of the outstanding shares of
capital stock of each Subsidiary have been duly authorized and validly issued,
are fully paid and non-assessable, and except as set forth in the Registration
Statement, are owned by the Company directly or indirectly through one of the
other Subsidiaries, free and clear of any lien, adverse claim, security
interest, equity or other encumbrance.
(iv) The authorized capital stock of the Company as of
the date of the Prospectus was as set forth under "Capitalization" in the
Registration Statement and the Prospectus. The shares of issued and outstanding
capital stock of the Company set forth thereunder have been duly authorized,
validly issued and are fully paid and non-assessable; the outstanding securities
of the Company, including without limitation, the Shares of the Company, have
been duly authorized and issued in compliance with or under an exemption from
registration under the Act and applicable state securities laws and have not
been issued in violation of the preemptive or similar rights of any stockholder
and the stockholders of the Company do not have any preemptive rights or other
rights to subscribe for or to purchase any of the Shares subject hereof. Except
for (i) the transfer restrictions regarding "affiliates" contained in Rule 144
promulgated under the Act, (ii) restrictions provided for in this Agreement, and
(iii) with respect to the Representatives' Warrants (as defined) restrictions
stated therein or under the National Association of Securities Dealers, Inc.'s
("NASD") Conduct Rules, there are no restrictions upon the voting or transfer
of, any of the Shares, the Common Stock or Representatives' Warrants. Except as
set forth in the Prospectus or as contemplated hereby, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
agreements or other rights to convert any obligation into, any shares of capital
stock of the Company have been granted or entered into by the Company. The
Shares and Representatives' Warrants (as that term is defined in Section 12
herein, the "Representatives' Warrants") conform in all material respects to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(v) The Shares are duly authorized and, when issued,
delivered and paid for pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. The certificates evidencing the Shares are
and will be in valid and proper legal form. The Representatives' Warrants will
be exercisable for shares of Common Stock of the Company in accordance with the
terms of the Representatives' Warrants and at the prices provided for therein.
The shares of Common Stock issuable upon exercise of the Representatives'
Warrants have been duly authorized and reserved for issuance upon such exercise,
and such shares, when issued upon such exercise and paid for in accordance with
the terms of the Representatives' Warrants and this Agreement, shall be fully
paid and non-assessable. Neither the filing of the Registration Statement nor
the issuance, offering or sale of any of the Shares or Representatives' Warrants
as contemplated in this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of any
securities of the Company, except as described in the Registration Statement.
3
<PAGE> 4
(vi) This Agreement, the Representatives' Warrants and
the Financial Consulting Agreement (as defined in Section 3(p)) have been duly
and validly authorized, executed and delivered by the Company, and assuming due
execution by the other party or parties hereto and thereto, constitute valid and
binding obligations of the Company enforceable against the Company in accordance
with their respective terms, except as rights to indemnity and contribution
thereunder may be limited by applicable law and except as enforceability may be
limited by bankruptcy, insolvency or other laws affecting the rights of
creditors generally or by general equitable principles of law. The Company has
full power and authority to authorize, issue and sell the Securities to be sold
by it hereunder on the terms and conditions set forth herein, and no consent,
approval, authorization or other order of any governmental authority is required
in connection with such authorization, execution and delivery or with the
authorization, issue and sale of the Representatives' Warrants or the Common
Stock underlying the Representatives' Warrants, except such as may be required
under the Act, state securities laws, or the by-laws and rules of the NASD.
(vii) Except as described in the Prospectus, the Company
is not in violation, breach or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement, and the Representatives' Warrants and the Financial Consulting
Agreement (as defined in Section 3(p)) will not conflict with, or result in a
breach of, any of the terms or provisions of, or constitute a default under, or
result in the creation or imposition of any lien, charge or encumbrance pursuant
to the terms of, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Company is a party or by which the Company
may be bound or to which any of the property or assets of the Company are
subject, which would have a Material Adverse Effect, nor will such action result
in any violation of the provisions of any statute or any order, rule or
regulation applicable to the Company of any court or of any regulatory authority
or other governmental body having jurisdiction over the Company.
(viii) Subject to the qualifications stated in the
Prospectus, the Company and each Subsidiary has good and valid title to all
properties and assets described in the Prospectus as owned by it, free and clear
of all liens, charges, encumbrances or restrictions, except such liens, charges,
encumbrances or restrictions which would not have a Material Adverse Effect; all
of the leases and subleases under which the Company and each Subsidiary is the
lessor or sublessor of properties or assets or under which the Company and each
Subsidiary holds properties or assets as lessee or sublessee as described in the
Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company and each Subsidiary is not in material default in any
respect with respect to any of the terms or provisions of any of such leases or
subleases, and the Company has no notice of any claim that has been asserted by
anyone adverse to rights of the Company or any Subsidiary as lessor, sublessor,
lessee or sublessee under any of the leases or subleases mentioned above, or
affecting or questioning the right of the Company and each Subsidiary to
continued possession of the leased or subleased premises or assets under any
such lease or sublease except as described or referred to in the Prospectus; and
the Company and each Subsidiary owns or leases all such properties described in
the Prospectus as are necessary to its operations as now conducted and, except
as otherwise stated in the Prospectus, as proposed to be conducted as set forth
in the Prospectus.
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(ix) Neither the Company nor any Subsidiary is in
violation of its charter or by-laws or in default in any respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any of the contracts,
indentures, mortgages, loan agreements, leases, joint ventures or other
agreements or instruments to which the Company or any Subsidiary is a party or
by which it is bound. The execution and delivery of the Underwriting Agreement,
the Representatives' Warrants and the Financial Consulting Agreement and the
incurrence of the obligations of the Company herein and therein set forth and
the consummation of the transactions herein or therein contemplated will not
result in a violation of or default under the charter or bylaws of the Company,
or any obligation, agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any of the contracts,
indentures, mortgages, loan agreements, leases, joint ventures or other
agreements or instruments to which the Company or any Subsidiary is a party or
by which it is bound.
(x) To the knowledge of the Company, Arthur Andersen LLP,
who has given its report on certain consolidated financial statements filed and
to be filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are with respect to the Company independent
public accountants as required by the Act and the Rules and Regulations.
(xi) The consolidated financial statements, related notes
and schedules set forth in the Registration Statement and the Prospectus present
fairly, in all material respects, the financial position and results of
operations and changes in financial position of the Company on the basis stated
therein and in the Registration Statement and the Prospectus, at the respective
dates and for the respective periods to which they apply. Said statements and
schedules and related notes have been prepared in accordance with generally
accepted accounting principles applied on a basis which is consistent during the
periods involved except for, with respect to interim statements, changes
resulting from year-end audit adjustments.
(xii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, except as
set forth in or contemplated by this Agreement, the Registration Statement and
the Prospectus, neither the Company nor any Subsidiary has incurred any material
liabilities or obligations, direct or contingent, not in the ordinary course of
business, or entered into any transaction not in the ordinary course of
business, which is material to the business of the Company or any such
Subsidiary, and there has not been any change in the capital stock of, or any
incurrence of long-term debt by, the Company or any Subsidiary or any issuance
of options, warrants or other rights to purchase the capital stock of the
Company or any Subsidiary or any adverse change or any development which would
reasonably be expected to have a Material Adverse Effect, and neither the
Company nor any Subsidiary has become party to, and neither the business nor the
property of the Company nor any Subsidiary has become the subject of, any
material litigation whether or not in the ordinary course of business.
(xiii) Except as set forth in the Prospectus, there is
not now pending nor, to the knowledge of the Company, threatened, any action,
suit or proceeding (including those related to environmental matters or
discrimination on the basis of age, sex, religion or race) to which the
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<PAGE> 6
Company is or could become a party before or by any court or governmental agency
or body, which, if adversely determined, would have a Material Adverse Effect on
the Company or any Subsidiary; and, except as set forth in the Prospectus, no
labor disputes involving the employees of the Company or any Subsidiary exist
which, if adversely determined, would have a Material Adverse Effect on the
Company or any such Subsidiary.
(xiv) Except as disclosed in the Prospectus, the Company
and its Subsidiaries have filed all necessary federal, state and foreign income
and franchise tax returns and have paid all taxes shown as due thereon; and
there is no tax deficiency which has been or to the knowledge of the Company
might be asserted against the Company or any Subsidiary which has not been
adequately reserved for on the Company's balance sheet.
(xv) The Company and each Subsidiary has sufficient
consents, approvals, licenses, permits, franchises and authorizations of and
from all United States and foreign, federal, state or provincial, local and
other governmental or other regulatory authorities ("Licenses") currently
required for the conduct of its businesses or the ownership of its property as
described in the Prospectus and is in all material respects complying therewith.
Except as described in the Prospectus, none of the activities or businesses of
the Company or any Subsidiary is in violation of, or causes the Company or any
Subsidiary to violate, any law, rule, regulation or order of the United States,
any state, county or locality, or of any agency or locality, or of any foreign
jurisdiction or subdivision thereof. Each of the Company and each Subsidiary has
fulfilled and performed all its obligations with respect to such Licenses and no
event has occurred that allows, or after notice or lapse of time or both would
allow, revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such License, except where any of
the foregoing would not have individually or in the aggregate a Material Adverse
Effect, subject in each case to such qualification as may be set forth in the
Prospectus; and, except as described in the Prospectus, none of such Licenses
contains any restriction or conditions not normally contemplated by such License
that is materially burdensome to the Company or any Subsidiary.
(xvi) The Company and its Subsidiaries have not, directly
or indirectly, at any time (A) made any contributions to any candidate for
foreign political office in violation of law, or if made, failed to disclose
fully any such contribution, or (B) made any payment to any state, federal or
foreign governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments or contributions required or
allowed by applicable law. The Company's internal accounting controls and
procedures are sufficient to cause the Company to comply in all respects with
the Foreign Corrupt Practices Act of 1977, as amended.
(xvii) On the Closing Dates (as defined in Section 2(c)),
all transfer or other taxes (including franchise, capital stock or other tax,
other than income taxes imposed by any jurisdiction), if any, which are required
to be paid in connection with the sale and transfer of the Shares to the
Underwriters hereunder will have been fully paid or provided for by the Company,
and all laws imposing such taxes will have been complied with fully.
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(xviii) All contracts and other documents of the Company
which are, under the Rules and Regulations, required to be filed as exhibits to
the Registration Statement have been filed.
(xix) The Company has not taken and will not take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Shares, or to facilitate the
sale or resale of the Securities.
(xx) Except for this Agreement and other agreements with
the Representatives and except as disclosed in the Prospectus, the Company has
not entered into any agreement pursuant to which any person is entitled either
directly or indirectly to compensation from the Company for services as a finder
in connection with the proposed public offering.
(xxi) The Common Stock has been approved for listing on
The Nasdaq National Market and is in material compliance with the continuing
listing requirements of Nasdaq NMS.
(xxii) Except for such rights which have been waived or
satisfied and except as set forth in the Registration Statement or the
Prospectus, no holder of securities of the Company has any rights to the
registration of securities of the Company because of the filing of the
Registration Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
(xxiii) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
investment company under the Investment Company Act of 1940, as amended, or the
rules thereunder.
(xxiv) Each of the Company and each Subsidiary (A) is in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (B) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its business and (C) is in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals will not have a
Material Adverse Effect.
(xxv) The Company maintains a system of internal
accounting controls that, taken as a whole, are sufficient to provide reasonable
assurance that (A) transactions are executed in accordance with management's
general or specific authorizations; (B) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (C) access
to assets is permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
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(xxvi) The Company and the Subsidiaries own or possess
all patents, patent applications, trademarks, trademark registrations, service
marks, service mark registrations, trade names, copyrights, licenses,
inventories, trade secrets and rights described in the Prospectus as being owned
by them or necessary for the conduct of their respective businesses except where
the lack of such ownership or possession would not have a Material Adverse
Effect and the Company is not aware of any claim to the contrary or any
challenge by any other person to the rights of the Company and the Subsidiaries
with respect to the foregoing.
(xxvii) Each of the Company and the Subsidiaries
maintains insurance of the types and in the amounts reasonably adequate for its
business, including, but not limited to, products' liability insurance with
coverage limits in the amount of $5 million and insurance covering real and
personal property owned or leased by the Company or such Subsidiary against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against by corporations of established reputations engaged in the same
or similar businesses and similarly situated, all of which insurance is in full
force and effect.
(xxviii) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers or directors of the Company or any of the members of the families of
any of them, except as disclosed in the Registration Statement and the
Prospectus.
2. Purchase, Delivery and Sale of the Shares.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties and agreements herein
contained, the Company agrees to issue and sell to the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase from the Company at
$_____ per Firm Share [92% of the public offering price per Firm Share] at the
place and time hereinafter specified, the number of Firm Shares set forth
opposite each Underwriter's name in Schedule I hereto.
Delivery of the Firm Shares against payment therefor shall
take place at the offices of Joseph Charles & Assoc., Inc., 2500 N. Military
Trail, Suite 300, Boca Raton, Florida 33431 (or at such other place as may be
designated by agreement between you and the Company) at 10:00 a.m. Eastern
Standard Time on _______________, 1999, or at such other time and date, not
later than five (5) business days thereafter, as you may designate, such time
and date of payment and delivery for the Firm Shares being herein called the
"First Closing Date." Time shall be of the essence and delivery at the time and
place specified in this subsection (a) is a further condition to the obligations
of the Underwriters hereunder.
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants the Representatives an option to
purchase all or any part of Option Shares at the same price per Option Share as
the Representatives pay for the Firm Shares being sold pursuant to the
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<PAGE> 9
provisions of subsection (a) of this Section 2. This option may be exercised on
one occasion within 45-days after the Effective Date upon notice by you to the
Company advising it as to the amount of Option Shares as to which the option is
being exercised, the names and denominations in which the certificates for such
Option Shares are to be registered and the time and date when such certificates
are to be delivered. Such time and date shall be determined by you but shall not
be earlier than three (3) and not later than five (5) full business days after
the exercise of said option, nor in any event prior to the First Closing Date,
and such time and date is referred to herein as the "Option Closing Date."
Delivery of the Option Shares against payment therefor shall take place at the
offices of Joseph Charles & Assoc., Inc., 2500 N. Military Trail, Suite 300,
Boca Raton, Florida 33431, or as otherwise may be agreed in writing. Time shall
be of the essence and delivery at the time and place specified in this
subsection (b) is a further condition to the obligations of the Underwriters
hereunder.
The Option granted hereunder may be exercised only to cover
over-allotments in the sale of Firm Shares referred to in subsection (a) above.
(c) The Company will make one or more certificates for the
Shares to be purchased by the Representatives hereunder, in definitive form,
available to you for checking and packaging at the office of Joseph Charles &
Assoc., Inc., 2500 N. Military Trail, Suite 300, Boca Raton, Florida 33431 or at
such other location as the Representatives may reasonably request in writing at
least one (1) full business day prior to the First Closing Date or the Option
Closing Date (which are collectively referred to herein as the "Closing Dates"
and individually as a "Closing Date"), as the case may be. The certificates
shall be registered in such name or names and in such denomination or
denominations as you may request in writing, at least two (2) full business days
prior to the relevant Closing Date. Time shall be of the essence and the
availability of the certificates at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
Definitive certificates in negotiable form for the Securities
to be purchased by the Underwriters hereunder will be delivered by the Company
to you for the several accounts of the Underwriters against payment of the
purchase price by you, at your option, by certified or bank cashier's checks
payable in New York Clearing House funds or by wire transfer of same-day funds,
payable to the order of the Company.
In addition, in the event the Representatives exercise the
option to purchase from the Company all or any portion of the Option Shares
pursuant to the provisions of subsection (b) above, payment for such Option
Shares shall be made to or upon the order of the Company by you, for the several
accounts of the Underwriters, at your option, by certified or bank cashier's
checks payable in New York Clearing House funds or by wire transfer of same-day
funds payable to the order of the Company, at the offices of Joseph Charles &
Assoc., Inc. at the time and date of delivery of such Option Shares as required
by the provisions of subsection (b) above, against receipt of the certificates
for such Option Shares by you, for the several accounts of the Underwriters
registered in such names and in such denominations as you may request.
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If the Representatives so elect, delivery of the Firm Shares
and Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representatives.
It is understood that the Underwriters propose to offer the
Shares to be purchased hereunder to the public upon the terms and conditions set
forth in the Registration Statement, after the Registration Statement becomes
effective.
3. Covenants of the Company.
The Company covenants and agrees with each Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and, upon notification from the
Commission that the Registration Statement has become effective, will so advise
the Representatives and will not at any time, whether before or after the
Effective Date, file any amendment to the Registration Statement or supplement
to the Prospectus of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives or counsel to
the Representatives shall have reasonably objected in writing or which is not in
compliance with the Act and the Rules and Regulations. During any time when a
prospectus relating to the Shares is required to be delivered under the Act, the
Company will prepare and file with the Commission, promptly upon your request,
any amendments or supplements to the Registration Statement or Prospectus which,
in the Representatives' reasonable opinion, may be necessary or advisable in
connection with the distribution of the Shares.
Promptly after the Representatives or the Company is advised thereof,
the Representatives will advise the Company or the Company will advise the
Representatives, as the case may be, and confirm the advice in writing, of the
receipt of any comments of the Commission, of the effectiveness of any
post-effective amendment to the Registration Statement, of the filing of any
supplement to the Prospectus or any amended Prospectus, of any request made by
the Commission for amendment of the Registration Statement or for supplementing
of the Prospectus or for additional information with respect thereto, of the
issuance by the Commission or any state or regulatory body of any stop orders or
other order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, or of the suspension of the qualification of the Shares for offering
in any jurisdiction, or the institution of any proceedings for any of such
purposes, and will use its best efforts to prevent the issuance of any such
order and, if issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company authorizes
the Underwriters and dealers to use the Prospectus in connection with the sale
of the Shares for such period as is required to comply with the applicable
provisions of the Act and the Rules and Regulations. In case of the happening,
at any time within such period as a Prospectus is required under the Act to be
delivered in connection with sales by an underwriter or dealer, of any event of
which the Company has knowledge and which
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materially affects the Company or the Securities, or which in the opinion of
counsel for the Company or counsel for the Underwriters should be set forth in
an amendment to the Registration Statement or a supplement to the Prospectus in
order to make the statements therein not then misleading, in light of the
circumstances existing at the time the Prospectus is required to be delivered to
a purchaser of the Shares, or in case it shall be necessary to amend or
supplement the Prospectus to comply with the Act or with the Rules and
Regulations, the Company will notify you promptly and forthwith prepare and
furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as the Representatives reasonably
may request, in order that the Prospectus, as so amended or supplemented, will
not contain any untrue statement of a material fact or omit to state any
material facts necessary to make the statements in the Prospectus, in the light
of the circumstances under which they are made, not misleading. The preparation
and furnishing of any such amendment or supplement to the Registration Statement
or amended Prospectus or supplement to be attached to the Prospectus shall be
without expense to the Underwriters, except that in case the Underwriters are
required, in connection with the sale of the Shares, to deliver a Prospectus
nine months or more after the Effective Date, the Company will upon request of
and at your expense, amend or supplement the Registration Statement and
Prospectus and furnish the Underwriters with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
(b) The Company will comply with the Act, the Rules and
Regulations and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder in connection with the offering
and issuance of the Shares. The Company will use its best efforts to qualify or
register the Securities for sale under the securities or "Blue Sky" laws of such
jurisdictions as the Representatives may have designated in writing prior to the
execution hereof and will make such applications and furnish such information to
counsel for Joseph Charles & Assoc., Inc., as may be required for that purpose
and to comply with such laws, provided that the Company shall not be required to
qualify as a foreign corporation or a dealer in securities or to execute a
general consent to service of process in any jurisdiction. The Company will,
from time to time, prepare and file such statements and reports as are or may be
required to continue such qualification in effect for so long a period as you
may reasonably require for the distribution of the Shares. Legal fees for such
registration or qualifications under U.S. state Blue Sky laws shall be $15,000
exclusive of U.S. state Blue Sky filing fees and disbursements.
(c) The Company will instruct its transfer agent to provide
you with copies of the Depository Trust Company stock transfer sheets on a
weekly basis for a period of three (3) months from the First Closing Date and on
a monthly basis thereafter for nine (9) additional months.
(d) The Company is a reporting company under Section 12(g) of
the Exchange Act. The Company has filed all reports required under the Exchange
Act. None of such reports include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
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(e) For so long as the Company is a reporting company under
either Section 12(g), 13 or 15(d) of the Exchange Act, the Company, at its
expense, will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), and will furnish to you
during the period ending five (5) years from the date hereof, (i) as soon as it
is available after the end of each fiscal year, a consolidated balance sheet of
the Company and its Subsidiaries as at the end of such fiscal year, together
with consolidated statements of income, stockholders' equity and cash flows of
the Company and its Subsidiaries as at the end of such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report thereon
of independent accountants; (ii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iii) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission; and (iv) such other information of a
public nature as you may from time to time reasonably request.
(f) The financial statements referred to in subsection (e)
above will be on a consolidated basis to the extent the accounts of the Company
and its Subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First
Closing Date two (2) originally signed copies of the Registration Statement,
including all financial statements and exhibits filed therewith and all
amendments thereto. The Company will deliver to or upon your order, from time to
time until the Effective Date as many copies of any Preliminary Prospectus filed
with the Commission prior to the Effective Date as the Underwriters may
reasonably request. The Company will deliver to you on the Effective Date and
thereafter for so long as a Prospectus is required to be delivered under the
Act, from time to time, as many copies of the Prospectus, in final form, or as
thereafter amended or supplemented, as the Underwriters may from time to time
reasonably request.
(h) The Company will make generally available to its security
holders and deliver to you as soon as it is practicable to do so, but in no
event later than ninety (90) days after the end of twelve (12) months after its
current fiscal quarter, an earnings statement (which need not be audited)
covering a period of at least twelve (12) consecutive months beginning after the
Effective Date which shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will, promptly upon your request, prepare and
file with the Commission any amendments or supplements to the Registration
Statement, preliminary Prospectus or Prospectus and take any other action, which
in the opinion of De Martino Finkelstein Rosen & Virga, counsel to Joseph
Charles & Assoc., Inc., may be reasonably necessary or advisable in connection
with the distribution of the Shares and will use its best efforts to cause the
same to become effective as promptly as possible.
(j) Prior to the Effective Date, the Company will cause all of
the directors, executive officers and 5% stockholders of the Company (except
Ingalls & Snyder L.L.C.), and those employees, consultants, and attorneys who
are issued options after March 23, 1999, and prior to the Effective Date, to
enter into a written agreement with the Representatives, reasonably acceptable
to the Representatives which, among other things, shall provide that for a
period of six
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(6) months following the Effective Date of the Registration Statement ("Lock-up
Period"), such persons will not offer, sell, contract to sell, transfer, assign,
gift, grant any option or warrant to purchase or right to acquire, any of the
shares of Common Stock or other capital stock or securities of the Company
(including preferred stock, warrants, options or other securities convertible
into Common Stock which may be deemed to be owned beneficially by such person in
accordance with the rules of the Commission) owned by them on the Effective
Date, or subsequently acquired by the exercise of any options or warrants or
conversion of any convertible security of the Company held by them on the
Effective Date directly or indirectly, except with Joseph Charles & Assoc.,
Inc.'s prior written consent, other than intra-family transfers or transfers to
trusts for estate planning purposes, and the Company will instruct the transfer
agent for the Company to place stop transfer restrictions on the transfer books
and records of the Company against such shares of Common Stock or other capital
stock. Notwithstanding the foregoing, during the Lock-up Period and commencing
ninety (90) days after the Effective Date, Dr. Alvin J. Glasky may sell up to
200,000 shares of Common Stock pursuant to Rule 144.
(k) As of the date hereof, the shares of Common Stock of the
Company are listed on The Nasdaq National Market and the Company will use its
best efforts to maintain such listing for at least three (3) years from the date
of this Agreement. Within ten (10) days after the Effective Date, the Company
shall cause the Company to be listed in the Moody's OTC Industrial Manual or S&P
Manual and cause such listing to be maintained for three (3) years from the date
of this Agreement.
(l) The Company has not taken, and agrees that it will not
take, directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result in the stabilization or
manipulation of the price of the Shares, or to facilitate the sale or resale of
the Securities.
(m) During the period of the offering, and for a period of six
(6) months from the later of the First Closing or Option Closing Date, the
Company will not sell or otherwise dispose of any shares of Common Stock or
preferred stock or other securities or issue warrants or options or other equity
securities of the Company (except for: (i) shares of Common Stock in connection
with strategic partnership transactions; (ii) shares of Common Stock issuable
upon exercise of options and warrants outstanding on the First Closing Date;
(iii) shares of Common Stock in connection with an acquisition; (iv) shares of
Common Stock pursuant to the Company's equity line of credit in the amount of up
to $10.5 million with Kingsbridge Capital, Ltd.; and/or (v) shares of Common
Stock upon conversion of outstanding shares of the Company's Series A Preferred
Stock) or purchase any securities of the Company without Joseph Charles &
Assoc., Inc.'s prior written consent, which shall not be unreasonably withheld.
(n) The Company shall retain a public relations firm
reasonably acceptable to Joseph Charles & Assoc., Inc., and shall continue to
retain such firm, or any alternate firm acceptable to Joseph Charles & Assoc.,
Inc., for a minimum period of one (1) year following the later of the First
Closing or Option Closing Date.
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(o) The Company will reserve and keep available that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Representatives' Warrants outstanding from time to time.
(p) The Company shall deliver to the Representatives, at the
Company's expense, five (5) bound volumes containing the Registration Statement
and all exhibits filed therewith, and all amendments thereto, and all other
material correspondence, filings, certificates and other documents filed and/or
delivered in connection with this offering and such number of cubes as the
Representatives may reasonably request. The Company shall use its best efforts
to deliver such volumes and cubes within one hundred eighty (180) days of the
First Closing Date.
(q) The Company shall deliver to Joseph Charles & Assoc., Inc.
an executed financial consulting agreement ("Financial Consulting Agreement") in
form and substance reasonably acceptable to Joseph Charles & Assoc., Inc.
whereby Joseph Charles & Assoc., Inc. agrees to act as a financial consultant
for a period of __________ (__) months from the First Closing Date for a fee of
$4,000 per month payable in advance at the First Closing Date.
(r) The Company shall have acquired directors' and officers'
liability insurance (provided that such insurance can be obtained at a
reasonable cost as determined by the Company and Joseph Charles & Assoc., Inc.)
from an insurer and in an amount reasonably satisfactory to Joseph Charles &
Assoc., Inc.
(s) If at any time during the one hundred-eighty (180) day
period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which in your opinion the market price of the Common Stock has been or
is likely to be affected materially (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
4. Conditions of Obligations of the Underwriters.
The obligations of the Underwriters to purchase and pay for the Shares
which they have agreed to purchase hereunder are subject to the accuracy (as of
the date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 4:30 p.m., Eastern
Standard Time, on the date of this Agreement, or at such later time or on such
later date as to which you may agree in writing; on the Closing Dates, no stop
order suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that or any similar purpose shall have been
instituted or shall be pending or, to the knowledge of any Underwriter or to the
knowledge of the Company, shall be
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contemplated by the Commission; any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of De Martino Finkelstein Rosen & Virga, counsel to Joseph Charles
& Assoc., Inc.; and no stop order shall be in effect denying or suspending
effectiveness of the Registration Statement nor shall any stop order proceedings
with respect thereto be instituted or pending or threatened under the Act.
(b) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Stradling Yocca Carlson & Rauth,
counsel for the Company, in form and substance reasonably satisfactory to
counsel for the Representatives, to the effect that:
(i) Each of the Company and Advanced ImmunoTherapeutics,
Inc. ("AIT"), has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation and is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each other state of the United States in
which the nature of its business or the character or location of its properties
requires such qualification, except where failure to so qualify will not have a
Material Adverse Effect. The Company has the corporate power to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectus and to enter into and perform its
obligations under this Agreement, the Representatives' Warrants and the
Financial Consulting Agreement. All of the Company's Subsidiaries are listed in
Exhibit 21.1 to the Registration Statement. All of the outstanding shares of
capital stock of AIT have been duly authorized and validly issued, are fully
paid and non-assessable, and except as set forth in the Registration Statement,
are, to the knowledge of such counsel, owned by the Company directly or
indirectly through one of the other Subsidiaries, free and clear of any lien,
adverse claim, security interest, equity or other encumbrance;
(ii) The authorized capital stock of the Company as of
the date of the Prospectus was as set forth under "Capitalization" in the
Registration Statement and the Prospectus. The shares of issued and outstanding
capital stock of the Company set forth thereunder have been duly authorized,
validly issued and are fully paid and non-assessable; the outstanding securities
of the Company, including without limitation, the Shares of the Company, have
been duly authorized and issued in compliance with or under an exemption from
registration under the Act and applicable state securities laws and have not
been issued in violation of the preemptive or, to the knowledge of such counsel,
similar rights of any stockholder. The stockholders of the Company do not have
any preemptive rights or, to such counsel's knowledge, other rights to subscribe
for or to purchase any of the Shares subject hereof. Except for (i) the transfer
restrictions regarding "affiliates" contained in Rule 144 promulgated under the
Act, (ii) restrictions provided for in this Agreement, and (iii) with respect to
the Representatives' Warrants, restrictions stated therein or under the NASD's
Conduct Rules, there are no restrictions upon the voting or transfer of, any of
the Shares or the Common Stock and there are no restrictions on the transfer of
the Representatives' Warrants. Except as set forth in the Prospectus, to the
knowledge of such counsel, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any shares of capital stock of the Company have
been granted or entered into by the Company. The Shares conform in all material
respects to all statements relating thereto contained in the Registration
Statement and Prospectus;
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<PAGE> 16
(iii) The Shares are duly authorized and, when issued,
delivered and paid for pursuant to the Underwriting Agreement, will be duly
authorized, validly issued, fully paid and nonassessable and free of preemptive
rights of any security holder of the Company. The certificates evidencing the
Shares are in valid and proper legal form. The Representatives' Warrants are
exercisable for shares of Common Stock of the Company in accordance with the
terms of the Representatives' Warrants and at the prices provided for therein.
The shares of Common Stock issuable upon exercise of the Representatives'
Warrants have been duly authorized and reserved for issuance upon such exercise,
and such shares, when issued upon such exercise in accordance with the terms of
the Representatives' Warrants and when the price is paid, shall be fully paid
and non-assessable. Neither the filing of the Registration Statement nor the
issuance, offering or sale of any of the Shares or Representatives' Warrants as
contemplated in this Agreement gives rise to any rights under any agreement
known to such counsel, other than those which have been waived or satisfied, for
or relating to the registration of any securities of the Company, except as
described in the Registration Statement;
(iv) The Underwriting Agreement, the Representatives'
Warrants and the Financial Consulting Agreement have been duly and validly
authorized by all corporate action on the part of the Company and have been duly
executed and delivered by the Company, and assuming due execution by the other
party or parties hereto and thereto, constitute valid and binding obligations of
the Company enforceable against the Company, in accordance with their respective
terms, except as rights to indemnity and contribution hereunder may be limited
by applicable law and except as enforceability may be limited by bankruptcy,
insolvency or other laws affecting the rights of creditors generally or by
general equitable principles of law. The Company has full power and authority to
authorize, issue and sell the Securities to be sold by it thereunder on the
terms and conditions set forth therein, and no consent, approval, authorization
or other order of any governmental authority is required in connection with such
authorization, execution and delivery or with the authorization, issue and sale
of the Securities, the Representatives' Warrants or the Securities underlying
the Representatives' Warrants, except such as may be required under the Act,
state securities laws (as to which such counsel need express no opinion), or the
by-laws and rules of the National Association of Securities Dealers, Inc.
("NASD");
(v) To the knowledge of such counsel and except as
described in the Prospectus, the Company is not in violation, breach or default
of or under, and consummation of the transactions herein contemplated and the
fulfillment of the terms of the Underwriting Agreement, and the Representatives'
Warrants and the Financial Consulting Agreement (as defined in Section 3(p)) do
not conflict with, or result in a breach of, any of the terms or provisions of,
or constitute a default under, or result in the creation or imposition of any
lien, charge or encumbrance pursuant to the terms of, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which the
Company is a party or by which the Company may be bound or to which any of the
property or assets of the Company are subject, which would have a Material
Adverse Effect, nor, to such counsel's knowledge, will such action result in any
violation of the provisions of any statute or any order, rule or regulation
applicable to the Company of any court or of any regulatory authority or other
governmental body having jurisdiction over the Company;
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<PAGE> 17
(vi) Neither the Company nor AIT is in violation of its
charter or by-laws;
(vii) Except as set forth in the Prospectus, there is not
now pending nor, to the knowledge of such counsel, threatened, any action, suit
or proceeding (including those related to environmental matters or
discrimination on the basis of age, sex, religion or race) to which the Company
is a party before or by any court or governmental agency or body, which, if
adversely determined, would have a Material Adverse Effect on the Company; and,
except as set forth in the Prospectus, no labor disputes involving the employees
of the Company exist which, if adversely determined, would have a Material
Adverse Effect on the Company;
(viii) The Registration Statement has become effective
under the Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are pending before or
contemplated by the Commission and any and all filings required by Rule 424 and
430A of the Rules and Regulations have been made. The Registration Statement and
the Prospectus (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto, for the
consolidated financial statements and notes and schedules thereto, and other
financial information or statistical data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) comply as to form
in all material respects with the applicable requirements of the Act and the
Rules and Regulations with respect to registration statements on Form S-1;
(ix) All descriptions in the Registration Statement and
the Prospectus, and any amendment or supplement thereto, of contracts, plans,
options and other documents are accurate and fairly present the information
required to be shown in all material respects, and such counsel is familiar with
all contracts and other documents referred to in the Registration Statement and
the Prospectus and any such amendment or supplement, or filed as exhibits to the
Registration Statement, and such counsel does not know of any contracts or
documents of a character required to be summarized or described therein or to be
filed as exhibits thereto which are not so summarized, described or filed;
(x) To the extent that the statements contained in the
Prospectus under the headings "Business - Legal Proceedings" (except with
respect to intellectual property matters), "Management Employment Agreements,"
"Management - Stock Option Plans," "Description of Capital Stock," "Shares
Eligible For Future Sale," "Certain Relationships and Related Transactions,"
"Certain United States Federal Tax Considerations for Non-U.S. Holders of Common
Stock," and "Legal Matters" refer to opinions of such counsel on matters of law
or purport to summarize the status of litigation or purport to summarize the
provisions of statutes, regulations, contracts, agreements or other documents,
such statements have been reviewed by such counsel and accurately reflect the
status of any such litigation, such provisions purported to be summarized and
any such opinions of such counsel;
(xi) The Securities have been approved for listing on The
Nasdaq National Market system ("Nasdaq NMS");
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<PAGE> 18
(xii) The Company is not, and immediately after receipt
of payment for the Shares will not be, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended; and
(xiii) Except as disclosed in the Prospectus and
Registration Statement and except for such rights which have been waived or
satisfied, to the knowledge of such counsel, there are no persons with
registration or other similar rights to have any equity or debt securities
registered for sale under the Registration Statement or included in the offering
contemplated by this Agreement.
Such counsel has participated in conferences with officers,
directors, employees and Representatives of the Company in connection with the
preparation of the Registration Statement and nothing has come to the attention
of such counsel which causes them to believe that the Registration Statement
(except as to financial statements, as aforesaid) at the time it became
effective contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or that the Prospectus and any supplement or amendment
thereto (except as to financial statements, as aforesaid), contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading;
In rendering such opinion, counsel may rely (i) as to matters
of law other than the State of California and federal law, upon the opinion or
opinions of local counsel provided that the extent of such reliance is specified
in such opinion and that such counsel shall state that such opinion or opinions
of local counsel are satisfactory to them and that they believe they and you are
justified in relying thereon and (ii) as to matters of fact, upon certificates
of officers of the Company provided that the extent of such reliance is
specified in the opinion.
(c) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Oppenheimer Wolff & Donnelly
L.L.P., as patent counsel to the Company, in form and substance reasonably
satisfactory to counsel to Joseph Charles & Assoc., Inc., to the effect that:
(i) Such counsel is familiar with the technology embodied
in the Company's patents ("Patents") and the patent applications as listed in an
exhibit to the opinion ("Patent Applications");
(ii) The statements in the Registration Statement and the
Prospectus under the captions "Risk Factors - We Face Uncertainty Regarding
Patents and Proprietary Rights," "Business - Patents and Proprietary Rights,"
and under the caption "Business," solely to the extent such statements relate to
patent matters, are accurate and complete statements or summaries of the matters
therein set forth and nothing has come to such counsel's attention that causes
such counsel to believe that the above-described portions of the Registration
Statement and the Prospectus contain any untrue statement of a material fact or
omit to state a material fact
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<PAGE> 19
required to be stated therein or necessary to make the statement therein, in the
light of the circumstances under which they were made, not misleading;
(iii) Except as set forth in the Prospectus under the
captions "Risk Factors - We Face Uncertainty Regarding Patents and Proprietary
Rights," "Business - Patents and Proprietary Rights," and "Business - Legal
Proceedings," to such counsel's knowledge, there are no legal or governmental
proceedings pending, except patent prosecution, relating to patent rights, trade
secrets, or other proprietary information or materials of the Company and its
Subsidiaries, and, to such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or others;
(iv) To such counsel's knowledge, the Company and
Advanced ImmunoTherapeutics, Inc., the Company's wholly owned subsidiary
("AIT"), have complied and are continuing to comply on an ongoing basis with the
required duty of candor and good faith in dealing with the United States Patent
and Trademark Office (the "USPTO"), including the duty to disclose to the USPTO
all information actually known by the Company and AIT to be material to the
patentability of each of the Patents or Patent Applications;
(v) Except as set forth in the Prospectus, to the
knowledge of such counsel, (a) the use by the Company or AIT of the technology
embodied in the Patents and Patent Applications will not infringe or otherwise
violate any patents of others, and (b) there are no infringements by others of
any of the Company's and AIT's Patents which could affect materially the use
thereof by the Company and AIT; and
(vi) To such counsel's knowledge, there are no patents
which would prevent the Company, without obtaining a license from the owner of
such patent, from commercializing the Company's technology embodied in the
Patents and Patent Applications.
In rendering such opinion, counsel may rely (i) as to matters
of law other than the State of California and federal law, upon the opinion or
opinions of local counsel provided that the extent of such reliance is specified
in such opinion and that such counsel shall state that such opinion or opinions
of local counsel are satisfactory to them and that they believe they and you are
justified in relying thereon and (ii) as to matters of fact, upon certificates
of officers of the Company provided that the extent of such reliance is
specified in the opinion.
(d) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of ___________________, Swiss
counsel to the Company and NeoTherapeutics GmbH, in form and substance
reasonably satisfactory to counsel for the Representatives, to the effect that:
(i) NeoTherapeutics GmbH has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdictions of its incorporation and is duly qualified or licensed to do
business as a foreign corporation and is in good standing in each other
jurisdiction in which the nature of its business or the character or location of
its properties requires such qualification, except where failure to so qualify
will not have a Material
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<PAGE> 20
Adverse Effect. All of the outstanding shares of capital stock of
NeoTherapeutics GmbH have been duly authorized and validly issued, are fully
paid and non-assessable, and except as set forth in the Registration Statement,
are, to the knowledge of such counsel, owned by the Company directly or
indirectly through one of the other Subsidiaries, free and clear of any lien,
adverse claim, security interest, equity or other encumbrance; and
(ii) NeoTherapeutics GmbH is not in violation of its
charter or by-laws.
In rendering such opinion, counsel may rely (i) as to matters
of law other than the laws of Switzerland, upon the opinion or opinions of local
counsel provided that the extent of such reliance is specified in such opinion
and that such counsel shall state that such opinion or opinions of local counsel
are satisfactory to them and that they believe they and you are justified in
relying thereon and (ii) as to matters of fact, upon certificates of officers of
the Company provided that the extent of such reliance is specified in the
opinion.
(e) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Kleinfeld, Kaplan & Becker, Food
and Drug Administration ("FDA") counsel to the Company, in form and substance
reasonably satisfactory to counsel for the Representatives, to the effect that:
(i) The statements in the Registration Statement and
Prospectus under the captions "Risk Factors - We Need to Comply with Extensive
Governmental Regulation to Obtain Product Approvals" and "Business - Drug
Approval Process and Other Government Regulation" are complete and accurate in
all material respects and are a fair summary of the applicable statutes,
regulations and legal procedures applied by the United States Food and Drug
Administration in its administration of the Federal Food, Drug and Cosmetics Act
("FDA Laws") and the FDA review processes to which the products of the Company
described in the Prospectus and Registration Statement are subject.
No facts have come to such counsel's attention that lead such
counsel to believe that the description of FDA Laws and FDA review processes
relating to the manufacture or sale of the Company's products as contained in
the above-referenced portions of the Registration Statement and Prospectus,
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
In rendering such opinion, counsel may rely (i) as to matters
of law other than the District of Columbia and federal law, upon the opinion or
opinions of local counsel provided that the extent of such reliance is specified
in such opinion and that such counsel shall state that such opinion or opinions
of local counsel are satisfactory to them and that they believe they and you are
justified in relying thereon and (ii) as to matters of fact, upon certificates
of officers of the Company provided that the extent of such reliance is
specified in the opinion.
(f) All corporate proceedings and other legal matters relating
to this Agreement, the Registration Statement, the Prospectus, and other matters
directly related to this Agreement and
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<PAGE> 21
the offering contemplated hereby shall be reasonably satisfactory to or approved
by De Martino Finkelstein Rosen & Virga, counsel to the Representatives.
(g) You shall have received a "cold comfort" letter on and as
of the date of the execution of this Agreement (the "Original Comfort Letter")
and again on and as of the First Closing Date, in each instance describing
procedures carried out to a date within five (5) days of the date of the letter,
from Arthur Andersen LLP, independent public accountants for the Company, with
respect to the consolidated financial statements and certain consolidated
financial information contained in the Registration Statement and Prospectus,
substantially in the form approved by you.
(h) At each of the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
with the same effect as if made on and as of such Closing Date, and the Company
shall have performed all of its obligations hereunder and satisfied all the
conditions on its part to be satisfied at or prior to such Closing Date; (ii)
the Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and shall in all material
respects conform to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statements of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading; (iii)
there shall have been, since the respective dates as of which information is
given, no material adverse change in the business, properties, condition
(financial or otherwise), business prospects, results of operations, capital
stock, long-term or short-term debt or general affairs of the Company from that
set forth in the Registration Statement and the Prospectus, except changes which
the Registration Statement and Prospectus indicate might occur after the
Effective Date and the Company shall not have incurred any material liabilities
nor entered into any agreement not in the ordinary course of business other than
as referred to in the Registration Statement and Prospectus; and (iv) except as
set forth in the Prospectus, no action, suit or proceeding at law shall be
pending or, to its knowledge, threatened against the Company which would be
required to be disclosed in the Registration Statement, and no proceedings shall
be pending or, to its knowledge, threatened against the Company before or by any
commission, board or administrative agency in the United States or elsewhere,
wherein an unfavorable decision, ruling or finding would materially and
adversely affect the business, property, condition (financial or otherwise),
results of operations or general affairs of the Company. In addition, you shall
have received, at the First Closing Date, a certificate signed by the President
and the principal financial or accounting officer of the Company, dated as of
the First Closing Date, evidencing compliance with the provisions of this
subsection (h).
(i) Upon exercise of the option provided for in Section 2(b)
hereof, the obligations of the Representatives to purchase and pay for the
Option Shares referred to therein will be subject (as of the date hereof and as
of the Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at
the Option Closing Date, no stop order suspending the effectiveness thereof
shall have been issued, and no
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proceedings for that purpose shall have been instituted or shall be pending, or,
to your knowledge or the knowledge of the Company, shall be contemplated by the
Commission, and any reasonable request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of De Martino Finkelstein Rosen & Virga, counsel to the
Representatives.
(ii) At the Option Closing Date there shall have been
delivered to you signed opinions of Stradling Yocca Carlson & Rauth, counsel for
the Company, and Oppenheimer Wolff & Donnelly L.L.P., patent counsel for the
Company, ____________________, Swiss counsel to the Company and NeoTherapeutics
GmbH, and Kleinfeld, Kaplan & Becker, FDA counsel to the Company, dated as of
the Option Closing Date, in form and substance reasonably satisfactory to De
Martino Finkelstein Rosen & Virga, counsel to the Representatives, which
opinions shall be substantially the same in scope and substance as the opinion
furnished to you at the First Closing Date pursuant to Section 4(b), 4(c), 4(d)
and 4(e) hereof, except that such opinions, where appropriate, shall cover the
Option Shares rather than the Firm Shares. If the First Closing Date is the same
as the Option Closing Date, such opinions may be combined.
(iii) At the Option Closing Date, there shall have been
delivered to you a certificate of the President and the Chairman of the Board of
Directors of the Company dated the Option Closing Date, in form and substance
reasonably satisfactory to De Martino Finkelstein Rosen & Virga, counsel to the
Representatives, substantially the same in scope and substance as the
certificates furnished to you at the First Closing Date pursuant to Section 4(h)
hereof.
(iv) At the Option Closing Date, there shall have been
delivered to you a letter in form and substance satisfactory to you from Arthur
Andersen LLP, dated the Option Closing Date and addressed to you, confirming the
information in the Original Comfort Letter referred to in Section 4(g) hereof as
of the date thereof and stating that, without any additional investigation
required, nothing has come to their attention during the period from the ending
date of their review referred to in said letter to a date not more than five (5)
days prior to the Option Closing Date which would require any change in said
letter if it were required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option
Closing Date in connection with the sale and issuance of the Option Shares shall
be reasonably satisfactory in form and substance to you, and you and/or De
Martino Finkelstein Rosen & Virga, counsel to the Representatives, shall have
been furnished with all such documents and certificates as you may request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of the
Company or of its compliance with any of the covenants or conditions contained
therein.
(j) If any of the conditions provided for in this Section
shall not have been completely fulfilled as of the date indicated, this
Agreement and all obligations of the Underwriters under this Agreement may be
canceled at, or at any time prior to, each Closing Date by your notifying the
Company of such cancellation in writing or by telegram at or prior to the
applicable
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<PAGE> 23
Closing Date. Any such cancellation shall be without liability of any
Underwriter to the Company, except as otherwise provided herein.
5. Conditions of the Obligations of the Company.
The obligation of the Company to sell and deliver the Shares is subject
to the following conditions:
(a) The Registration Statement shall have become effective not
later than 4:30 p.m. Eastern Standard Time, on the date of this Agreement, or at
such later time or on such later date as to which you and the Company may agree
in writing.
(b) On the Closing Dates, no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the Act
or any proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided for in
this Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Option Shares on exercise of
the option provided for in Section 2(b) hereof shall be affected.
6. Indemnification.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Representative and Underwriter, their
shareholders, partners, directors, officers, employees, and counsel, and each
person, if any, who controls the Representatives and each Underwriter within the
meaning of Section 15 of the Act and Section 20 of the Exchange Act against any
loss, claim, damage, liability or expense, as incurred, to which each
Representative and Underwriter or such controlling person may become subject,
under the Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based (i) upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Act, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (ii) upon any
untrue statements or alleged untrue statement of a material fact contained in
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) any act or failure to act or any alleged act or
failure to act by the Representatives or any Underwriter in connection with, or
relating in any manner to, the Common Stock or the offering contemplated hereby,
and which is included as part of or referred to
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<PAGE> 24
in any loss, claim, damage, liability or action arising out of or based upon any
matter covered by clause (i) or (ii) above, provided that the Company shall not
be liable under this clause (iv) to the extent that a court of competent
jurisdiction shall have determined by a final judgment that such loss, claim,
damage, liability or action resulted directly from any such acts or failures to
act undertaken or omitted to be taken by the Representatives or such Underwriter
through its bad faith or willful misconduct; and to reimburse the
Representatives or each Underwriter and each such controlling person for any and
all expenses (including the fees and disbursements of counsel chosen by the
Representatives) as such expenses are reasonably incurred by the Representatives
or such Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by the Representatives expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
the Representatives or any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Shares, or any person controlling
the Representatives or such Underwriter, if copies of the Prospectus were timely
delivered to the Representatives or the Underwriter pursuant to the provisions
hereunder, and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of the Representatives or such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage, liability or expense; and provided, further, that the
Company may agree, and without limiting the rights of the Representatives or the
Underwriters under this Agreement, as to the respective amounts of such
liability for which it shall be responsible. The indemnity agreement set forth
in this Section 6(a) shall be in addition to any liabilities that the Company
may otherwise have.
(b) Indemnification of the Company and each Director and
Officer of the Company. Each Representative and Underwriter agrees, severally
and not jointly, to indemnify and hold harmless the Company, each of its
shareholders, partners, directors, and counsel, and each of its officers who
signed the Registration Statement, each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
against any loss, claim, damage, liability or expense, as incurred to which the
Company, or any director, officer or controlling person of the Company may
become subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or arises out of or is
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the
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<PAGE> 25
statements therein, in the light of the circumstances under which they were
made, not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any preliminary prospectus, the
Prospectus (or any amendment or supplement thereto), in reliance upon and in
conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
director, officer or controlling person, for any legal and other expense
reasonably incurred by the Company, or any director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The Company
hereby acknowledges that the only information that the Representatives and the
Underwriters have furnished to the Company expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) information under the
caption "Underwriting" in the Prospectus; and (B) information under the heading
"Legal Matters." The indemnity agreement set forth in this Section 6(b) shall be
in addition to any liabilities that the Representatives and each Underwriter may
otherwise have.
(c) Notifications and Other Indemnification Procedures.
Promptly after receipt by an indemnified party under this Section 6 of notice of
the commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this Section
6, notify the indemnifying party in writing of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve the indemnifying
party from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section 6, to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it shall elect, jointly with all other indemnifying parties
similarly notified, by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that a conflict may arise
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 6 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
provisions of the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (a Representative in the case of Section 6(b) and Section 7), representing
the indemnified parties who are parties to such action) or (ii) the
25
<PAGE> 26
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 6
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense incurred
by reason of such settlement or judgment. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any settlement,
compromise or consent to the entry of judgment in any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or could
have been a party and indemnity was or could have been sought hereunder by such
indemnified party, unless such settlement, compromise or consent includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
7. Contribution.
If the indemnification provided for in Section 6 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party of any losses, claims, damages, liabilities or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
paid or payable by such indemnified party, as incurred, as a result of any
losses, claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand, and the Underwriters, on the other hand, from the
offering of the Shares pursuant to this Agreement or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand, and the Underwriters, on the other hand, in connection with the statements
or omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company on the one hand, and the Underwriters, on the other hand, in
connection with the offering of the Shares pursuant to this Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Shares pursuant to this Agreement (before deducting
expenses) received by the Company, and the total underwriting discount received
by the Underwriters, in each case as set forth on the front cover page of the
Prospectus, bear to the aggregate public offering price of the Shares as set
forth on such cover. The relative fault of the Company on the one hand, and the
Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact or any such
inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company on the one hand, or the Underwriters, on the
other hand, and the parties relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
26
<PAGE> 27
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 6(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 6(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 7; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 6(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 7.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Shares underwritten by it
and distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters obligations to contribute pursuant to this
Section 7 are several, and not joint, in proportion to their respective
underwriting commitments as set forth opposite their names in Schedule I. For
purposes of this Section 7, each officer and employee of an Underwriter and each
person, if any, who controls an Underwriter within the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company with the meaning of the Securities Act and the Exchange Act shall have
the same rights to contribution as the Company.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the
sale of the Shares to the Underwriters is consummated, the Company will pay all
costs and expenses incident to the performance of this Agreement by the Company,
including but not limited to the fees and expenses of counsel to the Company and
of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the consolidated financial statements therein and all
amendments and exhibits thereto), each Preliminary Prospectus and the
Prospectus, as amended or supplemented, the fee of the National Association of
Securities Dealers, Inc. ("NASD") in connection with the filing required by the
NASD relating to the offering of the Shares contemplated hereby; all expenses,
including fees (but not in excess of the amount set forth in Section 3(b)) and
disbursements of counsel to the Representatives, in connection with the
qualification of the Shares under the state or foreign securities or Blue Sky
Laws which you shall designate; the cost of printing and furnishing to you
copies of the Registration Statement, each Preliminary Prospectus, the
Prospectus, this Agreement, the Agreement Among Underwriters and related
agreements, and the Blue Sky Memorandum; the cost of printing the certificates
representing the Securities, the expenses of Company due diligence
27
<PAGE> 28
meetings and presentations (but not of any Representatives or Representatives'
counsel in connection therewith), the expense of placing one "tombstone"
advertisement as directed by you and approved by the Company, and the cost of
preparing bound volumes of all public offering documents and of the cubes to be
distributed to the Representatives. The Company shall pay or reimburse the
Representatives for the costs of background searches with respect to the
officers, directors and shareholders of the Company. All "road show" expenses
incurred by the Representatives shall be borne by the Company. The Company shall
pay any and all taxes (including any transfer, franchise, capital stock or other
tax imposed by any jurisdiction) on sales to the Representatives and the
Underwriters hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus as called for in Section 3(a) of this Agreement
except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses, the Company shall
at the First Closing Date pay to you the balance of a non-accountable expense
allowance equal to 3.00% of the gross proceeds of the offering, of which $50,000
has been paid. In the event the over-allotment option is exercised in part or in
full, the Company shall pay to you at the Option Closing Date an additional
amount equal to 3.00% of the gross proceeds received upon exercise of the
over-allotment option. In the event the transactions contemplated hereby are not
consummated for any reason, the Company shall be liable for your actual
accountable out-of-pocket expenses (with credit given to the amount heretofore
paid), including legal fees, provided however, that any portion of the $50,000
paid by the Company that has not been utilized by you in connection with the
offering on an accountable basis shall be refunded by you to the Company; and
further provided that if the contemplated transactions are not consummated by
reason of breach by the Company of this Agreement or of any representation,
warranty, covenant or condition contained herein, the Company shall be liable
for your accountable out-of-pocket expenses.
(c) Except as disclosed in the Prospectus and Registration
Statement, no person is entitled either directly or indirectly to compensation
from the Company, from any Underwriter or from any other person for services as
a finder in connection with the proposed offering, and the Company agrees to
indemnify and hold harmless each Underwriter, and the Underwriters agree to
indemnify and hold harmless, severally and not jointly, the Company from and
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all reasonable attorneys'
fees), to which the indemnified party may become subject insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon the claim of any person (other than an employee of the party
claiming indemnity) or entity that he or it is entitled to a finder's fee in
connection with the proposed offering by reason of such person's or entity's
influence or prior contact with the indemnifying party.
9. Default of One or More of the Several Underwriters.
If, on the First Closing Date or the Option Closing Date, as the case
may be, any one or more of the several Underwriters fail or refuse to purchase
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting
28
<PAGE> 29
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Shares set forth opposite their respective names on Schedule I bears to
the aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as may be specified by
the Representatives with the consent of the non-defaulting Underwriters, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date. If, on the First Closing Date or the
Option Closing Date, as the case may be, any one or more of the Underwriters
shall fail or refuse to purchase Shares and the aggregate number of Shares with
respect to which such default occurs exceeds 10% of the aggregate number of
Shares to be purchased on such date, and arrangements satisfactory to the
Representatives and the Company for the purchase of such Shares are not made
within 48 hours after such default, this Agreement shall terminate without
liability of any party to any other party except that the provisions of Section
6, Section 7 and Section 8 shall at all times be effective and shall survive
such termination. In any such case either the Representatives or the Company
shall have the right to postpone the First Closing Date or the Option Closing
Date, as the case may be, but in no event for longer than seven days in order
that the required changes, if any, to the Registration Statement and the
Prospectus or any other document or arrangements may be effected.
As used in this Agreement, the term Underwriter shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
9. Any action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10. Effective Date.
The Agreement shall become effective upon its execution, except that
you may, at your option, delay its effectiveness until the earlier to occur of
(a) 10:00 a.m., Eastern Standard Time, on the first full business day following
the Effective Date or (b) the day on which the Representatives in their
discretion shall first commence the public offering of any of the Shares. This
Agreement may be terminated by you at any time before it becomes effective as
provided above, except that Sections 6, 7, 8, 13, 14, 15 and 16 shall remain in
effect notwithstanding such termination. The time of the public offering shall
mean the time of release by you of the first newspaper advertisement with
respect to the Shares, or the time when the Shares are first generally offered
by you to dealers by letter or telecopier, whichever shall occur first.
11. Termination.
(a) This Agreement, except for Sections 6, 7, 8, 13, 14, 15
and 16, may be terminated at any time prior to the First Closing Date, and the
option referred to in Section 2(b), if exercised, may be canceled, at any time
prior to the Option Closing Date, by the Representatives if in the
Representatives' judgment it is impracticable to offer for sale or to enforce
contracts made by you for the resale of the Shares agreed to be purchased
hereunder, by reason of (i) the Company having sustained a material loss,
whether or not insured, by reason of fire, earthquake, flood, accident or other
calamity, or from any labor dispute or court or government action, order or
decree,
29
<PAGE> 30
(ii) trading in securities on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq NMS having been suspended or limited, (iii) material
governmental restrictions having been imposed on trading in securities generally
which are not in force and effect on the date hereof, (iv) a banking moratorium
having been declared by federal or New York State authorities, (v) an outbreak
of major international hostilities or other national or international calamity
having occurred, (vi) the passage by the Congress of the United States or by any
state legislative body of similar impact, of any act or measure, or the adoption
of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive,
which is reasonably believed likely by you to have a material adverse impact on
the business, financial condition or financial statements of the Company, (vii)
any material adverse change in the financial or securities markets beyond normal
fluctuations in the United States having occurred since the date of this
Agreement, or (viii) any material adverse change having occurred, since the
respective dates for which information is given in the Registration Statement
and Prospectus, in the earnings, business, prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If the Representatives elect to prevent this Agreement
from becoming effective or to terminate this Agreement as provided in this
Section 11 or in Section 10, the Company shall be promptly notified by you, by
telephone or facsimile transmission, confirmed by letter.
12. Representatives' Warrants.
On the First Closing Date, the Company will issue to you, for a
consideration of $100.00 ($.001 per Warrant) and upon the terms and conditions
set forth in the form of Representatives' Warrants annexed as an exhibit to the
Registration Statement, the Representatives' Warrants to purchase 100,000
Shares. In the event of conflict in the terms of this Agreement and the
Representatives' Warrants, the language of the Representatives' Warrants shall
control.
13. Representations, Warranties and Agreements to Survive
Delivery.
The respective indemnities, agreements, representations, warranties and
other statements of the Company and the Representatives, set forth in or made
pursuant to this Agreement will remain in full force and effect regardless of
any investigation made by or on behalf of the Underwriters, the Company or any
of its officers or directors or any controlling persons and will survive
delivery of and payment for the Shares and the termination of this Agreement.
14. Notice.
All communications hereunder will be in writing and, except as
otherwise expressly provided herein, if sent to any Underwriter, will be mailed,
delivered or telecopied and confirmed to it at Joseph Charles & Assoc., Inc.,
2500 N. Military Trail, Suite 300, Boca Raton, Florida 33431, Attn: Joseph C.
Visconti, President, with a copy sent to De Martino Finkelstein Rosen & Virga,
1818 N Street, N.W., Suite 400, Washington, D.C. 20036-2492, Attn: Ralph V. De
Martino, Esq. and Neil R.E. Carr, Esq., and to Millennium Financial Group, Inc.,
____________________,
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<PAGE> 31
____________________, ____________________, Attn: ____________________,
President, or if sent to the Company, will be mailed, delivered, or facsimiled
and confirmed to Dr. Alvin J. Glasky, President and Chief Executive Officer,
NeoTherapeutics, Inc., 157 Technology Drive, Irvine, California 92618, with a
copy sent to Stradling Yocca Carlson & Rauth, 660 Newport Center Drive, Suite
1600, Newport Beach, California 92660, Attn: C. Craig Carlson, Esq. and Robert
E. Rich, Esq.
15. Parties in Interest.
The Agreement herein set forth is made solely for the benefit of the
Representatives, the Underwriters, the Company and, to the extent expressed, any
person controlling the Company, or the Representatives or any Underwriter, and
directors of the Company, nominees for directors of the Company (if any) named
in the Prospectus, the officers of the Company who have signed the Registration
Statement, and their respective executors, administrators, successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successors and assigns" shall not include any
purchaser, as such purchaser, from any Underwriter of the Shares.
16. Severability
The invalidity or unenforceability of any Section, paragraph or
provision of this Agreement shall not affect the validity or enforceability of
any other Section, paragraph or provision hereof. If any Section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes (and only
such minor changes) as are necessary to make it valid and enforceable.
17. Applicable Law.
This Agreement will be governed by, and construed in accordance with,
the laws of the State of Florida applicable to agreements made and to be
entirely performed within Florida.
18. Integration
This Agreement constitutes the entire agreement of the parties and
supersede all prior written or oral and all contemporaneous oral agreements,
understandings and negotiations with respect to the subject matter hereof. This
Agreement may be executed in several counterparts, each one of which shall be an
original, and all of which shall constitute one and the same document.
[THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK.]
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<PAGE> 32
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Underwriting Agreement, whereupon it will
become a binding agreement between the Company and the Underwriters in
accordance with its terms.
Very truly yours,
NEOTHERAPEUTICS, INC.
Dated: , 1999 By:
-------------------- --------------------------------------
Alvin J. Glasky
President and Chief Executive Officer
The foregoing Underwriting Agreement is
hereby confirmed and accepted by Joseph
Charles & Assoc., Inc. and Millennium
Financial Group, Inc., on their behalf
and on behalf of each of the
Underwriters named in Schedule I hereto,
as of the date first above written.
JOSEPH CHARLES & ASSOC., INC.
By:
-------------------------------------
Authorized Officer
Dated: , 1999
--------------------
MILLENNIUM FINANCIAL GROUP, INC.
By:
-------------------------------------
Authorized Officer
Dated: , 1999
--------------------
32
<PAGE> 33
SCHEDULE I
Underwriting Agreement dated July __, 1999
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares to be Purchased
----------- -------------------------------------
<S> <C>
Joseph Charles & Assoc., Inc. __________
Millennium Financial Group, Inc. __________
______________________________ __________
______________________________ __________
______________________________ __________
Total __________
</TABLE>
33
<PAGE> 1
EXHIBIT 1.2
MASTER AGREEMENT AMONG UNDERWRITERS
-----------------------------------
July __, 1999
Joseph Charles & Assoc., Inc.
2500 N. Military Trail
Suite 300
Boca Raton, Florida 33431
Dear Sirs:
We understand that from time to time Joseph Charles & Assoc., Inc., may
act as representative ("Representative") or as one of the Representatives of the
several underwriters of offerings of securities of various issuers. This
Agreement shall apply to any offering of securities in which we elect to act as
an underwriter after receipt of an invitation from you which shall identify the
issuer, contain information regarding certain terms of the securities to be
offered and specify the amount of our proposed participation and the names of
the other Representatives, if any, and that our participation as an underwriter
in the offering shall be subject to the provisions of this Agreement. Your
invitation will include instructions for our acceptance of such invitation. At
or prior to the time of the offering, you will advise us, to the extent
applicable, as to the expected offering date, the expected closing date, the
initial offering price, the interest or dividend rate (or the method by which
such rate is to be determined), the conversion price, the underwriting discount,
the management fee, the selling concession and the reallowance, except that if
the offering price of the securities is to be determined as contemplated by Rule
430A under the Securities Act of 1933, as amended (such procedure being
hereinafter referred to as "430A Pricing"), you shall so advise us and shall
specify the maximum underwriting discount, management fee and selling
concession. Such information may be conveyed by you in one or more
communications (such communications received by us with respect to the offering
are hereinafter collectively referred to as the "Invitation"). If the
Underwriting Agreement (as hereinafter defined) provides for the granting of an
option to purchase additional securities to cover over-allotments or otherwise
(an "over-allotment option"), you will notify us, in the Invitation, of such
option and of our maximum obligation upon exercise of such option.
This Agreement, as amended or supplemented by the Invitation, shall
become effective with respect to our participation in an offering of securities
if you receive our oral or written acceptance and you do not receive a written
communication revoking our acceptance prior to the time and date specified in
the Invitation (our unrevoked acceptance after expiration of such time and date
being hereinafter referred to as our "Acceptance"). Our Acceptance will
constitute our confirmation that, except as otherwise stated in such Acceptance,
each statement included in the Master Underwriters'
1
<PAGE> 2
Questionnaire set forth as Exhibit A hereto (or otherwise furnished to us) is
correct. The issuer of the securities in any offering of securities made
pursuant to this Agreement is hereinafter referred to as the "Issuer". If the
Underwriting Agreement does not provide for an over-allotment option, the
securities to be purchased are hereinafter referred to as the "Securities," if
the Underwriting Agreement provides for an over-allotment option, the securities
the Underwriters (as hereinafter defined) are initially obligated to purchase
pursuant to the Underwriting Agreement are hereinafter called the "Initial
Securities" and any additional securities which may be purchased upon exercise
of the over-allotment option are hereinafter called the "Option Securities,"
with the Initial Securities and all or any part of the Option Securities being
hereinafter collectively referred to as the "Securities." Any underwriters of
Securities under this Agreement, including the Representatives (as hereinafter
defined), are hereinafter collectively referred to as the "Underwriters." All
references herein to "you" or to the "Representative(s)" shall mean Joseph
Charles & Assoc., Inc. and the other firms, if any, which are named as
Representatives in the Invitation. The Securities to be offered may, but need
not, be registered for a delayed or continuous offering pursuant to Rule 415
under the Securities Act of 1933, as amended (the "1933 Act").
The following provisions of this Agreement shall apply separately to
each individual offering of Securities. This Agreement may be supplemented or
amended by you by written notice to us and, except for supplements or amendments
set forth in an Invitation relating to a particular offering of Securities any
such supplement or amendment to this Agreement shall be effective with respect
to any offering of Securities to which this Agreement applies after this
Agreement is so amended or supplemented.
SECTION 1. UNDERWRITING AGREEMENT; AUTHORITY OF REPRESENTATIVES. We
authorize you to execute and deliver an underwriting agreement and any amendment
or supplement thereto and any associated Terms Agreement or other similar
agreement (collectively, the "Underwriting Agreement") on our behalf with the
Issuer and/or any selling security holder with respect to the Securities in such
form as you determine. We will be bound by all terms of the Underwriting
Agreement as executed. We understand that changes may be made in those who are
to be Underwriters, and in the amount of Securities to be purchased by them, but
the amount of Securities to be purchased by us in accordance with the terms of
this Agreement, including the maximum amount of Option Securities, if any, which
we may become obligated to purchase by reason of the exercise of any
over-allotment option provided in the Underwriting Agreement, shall not be
changed without our consent except as provided in the Underwriting Agreement.
As Representatives of the Underwriters, you are authorized to take such
action as you deem necessary or advisable to carry out this Agreement, the
Underwriting Agreement, and the purchase and sale of the Securities, and to
agree to any waiver or modification of any provision of the Underwriting
Agreement. To the extent applicable, you are also authorized to determine (i)
the amount of Option Securities, if any, to be purchased by the Underwriters
pursuant to any over-allotment option and (ii) with respect to offerings using
430A Pricing, the initial offering price and the price at which the Securities
are to be purchased in accordance with the Underwriting Agreement. It is
understood and agreed that Joseph Charles & Assoc., Inc. may act on behalf of
all Representatives.
2
<PAGE> 3
It is understood that, if so specified in the Invitation, arrangements
may be made for the sale of Securities by the Issuer pursuant to delayed
delivery contracts (hereinafter referred to as "Delayed Delivery Contracts").
References herein to delayed delivery and Delayed Delivery Contracts apply only
to offerings to which delayed delivery is applicable. The term "underwriting
obligation," as used in this Agreement with respect to any Underwriter, shall
refer to the amount of Securities, including any Option Securities (plus such
additional Securities as may be required by the Underwriting Agreement in the
event of a default by one or more of the Underwriters) which such Underwriter is
obligated to purchase pursuant to the provisions of the Underwriting Agreement,
without regard to any reduction in such obligation as a result of Delayed
Delivery Contracts which may be entered into by the Issuer.
If the Securities consist in whole or in part of debt obligations
maturing serial, the serial Securities being purchased by each Underwriter
pursuant to the Underwriting Agreement will consist, subject to adjustment as
provided in the Underwriting Agreement, of serial Securities of each maturity in
a principal amount which bears the same proportion to the aggregate principal
amount of the serial Securities of such maturity to be purchased by all the
Underwriters as the respective principal amount of serial Securities set forth
opposite such Underwriter's name in the Underwriting Agreement bears to the
aggregate principal amount of the serial Securities to be purchased by all the
Underwriters.
SECTION 2. REGISTRATION STATEMENT AND PROSPECTUS; OFFERING CIRCULAR. In
the case of an Invitation regarding an offer of Securities registered under the
1933 Act (a "Registered Offering"), you will furnish to us, to the extent made
available to you by the Issuer, copies of any registration statement or
registration statements relating to the Securities which may be filed with the
Securities and Exchange Commission (the "Commission") pursuant to the 1933 Act
and of each amendment thereto (excluding exhibits but including any documents
incorporated by reference therein). Such registration statement(s) as amended,
and the prospectus(es) relating to the sale of Securities by the Issuer
constituting a part thereof, including all documents incorporated therein by
reference, as from time to time amended or supplemented by the filing documents
pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"),
the 1933 Act or otherwise, are referred to herein as the "Registration
Statement" and the "Prospectus," respectively; provided however, that a
supplement to the Prospectus filed with the Commission pursuant to Rule 424
under the 1933 Act with respect to an offering of Securities (a "Prospectus
Supplement") shall be deemed to have supplemented the Prospectus only with
respect to the offering of Securities to which it relates.
With respect to Securities for which no Registration Statement is filed
with the Commission, you will furnish to us, to the extent made available to you
by the Issuer, copies of any private placement memorandum, offering circular or
other offering materials to be used in connection with the offering of the
Securities and of each amendment thereto (the "Offering Circular").
SECTION 3. OFFERING. The sale of the securities to the public shall
commence as soon as you deem advisable. We will not sell any Securities until
they are released by you for that purpose. When notified by you that the
Securities are released for sale, we will offer in conformity with the terms of
the offering set forth in the Prospectus or Offering Circular, such of the
Securities to be
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purchased by us as are not reserved for our account for sale to Selected Dealers
and others pursuant to Section 5. After the initial offering, the offering price
and the concession and discount therefrom may be changed by you by notice to the
Underwriters, and we agree to be bound by any such change.
If, in accordance with the terms of offering set forth in the
Prospectus or Offering Circular, the offering of the Securities is not at a
fixed price but at varying prices set by individual Underwriters based on market
prices or at negotiated prices, the provisions above relating to your right to
change the offering price and concession and concession and discount to dealers
shall not apply, and other references in this Section and elsewhere in this
Agreement to the offering price or Selected Dealers' concession shall be deemed
to mean the prices and concessions determined by you from time to time in your
discretion.
Unless otherwise permitted in the Invitation, we will not sell any
Securities to any account over which we have discretionary authority. We will
also comply with any other restrictions which may be set forth in the
Invitation.
The initial public advertisement, if any, with respect to the
Securities shall appear on such date, and shall include the names of such of the
Underwriters, as you may determine.
SECTION 4. DELAYED DELIVERY ARRANGEMENTS. We authorize you to act on
our behalf in making all arrangements for the solicitation of offers to purchase
Securities from the Issuer pursuant to Delayed Delivery Contracts, and we agree
that all such arrangements will be made only through you (directly or through
Underwriters or Selected Dealers). You may allow to Selected Dealers in respect
to such Securities a commission equal to the concession allowed to Selected
Dealers pursuant to Section 5.
The obligations of the Underwriters shall be reduced in the aggregate
by the principal amount of Securities covered by Delayed Delivery Contracts made
by the Issuer, the obligation of each Underwriter to be reduced by the principal
amount of such Securities, if any, allocated by you to such Underwriter. Your
determination of the allocation of Securities covered by Delayed Delivery
Contracts among the several Underwriters shall be final and conclusive, and we
agree to be bound by any notice delivered by you to the Issuer setting forth the
amount of the reduction in our obligation as a result of Delayed Delivery
Contracts.
Upon receiving payment from the Issuer of the fee for arranging Delayed
Delivery Contracts, you will credit our account with the portion of such fee
applicable to the Securities covered by Delayed Delivery Contracts allocated to
us. You will charge our account with any commission allocated to Selected
Dealers in respect of Securities covered by Delayed Delivery Contracts allocated
to us.
SECTION 5. OFFERING TO SELECTED DEALERS AND OTHERS; MANAGEMENT OF
OFFERING. We authorize you, for our account, to reserve for sale and sell to
dealers ("Selected Dealers"), among whom any of the Underwriters may be
included, such amount of Securities to be purchased by us as you shall
determine. Reservations for sales to Selected Dealers for our account need not
be in
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proportion to our underwriting obligation, but sales of Securities reserved for
our account for sale to Selected Dealers shall be made as nearly as practicable
in the ratio which the amount of Securities reserved for our account bears to
the aggregate amount of Securities reserved for the account of all Underwriters,
as calculated from day to day. Sales to Selected Dealers may be made under the
Joseph Charles & Assoc., Inc. Selected Dealer Agreement, or otherwise. The price
to Selected Dealers initially shall be the offering price less a concession not
in excess of the Selected Dealers' concession set forth in the Invitation.
Selected Dealers shall be actually engaged in the investment banking or
securities business and shall be either (i) members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") or (ii) dealers
with their principal place of business located outside the United States, its
territories and its possessions and not registered under the 1934 Act who agree
to make no sales within the United States, its territories or its possessions or
to persons who are nationals thereof or residents therein or (iii) banks that
are not eligible for membership in the NASD. Each Selected Dealer shall agree to
comply with the provisions of Rule 2740 of the NASD Conduct Rules, and each
foreign Selected Dealer or bank who is not a member of the NASD also shall agree
to comply with the NASD's interpretation with respect to free-riding and
withholding, to comply, as though it were a member of the NASD, with the
provisions of Rules 2730 and 2750 of the NASD Conduct Rules and to comply with
Rule 2420 thereof as that Rule applies to a non-member foreign dealer or bank.
With your consent, the Underwriters may allow, and Selected Dealers may
reallow, a discount on sales to any dealer who meets the above NASD requirements
in an amount not in excess of the amount set forth in the Invitation. Upon your
request, we will advise you of the identity of any dealer to whom we allow such
a discount and any Underwriter or Selected Dealer from whom we receive such a
discount.
We also authorize you, for our account, to reserve for sale and to sell
Securities to be purchased by us at the offering price to others, including
institutions and retail purchasers. Except for such sales which are designated
by a purchaser to be for the account of a particular Underwriter, such
reservations and sales shall be made as nearly as practicable in proportion to
our underwriting obligation, unless you agree to a smaller proportion at our
request.
At or before the time the Securities are released for sale, you shall
notify us of the amount of Securities which have not been reserved for our
account for sale to Selected Dealers and others and which is to be retained by
us for direct sale.
We will from time to time, upon your request, report to you the amount
of Securities retained by us for direct sale which remains unsold and, upon your
request, deliver to you for our account, or sell to you for the account of one
or more of the Underwriters, such amount of unsold Securities as you may
designate at the offering price less an amount determined by you not in excess
of the concession to Selected Dealers. You may also repurchase Securities from
other Underwriters and Selected Dealers, for the account of one or more of the
Underwriters, at prices determined by you not in excess of the offering price
less the concession to Selected Dealers.
You may from time to time deliver to any Underwriter, for carrying
purposes or for sale by such Underwriter, any of the Securities then reserved
for sale to, but not purchased and paid for by,
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Selected Dealers or others as above provided, but to the extent that Securities
are so delivered for sale by such Underwriter, the amount of Securities then
reserved for the account of such Underwriter shall be correspondingly reduced.
Securities delivered for carrying purposes only shall be redelivered to you upon
demand.
The Underwriters and Selected Dealers may, with your consent, purchase
Securities from and sell Securities to each other at the offering price less a
concession not in excess of the concession to Selected Dealers.
SECTION 6. REPURCHASE OF SECURITIES NOT EFFECTIVELY PLACED. In
recognition of the importance of distributing the Securities to bona fide
investors, we agree to repurchase on demand any Securities sold by us, except
through you, which are purchased by you in the open market or otherwise during a
period terminating as provided in Section 16, at a price equal to the cost of
such purchase, including accrued interest, amortization of original issue
discount or dividends, commissions and transfer and other taxes, if any, on
redelivery. The certificates delivered to us need not be identical certificates
delivered to you in respect of the Securities purchased. In lieu of requiring
repurchase, you may, in your discretion, sell such Securities for our account at
such prices, upon such terms and to such persons, including any of the other
Underwriters, as you may determine, charging the amount of any loss and expense,
or crediting the amount of any net profit, resulting from such sale, to our
account, or you may charge our account with an amount determined by you not in
excess of the concession to Selected Dealers.
SECTION 7. STABILIZATION AND OVER-ALLOTMENT. In order to facilitate the
sale of the Securities, we authorize you, in your discretion, to purchase and
sell Securities or any other securities of the Issuer or any guarantor of the
Securities specified in the Invitation in the open market or otherwise, for long
or short account, at such prices as you may determine, and, in arranging for
sales to Selected Dealers or others, to over-allot. You may liquidate any long
position or cover any short position incurred pursuant to this Section at such
prices as you may determine. You shall make such purchases and sales (including
over-allotments) for the accounts of the Underwriters as nearly as practicable
in proportion to their respective underwriting obligations. It is understood
that, in connection with any particular offering of Securities to which this
Agreement applies, you may have made purchase of securities of the Issuer or
securities of any guarantor of the Securities for stabilizing purposes prior to
the time when we become an Underwriter, and we agree that any such securities so
purchased shall be treated as having been purchased for the respective accounts
of the Underwriters pursuant to the foregoing authorization. At the close of
business on any day our net commitment, either for long or short account,
resulting from such purchases or sales (including over-allotments) shall not
exceed 20% (or such other amount as may be specified in the Invitation) of our
underwriting obligation, except that such percentage may be increased with the
approval of a majority in interest of the Underwriters. We will take up at cost
on demand any Securities or other securities of the Issuer or any securities of
any guarantor of the Securities so sold or over-allotted for our account,
including accrued interest, amortization of original issue discount or
dividends, and we will pay to you on demand the amount of any losses or expenses
incurred for our account pursuant to this Section. In the event of default by
any Underwriter in respect of its obligations under this Section, each
non-defaulting Underwriter shall assume its share of the obligations of such
defaulting Underwriter in the proportion that its underwriting obligation bears
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to the underwriting obligations of all non-defaulting Underwriters without
relieving such defaulting Underwriter of its liability hereunder.
If you effect any stabilizing purchase pursuant to this Section, you
shall promptly notify us of the date and time of the first stabilizing purchase
and the date and time when stabilizing was terminated. You shall prepare and
maintain such records as are required to be maintained by you as manager
pursuant to Rule 17a-2 under the 1934 Act.
SECTION 8. OPEN MARKET TRANSACTIONS. We represent and agree in
connection with the offering of Securities that we have complied and will comply
with the provisions of Regulation M under the 1934 Act with regard to trading in
the Securities. For purposes of the foregoing sentence, we agree that, in
addition to the Securities, other securities of the Issuer or securities of any
guarantor of the Securities or the right or option to purchase or otherwise
acquire any securities of the Issuer or any securities of any guarantor of the
Securities specified in the Invitation shall be considered securities of the
same class and series as the Securities.
SECTION 9. PAYMENT AND DELIVERY. At or before such time, on such dates
and at such places as you may specify in the Invitation, we will deliver to you
a certified or official bank check or a wire transfer in such funds as are
specified in the Invitation, payable to the order of Joseph Charles & Assoc.,
Inc. (unless otherwise specified in the Invitation) in an amount equal to, as
you direct, either (i) the offering price or prices plus accrued interest,
amortization of original issue discount or dividends, if any, set forth in the
Prospectus or Offering Circular less the concession to Selected Dealers in
respect of the amount of Securities to be purchased by us in accordance with the
terms of this Agreement, or (ii) the amount set forth in the Invitation with
respect to the Securities to be purchased by us. We authorize you to make
payment for our account of the purchase price for the Securities to be purchased
by us against delivery to you of such Securities (which may be in temporary
form), and the difference between such purchase price of the Securities and the
amount of our funds delivered to you therefore shall be credited to our account.
Delivery to us of Securities retained by us for direct sale shall be
made by you as soon as practicable after your receipt of the Securities. Upon
termination of the provisions of this Agreement as provided in Section 16, you
shall deliver to us any Securities reserved for our account for sale to Selected
Dealers and others which remain unsold at that time.
You are authorized to make appropriate arrangements for payment for
and/or delivery through the facilities of The Depository Trust Company or any
such other depository or similar facility, the Securities to be purchased by us,
or, if we are not a member, settlement may be made through a correspondent that
is a member pursuant to our timely instructions to you.
Upon receiving payment for Securities sold for our account to Selected
Dealers and others, you shall remit to us an amount equal to the amount paid by
us to you in respect of such Securities and credit or charge our account with
the difference, if any, between such amount and the price at which such
Securities were sold.
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In the event that the Underwriting Agreement for an offering provides
for the payment of a commission or other compensation to the Underwriters, we
authorize you to receive such commission or other compensation for our account.
SECTION 10. MANAGEMENT COMPENSATION. As compensation for your services
in the management of the offering, we will pay you an amount equal to the
management fee specified in the Invitation in respect of the Securities to be
purchased by us pursuant to the Underwriting Agreement, and we authorize you to
charge our account with such amount. If there is more than one Representative,
such compensation shall be divided among the Representatives in such proportions
as they may determine.
SECTION 11. AUTHORITY TO BORROW. We authorize you to advance your own
funds for our account, charging current interest rates, or to arrange loans for
our account or the account of the Underwriters, as you may deem necessary or
advisable for the purchase, carrying, sale and distribution of the Securities.
You may execute and deliver any notes or other instruments required in
connection therewith and may hold or pledge as security therefor all or any part
of the Securities which we or such Underwriters have agreed to purchase. The
obligations of the Underwriters under loans arranged on their behalf shall be
several in proportion to their respective participations in such loans, and not
joint. Any lender is authorized to accept your instructions as to the
disposition of the proceeds of any such loans. You shall credit each Underwriter
with the proceeds of any loans made for its account.
SECTION 12. LEGAL QUALIFICATIONS. You shall inform us, upon request, of
the states and other jurisdictions of the United States in which it is believed
that the Securities are qualified for sale under, or are exempt from the
requirements of, their respective securities laws, but you assume no
responsibility with respect to our right to sell Securities in any jurisdiction.
You are authorized to file with the Department of State of the State of New York
a Further State Notice with respect to the Securities, if necessary.
If we propose to offer Securities outside the United States, its
territories or its possessions, we will take, at our own expense, such action,
if any, as may be necessary to comply with the laws of each foreign jurisdiction
in which we propose to offer Securities.
SECTION 13. MEMBERSHIP IN NATIONAL ASSOCIATION OF SECURITIES DEALERS,
FOREIGN UNDERWRITERS AND BANKS. We understand that you are a member in good
standing of the NASD. We confirm that we are actually engaged in the investment
banking or securities business and are either (i) a member in good standing of
the NASD or (ii) a dealer with its principal place of business located outside
the United States, its territories and its possessions and not registered under
the 1934 Act who hereby agrees to make no sales within the United States, it
territories or its possessions or to persons who are nationals thereof or
residents therein (except that we may participate in sales to Selected Dealers
and others under Section 5 of this Agreement) or (iii) a bank not eligible for
membership in the NASD. We hereby agree to comply with Rule 2740 of the NASD
Conduct Rules, and if we are a foreign dealer or bank and not a member of the
NASD we also hereby agree to comply with the NASD's interpretation with respect
to free-riding and withholding, to comply, as though we were a member of the
NASD, with the provisions of Rule
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2420 of the NASD Conduct Rules, and to comply with Rule 2420 thereof as that
Rule applies to a non-member foreign dealer or bank.
SECTION 14. DISTRIBUTION OF PROSPECTUSES; OFFERING CIRCULAR. We are
familiar with Securities Act of 1933 Release No. 4968 and Rule 15c2-8 under the
1934 Act, relating to the distribution of preliminary and final prospectuses,
and we confirm that we will comply therewith, to the extent applicable, in
connection with any sale of Securities. You shall cause to be made available to
us, to the extent made available to you by the Issuer, such number of copies of
the Prospectus as we may reasonably request for purposes contemplated by the
1933 Act, the 1934 Act and the rules and regulations thereunder.
Our Acceptance of an Invitation relating to an offering made pursuant
to an Offering Circular shall constitute our agreement that, if requested by
you, we will furnish a copy of any amendment to a preliminary or final Offering
Circular to each person to whom we shall have furnished a previous preliminary
of final Offering Circular. Our Acceptance shall constitute our confirmation
that we have delivered and our agreement that we will deliver all preliminary
and final Offering Circulars required for compliance with the applicable federal
and state laws and the applicable rules and regulations of any regulatory body
promulgated thereunder governing the use and distribution of offering circular
by underwriters and any additional instructions contained in the Invitation and,
to the extent consistent with such laws, rules and regulations, our Acceptance
shall constitute our confirmation that we have delivered and our agreement that
we will deliver all preliminary and final Offering Circulars which would be
required if the provisions of Rule 15c2-8 (or any successor provision) under the
1934 Act applied to such offering.
SECTION 15. NET CAPITAL. The incurrence by us of our obligation
hereunder and under the Underwriting Agreement in connection with the offering
of the Securities will not place us in violation of the net capital requirements
of Rule 15c3-1 under the 1934 Act, or, if we are a financial institution subject
to regulation by the Board of Governors of the Federal Reserve System, the
Comptroller of the Currency or the Federal Deposit Insurance Corporation, will
not place us in violation of the capital requirements of such regulator or any
other regulator to which we are subject.
SECTION 16. TERMINATION. With respect to each offering of Securities
pursuant to this Agreement, all limitations in this Agreement on the price at
which the Securities may be sold, the period of time referred to in Section 6,
the authority granted by the first sentence of Section 7, and the restrictions
contained in Section 8 shall terminate at the close of business on the 45th day
after the commencement of the offering of such Securities. You may terminate any
or all of such provisions at any time prior thereto by notice to the
Underwriters. All other provisions of this Agreement shall remain operative and
in full force and effect with respect to such offering.
SECTION 17. EXPENSES AND SETTLEMENT. You may charge our account with
any transfer taxes on sales of securities made for our account and with our
proportionate share (based upon our underwriting obligation) of all other
expenses incurred by you under this Agreement or otherwise in connection with
the purchase, carrying, sale or distribution of the Securities. With respect to
each offering of Securities pursuant to this Agreement, the respective accounts
of the Underwriters
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shall be settled as promptly as practicable after the termination of all the
provisions of this Agreement as provided in Section 16, but you may reserve such
amounts as you may deem advisable for additional expenses. Your determination of
the amount to be paid to or by us shall be conclusive. You may at any time make
partial distributions of credit balances or call for payment of debit balances.
Any of our funds in your hands may be held with your general funds without
accountability for interest. Notwithstanding any settlement, we will remain
liable for any taxes on transfers for our account and for our proportionate
share (based upon our underwriting obligation) of all expenses and liabilities
which may be incurred by or for the accounts of the Underwriters with respect to
each offering of Securities pursuant to this Agreement.
SECTION 18. INDEMNIFICATION. With respect to each offering of
Securities pursuant to this Agreement, we will indemnify and hold harmless each
other Underwriter and each person, if any, who controls each other Underwriter
within the meaning of Section 15 of the 1933 Act, to the extent that and on the
terms upon which we agree to indemnify and hold harmless the Issuer and other
specified persons as set forth in the Underwriting Agreement.
SECTION 19. CLAIMS AGAINST UNDERWRITERS. With respect to each offering
of Securities pursuant to this Agreement, if at any time any person other than
an Underwriter asserts a claim (including any commenced or threatened
investigation or proceeding by any governmental agency or body) against one or
more of the Underwriters or against you as Representative of the Underwriters
arising out of an alleged untrue statement or omission in the Registration
Statement (or any amendment thereto) or in any preliminary prospectus or the
Prospectus or any amendment or supplement thereto, or in any preliminary
prospectus or the Prospectus or any amendment or supplement thereto, or in any
preliminary or final Offering Circular, or relating to any transaction
contemplated by this Agreement, we authorize you to make such investigation, to
retain such counsel for the Underwriters and to take such action in the defense
of such claim as you may deem necessary or advisable. You may settle such claim
with the approval of a majority in interest of the Underwriters. We will pay our
proportionate share (based upon our underwriting obligation) of all expenses
incurred by you (including the fees and expenses of counsel for the
Underwriters) as incurred, in investigating and defending against such claim and
our proportionate share of the aggregate liability incurred by all Underwriters
in respect to such claim (after deducting any contribution or indemnification
obtained pursuant to the Underwriting Agreement, or otherwise, from persons
other than Underwriters), whether such liability is the result of a judgment
against one or more of the Underwriters or the result of any such settlement.
Any Underwriter may retain separate counsel at its own expense. A claim against
or liability incurred by a person who controls an Underwriter shall be deemed to
have been made against or incurred by such Underwriter. In the event of default
by any Underwriter in respect of its obligations under this Section, the
non-defaulting Underwriters shall be obligated to pay the full amount thereof in
the proportions that their respective underwriting obligations bear to the
underwriting obligations of all non-defaulting Underwriters without relieving
such defaulting Underwriter of its liability hereunder.
SECTION 20. DEFAULT BY UNDERWRITERS. Defaults by any Underwriter in
respect of its obligations hereunder or under the Underwriting Agreement shall
not release us from any of our obligations or in any way affect the liability of
such defaulting Underwriter to the other Underwriters for damages resulting from
such default. If one or more Underwriters default under
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the Underwriting Agreement, if provided in such Underwriting Agreement you may
(but shall not be obligated to) arrange for the purchase by others, which may
include yourselves or other nondefaulting Underwriters, of all or a portion of
the Securities not taken up by the Defaulting Underwriters.
In the event that such arrangements are made, the respective
underwriting obligations of the non-defaulting Underwriters and the amounts of
the Securities to be purchased by others, if any, shall be taken as the basis
for all rights and obligations hereunder, but this shall not in any way affect
the liability of any defaulting Underwriter to the other Underwriters for
damages resulting from its default, nor shall any such default relieve any other
Underwriter of any of its obligations hereunder or under the Underwriting
Agreement except as herein or therein provided. In addition, in the event of
default by one or more Underwriters in respect of their obligations under the
Underwriting Agreement to purchase the Securities agreed to be purchased by them
thereunder and, to the extent that arrangements shall not have been made by you
for any person to assume the obligations of such defaulting Underwriter or
Underwriters, we agree to assume our proportionate share, based upon our
underwriting obligation, of the obligations of each such defaulting Underwriter
(subject to the limitations contained in the Underwriting Agreement) without
relieving such defaulting Underwriter of its liability therefor.
In the event of default by one or more Underwriters in respect of their
obligations under this Agreement to take up and pay for any securities purchased
or to deliver any securities sold or over-allotted, by you for the respective
accounts of the Underwriters, or to bear their proportion of expenses or
liabilities pursuant to this Agreement, and to the extent that arrangements
shall not have been made by you for any persons to assume the obligations of
such defaulting Underwriter or Underwriters, we agree to assume our
proportionate share, based upon our respective underwriting obligation, of the
obligations of each defaulting Underwriter without relieving any such defaulting
Underwriter of its liability therefor.
SECTION 21. LEGAL RESPONSIBILITY. As Representative of the
Underwriters, you shall have no liability to us, except for your lack of good
faith and for obligations assumed by you in this Agreement and except that we do
not waive any rights that we may have under the 1933 Act or the 1934 Act or the
rules and regulations thereunder. No obligations not expressly assumed by you in
this Agreement shall be implied herefrom.
Nothing herein contained shall constitute the Underwriters an
association, or partners, with you, or with each other, or, except as otherwise
provided herein or in the Underwriting Agreement, render any Underwriter liable
for the obligations of any other Underwriter; and the rights, obligations and
liabilities of the Underwriters are several in accordance with their respective
underwriting obligations, and not joint.
If the Underwriters are deemed to constitute a partnership for federal
income tax purposes, we elect to be excluded from the application of Subchapter
K, Chapter 1, Subtitle A of the Internal Revenue Code of 1986, as amended, and
agree not to take any position inconsistent with such election, and you, as
Representatives, are authorized, in your discretion, to execute on behalf of the
Underwriters such evidence of such election as may be required by the Internal
Revenue Service.
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Unless we have promptly notified you in writing otherwise, our name as
it should appear in the Prospectus or Offering Circular and our address are set
forth on the signature pages hereof.
SECTION 22. NOTICES. Any notice from you shall be deemed to have been
duly given if mailed or transmitted to us at our address appearing below.
SECTION 23. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Florida applicable to agreements made and to be performed in
said state.
Please confirm this Agreement and deliver a copy to us.
Very truly yours,
Name of Firm:
By:
-----------------------------------------
Authorized Officer or Partner
Address:
----------------------------------------------
----------------------------------------------
----------------------------------------------
Confirmed as of the date
first above written.
Joseph Charles & Assoc., Inc.
By:
-----------------------------------------
Authorized Officer
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EXHIBIT A
MASTER UNDERWRITERS' QUESTIONNAIRE
In connection with each offering of Securities pursuant to the Joseph
Charles & Assoc., Inc. Master Agreement Among Underwriters, dated
_______________, 1999 (the "Agreement"), each Underwriter confirms the following
information, except as indicated in such Underwriter's Acceptance or other
written communication furnished to Joseph Charles & Assoc., Inc. Defined terms
used herein have the same meaning as defined terms in the Master Agreement Among
Underwriters.
(a) Neither such Underwriter nor any of its directors, officers or
partners have any material (as defined in Regulation C under the 1933 Act)
relationship with Issuer, its parent (if any), any other seller of the
Securities or any guarantor of the Securities.
(b) Except as described or to be described in the Agreement, the Joseph
Charles & Assoc., Inc. Selected Dealer Agreement, the Underwriting Agreement or
the Invitation, such Underwriter does not know: (i) of any discounts or
commissions to be allowed or paid to dealers, including all cash, securities,
contracts, or other consideration to be received by any dealer in connection
with the sale of the Securities, or of any other discounts or commissions to be
allowed or paid to the Underwriters or of any other items that would be deemed
by the NASD to constitute underwriting compensation for purposes of the NASD
Conduct Rules, (ii) of any intention to over-allot, or (iii) that the price of
any security may be stabilized to facilitate the offering of the Securities.
(c) No report or memorandum has been prepared for external use (i.e.,
outside such Underwriter's organization) by such Underwriter in connection with
the proposed offering of Securities or with respect to the Issuer, its parent
(if any) or any guarantor of the Securities and, in the case of a Registered
Offering, where the Registration Statement is on Form S-1 or SB-2, such
Underwriter has not prepared or had prepared for it any engineering, management
or similar report or memorandum relating to the broad aspects of the business,
operations or products of the Issuer, its parent (if any) of any guarantor of
the Securities within the past twelve months (except for reports solely
comprised of recommendations to buy, sell or hold the securities of the Issuer,
its parents (if any) or any guarantor of the Securities, unless such
recommendations have changed within the past six months). If any such report or
memorandum has been prepared, furnish to Joseph Charles & Assoc., Inc. three
copies thereof, together with a statement as to the actual or proposed use,
identifying each class of persons who have received or will receive the report
or memorandum, the number of copies distributed to each class and the period of
distribution.
(d) If the Securities are debt securities to be issued under an
indenture to be qualified under the Trust Indenture Act of 1939, neither such
Underwriter nor any of its directors, officers or partners is an "affiliate," as
that term is defined under the Trust Indenture Act of 1939, of the Trustee for
the Securities as specified in the Invitation, or of its parent (if any);
neither the Trustee nor its parent (if any) nor any of their directors or
executive officers is a director, officer, partner,
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employee, appointee or representative of such Underwriters as those terms are
defined in the Trust Indenture Act of 1939 or in the relevant instructions to
Form T-1; neither such Underwriter nor any of its directors, partners or
executive officers, separately or as a group, owns beneficially 1% or more of
its shares of any class of voting securities of the Trustee or of its parent (if
any); and if such Underwriter is a corporation, it does not have outstanding nor
has it assumed or guaranteed any securities issued otherwise than in its present
corporate name, and neither the Trustee nor its parent (if any) is a holder of
any such securities.
(e) If the Issuer is a public utility, such Underwriter is not a
"holding company" or a "subsidiary company" or an "affiliate" of a "holding
company" or a "public utility company," each as defined in the Public Utility
Holding Company Act of 1935.
(f) Neither such Underwriter nor any "group" (as that term is defined
in Section 13(d)(3) of the 1934 Act) of which it is a member is the beneficial
owner (determined in accordance with Rule 13d-3 under the 1934 Act) of more than
5% of any class of voting securities of the Issuer, its parent (if any), any
other seller of the Securities or any guarantor of the Securities nor does it
have any knowledge that more than 5% of any class of voting securities of the
Issuer is held or to be held subject to any voting trust or other similar
agreement.
We agree to keep an accurate record of the distribution by us of copies
of the Registration Statement, of each amendment thereto, and or each
preliminary prospectus, and we also agree promptly upon request by the Company
or by Joseph Charles & Assoc., Inc. to furnish to each person who received
copies of the above, copies of any subsequent amendment or revised preliminary
prospectus or of any memorandum furnished to us outlining changes in the
Registration Statement or Prospectus. We agree to deliver a copy of the final
form of Prospectus to each person who purchases any of the Securities from us
and shall otherwise comply with the provisions of Rule 15c2-8 under the 1934 Act
and Release No. 4968 under the 1933 Act.
The answers to the foregoing questions are correctly stated and are
true to the best of the knowledge, information and belief of the undersigned.
The undersigned agrees to notify the Company promptly of any material changes in
the foregoing information which may occur prior to the effective date of the
Registration Statement covering the Securities.
Very truly yours,
------------------------------------------
Corporate Name
(For Corporate Signature) By:
--------------------------------------
- ---------------------------------
------------------------------------------
Partnership Name
(For Partnership Signature) By:
--------------------------------------
- ---------------------------------
Dated: , 1999
------------------
14
<PAGE> 15
SIGNING PROCEDURE FOR POWER OF ATTORNEY
As a convenience to Underwriters and in order to avoid the necessity of
your having to sign physically the Master Agreement Among Underwriters at our
office on the date of the offering, we have instituted the following signing
procedure:
1. All prospective Underwriters are requested to execute this Power of
Attorney authorizing Joseph C. Visconti and Bruce Jordan of Joseph Charles &
Assoc., Inc., to sign the Master Agreement Among Underwriters on their behalf.
In case of a partnership, this Power of Attorney should be
signed in the firm name by a general partner. In the case of a corporation, it
should be signed in the corporate name by an authorized officer, attested to by
the Secretary of Assistant Secretary and the corporate seal affixed. In both
cases, the partner s or officer s signature should be acknowledged before a
Notary Public.
2. Joseph Charles & Assoc., Inc. will advise the Syndicate Department
of the signer of this Power of Attorney, by wire prior to the signing and public
offering, of the anticipated terms as follows:
(a) Number of shares of stock or other securities to be
underwritten by you.
(b) Public offering date.
(c) Closing date.
(d) Gross compensation and breakdown of management fee,
underwriting fee, selling concession and reliance.
3. Unless the Syndicate Department of Joseph Charles & Assoc., Inc.,
2500 N. Military Trail, Suite 300, Boca Raton, Florida 33431, receives a
telephone call, graphic scanning or telegram (whether or not the notification of
anticipated terms was received) revoking the Power of Attorney (i) not later
than 6:00 a.m. Florida time, on the day of the proposed public offering if the
notification of anticipated terms has been transmitted on the business day
preceding the proposed offering date, or (ii) within two hours following the
transmission of the notification of anticipated terms if such notification has
been transmitted on the proposed offering date, this Power of Attorney will be
exercised as contemplated by its terms.
4. A facsimile signature copy, following by an executed copy, of the
Master Agreement Among Underwriters will be sent to you promptly after its
execution.
15
<PAGE> 16
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby
irrevocably constitute and appoint Joseph C. Visconti, and Bruce Jordan, each of
Joseph Charles & Assoc., Inc., 2500 N. Military Trail, Suite 300, Boca Raton,
Florida 33431, or any of them, the true and lawful agent and attorney-in-fact of
the undersigned, with full power to appoint a substitute or substitutes to act
hereunder with the same power and authority as said agent and attorney-in-fact
would have if personally acting, with respect to all matters arising in
connection with the undersigned's acting as one of the Underwriters of the
proposed offering of __________ shares of common stock, $.001 par value per
share, of NeoTherapeutics, Inc., with full power and authority to execute and
deliver for and on behalf of the undersigned all such agreements, consents and
documents in connection therewith as said agent, and attorney-in-fact may deem
advisable. The undersigned hereby gives to each said agent and attorney-in-fact
full power and authority to execute, by manual or facsimile signature, and
deliver, in such form as said agent and attorney-in-fact may determine, the
Master Agreement Among Underwriters with respect to such securities, authorizing
the Representative named in such Agreement in turn to execute and deliver the
Underwriting Agreement relating to the purchase of such securities and any
Selected Dealer Agreement. The undersigned hereby ratifies and confirms all that
each said agent and attorney-in-fact, or any substitute or substitutes, may do
by virtue hereof.
WITNESS the due execution hereof at _________________________,
_________________ this ______ day of ____________________, 199__.
-------------------------------------
(Name of Corporation or Firm)
(Seal of Corporation, if any,
should be affixed)
-------------------------------------
(Officer of Partner)
16
<PAGE> 17
(CORPORATE ACKNOWLEDGEMENT)
STATE OF )
------------------------- )
) ss:
COUNTY OF )
-------------------------
On this _____ day of _______________, 1999, before me, a notary public
in and for said county and state, residing therein, duly commissioned and sworn,
personally appeared _______________, known to me to be _______________ of the
corporation that executed the within instrument and acknowledged to me that he
executed, and was duly authorized to execute, the same on behalf of, and in the
name of such corporation pursuant to its bylaws or a resolution of its
directors.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the county and state aforesaid on the day and year first above written.
My Commission expires: .
---------------
------------------------
Notary Public
------------------------
Address
SEAL
(PARTNERSHIP ACKNOWLEDGEMENT)
STATE OF )
------------------------- )
) ss:
COUNTY OF )
-------------------------
On this _____ day of _______________, 1999, before me, a notary public
in and for said county and state, residing therein, duly commissioned and sworn,
personally appeared _______________, known to me to be _______________ of the
corporation that executed the within instrument and acknowledged to me that he
executed, and was duly authorized to execute, the same on behalf of, and in the
name of such corporation pursuant to its bylaws or a resolution of its
directors.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal in the county and state aforesaid on the day and year first above written.
My Commission expires: .
---------------
------------------------
Notary Public
------------------------
Address
SEAL
<PAGE> 1
EXHIBIT 1.3
_______________, 1999
SELECTED DEALER AGREEMENT
Dear Sirs:
In connection with the public offering of securities of
NeoTherapeutics, Inc. underwritten by us, or by a group of underwriters,
including us (the "Underwriters"), represented by us, you are to be offered, as
principal, a portion of such securities at a discount from the offering price
representing a selling concession or reallowance granted as consideration for
services rendered by you in the sale of such securities. We request that you
agree to the following terms and provisions, and make the following
representations, which, together with any additional terms and provisions set
forth in any wire or letter sent to you in connection with a particular
offering, will govern all such purchases of securities and the reoffering
thereof by you.
Your subscription for, or purchase of, such securities will constitute
your reaffirmation of this Agreement.
1. When we are acting as representatives (the "Representatives") of the
Underwriters in offering securities to you, it should be understood that all
offers are made subject to prior sale of the subject securities, when, as and if
such securities are delivered to and accepted by the Underwriters and subject to
the approval of legal matters by their counsel. In such cases, any order from
you for securities will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part.
Upon release by us, you may reoffer such securities at the offering price fixed
by us. With our consent, you may allow a discount, not in excess of the
reallowance fixed by us, in selling such securities to other dealers, provided
that in doing so you comply with the Conduct Rules of the National Association
of Securities Dealers, Inc. (the "NASD"). Upon our request, you will advise us
of the identity of any dealer to whom you allow such a discount and any
Underwriter or dealer from whom you receive such a discount. After the
securities are released for sale to the public, we may vary the offering price
and other selling terms.
2. You represent that you are a dealer actually engaged in the
investment banking or securities business and that you are either (i) a member
in good standing of the NASD or (ii) a dealer with its principal place of
business located outside the United States, its territories or possessions and
not registered under the Securities Exchange Act of 1934 (a "non-member foreign
dealer") or (iii) a bank not eligible for membership in NASD. If you are a
non-member foreign dealer, you agree to make no sales of securities within the
United States, its territories or its possessions or to persons who are
nationals thereof or residents therein. If you are a non-member foreign dealer
or bank, you agree, in making any sales, to comply with the NASD's
interpretation with respect to free-riding and withholding. In accepting a
reallowance from us whether or not we
<PAGE> 2
are acting as such Representatives of the Underwriters, and in allowing a
discount to any other person, you agree to comply with the provision of Rule
2740 of the NASD Conduct Rules, and, in addition, if you are a non-member
foreign dealer or bank, you agree to comply, as though you were a member of the
NASD, with the provisions of Rules 2730 and 2750 of the NASD Conduct Rules and
to comply with Rule 2420 thereof as that Rule applies to a non-member foreign
dealer or bank. You represent that you are fully familiar with the above
provisions of the Conduct Rules of the NASD.
3. If the securities have been registered under the Securities Act of
1933, as amended (the "1933 Act"), in offering and selling such securities, you
are not authorized to give any information or make any representation not
contained in the prospectus relating thereto. You confirm that you are familiar
with the rules and policies of the Securities and Exchange Commission relating
to the distribution of preliminary and final prospectuses, including but not
limited to Rule 15c2-8 and Regulation M under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and you agree that you will comply therewith
in any offering covered by this Agreement. If we are acting as Representatives
of the Underwriters, we will make available to you, to the extent made available
to use by the issuer of the securities, such number of copies of the prospectus
(or offering documents for securities not registered under the 1933 Act) as you
may reasonably request for the purposes contemplated by the 1933 Act or the 1934
Act, or the rules and regulations thereunder.
4. If we are acting as Representatives of the Underwriters of
securities of an issuer that is not required to file reports under the 1934 Act,
you agree that you will not sell any of the securities to any account over which
you have discretionary authority.
5. Payment for securities purchased by you is to be made at our office,
2500 N. Military Trail, Suite 300, Boca Raton, Florida 33431 (or at such other
place as we may advise), at the offering price less the concession allowed to
you, on such date as we may advise, by certified or official bank check in New
York Clearing House funds (or such other funds as we may advise), payable to our
order, against delivery of the securities to be purchased by you. We shall have
authority to make appropriate arrangements for payment for and/or delivery
through the facility of The Depository Trust Company or any such other
depository or similar facility for the securities.
6. In the event that, prior to the completion of the distribution of
securities covered by this Agreement, we purchase in the open market or
otherwise any securities delivered to you, if we are acting as Representatives
of the Underwriters, you agree to repay to us for the accounts of the
Underwriters the amount of the concession allowed to you plus brokerage
commissions and any transfer taxes paid in connection with such purchase.
7. At any time prior to the completion of the distribution of
securities covered by this Agreement you will, upon our request as
Representatives of the Underwriters, report to us the amount of securities
purchased by you which then remains unsold and will, upon our request, sell to
us for the account of one or more of the Underwriters such amount of such unsold
securities as we may designate, at the offering price less an amount to be
determined by us not in excess of the concession allowed to you.
2
<PAGE> 3
8. If we are acting as Representatives for the Underwriters, upon
application to us, we will inform you of the states and other jurisdictions of
the United States in which it is believed that the securities offered are
qualified for sale or are exempt from registration with respect to your right to
sell securities in any jurisdiction. We shall have authority to file with the
Department of State of the State of New York a Further State Notice with respect
to the securities, if necessary.
9. You agree, that in connection with any offering of securities
covered by this Agreement you will comply with the applicable provisions of the
1933 Act and the 1934 Act and the applicable rules and regulations of the
Securities and Exchange Commission thereunder the applicable rules and
regulations of the NASD, and the applicable rules of any securities exchange
having jurisdiction over the offering.
10. We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to any offering covered by this
Agreement. We shall be under no liability to you except for our lack of good
faith and for obligations assumed by us in this Agreement, except that you do
not waive any rights that you may have under the 1933 Act or the rules and
regulations thereunder.
11. Any notice from us shall be deemed to have been duly give if mailed
or transmitted by any standard form of written telecommunications to you at such
address as you shall specify to us in writing.
12. With respect to any offering of securities covered by this
Agreement, the price restrictions contained in Paragraph 1 hereof and the
provisions of Paragraphs 6 and 7 hereof shall terminate as to such offering at
the close of business on the 45th day after the securities are released for sale
or, as to any or all such provisions, at such earlier time as we may advise. All
other provisions of this Agreement shall remain operative and in full force and
effect with respect to such offering.
13. This Agreement shall be governed by the laws of the State of
Florida applicable to agreements made and to be performed entirely within such
state.
[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK.]
3
<PAGE> 4
Please confirm your agreement hereto by signing the enclosed duplicate
copy hereof in the place provided below and returning such signed duplicate copy
to us at 2500 N. Military Trail, Suite 300, Boca Raton, Florida 33431,
Attention: Syndicate Department (800) 284-9995. Upon receipt thereof, this
instrument and such signed duplicate copy will evidence the agreement between
us.
Very truly yours,
JOSEPH CHARLES & ASSOC., INC.
MILLENNIUM FINANCIAL GROUP, INC.
As Representatives of the Several
Underwriters
BY: JOSEPH CHARLES & ASSOC., INC.
By:
------------------------------------
Authorized Officer
Name:
-----------------------------
Its:
-----------------------------
Confirmed and accepted as of the
____ day of ___________, 1999
- ------------------------------
Name of Dealer
- ------------------------------
Authorized Officer or Partner
(if not Officer or Partner, attach
copy of Instrument of Authorization)
4
<PAGE> 5
Please complete and return with one executed copy of the Selected Dealer
Agreement.
Firm Name:
---------------------------------------------------------------
Address:
---------------------------------------------------------------
Street:
---------------------------------------------------------------
City:
---------------------------------------------------------------
State:
---------------------------------------------------------------
Zip Code:
---------------------------------------------------------------
Phone Number:
---------------------------------------------------------------
Fax Number:
---------------------------------------------------------------
Contact Person:
---------------------------------------------------------------
Tax I.D. #:
---------------------------------------------------------------
DTC #
---------------------------------------------------------------
ABA #
---------------------------------------------------------------
Corporate
Delivery
Instructions:
---------------------------------------------------------------
Government
Delivery
Instructions:
---------------------------------------------------------------
5
<PAGE> 1
EXHIBIT 1.4
FINANCIAL CONSULTING AGREEMENT
THIS AGREEMENT (this "Agreement") is made and entered into this _____
day of _______________, 1999, by and between Joseph Charles & Assoc., Inc.
("Consultant") and NeoTherapeutics, Inc., a Delaware corporation ("Client").
WITNESSETH:
WHEREAS, Client desires to obtain Consultant's services in connection
with Client's business and financial affairs, and Consultant is willing to
render such services as hereinafter more fully set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth herein, and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereby agree as follows:
1. Client hereby engages and retains Consultant and Consultant hereby
agrees to use its best efforts to render to client the consulting services
hereinafter described for a period of eighteen months (18) commencing as of, and
conditioned upon, the closing of the underwriting contemplated in the
Registration Statement on Form S-1 (File No. 333-79935) declared effective by
the Securities and Exchange Commission on _______________, 1999.
2. Consultant's services hereunder shall consist of consultations with
Client concerning the management and operations and the financing of Client's
business as Client may from time to time require during the term of this
Agreement. Such services may include, at the request of the client, written
reports; review, analysis and reports on proposed investment opportunities and
short-term and long-term investment policies; assistance in the Client's general
relationship with the financial community, including brokers, financial
analysts, investment bankers and institutions; and assistance in obtaining
financial management, technical and advisory services and financial and
corporate public relations. Client agrees that Consultant shall not be precluded
during the term of this Agreement from providing other consulting services or
engaging in any other business activities whether or not such consulting
services or business activities are pursued for gain, profit or other pecuniary
advantage and whether or not such consulting activities are in direct or
indirect competition with the business activities of Client.
3. The fees payable to Consultant under this Agreement do not include
any services Consultant might perform as finder, or person otherwise responsible
for the public or private placement of future financing for Client. Consultant
will be paid additional compensation on terms and conditions mutually
satisfactory to Client pursuant to a separate written agreement between the
parties with respect to any such transaction which is consummated as to which
Consultant is a finder.
<PAGE> 2
4. Client agrees to pay to Consultant for its services hereunder the sum
of $4,000.00 per month during the term of this Agreement. Client agrees that the
entire sum due to consultant hereunder, $72,000.00, shall be paid in full upon
execution hereof.
5. Consultant shall be entitled to reimbursement by Client for such
reasonable out-of-pocket expenses for travel, accommodation and other related
expenses as Consultant may incur in performing services under this Agreement.
6. All final decisions with respect to consultations or services
rendered by Consultant pursuant to this Agreement shall be those of Client, and
there shall be no liability on the part of the Consultant in respect thereof.
This Agreement contains the entire agreement of the parties hereto with respect
to the subject matter hereof, and there are no representations or warranties
other than as shall be herein set forth. No waiver or modification hereof shall
be valid unless in writing. No waiver of any term, provision or condition of
this Agreement, in any one or more instance, shall constitute a waiver of any
other provision hereof, whether or not similar, nor shall such waiver constitute
a continuing waiver.
7. This Agreement shall be governed, construed and enforced in
accordance with the laws of the State of Florida.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
signed as of the day and year first above written.
NEOTHERAPEUTICS, INC.
By: /s/ DR. ALVIN J. GLASKY
-------------------------------------
Dr. Alvin J. Glasky,
President and Chief Executive Officer
JOSEPH CHARLES & ASSOC., INC.
By:
-------------------------------------
Authorized Officer
2
<PAGE> 1
EXHIBIT 4.12
NEOTHERAPEUTICS, INC.
Representatives' Warrant
No. __ __________ Shares of Common Stock
THIS CERTIFIES that, for receipt in hand of $__________ and other value
received, ____________________, ____________________, ____________________ (the
"Holder"), is entitled to subscribe for and purchase from NeoTherapeutics, Inc.,
a Delaware corporation (the "Company"), upon the terms and conditions set forth
herein, at any time or from time to time from and after _______________, 2000,
and before 5:00 p.m. Eastern Standard Time on ______________, 2004 (the
"Exercise Period"), __________ shares of common stock, $.001 par value per share
(the "Common Shares"), of the Company (as adjusted, the "Underlying Shares") at
an aggregate exercise price of $_____ per Common Share, subject to adjustment as
provided herein (the "Exercise Price"). The Underlying Shares are sometimes
collectively referred to herein as the "Underlying Securities."
This Representatives' Warrant is the warrant or one of the warrants
(collectively, including any warrants issued upon the exercise or transfer of
any such warrants in whole or in part, the "Representatives' Warrants") issued
pursuant to the Underwriting Agreement, dated July __, 1999 (the "Underwriting
Agreement"), among the Company, Joseph Charles & Assoc., Inc. and Millennium
Financial Group, Inc. as Representatives of the several Underwriters. As used
herein the term "this Representatives' Warrant" shall mean and include this
Representatives' Warrant and any Representatives' Warrant or Representatives'
Warrants hereafter issued as a consequence of the exercise or transfer of this
Representatives' Warrant in whole or in part. This Representatives' Warrant may
not be sold, transferred, assigned or hypothecated until _______________, 2000,
except that it may be transferred, in whole or in part, to (i) one or more
officers or partners of the Holder (or the officers or partners of any such
partner); (ii) any other underwriting firm or member of the selling group (or
the officers or partners of any such firm) which participated in the public
offering of __________ Common Shares of the Company pursuant to a Registration
Statement (Registration File Number 333-79935) on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"); (iii) a
successor to the Holder, or the officers or partners of such successor; (iv) a
purchaser of substantially all of the assets of the Holder; or (v) by operation
of law; and the term the "Holder" as used herein shall include any transferee to
whom this Representatives' Warrant has been transferred in accordance with the
above.
1. This Representatives' Warrant may be exercised during the Exercise
Period, as to the whole or any lesser number of whole Underlying Shares, by the
surrender of this Representatives' Warrant (with the election at the end hereof
duly executed) to the Company at its office at NeoTherapeutics, Inc., 157
Technology Drive, Irvine, California 92618, or at such other place as is
designated in writing by the Company, together with a certified or bank
cashier's
<PAGE> 2
check payable to the order of the Company in an amount equal to the Exercise
Price (as defined) multiplied by the number of Underlying Shares for which this
Representatives' Warrant is being exercised.
2. Upon each exercise of the Holder's rights to purchase Common Shares,
the Holder shall be deemed to be the holder of record of the Underlying Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Underlying Shares
shall not then have been actually delivered to the Holder. Promptly after each
such exercise of this Representatives' Warrant, the Company shall issue and
deliver, or shall cause the transfer agent for the Common Shares to issue and
deliver, to the Holder a certificate or certificates for the Underlying Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. The Company has reserved and authorized a number of Underlying Shares
sufficient for issuance and delivery upon exercise of the Representatives'
Warrants. In the event that the Company fails promptly to issue and deliver or
cause the issuance and delivery of certificates for Common Shares in accordance
with the second sentence of this Section, the Representative is hereby
irrevocably designated the Company's agent to so instruct the transfer agent for
the Common Shares to issue and deliver such certificates and to take any other
actions either of them deem necessary or appropriate in connection with such
issuance and delivery. If this Representatives' Warrant should be exercised in
part only, the Company shall, upon surrender of this Representatives' Warrant
for cancellation, execute and deliver a new Representatives' Warrant evidencing
the right of the Holder to purchase the balance of the Underlying Shares (or
portions thereof) subject to purchase hereunder.
3. Any Representatives' Warrants issued upon the transfer or exercise in
part of this Representatives' Warrant shall be numbered and shall be registered
in a Representatives' Warrant Register as they are issued. The Company shall be
entitled to treat the registered holder of any Representatives' Warrant on the
Representatives' Warrant Register as the owner in fact thereof for all purposes
and shall not be bound to recognize any equitable or other claim to or interest
in such Representatives' Warrant on the part of any other person, and shall not
be liable for any registration or transfer of Representatives' Warrants which
are registered or to be registered in the name of a fiduciary or the nominee of
a fiduciary unless made with the actual knowledge that a fiduciary or the
nominee is committing a breach of trust in requesting such registration or
transfer, or with the knowledge of such facts that its participation therein
amounts to bad faith. This Representatives' Warrant shall be transferable only
on the books of the Company upon delivery thereof duly endorsed by the Holder or
by his duly authorized attorney or representative, or accompanied by proper
evidence of succession, assignment, or authority to transfer. In all cases of
transfer by an attorney, executor, administrator, guardian, or other legal
representative, duly authenticated evidence of his or its authority shall be
produced. Upon any registration of transfer, the Company shall deliver a new
Representatives' Warrant or Representatives' Warrants to the person entitled
thereto. This Representatives' Warrant may be exchanged, at the option of the
Holder thereof, for another Representatives' Warrant, or other Representatives'
Warrant of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Underlying Shares (or portions
thereof), upon
2
<PAGE> 3
surrender to the Company or its duly authorized agent. Notwithstanding the
foregoing, the Company shall have no obligation to cause Representatives'
Warrants to be transferred on its books to any person if, in the opinion of
counsel to the Company, such transfer does not comply with the provisions of the
Act, and the rules and regulations thereunder.
4. The Company shall at all times reserve and keep available for
issuance upon the exercise of the Representatives' Warrants a number of its
authorized and unissued Common Shares that will be sufficient to permit the
exercise in full of the Representatives' Warrants. The Company covenants that
all Common Shares issuable upon exercise of this Representatives' Warrant, upon
receipt by the Company of the full payment therefor, shall be validly issued,
fully paid, nonassessable, and free of preemptive rights.
5. (a) In case the Company shall at any time after the date hereof (i)
declare a dividend on the outstanding Common Shares payable in shares of its
capital stock, (ii) subdivide the outstanding Common Shares, (iii) combine the
outstanding Common Shares into a smaller number of shares, or (iv) issue any
shares of its capital stock by reclassification of the Common Shares (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then, in each case, the Exercise
Price, and the number of Underlying Shares issuable upon exercise of the
Representatives' Warrants in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination, or
reclassification, shall be proportionately adjusted so that the holders of the
Representatives' Warrants after such time shall be entitled to receive the
aggregate number and kind of shares which, if such Representatives' Warrants had
been exercised immediately prior to such time, such holders would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one-thousandth of a share, as the case may be.
(c) In any case in which this Section 5 shall require that an
adjustment in the number of Underlying Shares be made effective as of a record
date for a specified event the Company may elect to defer, until the occurrence
of such event, issuing to the Holder, if the Holder exercised this
Representatives' Warrant after such record date, the Common Shares, if any,
issuable upon such exercise over and above the number of Underlying Shares, if
any, issuable upon such exercise on the basis of the number of Underlying Shares
in effect prior to such adjustment; provided, however, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing the
Holder's right to receive such additional shares upon the occurrence of the
event requiring such adjustment.
(d) Whenever there shall be an adjustment as provided in this Section
5, the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to the Holder, at its address as it shall
appear in the Representatives' Warrant Register, which notice shall be
accompanied by an officer's certificate setting forth the number of
3
<PAGE> 4
Underlying Shares issuable pursuant to such Representatives' Warrants and the
Exercise Price, after such adjustment and setting forth a brief statement of the
facts requiring such adjustment and the computation thereof, which officer's
certificate shall be conclusive evidence of the correctness of any such
adjustment absent manifest error.
(e) The Company shall not be required to issue fractions of Common
Shares or other capital stock of the Company upon the exercise of this
Representatives' Warrant. If any fraction of a share would be issuable on the
exercise of this Representatives' Warrant (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price (as hereinafter defined) of such Common
Share on the date of exercise of this Representatives' Warrant.
(f) The "Current Market Price" per Common Share on any date shall be
defined as the average of the daily closing prices for the 30 consecutive
trading days immediately preceding the date in question. The closing price for
each day shall be the last reported sales price regular way or, in case no such
reported sale takes place on such day, the closing bid price regular way, in
either case on the principal national securities exchange (including, for
purposes hereof, The Nasdaq National Market system or The Nasdaq SmallCap
Market) on which the Common Shares are listed or admitted to trading or, if the
Common Shares are not listed or admitted to trading on any national securities
exchange, the highest reported bid price for the Common Shares as furnished by
the National Association of Securities Dealers, Inc. through The Nasdaq Stock
Market, Inc. or a similar organization if The Nasdaq Stock Market, Inc. is no
longer reporting such information. If on any such date the Common Shares are not
listed or admitted to trading on any national securities exchange and are not
quoted by The Nasdaq Stock Market, Inc. or any similar organization, the fair
value of the Common Shares on such date, as determined in good faith by the
Board of Directors of the Company, whose determination shall be conclusive
absent manifest error, shall be used.
6. (a) In case of any consolidation with or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Representatives' Warrant
solely the kind and amount of Common Shares and other securities, property,
cash, or any combination thereof receivable upon such consolidation, merger,
sale, lease, or conveyance by a holder of the number of Common Shares for which
this Representatives' Warrant might have been exercised immediately prior to
such consolidation, merger, sale, lease, or conveyance and (ii) make effective
provision in its certificate or articles of incorporation or otherwise, if
necessary, to effect such agreement. Such agreement shall provide for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5 hereof.
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<PAGE> 5
(b) In case of any reclassification or change of the Common Shares
issuable upon exercise of this Representatives' Warrant (other than a change in
par value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the shares into two or
more classes or series of shares), or in case of any consolidation or merger of
another corporation into the Company in which the Company is the continuing
corporation and in which there is a reclassification or change (including a
change to the right to receive cash or other property) of the Common Shares
(other than a change in par value, or from no par value to a specified par
value, or as a result of a subdivision or combination, but including any change
in the shares into two or more classes or series of shares), the Holder shall
have the right thereafter to receive upon exercise of this Representatives'
Warrant solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
Common Shares for which this Representatives' Warrant might have been exercised
immediately prior to such reclassification, change, consolidation, or merger.
Thereafter, appropriate provision shall be made for adjustments which shall be
as nearly equivalent as practicable to the adjustments in Section 5 hereof.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of Common Shares and to successive
consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on Common Shares in
Common Shares or make any other distribution (other than regularly scheduled
cash dividends which are not in a greater amount per share than the most recent
such cash dividend) to all holders of Common Shares; or
(b) to issue any rights, warrants, or other securities to all holders
of Common Shares entitling them to purchase any additional Common Shares or any
other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding Common
Shares, or any consolidation, merger, sale, lease, or conveyance of property,
described in Section 6(b); or
(d) to effect any liquidation, dissolution, or winding up of the
Company;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Representatives' Warrant Register,
mailed at least 15 days prior to (i) the date as of which the holders of record
of Common Shares to be entitled to receive any such dividend, distribution,
rights, warrants, or other securities are to be determined, or (ii) the date on
which any such reclassification, change of outstanding Common Shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding up is expected to become effective,
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<PAGE> 6
and the date as of which it is expected that holders of record of Common Shares
shall be entitled to exchange their shares for securities or other property, if
any, deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding up. Any such notice shall be deemed delivered on the
date of actual delivery as shown by the certification receipt or at the
expiration of the tenth (10th) business day after the date of mailing, whichever
is earlier in time.
8. The issuance of any shares or other securities upon the exercise of
this Representatives' Warrant, and the delivery of certificates or other
instruments representing such shares or other securities, shall be made without
charge to the Holder for any tax or other charge in respect of such issuance.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of any certificate
in a name other than that of the Holder and the Company shall not be required to
issue or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.
9. (a) If, at any time during the four-year period commencing one year
after the effective date of the Registration Statement (the "Effective Date"),
the Company shall file a registration statement (other than on Form S-4, Form
S-8, or any successor form) with the Securities and Exchange Commission (the
"Commission") while this Representatives' Warrant or any of the Representatives'
Securities (as hereinafter defined) are outstanding, the Company shall give all
the then holders of the Representatives' Warrants or any Representatives'
Securities (collectively, the "Eligible Holders") at least 45 days' prior
written notice of the filing of such registration statement. If requested by any
Eligible Holder in writing within 20 days after receipt of any such notice, the
Company shall, at the Company's sole expense (other than the fees and
disbursements of counsel for the Eligible Holders and the underwriting
discounts, if any, payable in respect of the Representatives' Securities sold by
any Eligible Holder), register or qualify all or, at each Eligible Holder's
option, any portion of the Representatives' Securities of any Eligible Holder
who shall have made such request, concurrently with the registration of such
other securities, all to the extent requisite to permit the public offering and
sale of the Representatives' Securities through the facilities of all
appropriate securities exchanges and the over-the-counter market, and will use
its best efforts through its officers, directors, auditors, and counsel to cause
such registration statement to become effective as promptly as practicable.
Notwithstanding the foregoing, if the managing underwriter of any such offering
shall advise the Company in writing that, in its opinion, the distribution of
all or a portion of the Representatives' Securities requested to be included in
the registration concurrently with the securities being registered by the
Company would materially adversely affect the distribution of such securities by
the Company for its own account, then any Eligible Holder who shall have
requested registration of his or its Representatives' Securities shall delay the
offering and sale of such Representatives' Securities (or the portions thereof
so designated by such managing underwriter) for such period, not to exceed 90
days (the "Delay Period"), as the managing underwriter shall request, provided
that no such delay shall be required as to any Representatives' Securities if
any securities of the Company are included in such registration statement and
eligible for sale during the Delay Period
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<PAGE> 7
for the account of any person other than the Company and any Eligible Holder
unless the securities included in such registration statement and eligible for
sale during the Delay Period for such other person shall have been reduced pro
rata to the reduction of the Representatives' Securities which were requested to
be included and eligible for sale during the Delay Period in such registration.
As used herein, "Representatives' Securities" shall mean the Underlying
Securities (including any shares of capital stock or other securities issued or
issuable pursuant to Sections 5, 6 and 7 hereof) which have not been previously
sold pursuant to a registration statement or Rule 144 promulgated under the Act.
(b) If, at any time during the four-year period commencing one year
after the Effective Date, the Company shall receive a written request (a
"Request"), from Eligible Holders who in the aggregate own (or upon exercise of
all Representatives' Warrants then outstanding would own) a majority of the
total number of Common Shares then included (or which upon such exercises would
be included) in the Representatives' Securities (the "Majority Holders"), to
register the sale of all or part of such Representatives' Securities, the
Company shall, as promptly as practicable, prepare and file with the Commission
a registration statement sufficient to permit the public offering and sale of
the Representatives' Securities through the facilities of all appropriate
securities exchanges and the over-the-counter market, and will use its best
efforts through its officers, directors, auditors, and counsel to cause such
registration statement to become effective as promptly as practicable; provided;
however, that the Company shall only be obligated to register Representatives'
Securities on one occasion pursuant to this Section 9(b). All expenses incurred
in connection with such registration (other than the fees and disbursements of
counsel for the Eligible Holders and underwriting discounts, if any, payable in
respect of the Representatives' Securities sold by the Eligible Holders) shall
be borne by the Company. Within ten (10) business days after receiving any
request contemplated by this Section 9(b), the Company shall give written notice
to all the other Eligible Holders, advising each of them that the Company is
proceeding with such registration and offering to include therein all or any
portion of any such other Eligible Holder's Representatives' Securities,
provided that the Company receives a written request to do so from such Eligible
Holder within 30 days after receipt by him or it of the Company's notice.
Notwithstanding anything contained in this Section 9(b) to the contrary: (i) no
person may make a Request that the Company file, nor shall the Company be
obligated to file, a Registration Statement on any date that is within 90 days
of the effective date of any registration statement filed by the Company and
pursuant to which such person was given full "piggyback" registration rights in
accordance with Section 9(a) hereof including, without limitation, the ability
to include a portion of Representatives' Securities requested to be included
therein; and (ii) the Company may delay the registration of the securities to
which a Request relates if upon receipt of such Request (A) the Company notifies
the person making the Request that it is contemplating filing a Registration
Statement within 90 days of such Request, or (B) the Company notifies the person
making the Request that the Board of Directors of the Company has determined
that a material event has occurred that has not been publicly disclosed and
which if disclosed would have a material adverse effect on the Company; provided
that (x) in the case of clause (ii)(A) of this paragraph, the Company shall, as
soon as practical, upon the first to occur of the abandonment of such
contemplated Registration Statement or the expiration of such 90 day period,
register the securities to which the Request
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<PAGE> 8
relates unless such Request is withdrawn; and (y) in the case of clause (ii)(B)
of this paragraph, the Company may not delay the filing of the Registration
Statement for more than 60 days from the date of the Request unless such Request
is withdrawn.
(c) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall use its best efforts to cause the Representatives'
Securities so registered to be registered or qualified for sale under the
securities or Blue Sky Laws of such jurisdictions as the Holder or such holders
may reasonably request; provided, however, that the Company shall not be
required to qualify to do business in any state by reason of this Section 9(c)
in which it is not otherwise required to qualify to do business.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication until the earlier of
the conclusion of the period required to permit the Eligible Holders to complete
the offer and sale of the Representatives' Securities covered thereby and 270
days from the effective date of the Registration Statement; provided, however,
that, if the Company is required to keep any such registration or qualification
in effect with respect to securities other than the Representatives' Securities
beyond such period, the Company shall keep such registration or qualification in
effect as it relates to the Representatives' Securities for so long as such
registration or qualification remains or is required to remain in effect in
respect of such other securities.
(e) In the event of a registration pursuant to the provisions of this
Section 9, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Representatives' Securities included in such
registration.
(f) In the event of a registration pursuant to the provisions of this
Section 9, the Company and each Eligible Holder who includes Representatives'
Securities in such registration shall enter into a cross-indemnity agreement and
a contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Representatives'
Securities.
(g) The Company agrees that until all the Representatives' Securities
have been sold under a registration statement or pursuant to Rule 144 under the
Act, it shall keep current in filing all reports, statements and other materials
required to be filed with the Commission to permit holders of the
Representatives' Securities to sell such securities under Rule 144.
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<PAGE> 9
(h) So long as any Representatives' Securities are outstanding, the
Company will not enter into any agreement requiring the registration of any
securities of the Company which is in conflict with the terms of this Section 9.
10.(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, but not be
limited to, attorneys' fees and any and all reasonable expenses whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, relating to the sale of
any of the Representatives' Securities, or (B) in any application or other
document or communication (in this Section 10 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Representatives' Securities under the
securities or Blue Sky laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, unless
such statement or omission was made in reliance upon and in conformity with
written information furnished to the Company with respect to such Eligible
Holder by or on behalf of such Person expressly for inclusion in any
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Representatives' Warrant. The foregoing agreement to
indemnify shall be in addition to any liability the Company may otherwise have,
including liabilities arising under this Representatives' Warrant.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "Indemnified Party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
Indemnified Party or Parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 10) and the
Company shall promptly assume the defense of such action, including the
employment of counsel and payment of expenses. Such Indemnified Party or Parties
shall have the right to employ its or their own
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<PAGE> 10
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Party or Parties unless the employment of such
counsel shall have been authorized in writing by the Company in connection with
the defense of such action or the Company shall not have promptly employed
counsel reasonably satisfactory to such Indemnified Party or Parties to have
charge of the defense of such action or such Indemnified Party or Parties shall
have reasonably concluded that there may be one or more legal defenses available
to it or them or to other Indemnified Parties which are different from or
additional to those available to the Company, in any of which events such fees
and expenses shall be borne by the Company and the Company shall not have the
right to direct the defense of such action on behalf of the Indemnified Party or
Parties. Anything in this Section 10 to the contrary notwithstanding, the
Company shall not be liable for any settlement of any such claim or action
effected without its written consent, which shall not be unreasonably withheld.
The Company shall not, without the prior written consent of each Indemnified
Party that is not released as described in this sentence, settle or compromise
any action, or permit a default or consent to the entry of judgment in or
otherwise seek to terminate any pending or threatened action, in respect of
which indemnity may be sought hereunder (whether or not any Indemnified Party is
a party thereto), unless such settlement, compromise, consent, or termination
includes an unconditional release of each Indemnified Party from all liability
in respect of such action. The Company agrees promptly to notify the Eligible
Holders of the commencement of any litigation or proceedings against the Company
or any of its officers or directors in connection with the sale of any
Representatives' Securities or any preliminary prospectus, prospectus,
registration statement, or amendment or supplement thereto, or any application
relating to any sale of any Representatives' Securities.
(b) The Holder agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Representatives' Securities held by the
Holder, each other person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to the Holder in Section 10(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to the
Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this Section 10(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the Indemnified Parties, by the provisions of Section
10(a).
(c) To provide for just and equitable contribution, if (i) an
Indemnified Party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations
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thereof) but it is found in a final judicial determination, not subject to
further appeal, that such indemnification may not be enforced in such case, even
though this agreement expressly provides for indemnification in such case, or
(ii) any Indemnified Party or indemnifying party seeks contribution under the
Act, the Exchange Act or otherwise, then the Company (including for this purpose
any contribution made by or on behalf of any director of the Company, any
officer of the Company who signed any such registration statement, any
controlling person of the Company, and its or their respective counsel), as one
entity, and the Eligible Holders of the Representatives' Securities included in
such registration in the aggregate (including for this purpose any contribution
by or on behalf of an Indemnified Party), as a second entity, shall contribute
to the losses, liabilities, claims, damages, and expenses whatsoever to which
any of them may be subject, on the basis of relevant equitable considerations
such as the relative fault of the Company and such Eligible Holders in
connection with the facts which resulted in such losses, liabilities, claims,
damages, and expenses. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission, or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission, or
alleged omission relates to information supplied by the Company or by such
Eligible Holders, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement, alleged
statement, omission, or alleged omission. The Company and the Holder agree that
it would be unjust and inequitable if the respective obligations of the Company
and the Eligible Holders for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages, and
expenses (even if the Holder and the other Indemnified Parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 10(c). In no
case shall any Eligible Holder be responsible for a portion of the contribution
obligation imposed on all Eligible Holders in excess of its pro rata share based
on the number of Common Shares owned (or which would be owned upon exercise of
all Representatives' Warrants) by it and included in such registration as
compared to the number of Common Shares owned (or which would be owned upon
exercise of all Representatives' Warrants) by all Eligible Holders and included
in such registration. No person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation. For purposes
of this Section 10(c), each person, if any, who controls any Eligible Holder
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act
and each officer, director, partner, employee, agent, and counsel of each such
Eligible Holder or control person shall have the same rights to contribution as
such Eligible Holder or control person and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed any such
registration statement, each director of the Company, and its or their
respective counsel shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 10(c). This Section 10(c)
is intended to supersede any right to contribution under the Act, the Exchange
Act or otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof,
the certificate or certificates evidencing such securities shall bear the
following legend:
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"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION. HOWEVER, SUCH SHARES MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION
STATEMENT, (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR
(iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Representatives' Warrant (and, in the
case of loss, theft or destruction of the Representatives' Warrant, upon
delivery of an indemnity agreement or security reasonably satisfactory in form
and amount to the Company, or upon surrender of any Representatives' Warrant if
mutilated), and upon reimbursement of the Company's reasonable incidental
expenses, the Company shall exercise and deliver to the Holder thereof a new
Representatives' Warrant of like date, tenor, and denomination.
13. The Holder of any Representatives' Warrant shall not have, solely
on account of such status, any rights of a stockholder of the Company, either at
law or in equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Representatives' Warrant.
14. This Representatives' Warrant shall be construed in accordance
with the laws of the State of Delaware.
15. The Company irrevocably consents to the jurisdiction of the
courts of the State of Florida and of any federal court located in such State in
connection with any action or proceeding arising out of or relating to this
Representatives' Warrant, any document or instrument delivered pursuant to, in
connection with or simultaneously with this Representatives' Warrant, or a
breach of this Representatives' Warrant or any such document or instrument. In
any such action or proceeding, the Company waives personal service of any
summons, complaint or other process. Within 30 days after such service, or such
other time as may be mutually agreed upon in writing by the attorneys for the
parties to such action or proceeding, the Company shall appear to answer such
summons, complaint or other processes.
Dated: ________________, 1999
WITNESS: NEOTHERAPEUTICS, INC.
By: /s/ DR. ALVIN J. GLASKY
- --------------------------------- -------------------------------------
Secretary Dr. Alvin J. Glasky,
President and Chief Executive Officer
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FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Representatives' Warrant.)
FOR VALUE RECEIVED, _______________________ hereby sells, assigns, and
transfers unto ____________________________ a Representatives' Warrant to
purchase ____________ Common Shares of NeoTherapeutics, Inc., a Delaware
corporation (the "Company"), together with all right, title, and interest
therein, and does hereby irrevocably constitute and appoint _________________
attorney to transfer such Representatives' Warrant on the books of the Company,
with full power of substitution.
Dated: _________________
_____________________________
Signature
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ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
__________ Shares covered by the within Representatives' Warrant and tenders
payment herewith in the amount of $______________ in accordance with the terms
thereof, and requests that certificates for such securities be issued in the
name of, and delivered to:
________________________________________________________
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Underlying Shares shall not be all the Underlying Shares
covered by the within Representatives' Warrant, requests that a new
Representatives' Warrant for the balance of the Underlying Shares covered by the
within Representatives' Warrant be registered in the name of, and delivered to,
the undersigned at the address stated below.
Dated:______________________ Name: __________________________________
(Print)
Address:
Signature: _____________________________
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EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Orange County, California
July 20, 1999
