As filed with the Securities and Exchange Commission on January 13, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEOSE TECHNOLOGIES, INC.
(Exact name of Registrant as specified in charter)
<TABLE>
<CAPTION>
Delaware 8731 13-3549286
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
102 Witmer Road
Horsham, Pennsylvania 19044
(215) 441-5890
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Stephen A. Roth, Ph.D.
Chief Executive Officer
Neose Technologies, Inc.
102 Witmer Road
Horsham, Pennsylvania 19044
(215) 441-5890
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
---------------
David R. King, Esq. James R. Tanenbaum, Esq.
Morgan, Lewis & Bockius LLP Stroock & Stroock & Lavan
2000 One Logan Square Seven Hanover Square
Philadelphia, Pennsylvania 19103 New York, New York 10004
(215) 963-5000 (212) 806-5400
---------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
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. / /
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class Amount to Be Offering Price Aggregate Offering Amount of
of Securities to Be Registered Registered Per Unit Price Registration Fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share .............. 1,250,000 $18.25(1) $22,812,500.00(1) $7,866.00
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
in accordance with Rule 457(c) under the Securities Act of 1933, as
amended.
---------------
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 such Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JANUARY 13, 1997
PROSPECTUS
1,250,000 Shares
[NEOSE TECHNOLOGIES, INC. LOGO]
Common Stock
All of the 1,250,000 shares of Common Stock, par value $.01 per share
(the "Common Stock"), offered hereby are being sold by Neose Technologies, Inc.
("Neose" or the "Company"). The Company's Common Stock is quoted on the Nasdaq
National Market under the symbol "NTEC." On January 10, 1997, the last reported
sale price of the Common Stock, as reported on the Nasdaq National Market, was
$18.00 per share. See "Price Range of Common Stock."
---------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 7.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
========================================================================================================================
Price to Placement Agent Proceeds to
Public Fees (1) Company (2)(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................... $ $ $
- ------------------------------------------------------------------------------------------------------------------------
Total....................... $ $ $
========================================================================================================================
</TABLE>
(1) The Common Stock is being offered on an all or none basis by the
Company to selected institutional investors. Vector Securities
International, Inc. (the "Placement Agent") has been retained to act,
on a best efforts basis, as agent for the Company in connection with
the arrangement of this transaction. The Company has agreed to pay the
Placement Agent a fee in connection with the arrangement of this
transaction and reimburse the Placement Agent for certain out-of-pocket
expenses. The Company has agreed to indemnify the Placement Agent
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). See "Plan of
Distribution."
(2) The termination date of the offering is , 1997, subject to
extension by mutual agreement of the Company and the Placement Agent.
Prior to the closing date of this best efforts, all or nothing,
offering all investor funds will promptly be placed in escrow with
Citibank, N.A., as escrow agent for funds collected in connection with
the offering (the "Escrow Agent"), in an escrow account established
for the benefit of the investors. Upon receipt of notice from the
Escrow Agent that investors have affirmed purchase of the Common Stock
and deposited the requisite funds in the escrow account, the Company
will deposit with The Depository Trust Company ("DTC") the shares of
Common Stock to be credited to the accounts of the investors and will
collect the investor funds from the Escrow Agent. In the event that
investor funds are not received in the full amount necessary to
satisfy the requirements of the offering, all funds deposited with the
Escrow Agent will promptly be returned to the investors. See "Plan of
Distribution."
(3) Before deducting expenses payable by the Company estimated at $285,000.
----------
Vector Securities International, Inc.
The date of this Prospectus is , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[This page intentionally left blank]
<PAGE>
PROSPECTUS SUMMARY
The statements in this Prospectus that relate to future plans, events
or performance are forward-looking statements. Actual results could differ
materially due to a variety of factors, including the factors described under
"Risk Factors" and the other risks described in this Prospectus. The following
summary is qualified in its entirety by the more detailed information and the
Financial Statements and Notes thereto appearing elsewhere in this Prospectus,
including information under "Risk Factors."
The Company
Neose Technologies, Inc. ("Neose" or the "Company") is focused on the
enzymatic synthesis of complex carbohydrates (oligosaccharides), and the
discovery and development of complex carbohydrates for nutritional and
pharmaceutical uses. Complex carbohydrates serve as attachment sites for many
pathogens that cause infectious diseases. Present on all cells, these compounds
also play a critical role in the immune response. Because oligosaccharides are
difficult and expensive to produce, their commercial development has been
significantly limited despite the role they play in human diseases. The Company
believes that its proprietary Multi-Transferase Reaction ("MTR") technology
enables, for the first time, the rapid and cost-efficient production of
naturally-occurring oligosaccharides. The Company, with Abbott Laboratories
("Abbott"), a leading provider of infant formula in the United States, is
applying its MTR technology to the development of breast milk oligosaccharides
as additives to infant formula. Breast milk oligosaccharides are believed to
play an important anti-infective role in infants. In its therapeutic development
programs, the Company is using its technology to develop complex carbohydrates
as pharmaceuticals to treat various bacterial infections, such as
gastrointestinal and pediatric ear infections, and to prevent xenotransplant
rejection.
All human cell surfaces have complex carbohydrates that serve as
specific binding sites for other molecules and cells, including pathogens such
as bacteria, viruses, and other infectious microorganisms. In addition, soluble
oligosaccharides (oligosaccharides not bound to cells) produced by the body are
found in many body fluids. These soluble complex carbohydrates are identical to
the complex carbohydrates on cell surfaces, and are believed to serve as decoys
that bind to pathogens, preventing the pathogens from binding to cells and
causing disease. The Company believes that naturally-occurring oligosaccharides
can be developed into anti-infective pharmaceutical and healthcare products that
are less likely to cause adverse side-effects, and less likely to result in
resistant strains of infectious agents, than synthetic drugs or traditional
antibiotics.
Difficulties in producing oligosaccharides efficiently and in
sufficient quantities have significantly limited their development and
commercialization as pharmaceutical or healthcare products. Neose's proprietary
MTR technology utilizes enzymes as part of a molecular assembly line to
synthesize a wide variety of oligosaccharides. These enzymes, or
glycosyltransferases, are catalysts that join monosaccharides together in highly
specific ways. Neose has developed various methods to obtain the
glycosyltransferases necessary to manufacture many naturally-occurring
oligosaccharides. Utilizing its proprietary MTR technology, the Company believes
it can produce these naturally-occurring complex carbohydrates in commercial
quantities on a cost-effective basis. These compounds can then be used as lead
compounds for pharmaceutical development and for other healthcare applications.
Neose is applying its proprietary technologies to develop the following
products:
Nutritional Additives. Breast milk contains more than two dozen soluble
oligosaccharides that are believed to play an important anti-infective role in
infants by preventing the attachment of certain bacteria to gastrointestinal,
respiratory, and urinary tract cells. The Company has entered into a strategic
alliance with Abbott for the commercialization of breast milk oligosaccharides
for nutritional applications. Abbott, through its Similac(R) and Isomil(R)
products, is a leading provider of infant formula in the United States. The
Company's first oligosaccharide, NE-1340, is being developed as an additive to
Abbott's infant formula products. The Company believes that the development and
commercialization of this additive may occur more rapidly than pharmaceutical
product development.
3
<PAGE>
Pharmaceuticals. In its pharmaceutical discovery and development efforts,
the Company is targeting diseases or indications that are mediated by complex
carbohydrates located on cell surfaces, and that affect large patient
populations. The Company is currently developing pharmaceutical products for the
following indications:
o Gastritis and Peptic Ulcers. The Company is developing NE-0080, a
naturally-occurring human gastrointestinal oligosaccharide, to treat
gastritis and peptic ulcers caused by Helicobacter pylori
("H. pylori") infections. An estimated four million people suffer from
active peptic ulcers each year in the United States, and approximately
500,000 new cases are diagnosed annually. The Company completed Phase
IA and Phase IB clinical trials involving 24 healthy subjects in an
ascending single dose study and 32 subjects with asymptomatic
H. pylori infections in a 10-day repeat dose study, respectively. The
results of these studies indicated that NE-0080 was well-tolerated and
did not cause any adverse side-effects. A Phase IC study, involving a
28-day repeat dose study in 11 subjects with asymptomatic H. pylori
infections, was completed in November 1996. Although the study was
designed primarily to test safety, the Company also used the
non-invasive, urea breath test ("UBT") to measure H. pylori loads in
the subjects over an eight-week period. NE-0080 caused a statistically
significant decrement in UBT values. The Company plans to initiate
Phase II studies on NE-0080 in early 1997. Neose also is developing
NE-1327, a polyvalent configuration of NE-0080 that is significantly
more effective than the natural monovalent molecule in inhibiting in
vitro binding of H. pylori bacteria to human stomach cells.
o Pediatric Ear Infections. Neose is developing NE-1530, a
naturally-occurring human airway oligosaccharide, for the treatment of
pediatric ear infections. Middle ear infections, one of the most
frequent reasons for pediatrician visits, cause an estimated
30 million office visits and prescriptions each year. Preclinical
studies using animal models have indicated that NE-1530 inhibits and
reversesthe attachment of bacteria that cause ear infections and other
respiratory diseases. Neose is currently conducting additional
preclinical studies and plans to file in late 1997 an investigational
new drug ("IND") application for the treatment of pediatric ear
infections. Most bacteria involved in pediatric ear infections also
cause acute infections associated with chronic bronchitis and
pneumonia. Although the Company has chosen initially to develop
NE-1530 to treat pediatric ear infections, the Company also may
develop this compound in the future for such other indications.
o Xenotransplant Rejection. An estimated 20,000 human organ transplants
were performed in the United States in 1995 and many times that number
of patients are believed to die each year due to the lack of available
human organs. At the end of 1995, the waiting list for humans awaiting
human organs was approximately 44,000, and that list has grown
significantly each year. Although substantial resources have been
committed to develop animal organs for human transplants, hyperacute
rejection ("HAR"), in which the transplanted organ is rejected within
minutes of transplantation, remains one of the most critical obstacles
to xenotransplantation. HAR results from an antibody-mediated response
against an oligosaccharide found on the cell surface of most mammals
but absent in humans. The Company is developing NE-0501 to neutralize,
or to remove, the human antibodies against the mammalian
oligosaccharide. During 1996, the Company conducted preclinical
studies in which unmodified pig hearts were grafted into two baboons
receiving NE-0501 intravenously to neutralize the target antibodies.
These studies demonstrated that NE-0501, while present in the
bloodstream in adequate concentrations, allows the in vivo survival of
the transplanted organ and neutralizes the antibodies that initiate
HAR. The Company is collaborating with other companies that are
pursuing xenotransplantation with several different approaches,
including transgenic modification of pig organs, and chimeric
tolerization of donor organs. The Company believes that the use of
oligosaccharides may be an important part of the therapies that will
ultimately be utilized in the possible commercialization of
xenotransplantation in the future.
Neose seeks to complement its internal research and development
resources through collaborations with corporate partners and research
institutions. Under Neose's strategic alliance with Abbott, Abbott has invested
$6.0 million in the Company and has paid the Company $5.2 million in contract
payments, license fees, and milestone payments, and has agreed to pay further
milestone payments and ongoing fees upon the successful commercialization of an
infant formula product that includes the Company's compound. In September 1995,
Neose entered into an exclusive research collaboration with Bracco Research USA
Inc. ("Bracco"), a world leader in diagnostic imaging products and formerly the
4
<PAGE>
diagnostics division of Bristol-Myers Squibb Company, to test the effectiveness
of oligosaccharides for in vivo imaging purposes.
The Company's objective is to be the leader in the discovery,
development, and manufacture of complex carbohydrates for a wide range of
nutritional and healthcare applications. The key elements of the Company's
strategy include: (i) continuing development of nutritional additives; (ii)
leveraging its core technology to discover and develop pharmaceutical products
to treat carbohydrate-mediated diseases; (iii) establishing strategic alliances
and research and development collaborations; (iv) continuing to develop its
manufacturing capabilities; and (v) pursuing additional applications of its core
technology.
The Company was incorporated in New York in January 1989, commenced
operations in 1990 and was reincorporated in Delaware in June 1991 under the
name Neose Pharmaceuticals, Inc. In April 1995, the Company changed its name to
Neose Technologies, Inc. The Company completed its initial public offering of
2,587,500 shares of Common Stock in February 1996, raising net proceeds of $29.1
million. The Company's executive offices are located at 102 Witmer Road,
Horsham, Pennsylvania 19044, and its telephone number is (215) 441-5890.
5
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered................................................................... 1,250,000 shares
Common Stock to be outstanding after the offering...................................... 9,468,607 shares (1)
Use of proceeds........................................................................ Research and development activities,
capital expenditures, working capital,
and general corporate purposes,
including possible acquisitions. See
"Use of Proceeds."
Nasdaq National Market Symbol.......................................................... NTEC
</TABLE>
Summary Financial Information
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period
Period from from
Nine Months inception inception
Ended (January 17, (January 17,
Year Ended December 31, September 30, 1989) to 1989) to
---------------------------------------- ------------- December 31, September 30,
1991 1992 1993 1994 1995 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues from collaborative
agreements...................... $ -- $ -- $ 2,600 $ 48 $ 1,199 $ 876 $ 1,006 $ 3,846 $ 4,852
Research and development
expenses........................ 1,055 1,941 3,399 5,004 4,733 3,426 4,900 16,476 21,376
General and administrative
expenses........................ 703 1,324 1,577 1,319 1,665 1,172 1,788 6,689 8,477
Interest income (expense), net..... (107) (90) (47) 63 132 73 1,082 (63) 1,019
Net loss........................... (1,865) (3,355) (2,423) (6,212) (5,067) (3,649) (4,600) (19,382) (23,982)
Pro forma net loss per share (2)... $ (1.06) $ (0.60)
Shares used in computing pro forma
net loss per share (2).......... 4,761 7,728
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1996
-------------------------------
Actual As Adjusted(3)
-------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................. $ 35,717 $56,638
Total assets.......................................... 39,032 59,953
Long-term debt (4).................................... 683 683
Deficit accumulated during the development stage...... (23,982) (23,982)
Total stockholders' equity............................ 36,512 57,433
</TABLE>
- ------------
(1) Does not include, as of January 6, 1997, (i) 147,690 shares of Common
Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price per share of $11.18, (ii) 1,199,643 shares of
Common Stock issuable upon exercise of outstanding options at a
weighted average exercise price of $10.04 per share, (iii) 260,729
shares of Common Stock reserved for future option grants under the
Company's stock option plans, and (iv) 94,369 shares of Common Stock
reserved for issuance pursuant to the Company's employee stock
purchase plan. See "Management -- 1995 Stock Option/Stock Issuance
Plan," "Management -- Employee Stock Purchase Plan," "Description of
Capital Stock," and Note 7 of Notes to Financial Statements.
(2) See Note 2 of Notes to Financial Statements.
(3) Adjusted to give effect to the sale of the Common Stock offered hereby
(at an assumed public offering price of $18.00 per share) and the
receipt of the estimated net proceeds therefrom. See "Use of
Proceeds."
(4) The "As Adjusted" amount does not include the long-term debt financing
contemplated in connection with the Company's planned purchase of its
facility and Good Manufacturing Practices manufacturing expansion. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments."
----------
This Prospectus also includes trademarks and trade names of
companies other than the Company.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered by potential investors in evaluating an
investment in the shares of Common Stock offered hereby. These factors may cause
actual results, events or performance to differ materially from those expressed
in any forward-looking statements made by the Company in this Prospectus.
Early Stage of Development; Uncertainty of Product Development;
Technological Uncertainty; Novel Therapeutic Approach. The Company was founded
in 1989 and is at an early stage of development. The Company has not yet
completed the development of any of its products and, accordingly, has not begun
to market or generate revenues from the commercialization of products. It will
be a number of years, if ever, before the Company will recognize significant
revenues from product sales or royalties. Substantially all of the Company's
revenues received to date have resulted from payments received under its
strategic alliance with Abbott. The Company expects that substantially all of
its revenues for the foreseeable future will result from payments under its
strategic alliance with Abbott, license fees, payments from future strategic
alliances and collaborative arrangements, if any, and interest income. Such
revenues will be subject to significant fluctuations in both timing and amount.
There can be no assurance that the Company will receive royalty revenues from
Abbott or that the Company will be successful in entering into other strategic
alliances or collaborative arrangements that will result in significant
revenues. The Company's products under development will require significant
time-consuming and costly research, development, preclinical studies, clinical
testing, regulatory approval, and significant additional investment prior to
their commercialization, which may never occur. Moreover, the development and
commercialization of complex carbohydrates for pharmaceutical applications have
been pursued successfully by few companies. There can be no assurance that the
Company's research and development programs will be successful, that its
oligosaccharide products will exhibit the expected biological activities in
humans, that its nutritional additive will be successfully commercialized, that
its pharmaceutical products, if developed, will prove to be safe and efficacious
in clinical trials, that the Company or its collaborators will obtain the
necessary regulatory approvals for its products, or that the Company or its
collaborators will be successful in obtaining market acceptance of any of its
products. The Company or its collaborators may encounter problems and delays
relating to research and development, regulatory approval, manufacturing, and
marketing. The failure by the Company to address such problems and delays
successfully would have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, although several
companies are focusing research and development efforts in the area of
xenotransplantation-based products, such products represent a novel therapeutic
approach that has not yet been subject to extensive clinical testing. No
xenogeneic organ or living tissue has been approved by the United States Food
and Drug Administration ("FDA") for use in humans. There can be no assurance
that any xenotransplantation-based products, including the Company's NE-0501
oligosaccharide, will be approved by the FDA or other regulatory authorities, or
that, even if so approved, will be accepted by the medical community or
third-party payors.
Dependence on Abbott; Dependence on Other Collaborative Partners. The
Company's strategic alliance with Abbott provides, in part, for the receipt by
the Company of certain license fees, milestone payments, and, if
commercialization occurs, royalty payments. The Company has derived
substantially all of its revenues to date from its strategic alliance with
Abbott and anticipates that payments from Abbott will constitute all or a
substantial portion of its revenues for the next several years. Abbott has the
option at any time prior to the first commercial sale, if any, of infant formula
containing the Company's nutritional additive, to elect to make the underlying
license agreement with the Company non-exclusive, in which event the license
fees payable to the Company after commercialization would be reduced by 50%, and
Abbott's obligations to make contract and milestone payments would be
terminated. Abbott also has the right to terminate the underlying license
agreement upon 60 days' notice, in which event it would have no further funding
obligations to the Company. In addition, under the terms of the Abbott
agreement, if Abbott fails to make appropriate regulatory filings with the FDA
for the addition of Neose oligosaccharides in infant formula prior to December
31, 1997, Neose, at its option, may elect to convert the license of Neose
technology to a non-exclusive license to Abbott, in which event the license fees
7
<PAGE>
payable by Abbott after commercialization would be reduced by 50%, and Abbott's
obligations to make contract and milestone payments would be terminated. The
success of the strategic alliance will depend on Abbott's own competitive,
marketing and strategic considerations, including the relative advantages of
alternative products being developed or marketed by competitors. The amount and
timing of resources Abbott commits to these activities are entirely within
Abbott's control. There can be no assurance that Abbott will pursue the
development and commercialization of this product or that Abbott will perform
its obligations as expected. No assurance can be given that the strategic
alliance will result in the successful commercialization of the Company's
nutritional additive or that any future milestone payments or fees will be
received by the Company. The suspension or termination of the Company's
strategic alliance with Abbott, the failure of the strategic alliance to be
successful, or the delay in the development or commercialization of the
nutritional additive by Abbott would have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Business -- Strategic Alliance with Abbott."
The Company's strategy for the development and commercialization of its
pharmaceutical product candidates involves entering into collaborative
agreements with pharmaceutical and other companies. The Company may in the
future grant to its collaborative partners rights to license and commercialize
any products developed under these collaborative agreements, and such rights
would limit the Company's flexibility in considering alternatives for the
commercialization of such products. Under such agreements, the Company may rely
on its collaborative partners to conduct research and development efforts and
clinical trials on, obtain regulatory approvals for, and manufacture, market,
and commercialize certain of the Company's products. The amount and timing of
resources devoted to these activities generally will be controlled by each such
individual partner. To date, the Company has only entered into a limited number
of these collaborative arrangements, and none with respect to pharmaceutical
product candidates. There can be no assurance that the Company will be
successful in establishing any additional collaborative arrangements, that
existing or future collaborative arrangements will be successful in
commercializing products, or that the Company will derive any revenues from such
arrangements. In addition, the Company's strategy involves entering into
multiple, concurrent strategic alliances to pursue pharmaceutical discovery in
different disease areas. There can be no assurance that the Company will be able
to manage simultaneous programs successfully. With respect to existing and
potential future strategic alliances and collaborative arrangements, the Company
will be dependent upon the expertise and dedication of sufficient resources by
these outside parties to develop, manufacture, or market products. Should a
strategic alliance or collaborative partner fail to develop or commercialize a
product to which it has rights, the Company's business, financial condition, and
results of operations could be materially and adversely affected. See "Business
- -- Other Collaborative Relationships."
History of Operating Losses; Uncertainty of Future Profits. The Company
has not generated any revenues from operations, except for interest income and
revenues from strategic alliances. The Company has incurred losses since its
inception and, as of September 30, 1996, had a deficit accumulated during the
development stage of approximately $24 million for the period since inception.
The Company anticipates incurring additional losses over at least the next
several years. Such losses may fluctuate significantly from quarter to quarter
and are expected to increase as the Company expands its research and development
activities. To achieve profitability, the Company, alone or with others, must
successfully commercialize its nutritional additive, develop its pharmaceutical
products, conduct preclinical studies and clinical trials, obtain required
regulatory approvals and successfully manufacture, introduce, and market such
products. In addition, to the extent the Company relies upon others for
research, development, and commercialization activities, the Company's ability
to achieve profitability will be dependent upon the success of such outside
parties. The time required to reach profitability is highly uncertain, and there
can be no assurance that the Company will be able to achieve profitability on a
sustained basis, if at all. See "Management's Discussion and Analysis of
Financial Condition and Result of Operations."
8
<PAGE>
Additional Financing Requirements; Access to Capital. The Company has
incurred negative cash flows from operations since its inception, and has
expended, and expects to continue to expend in the future, substantial funds to
continue its research and development programs. The Company expects that its
existing capital resources, together with the net proceeds of this offering and
the interest earned thereon, will be adequate to fund its capital requirements
through 1999. No assurance can be given that there will be no change that would
consume available resources significantly before such time. The Company's future
capital requirements and the adequacy of available funds will depend on many
factors, including progress in its research and development activities,
including its pharmaceutical discovery and development programs, the magnitude
and scope of these activities, progress with preclinical studies and clinical
trials, the costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in existing collaborative
research relationships and strategic alliances, the ability of the Company to
establish additional collaborative arrangements for product development, the
cost of manufacturing scale-up and developing effective marketing activities and
arrangements, and the ability of the Company to obtain long-term financing with
respect to its planned manufacturing expansion. The Company has made and expects
to make capital expenditures in late 1996 and 1997 totaling approximately $7.5
million to expand FDA Good Manufacturing Practices ("GMP") manufacturing
capabilities for its compounds under development. In addition, the Company has
entered into a non-binding letter of intent with the owner of its leased
facility to purchase the facility for a total of approximately $3.8 million
contingent upon, among other things, the Company's obtaining financing for the
acquisition. Additional funds will be needed by the Company to expand its
manufacturing capacity to manufacture commercial quantities of its potential
products. The Company is exploring alternatives for long-term financing in
connection with its planned GMP manufacturing expansion and the purchase of its
facility, including the issuance of taxable and tax exempt bonds. The Company
does not currently have any committed sources of additional financing and no
commitments have been received by the Company for long-term financing to support
the expansion and purchase. To the extent that funds generated from the
Company's operations, together with its existing capital resources and the net
proceeds of this offering and the interest earned thereon, are insufficient to
meet current or planned operating requirements, it is likely that the Company
will seek to obtain additional funds through equity or debt financings,
collaborative or other arrangements with corporate partners and others, and from
other sources. The terms and prices of any such financings may be significantly
more favorable to investors than those of the Common Stock sold in this
offering, which could have the effect of diluting or adversely affecting the
holdings or the rights of existing stockholders of the Company, including
investors acquiring Common Stock in this offering. There can be no assurance
that additional financing will be available when needed or on terms acceptable
to the Company. If adequate additional funds are not available for these
purposes or otherwise, the Company may be required to delay, scale back, or
eliminate certain of its research and product development activities or certain
other aspects of its business or attempt to obtain funds through collaborative
arrangements that may require the Company to relinquish some or all of its
rights to certain of its intellectual property, product candidates, or products.
If adequate funds are not available, the Company's business, financial
condition, and results of operations will be materially and adversely affected.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments ."
Uncertainty Regarding Patents and Proprietary Rights. The Company's
success will depend in part on its ability to obtain patent protection for its
products, preserve its trade secrets, and operate without infringing the
proprietary rights of other parties. Because of the substantial length of time
and expense associated with bringing new products through development to the
marketplace, the pharmaceutical and biotechnology industries place considerable
importance on obtaining and maintaining patent and trade secret protection for
new technologies, products, and processes. The Company has an exclusive license
from the University of Pennsylvania ("Penn") to two U.S. patents as well as
certain related foreign patents and patent applications, subject to Penn's
reserved right of use, and right to permit use by non-profit organizations,
solely for educational and research purposes. Such license terminates upon the
expiration of the last to expire licensed patent in each country. The licensor
9
<PAGE>
may, at its option, terminate the license upon 60 days' notice if the Company is
not using its continuing best efforts to develop or sell a product using the
licensed technology.
In addition, the Company owns three U.S. patents and has licensed two
other U.S. patents, and the Company and its licensors have filed a number of
U.S. and foreign patent applications. The Company may be dependent on licensors
or collaborators to prosecute certain of the Company's patent applications and
may be dependent on such parties to protect such patent rights if patents issue.
Legal standards relating to the scope of claims and the validity of patents in
the biotechnology field are uncertain and still evolving. There can be no
assurance that patent applications to which the Company holds rights will result
in the issuance of patents, that any patents issued or licensed to the Company
will not be challenged and held to be invalid, or that any such patents will
provide commercially significant protection to the Company's technology,
products, and processes. In addition, there can be no assurance that others will
not independently develop substantially equivalent proprietary information not
covered by patents to which the Company owns rights or obtain access to the
Company's know-how or that others will not be issued patents which may prevent
the sale of one or more of the Company's products, or require licensing and the
payment of significant fees or royalties by the Company to third parties in
order to enable the Company to conduct its business. Defense and prosecution of
patent claims can be expensive and time consuming, regardless of whether the
outcome is favorable to the Company, and can result in the diversion of
substantial financial, management, and other resources from the Company's other
activities. An adverse outcome could subject the Company to significant
liabilities to third parties, require the Company to obtain licenses from third
parties, or require the Company to cease any related research and development
activities or product sales. In addition, the laws of certain countries may not
protect the Company's intellectual property. No assurance can be given that any
licenses required under any such third-party patents or proprietary rights would
be made available on acceptable terms, if at all.
The Company's success is also dependent upon the skills, knowledge, and
experience of its scientific and technical personnel. To help protect its
rights, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company, and
require disclosure and assignment to the Company of their ideas, developments,
discoveries, and inventions. There can be no assurance, however, that these
agreements will provide adequate protection for the Company's trade secrets,
know-how, or other proprietary information in the event of any unauthorized use
or disclosure. See "Business -- Patents and Proprietary Rights."
Substantial Competition; Risk of Technological Obsolescence. The
Company is engaged in highly competitive industries. The Company competes with
many public and private companies, including well-known nutritional products
manufacturers, pharmaceutical companies, chemical companies, specialized
biotechnology companies, and academic institutions. Many of the Company's
competitors have significantly greater financial, scientific, and technical
resources, and manufacturing and marketing capabilities than the Company. In
addition, many of the Company's competitors have significantly greater
experience conducting preclinical studies and clinical trials of new
pharmaceutical products, and in obtaining regulatory approvals for
pharmaceutical products. The Company is relying on Abbott to develop and
commercialize its nutritional additive. As a result, the success of the
Company's nutritional additive will depend, in significant part, on Abbott's
ability to compete in the highly competitive infant formula market. Abbott's
principal competitors in this market include Bristol-Myers Squibb Company,
American Home Products Corp., Nestle S.A., and Gerber Products Co. Competitors
of the Company and its collaborators may develop products that compete
successfully with the Company's products and may develop and commercialize such
products more rapidly than the Company and its collaborators. In addition, the
Company's products may be subject to competition from related products developed
by competitors or different products developed using techniques other than those
developed by the Company or based on advances that may render the Company's
products less competitive or obsolete, uneconomical or otherwise less
competitive. Competition may increase further as a result of potential advances
from the study of complex carbohydrates and greater availability of capital for
investment in this field. There can be no assurance that the Company's
10
<PAGE>
competitors will not succeed in developing technologies and products that are
more effective than any being developed by the Company, or that would render the
Company's technology and products obsolete or noncompetitive.
See "Business -- Competition."
Government Regulation; No Assurance of Product Approval. The Company's
product candidates are subject to stringent regulation by a number of government
authorities in the United States and other countries, including the FDA.
NE-1340, the Company's infant formula ingredient, may be subject to FDA review
as a food additive. Substances that are generally recognized as safe ("GRAS")
are excluded from the definition of food additives. Information supporting the
safety of a food additive is submitted to the FDA in the form of a food additive
petition. The food additive petition process is generally expensive and lengthy,
frequently requiring several years after the petition is submitted to the FDA.
No assurance can be given that, if submitted, the FDA will accept the petition
or permit desired labeling claims and that, if accepted, such petition will not
result in the establishment of regulations which necessitate costly and
time-consuming compliance procedures. This process could be time-consuming and
expensive and would have a material adverse effect on the Company's business,
financial condition, and results of operations. The FDA has by regulation
affirmed a number of substances as GRAS, although it is not required that a
substance be affirmed as GRAS by regulation in order to be GRAS. A manufacturer
may make an independent determination that there is general recognition of
safety of a substance by qualified experts when used for a particular use. There
can be no assurance that Abbott will make such a determination or that the FDA
will agree with such a determination, if Abbott were to elect to make such a
determination. Accordingly, there is a risk that the FDA will disagree with the
determination. In such a circumstance the manufacturer must submit a GRAS
affirmation petition for the FDA to review and affirm GRAS status by regulation
in order to market and sell the additive or formula containing the additive.
This process could be time-consuming and expensive and would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
If the Company's technology is incorporated in products claiming a
therapeutic benefit, such products could be regulated as a drug rather than as a
food. Regulation of these products as a drug would require extensive clinical
testing and review by the FDA to support the claims made for the product. The
uncertainty regarding the regulatory status of this type of product could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Any infant formula containing the Company's nutritional additive will
be subject to the provisions of the United States Infant Formula Act, which
amended the Food, Drug and Cosmetic Act (the "FDC Act") and established detailed
requirements for infant formulas, including their manufacture, composition, and
labeling. Pursuant to the Company's agreement with Abbott, Abbott is responsible
for all regulatory activities relating to the infant formula additive. There can
be no assurance that Abbott will be able to satisfy all applicable regulatory
requirements. Abbott may also market infant formula containing the additive in
foreign countries. Infant formula regulatory requirements vary widely from
country to country, and may be more or less stringent than FDA requirements. The
time required to obtain clearances, if required, in foreign countries may be
longer or shorter than that required in the United States.
Prior to marketing, any pharmaceutical product candidates developed by
the Company must undergo an extensive regulatory approval process required by
the FDA and by comparable agencies in other countries. This process, which
includes preclinical studies and clinical trials of each compound to establish
its safety and effectiveness and requires compliance with FDA good laboratory,
clinical, and manufacturing practices during testing and manufacturing, can take
many years, requires the expenditure of substantial resources, and gives larger
companies with greater financial resources a competitive advantage over the
Company. Failure to comply with applicable requirements can result in fines,
recall, or seizure of products, total or partial suspension of production,
withdrawal of existing product approvals, refusal to approve new drug
applications, and criminal prosecution. To date, no pharmaceutical product
candidate being developed by the Company has been submitted for approval or has
been approved by the FDA or any other regulatory authority for marketing, and
there can be no assurance that any such product will ever be approved for
11
<PAGE>
marketing, or that the Company will be able to obtain the labeling claims
desired for its products. The Company is and will continue to be dependent upon
and require that the laboratories and medical institutions conducting its
preclinical studies and clinical trials maintain both good laboratory and good
clinical practices and that the manufacturers of its compounds maintain
compliance with current GMP. Data obtained from preclinical studies and clinical
trials are subject to varying interpretations that could delay, limit, or
prevent FDA regulatory approval. Delays or rejections may be encountered based
upon changes in FDA policy for drug approval during the period of development
and FDA regulatory review. Similar delays also may be encountered in foreign
countries. Any delay in obtaining, or failure to obtain, such approvals would
adversely affect the Company's ability to generate product revenues or
royalties. There can be no assurance that regulatory approval will be obtained
for any product developed by the Company. Moreover, even if approval is granted,
such approval may entail commercially unacceptable limitations on the labeling
claims for which a product may be marketed. Even if such regulatory approval is
obtained, a marketed drug or compound and its manufacturer are subject to
continual review and inspection, and later discovery of previously unknown
problems with the product or manufacturer may result in restrictions or
sanctions on such product or manufacturer, including withdrawal of the product
from the market, and other enforcement actions. Additional governmental
regulations may be promulgated that would delay regulatory approval of the
Company's potential products. The Company cannot predict the impact of adverse
governmental action that might arise from future legislative and administrative
action. See "Business -- Government Regulation."
No Commercial Manufacturing Capability or Experience. To be successful,
the Company's products must be manufactured in commercial quantities under GMP
prescribed by the FDA and at acceptable costs. The Company has not yet
manufactured any products in commercial quantities and currently does not have
the facilities to manufacture any products in commercial quantities under GMP.
Existing facilities of the Company are not adequate for commercial scale
manufacturing. Therefore, the Company will need to develop its own commercial
scale GMP manufacturing facility and/or depend on its collaborators, licensees,
or contract manufacturers for the commercial manufacture of its products. In the
event the Company determines to establish a manufacturing facility, it will
require substantial additional funds, the hiring and retention of significant
additional personnel and compliance with extensive regulations applicable to
such a facility. The Company has no experience in such commercial manufacturing,
and there can be no assurance that the Company will be able to establish such a
facility successfully and, if established, that it will be able to manufacture
products in commercial quantities for sale at competitive prices. If the Company
determines to rely on collaborators, licensees, or contract manufacturers for
the commercial manufacture of its products, the Company will be dependent on
such corporate partners or other entities for, and will have only limited
control over, the commercial manufacturing of its products. There can be no
assurance that the Company will be able to enter into any such manufacturing
arrangements on acceptable terms, if at all. If the Company is not able to enter
into commercial manufacturing agreements, it could encounter delays in
introducing its products into certain markets, or find that the manufacture of
its products in these markets is adversely affected. There can be no assurance
that the parties to the Company's future commercial manufacturing agreements
will perform their obligations as expected, or that any revenue will be derived
from these commercial manufacturing agreements. See "Business -- Manufacturing."
Limited Clinical Trial Experience; No Marketing or Sales Capability or
Experience. Before obtaining required regulatory approvals for the commercial
sale of its pharmaceutical product candidates, the Company must demonstrate
through human clinical trials that such products are safe and efficacious for
use. To date, the Company has very limited experience in conducting clinical
trials. The Company will either need to rely on third parties to design and
conduct any required clinical trials or expend resources to hire additional
personnel to administer such clinical trials. There can be no assurance that the
Company will be able to find appropriate third parties to design and conduct
clinical trials or that it will have the resources to hire personnel to
administer clinical trials in-house.
The Company has no experience in marketing, distributing, or selling
nutritional additives or pharmaceutical products, and will have to develop a
sales force and/or rely on its collaborators, licensees, or arrangements with
12
<PAGE>
others to provide for the marketing, distribution, and sales of its products.
There can be no assurance that the Company will be able to establish marketing,
distribution, and sales capabilities or make arrangements with third parties to
perform such activities on acceptable terms, if at all. See "Business --
Marketing, Distribution, and Sales."
Risks Associated with the Infant Formula Industry. To the extent
NE-1340 is added to infant formula, the Company is subject to the risks
generally associated with the infant formula industry. These risks include: (i)
product tampering or production defects may occur requiring a recall of infant
formula containing NE-1340, or may reduce the demand for such infant formula;
(ii) an ingredient in such formula, including NE-1340, may be banned or its use
limited or declared unhealthful; and (iii) sales of infant formula may decline
or use of NE-1340 may be limited or discontinued due to real or perceived health
concerns, adverse publicity, or other reasons beyond the control of the Company.
Dependence on Key Personnel. The Company is highly dependent upon the
efforts of its senior management and scientific team. The loss of the services
of one or more members of the senior management and scientific team could
significantly impede the achievement of the Company's business and product
development objectives. Due to the specialized scientific nature of the
Company's business, the Company is also highly dependent upon its ability to
attract and retain qualified scientific, technical, and key management
personnel. The number of qualified scientific personnel is limited, and there is
intense competition for such persons and for other qualified personnel in the
areas of the Company's activities. There can be no assurance that the Company
will be able to continue to attract and retain the qualified personnel necessary
for the development of its existing business and its expansion into areas and
activities requiring additional expertise, such as production and marketing. The
Company may need to hire additional personnel or outside consultants skilled in
clinical testing and regulatory compliance as it develops its products. There
can be no assurance that the Company will be able to hire or retain such
personnel. The loss of, or failure to recruit scientific, technical and
managerial personnel could have a material adverse effect on the Company. In
addition, the Company relies on members of its Scientific Advisory Board and
consultants to assist the Company in formulating its research and development
strategy. All of the members of the Scientific Advisory Board and all of the
Company's consultants are employed by other employers, and each such member or
consultant may have commitments to, or consulting or advisory contracts with,
other entities that may limit their availability to the Company. See "Business
- -- Scientific Advisory Board," "Business -- Employees," and "Management."
Third-Party Reimbursement; Uncertainty of Healthcare Reform Measures.
Successful commercialization of any pharmaceutical products the Company may
develop will depend in part upon the availability of reimbursement for the costs
of such products or funding from third-party healthcare payors such as
government and private insurance plans. Third-party payors are continuing their
efforts to contain or reduce the costs of healthcare through various means. For
example, third-party payors are increasingly challenging the coverage of and
prices charged for medical products and services. In addition, significant
uncertainty exists as to the coverage and reimbursement status of newly approved
pharmaceutical products. There can be no assurance that third-party
reimbursement or funding will be available or will permit price levels
sufficient to realize an appropriate return on the Company's investment in its
pharmaceutical product development. The U.S. Congress is considering a number of
legislative and regulatory reforms that may affect companies engaged in the
healthcare industry in the United States. Although the Company cannot predict
whether these proposals will be adopted or the effects such proposals may have
on its business, the existence and pendency of such proposals could have a
material adverse effect on the Company in general. In addition, the Company's
ability to commercialize potential pharmaceutical products may be adversely
affected to the extent that such proposals have a material adverse effect on
other companies that are prospective collaborators with respect to any of the
Company's pharmaceutical product candidates.
Product Liability; Lack of Product Liability Insurance. The Company's
business may be adversely affected by potential product liability risks which
are inherent in the testing, manufacturing, and marketing of the Company's
products which it has developed or which it may develop. There can be no
13
assurance that product liability claims will not be asserted against the
Company, its collaborators, or licensees. In addition, the use of pharmaceutical
products developed by the Company through collaborative or licensing
arrangements in clinical trials and the subsequent sale of such products is
likely to cause the Company to bear all or a portion of those potential product
liability risks. The Company does not currently have product liability
insurance. There can be no assurance that it will be able to obtain or maintain
adequate product liability insurance on acceptable terms or that such insurance
will provide adequate coverage against potential liabilities. Furthermore, there
can be no assurance that any collaborators or licensees of the Company will
agree to indemnify the Company, be sufficiently insured, or have a net worth
sufficient to satisfy the product liability claims. As a result, a product
liability claim or recall could have a material adverse effect on the Company's
business, financial condition, and results of operations.
Hazardous Materials; Compliance with Environmental Regulations. The
Company's research and development activities involve the controlled use of
hazardous materials, chemicals, and radioactive compounds. The risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any resulting damages, and any such liability could exceed the resources of
the Company which would have a material adverse effect on the Company's
business, financial condition, and results of operations. The Company may incur
substantial additional costs to comply with environmental regulations if the
Company develops pharmaceutical manufacturing capacity. See "Business --
Government Regulation."
Control by Existing Management and Stockholders. Upon completion of
this offering, the Company's directors, executive officers, and certain
principal stockholders affiliated with members of the Board of Directors and
their affiliates will beneficially own approximately 12.2% of the Common Stock.
Accordingly, such stockholders, if acting together, may have the ability to
exert significant influence over the election of the Company's Board of
Directors and other matters submitted to the Company's stockholders for
approval. The voting power of these holders may discourage or prevent tender
offers for the Common Stock unless the terms are approved by such holders. See
"Principal Stockholders."
Possible Volatility of Common Stock Price; Dilution. The market price
of the Common Stock could be subject to wide fluctuations in response to
quarterly variations in operating results, announcements by the Company, its
collaborative partners or the Company's present or potential competitors
regarding technological innovations or new commercial products or services,
regulatory developments, including the results of preclinical testing and
clinical trials, arrangements with collaborative partners, the achievement of or
failure to achieve certain milestones, developments or disputes concerning
patent or proprietary rights, government regulations, healthcare reform measures
or public concern regarding the safety or efficacy of the products to be
developed by the Company or its collaborators, and other events or factors. In
addition, the stock market has experienced extreme price and volume
fluctuations. This volatility has significantly affected the market prices of
securities of many biotechnology and pharmaceutical companies for reasons
frequently unrelated to or disproportionate to the performance of the specific
companies. These broad market fluctuations may adversely affect the market price
of the Common Stock. Purchasers of the shares of Common Stock offered hereby
will experience immediate and substantial dilution in the pro forma net tangible
book value of their investment of $11.92 per share. Additional dilution will
occur upon exercise of outstanding options and warrants. See "Dilution."
Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock in the public market after the offering, or the possibility of such sales
occurring, could adversely affect prevailing market prices for the Common Stock
or the future ability of the Company to raise capital through an offering of
equity securities. Of the 9,468,607 shares to be outstanding after the offering,
the 1,250,000 shares of Common Stock offered hereby and an additional 6,212,809
shares of Common Stock outstanding will be freely tradable without restriction
in the public market unless such shares are held by "affiliates" of the Company,
as that term is defined in Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). However, approximately 978,286 of these shares are
subject to a stockholders agreement whereby each holder who has signed the
stockholders agreement has agreed, until December 30, 1997, not to offer, sell
14
<PAGE>
or otherwise dispose of, directly or indirectly, more than 2% per month, on a
cumulative basis, of the aggregate amount of shares held by such holder as of
the Company's initial public offering in February 1996, subject to certain
conditions. The remaining 2,005,798 shares of Common Stock are restricted
securities under the Securities Act and may be sold in the public market only if
they are registered or if they qualify for exemption from registration under
Rule 144 under the Securities Act. Pursuant to "lock-up" agreements, all of the
Company's executive officers and directors, who collectively hold 927,490 of
such restricted securities, have agreed not to offer, sell or otherwise dispose
of any of their restricted securities for a period of 90 days from the date of
this Prospectus without the prior written consent of Vector Securities
International, Inc. The Company also has agreed that it will not offer, sell or
otherwise dispose of Common Stock for a period of 90 days from the date of this
Prospectus, other than pursuant to outstanding warrants, existing stock option
and employee stock purchase plans, and in connection with potential corporate
collaborations and acquisitions, without the prior written consent of Vector
Securities International, Inc. Upon termination of such lock-up agreements,
approximately 908,906 of the "locked-up" restricted securities will be eligible
for immediate sale, beginning 90 days after the date of this Prospectus, in the
public market subject to certain volume, manner of sale and other limitations
under Rule 144. Vector Securities International, Inc. may, at its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such lock-up agreements. The Securities and Exchange
Commission (the "Commission") has proposed revisions to Rule 144, the effect of
which would be to shorten the holding periods under Rule 144. If enacted, these
proposed revisions would increase, potentially substantially, the number of
shares that would be available for sale in the public market following the
expiration of the lock-up agreements.
As of January 6, 1997, options to purchase a total of 1,199,643 shares
of Common Stock were outstanding, of which options to purchase 415,694 shares
were exercisable. Of such shares subject to options, approximately 708,963
shares are subject to lock-up agreements for a period of 90 days from the date
of this Prospectus. As of January 6, 1997, an additional 355,098 shares were
available for future option grants and employee stock purchases under the
Company's stock option and employee stock purchase plans. All of the shares
issued, issuable or reserved for issuance under the Company's stock option and
employee stock purchase plans or upon the exercise of options issued or issuable
under such plans are covered by an effective registration statement. Such shares
may be sold in the open market, subject, in the case of certain holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lock-up
agreements and vesting restrictions imposed by the Company.
After the offering, holders of an aggregate of 3,236,423 shares of
Common Stock will be entitled to certain rights with respect to the registration
of such shares for resale under the Securities Act. In addition, the 147,690
shares issuable upon exercise of outstanding warrants have similar registration
rights. If such registrations cause a large number of shares to be registered
and sold in the public market, such sales could have an adverse effect on the
market price for the Company's Common Stock. See "Management -- 1995 Stock
Option/Stock Issuance Plan," "Management -- Employee Stock Purchase Plan,"
"Description of Capital Stock -- Registration Rights of Certain Holders,"
"Shares Eligible for Future Sale," and "Plan of Distribution."
Anti-Takeover Effect of Charter and By-Law Provisions and Delaware Law.
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion, and other rights and preferences that could materially and adversely
affect the voting power or other rights of the holders of Common Stock. The
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. The Company's By-Laws
contain procedural restrictions on director nominations by stockholders and the
submission of other proposals for consideration at stockholder meetings. The
possible issuance of Preferred Stock and the procedures required for director
nominations and stockholder proposals could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Common Stock, or
limit the price that investors might be willing to pay in the future for shares
of the Common Stock. In addition, certain provisions of Delaware law applicable
to the Company could also delay or make more difficult a merger, tender offer,
or proxy contest involving the Company. See "Description of Capital Stock."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,250,000 shares
of Common Stock offered hereby are estimated to be approximately $20.9 million,
assuming an offering price of $18.00 per share, and after deducting the
Placement Agent's fee and other estimated offering expenses payable by the
Company.
The Company intends to use approximately $7.0 million of the net
proceeds of this offering to fund its research and product development
activities, approximately $2.0 million for capital expenditures, and the balance
for working capital and general corporate purposes, including possible
acquisitions of or investments in technology, licenses, proprietary rights, or
companies that complement the business of the Company. There are currently no
agreements or other arrangements regarding any such acquisitions by the Company.
The amount and timing of expenditures for each purpose will depend on a number
of factors, including progress of the Company's research and development
programs, the number and breadth of these programs, the progress of the
development and commercialization efforts of the Company and Abbott, the overall
success of the Company's strategic alliance with Abbott, the ability of the
Company to establish and maintain additional strategic alliances and licensing
arrangements, competing technological and marketing developments, the costs
involved in preparing, filing, prosecuting, maintaining, and enforcing patent
claims and other proprietary rights, progress in the regulatory process, and
other factors. The Company believes that the net proceeds from this offering,
together with interest thereon, and the Company's existing capital resources
will be sufficient to fund its capital requirements through 1999. Pending such
uses, the net proceeds will be invested in investment grade instruments,
certificates of deposit, or direct or guaranteed obligations of the United
States.
DIVIDEND POLICY
The Company currently anticipates that it will retain all available
funds for use in the operation of its business and for potential acquisitions,
and therefore does not anticipate paying any cash dividends on its Common Stock
for the foreseeable future. The Company paid to certain holders of its Preferred
Stock cash dividends accrued thereon in the amount of $18,000 for the year ended
December 31, 1995. The Company has not otherwise declared or paid cash dividends
on its capital stock since 1992.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "NTEC." The following table sets forth, for the periods
indicated, the high and low closing sales price per share of the Common Stock,
as reported on the Nasdaq National Market, since the Company's initial public
offering in February 1996.
High Low
---- ---
1996
First Quarter (from February 15, 1996)............ $22.750 $12.500
Second Quarter.................................... 24.000 18.375
Third Quarter..................................... 20.875 11.625
Fourth Quarter.................................... 19.625 14.500
1997
First Quarter (through January 10, 1997).......... $18.625 $18.000
16
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1996 (i) the
capitalization of the Company and (ii) such capitalization as adjusted to give
effect to the sale of the 1,250,000 shares of Common Stock offered hereby (at an
assumed public offering price of $18.00 per share) and the receipt of the
estimated net proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
As of September 30, 1996
--------------------------
Actual As Adjusted
------ -----------
(In thousands)
<S> <C> <C>
Long-term debt (1)................................................... $ 683 $ 683
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
none issued or outstanding..................................... -- --
Common stock, $0.01 par value; 30,000,000 shares authorized;
8,203,616 shares issued and outstanding, actual; and 9,453,616
shares issued and outstanding, as adjusted (2)................. 82 95
Additional paid-in capital....................................... 60,705 81,613
Deferred compensation............................................ (293) (293)
Deficit accumulated during the development stage................. (23,982) (23,982)
------- -------
Total stockholders' equity..................................... 36,512 57,433
------- -------
Total capitalization...................................... $37,195 $58,116
======= =======
</TABLE>
- ----------
(1) Does not include the long-term debt financing contemplated in connection
with the Company's planned purchase of its facility and GMP manufacturing
expansion. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments."
(2) Does not include, as of January 6, 1997, (i) 147,690 shares of Common Stock
issuable upon exercise of outstanding warrants at a weighted average
exercise price per share of $11.18, (ii) 1,199,643 shares of Common Stock
issuable upon exercise of outstanding options at a weighted average
exercise price of $10.04 per share, (iii) 260,729 shares of Common Stock
reserved for future option grants under the Company's stock option plans,
and (iv) 94,369 shares of Common Stock reserved for issuance pursuant to
the Company's employee stock purchase plan. See "Management -- 1995 Stock
Option/Stock Issuance Plan," "Management -- Employee Stock Purchase Plan,"
"Description of Capital Stock," and Note 7 of Notes to Financial
Statements.
17
<PAGE>
DILUTION
The net tangible book value of the Company at September 30, 1996 was
$36,512,000, or $4.45 per share. Net tangible book value per share is equal to
the Company's net tangible assets (tangible assets of the Company less total
liabilities) divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of the 1,250,000 shares of Common Stock
offered hereby (based on an assumed public offering price of $18.00 per share
and after deducting the Placement Agent's fee and the estimated expenses of the
offering), the net tangible book value of the Company as of September 30, 1996
would have been approximately $57,433,370, or $6.08 per share. This represents
an immediate increase in net tangible book value of $1.63 per share to existing
holders and immediate dilution in net tangible book value of $11.92 per share to
new investors. The following table sets forth the per share dilution to new
investors in the offering.
<TABLE>
<CAPTION>
<S> <C>
Assumed offering price per share.................................................... $18.00
Net tangible book value per share as of September 30, 1996........................ $4.45
Increase per share attributable to new investors.................................. 1.63
-----
Net tangible book value per share after the offering................................ 6.08
------
Dilution per share to new investors................................................. $11.92
======
</TABLE>
The following table summarizes, on a pro forma basis as of September
30, 1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by existing
stockholders and by new investors (based on an assumed public offering price of
$18.00 per share):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
--------------------------- ----------------------------- Average Price
Number Percent Amount Percent Per Share
------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 8,203,616 86.8% $66,190,000 74.6% $ 8.07
New investors.................. 1,250,000 13.2 22,500,000 25.4 18.00
--------- ----- ---------- -----
Total........ 9,453,616 100.0% $88,690,000 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables do not include, as of January 6, 1997, (i) 147,690
shares of Common Stock issuable upon exercise of outstanding warrants at a
weighted average exercise price per share of $11.18, (ii) 1,199,643 shares of
Common Stock issuable upon exercise of outstanding options at a weighted average
exercise price of $10.04 per share, (iii) 260,729 shares of Common Stock
reserved for future option grants under the Company's stock option plans, and
(iv) 94,369 shares of Common Stock reserved for issuance pursuant to the
Company's employee stock purchase plan. The exercise of such warrants and
options will result in further dilution to new investors. See "Management --
1995 Stock Option/Stock Issuance Plan," "Management -- Employee Stock Purchase
Plan," "Description of Capital Stock," and Note 7 of Notes to Financial
Statements.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for the years
ended December 31, 1991, 1992, 1993, 1994, and 1995, and for the period from
inception (January 17, 1989) to December 31, 1995, have been derived from the
Company's audited financial statements. The financial statements of the Company
for each of the three years in the period ended December 31, 1995, and for the
period from inception (January 17, 1989) to December 31, 1995, and the related
balance sheets at December 31, 1994 and 1995 included elsewhere in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants. The balance sheet data at September 30, 1996 and the statement of
operations data for the nine month periods ended September 30, 1995 and 1996 and
for the period from inception (January 17, 1989) to September 30, 1996, have
been derived from unaudited financial statements of the Company that, in the
opinion of management, include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
condition and results of operation for those periods. The statement of
operations data for interim periods is not necessarily indicative of results for
subsequent periods or the full year. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Period from Period from
Nine Momths Inception Inception
Ended (January 17, (January 17,
Year Ended December 31, September 30, 1989) to 1989) to
---------------------------------------- --------------- December 31, September 30,
1991 1992 1993 1994 1995 1995 1996 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenue from
collaborative
agreements....... $ -- $ -- $ 2,600 $ 48 $1,199 $ 876 $ 1,006 $ 3,846 $ 4,852
------ ------ ------- ------- ------ ------ -------- ---------- ----------
Operating expenses:
Research and
development...... 1,055 1,941 3,399 5,004 4,733 3,426 4,900 16,476 21,376
General and
administrative... 703 1,324 1,577 1,319 1,665 1,172 1,788 6,689 8,477
------- ------- ------- ------- ------- ------- ------- -------- --------
Total expenses.. 1,758 3,265 4,976 6,323 6,398 4,598 6,688 23,165 29,853
------- ------- ------- ------- ------- ------- ------- -------- --------
Interest income
(expense),
net.............. (107) (90) (47) 63 132 73 1,082 (63) 1,019
------- ------- ------- ------- ------- ------- ------- -------- --------
Net loss............ $(1,865) $(3,355) $(2,423) $(6,212) $(5,067) $(3,649) $(4,600) $(19,382) $(23,982)
======= ======= ======= ======= ======= ======= ======= ======== ========
Pro forma net loss per
share (1)....... $ (1.06) $ (0.60)
======= ========
Shares used in computing
pro forma net loss per
share(1).............. 4,761 7,728
======= ========
</TABLE>
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
----------------------------------------------- --------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data: (in thousands)
Cash and cash equivalents................. $ 3,401 $ 820 $ 1,500 $ 5,363 $11,189 $35,717
Total assets.............................. 3,537 2,743 3,534 8,196 14,639 39,032
Long-term debt............................ -- 368 1,010 736 1,235 683
Deficit accumulated during the development
stage................................... (2,325) (5,680) (8,103) (14,315) (19,382) (23,982)
Total stockholders' equity................ 2,193 1,887 1,448 6,352 11,733 36,512
</TABLE>
- ----------
(1) See Note 2 of Notes to Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
Overview
Neose, a development-stage company, commenced operations in 1990, and
has devoted substantially all of its resources to the development of its
enzymatic carbohydrate synthesis technology and to the discovery and development
of complex carbohydrates for a variety of applications, including nutritional
additives and pharmaceuticals. The Company does not anticipate receiving
revenues from product sales for at least the next several years. The Company
anticipates that its sources of revenue for the next several years will be
payments under its strategic alliance with Abbott and other collaborative
arrangements, license fees, payments from future strategic alliances and
collaborative arrangements, if any, and interest income. Payments under
strategic alliances and collaborative arrangements will be subject to
significant fluctuation in both timing and amount. Therefore, the Company's
results of operations for any period may not be comparable to the results of
operations for any other period.
In December 1992, the Company entered into its strategic alliance with
Abbott for the development of breast milk oligosaccharides as nutritional
additives. The Company has received approximately $5.2 million in contract
payments, license fees, and milestone payments from its strategic alliance with
Abbott. See "Business -- Strategic Alliance with Abbott."
The Company has not generated any revenues from operations, except for
interest income and revenues from strategic alliances. The Company has incurred
losses since its inception and, as of September 30, 1996, had a deficit
accumulated during the development stage of approximately $24 million for the
period since inception. The Company anticipates incurring additional losses over
at least the next several years. Such losses may fluctuate significantly from
quarter to quarter and are expected to increase as the Company expands its
research and development programs, including preclinical studies and clinical
trials for its pharmaceutical product candidates under development, and as the
Company expands its manufacturing capabilities.
Results of Operations
Three and Nine Months Ended September 30, 1995 and 1996
Revenues from collaborative agreements for the three and nine months
ended September 30, 1996, were $313,000 and $1.0 million, respectively, compared
to $376,000 and $876,000, respectively, for the corresponding periods in 1995.
The decrease for the comparable three month period was due to non-recurring
revenues received during the 1995 period. The increase for the comparable nine
month period was primarily attributable to increased revenues from the Company's
collaborative research agreements with Abbott and Bracco.
Research and development expenses for the three and nine months ended
September 30, 1996, were $1.5 million and $4.9 million, respectively, compared
to $1.2 million and $3.4 million, respectively, for the corresponding periods in
1995. The increases were primarily attributable to the hiring of additional
scientific personnel, increased purchases of laboratory supplies and services,
increased clinical trial expenditures for NE-0080, and increased funding of
external research.
General and administrative expenses for the three and nine months ended
September 30, 1996, were $597,000 and $1.8 million, respectively, compared to
$290,000 and $1.2 million, respectively, for the
20
<PAGE>
corresponding periods in 1995. The increases were primarily attributable to
increased patent and business development expenses, and expenses associated with
being a public company.
Interest income for the three and nine months ended September 30, 1996,
was $483,000 and $1.3 million, respectively, compared to $76,000 and $199,000,
respectively, for the corresponding periods in 1995. The increases were
primarily attributable to higher average cash balances resulting from the
closing of a private placement of equity securities in the third and fourth
quarters of 1995 and the Company's initial public offering in February 1996.
Interest expense for the three and nine months ended September 30,
1996, was $58,000 and $196,000, respectively, compared to $60,000 and $126,000,
respectively, for the corresponding periods in 1995. The increases were due to
higher average loan balances during the three and nine months ended September
30, 1996, as compared to the corresponding periods in 1995.
Years Ended December 31, 1995 and 1994
Revenues from collaborative agreements increased to $1.2 million in
1995 from $48,000 in 1994 due to the timing and size of milestone payments and
license fees received from Abbott.
The Company's research and development expenses decreased to $4.7
million in 1995 from $5.0 million in 1994. The decrease was primarily
attributable to a decrease in expenses connected with the Company's strategic
alliance with Abbott resulting from the licensing in 1995 of certain
manufacturing rights to Abbott, which was partially offset by increases in other
research and development activities.
General and administrative expenses increased to $1.7 million in 1995
from $1.3 million in 1994. The increase reflected additional management expenses
associated with a general increase in the level of the Company's activities.
Interest income increased to $322,000 in 1995 from $257,000 in 1994 due
to higher average cash balances during 1995. Interest expense decreased to
$190,000 in 1995 from $194,000 in 1994 due to slightly lower average loan
balances during 1995.
Years Ended December 31, 1994 and 1993
Revenues from collaborative agreements decreased to $48,000 in 1994
from $2.6 million in 1993 due to the timing of milestone payments received from
Abbott.
Research and development expenses increased to $5.0 million in 1994
from $3.4 million in 1993. The increase was primarily attributable to the hiring
of additional research and development personnel, related increased purchases of
laboratory supplies and services, and increased equipment depreciation and
facilities expenses.
General and administrative expenses decreased to $1.3 million in 1994
from $1.6 million in 1993, primarily due to the payment of a onetime bonus to
the Company's former President and Chief Executive Officer in 1993, and the
higher level of professional fees related to financing activities and the
negotiation of the Company's strategic alliance with Abbott incurred in 1993.
Interest income increased to $257,000 in 1994 from $60,000 in 1993 due
to higher average cash balances during 1994. Interest expense increased to
$194,000 in 1994 from $106,000 in 1993 due to expenses related to equipment
financing transactions.
21
<PAGE>
Liquidity and Capital Resources
From inception through September 30, 1996, the Company has incurred a
cumulative net loss of approximately $24.0 million, and has financed its
operations through private and public offerings of its securities and revenues
from its strategic alliances. The Company had $35.7 million in cash and cash
equivalents at September 30, 1996, compared to $11.2 million at December 31,
1995. This increase is primarily attributable to the receipt of net proceeds
from the Company's initial public offering in February 1996. In February and
March 1996, the Company sold 2,587,500 shares of Common Stock to the public at a
price per share of $12.50. The Company received proceeds of approximately $29.1
million after deducting underwriting commissions and offering expenses.
The Company and Abbott have entered into collaborative agreements to
develop breast milk oligosaccharides as additives to infant formula and other
nutritional products. Under this strategic alliance, the Company has received
approximately $5.2 million in contract payments, license fees, and milestone
payments. In addition, Abbott is obligated to make an additional payment of $5.0
million to Neose within 60 days of the first commercial sale, if any, of infant
formula containing the Company's nutritional additive. Abbott may (i) at any
time prior to the first commercial sale, if any, of infant formula containing
the Company's nutritional additive, elect to make its license agreement
non-exclusive, in which event the license fees payable by Abbott after
commercialization would be reduced by 50%, and Abbott's obligations to make
contract and milestone payments, including the $5.0 million milestone payment,
would be terminated, or (ii) elect to terminate the license agreement and return
the licensed technology to Neose upon 60 days' notice, in which event it would
have no further funding obligation to the Company, including no obligation to
make the $5.0 million milestone payment. In addition, under the terms of the
Abbott agreement, if Abbott fails to make appropriate regulatory filings with
the FDA for the addition of Neose oligosaccharide in infant formula prior to
December 31, 1997, Neose, at its option, may elect to convert the license of
Neose technology to a non-exclusive license to Abbott, in which event the
license fees payable by Abbott after commercialization would be reduced by 50%,
and Abbott's obligations to make contract and milestone payments, including the
$5.0 million milestone payment, would be terminated.
The Company expects to make additional capital expenditures totaling
approximately $7.5 million in connection with its planned GMP manufacturing
expansion and has entered into a non-binding letter of intent to acquire its
facility for a total of approximately $3.8 million. The Company presently leases
its facility. The Company's minimum lease obligation for the year ended December
31, 1996 was approximately $310,000. See "-- Recent Developments."
The Company has entered into a capital lease agreement with an
equipment finance company that provides for up to $1.5 million of financing, of
which approximately $1.4 million had been drawn on as of September 30, 1996.
During 1993, 1994, 1995, and during the nine months ended September 30,
1995 and 1996, the Company purchased approximately $491,000, $975,000, $875,000,
$613,000, and $667,000 of capital equipment and leasehold improvements.
The Company also has obligations to certain of its employees under
employment agreements. See "Management -- Employment Agreements."
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to continue its research and development programs. The Company
expects that its existing capital resources, together with the net proceeds of
this offering and the interest earned thereon, will be adequate to fund its
capital requirements through 1999. No assurance can be given that there will be
no change that would consume available resources significantly before such time.
The Company's future capital requirements and the adequacy of available funds
will depend on many factors, including progress in its research and development
activities,
22
<PAGE>
including its pharmaceutical discovery and development programs, the magnitude
and scope of these activities, progress with preclinical studies and clinical
trials, the costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, changes in existing collaborative
research relationships and strategic alliances, the ability of the Company to
establish additional collaborative arrangements for product development, the
cost of manufacturing scale-up and developing effective marketing activities and
arrangements, and the ability of the Company to obtain long-term financing with
respect to its planned manufacturing expansion. The Company has made and expects
to make capital expenditures in late 1996 and 1997 totaling approximately $7.5
million to expand GMP manufacturing capabilities for its compounds under
development. In addition, the Company has entered into a non-binding letter of
intent with the owner of its leased facility to purchase the facility for a
total of approximately $3.8 million contingent upon, among other things, the
Company's obtaining financing for the acquisition. Additional funds will be
needed by the Company to expand its manufacturing capacity to manufacture
commercial quantities of its potential products. The Company is exploring
alternatives for long-term financing in connection with its planned GMP
manufacturing expansion and the purchase of its facility, including the issuance
of taxable and tax exempt bonds. The Company does not currently have any
committed sources of additional financing and no commitments have been received
by the Company for long-term financing to support the expansion and purchase. To
the extent that funds generated from the Company's operations, together with its
existing capital resources and the net proceeds of this offering and the
interest earned thereon, are insufficient to meet current or planned operating
requirements, it is likely that the Company will seek to obtain additional funds
through equity or debt financings, collaborative or other arrangements with
corporate partners and others, and from other sources. The terms and prices of
any such financings may be significantly more favorable to investors than those
of the Common Stock sold in this offering, which could have the effect of
diluting or adversely affecting the holdings or the rights of existing
stockholders of the Company, including investors acquiring Common Stock in this
offering. There can be no assurance that additional financing will be available
when needed or on terms acceptable to the Company. If adequate additional funds
are not available for these purposes or otherwise, the Company may be required
to delay, scale back, or eliminate certain of its research and product
development activities or certain other aspects of its business or attempt to
obtain funds through collaborative arrangements that may require the Company to
relinquish some or all of its rights to certain of its intellectual property,
product candidates, or products. If adequate funds are not available, the
Company's business, financial condition, and results of operations will be
materially and adversely affected. See "-- Recent Developments."
Recent Developments
The Company expects to make additional capital expenditures in the
total amount of approximately $7.5 million, which began in the fourth quarter of
1996, to expand GMP manufacturing capabilities for NE-0080, and to establish GMP
manufacturing capabilities for NE-1530 and NE-0501. In each case, the Company
believes that the planned GMP capacity will be adequate to complete clinical
trials for the respective compounds. In addition, the Company believes that the
planned expansion will give it capacity to manufacture under GMP conditions
certain amounts of these and other carbohydrates for third parties. In
connection with the planned capital expenditures, the Company is exploring
various long-term financing alternatives as discussed below.
In connection with the planned GMP manufacturing expansion described
above, the Company has entered into a non-binding letter of intent with the
owner of the facility to purchase the facility for a total of approximately $3.8
million. The Company is currently negotiating a definitive purchase agreement
for the facility.
In connection with the planned $7.5 million GMP manufacturing expansion
and the planned $3.8 million purchase of its facility, the Company is exploring
various alternatives for long-term financing. The Company plans to make
application to the Montgomery County (Pennsylvania) Industrial Development
Authority for the issuance of approximately $10.0 million total in taxable and
tax exempt bonds to support
23
<PAGE>
this project. The bonds are expected to be supported by a AA-rated letter of
credit, and a reimbursement agreement from the Company's bank, Jefferson Bank,
to the letter of credit issuer. To provide credit support for this arrangement,
the Company is prepared to offer a first mortgage on the land, building,
improvements, and certain machinery and equipment to Jefferson Bank, and to
provide certain covenants for the maintenance of minimum cash and short-term
investment balances. See "Certain Transactions."
24
<PAGE>
BUSINESS
The statements in this Prospectus that relate to future plans, events
or performance are forward-looking statements. Actual results could differ
materially due to a variety of factors, including the factors described under
"Risk Factors" and the other risks described in this Prospectus.
Neose is focused on the enzymatic synthesis of complex carbohydrates
(oligosaccharides), and the discovery and development of complex carbohydrates
for nutritional and pharmaceutical uses. Complex carbohydrates serve as
attachment sites for many pathogens that cause infectious diseases. Present on
all cells, these compounds also play a critical role in the immune response. Due
to their complexity, oligosaccharides are difficult and expensive to produce,
and their commercial development has been significantly limited despite the role
they play in human diseases. The Company believes that its proprietary MTR
technology enables, for the first time, the rapid and cost-efficient production
of naturally-occurring oligosaccharides. The Company, with Abbott, a leading
provider of infant formula in the United States, is applying its MTR technology
to the development of breast milk oligosaccharides as additives to infant
formula. Breast milk oligosaccharides are believed to play an important
anti-infective role in infants. In its therapeutic development programs, the
Company is using its technology to develop complex carbohydrates as
pharmaceuticals to treat various bacterial infections, such as gastrointestinal
and pediatric ear infections, and to prevent xenotransplant rejection.
Background
All human cell surfaces have complex carbohydrates that serve as
specific binding sites for other molecules and cells, including pathogens such
as bacteria, viruses, and other infectious microorganisms. The first step in the
development of many infectious diseases is the attachment of the bacterium,
virus, or other pathogen to the human cell. This attachment often occurs when a
specific receptor protein on the pathogen recognizes a specific carbohydrate on
the human cell. The protein/carbohydrate interaction, which allows the pathogen
to initiate the disease process, is highly dependent on the complementary shapes
of the protein and the carbohydrate.
Oligosaccharides are not, however, located only on cell surfaces.
Soluble oligosaccharides (oligosaccharides not bound to cells) produced by the
body are found in many body fluids, including breast milk, tears, urine, and
respiratory and gastrointestinal secretions. These soluble complex carbohydrates
are identical to the complex carbohydrates on cell surfaces, and are believed to
serve as decoys that bind to pathogens, preventing the pathogens from binding to
cells and causing disease. The pathogens are then expelled from the body in
respiratory and gastrointestinal secretions. For example, breast milk contains a
number of soluble oligosaccharides that are believed to prevent the attachment
of certain bacteria and viruses to gastrointestinal, respiratory, and urinary
tract cells in infants. Soluble oligosaccharides are, therefore, thought to be
one of the body's natural anti-infective agents (which also include white blood
cells and antibodies). The anti-infective role of oligosaccharides is
illustrated below:
25
<PAGE>
- -------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
[The following is required for the EDGAR filing and will not appear in the
printed prospectus: This diagram depicts schematically two human cells.
The first human cell has come in contact with a bacterium and the protein
receptors of the bacterium have attached to the cell's surface oligosaccharides.
The second human cell has come in contact with a bacterium; however, soluble
oligosaccharides have attached to the bacterium, preventing the bacterium from
attaching to the cell surface oligosaccharides. The diagram is centered around
two human cells, each labeled as a "Human Cell." The cells are depicted by half
circles, with the flat side to the bottom of the diagram and the arched side
facing towards the top of the diagram. Extending from various points on the
arched sides of each human cell are four cell surface oligosaccharides, depicted
by a string of five to seven small circles that end with a small box. The human
cell on the left side of the diagram has arrows extending from a label "Cell
Surface Oligosaccharides" to the two string-like series of cell surface
oligosaccharides on its right side. Above the top of the cell surface
oligosaccharides is a bacterium, depicted by an oval shape, and labeled as
"Bacterium." Extending from the bottom of the bacterium and attached to the top
of the two center cell surface oligosaccharides are protein receptors depicted
by a vertical line. The bacterium also has two other protein receptors, one on
each side, depicted by a line that branches into two parts at its end.
Above the human cell on the right side of the diagram are seven soluble
oligosaccharides labeled as "Soluble Oligosaccharides," depicted similarly to
the cell surface oligosaccharides, but with tails of three small circles. Three
of these units are attached to lines (protein receptors) extending out from an
oval (the bacterium). The bacterium is not connected in any way to the human
cell or cell surface oligosaccharides below it.]
Caption: The protein/carbohydrate interaction that allows the pathogens to
initiate the disease process is highly dependent on the complementary shapes of
the protein and the carbohydrate. Soluble complex carbohydrates are identical to
the complex carbohydrates on cell surfaces, and are believed to serve as decoys
that bind to pathogens, preventing the pathogens from binding to cells and
causing disease.
- -------------------------------------------------------------------------------
Oligosaccharides are chains of monosaccharides, or individual sugar
molecules, that can be joined in many different combinations. Because there are
ten types of individual sugar molecules in humans, and because any two of these
may be chemically linked in up to 22 different ways, oligosaccharides are very
complex. For example, four different monosaccharides can be arranged to make
35,560 different complex carbohydrates. In contrast, four different amino acids,
which are the building blocks of proteins, can be combined to make only 24
distinct peptides.
The specific biological properties of an oligosaccharide are dictated
by its component monosaccharides and the chemical linkage between those
monosaccharides. Because monosaccharide chains can be linked in so many
different combinations, with each combination potentially having a different
biological activity, synthesis of complex carbohydrates is difficult.
Traditional organic chemical synthesis of oligosaccharides is time-consuming,
prohibitively expensive, and becomes more complex as the length of a chain
increases. Moreover, because oligosaccharides are not directly encoded by genes,
they cannot be produced by established recombinant methods. Difficulties in
producing oligosaccharides efficiently and in sufficient quantities have
significantly limited their development and commercialization.
Neose's MTR Technology
Neose believes its proprietary MTR technology platform enables, for the
first time, the rapid and cost-effective synthesis of commercial quantities of
oligosaccharides. The Company's MTR technology utilizes enzymes to synthesize
specific chemical linkages among individual sugar molecules. These enzymes,
which are referred to as glycosyltransferases, are catalysts that join
monosaccharides together in highly specific ways. Generally, each
glycosyltransferase attaches a specific sugar molecule to another specific sugar
molecule by means of a specific chemical linkage.
To synthesize an oligosaccharide, the Company uses its MTR technology
to join monosaccharides in a chain. This process, which can be viewed as a
molecular assembly line, is illustrated below:
26
<PAGE>
- -------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
[The following is required for the EDGAR filing and will not appear in the
printed prospectus: This diagram depicts schematically the process of making the
oligosaccharides A-B-C-D from the monosaccharide A. The diagram centers on three
cylinder shaped units, labeled in the center of each, from left to right:
B-Transferase, C-Transferase and D-Transferase. Extending from the lower right
side of each cylinder is a tube extending out horizontally and then dropping
down at a ninety degree angle. Several tear shaped drops fall from each tube to
a small cylinder below and to the right of each large cylinder, labeled in the
center of each cylinder A-B, A-B-C and A-B-C-D, from left to right. The small
cylinder labeled A-B is connected by a long arrow up to the top of the large
cylinder to its right labeled C-Transferase. The small cylinder labeled A-B-C is
connected by a long arrow up to the top of the large cylinder to its right
labeled D-Transferase. Above the large cylinder on the left (labeled
B-Transferase) is a label "A" with an arrow pointing down to the cylinder. To
the right of the label "A" is the label "B-PN" with an arrow also pointing down
to the cylinder. Above the large cylinder in the middle (labeled C-Transferase)
is the label "C-PN" with an arrow pointing down to the cylinder. Above the large
cylinder on the right (labeled D-Transferase) is the label "D-PN" with an arrow
pointing down to the cylinder.]
Caption: To make the oligosaccharides A-B-C-D, the monosaccharide A, along with
a B sugar donor molecule (B-PN), is added to a B-transferase preparation that
causes the B sugar molecule to link to A, producing the disaccharide A-B. Then
the A-B disaccharide, along with a C sugar donor molecule (C-PN), is added to a
C-transferase preparation and the trisaccharide A-B-C is produced. Then the
A-B-C trisaccharide, along with a D sugar donor molecule (D-PN), is added to a
D-transferase preparation and the tetrasacharide A-B-C-D is produced. This
process can be continued to attach additional monosaccharides to the A-B-C-D
chain.
- -------------------------------------------------------------------------------
Glycosyltransferases synthesize linkages at a very rapid rate. Because
glycosyltransferases can work for months before having to be replenished, the
Company believes that the correct preparation can generate the desired
oligosaccharide in a commercially scalable manner. Nevertheless, the cost of
manufacturing a product depends in significant part on the cost of obtaining the
glycosyltransferases. Neose has accordingly invested heavily in recombinant
methods of producing the glycosyltransferases necessary to manufacture
cost-effectively many naturally-occurring oligosaccharides. This procedure has
significantly reduced the costs, and increased the efficiencies, of
manufacturing certain oligosaccharides.
Strategy
The Company's objective is to be the leader in the discovery,
development, and manufacture of complex carbohydrates for a wide range of
nutritional and healthcare applications. The key elements of the Company's
strategy include:
Continuing Development of Nutritional Additives. Through its strategic
alliance with Abbott, the Company is developing a breast milk oligosaccharide
for use as an additive to infant formula. The Company believes that the
development and commercialization of this additive may occur more rapidly than
pharmaceutical product development. The Company intends to continue to develop
this product and enhance production capacity in conjunction with Abbott. There
are more than two dozen oligosaccharides found in breast milk. The Company,
together with Abbott, has developed one breast milk oligosaccharide, and is
exploring the development of additional breast milk oligosaccharides for use in
infant formula and in adult nutritional supplement products. In addition, the
Company is exploring with other collaborators the development of other
oligosaccharides for other nutritional and non-prescription products.
Leveraging Core Technology for Pharmaceutical Product Development.
Using its core technology, the Company is currently developing pharmaceutical
products for the treatment of gastritis and peptic ulcers, pediatric ear
infections, and for the prevention of xenotransplant rejection. The Company has
also identified
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a number of other diseases and indications that are potential targets for
carbohydrate-based pharmaceutical product development.
Establishing Additional Strategic Alliances and Research
Collaborations. The Company generally intends to develop its pharmaceutical
products through preclinical development and initial clinical trial phases and
to use strategic alliances to supplement its internal clinical development and
regulatory resources. The Company seeks to establish strategic alliances with
pharmaceutical companies to conduct late-stage clinical trials, to obtain
regulatory approvals, and to market and sell the Company's products, in exchange
for license fees, milestone payments, and royalties. The Company also intends to
continue to enter into research collaborations with corporate partners and with
academic research institutions to enhance and further develop its technology
platform.
Continuing to Develop Manufacturing Capabilities. The Company intends
to continue to develop and refine its MTR technology to reduce costs, increase
output, and improve production speed. The Company intends to develop its
manufacturing capabilities to support clinical development, and ultimately,
commercial introduction, of its pharmaceutical products. In addition, on a
selective basis, the Company intends to develop capabilities to manufacture
oligosaccharide products for third parties.
Pursuing Additional Applications of Its Core Technologies. The Company
believes that its proprietary MTR technology has broad applications in a wide
range of industries. Through its research collaboration with Bracco, the Company
is testing the effectiveness of oligosaccharides for in vivo imaging purposes.
The Company intends to pursue other applications as time and resources permit.
Products in Development
Neose has focused its initial research and development efforts on (i) a
nutritional additive product, NE-1340, a breast milk oligosaccharide that is
being developed in conjunction with Abbott for inclusion in its infant formula
products, and (ii) potential carbohydrate-based therapeutic products for the
treatment of chronic gastritis and peptic ulcers, pediatric ear infections, and
the prevention of xenotransplant rejection. The following table sets forth the
development status of each of the Company's product candidates:
- -------------------------------------------------------------------------------
Product Application/Indication Development Status (1)
- ------- ---------------------- ----------------------
NE-1340 Infant formula additive Manufacturing scale-up(2)
NE-0080 Gastritis and peptic ulcers (monovalent) Completed Phase IC trial;
Phase II trial planned in
early 1997
NE-1530 Pediatric ear infections Preclinical studies; IND
planned in late 1997
NE-0501 Prevention of xenotransplant rejection Preclinical studies
NE-1327 Gastritis and peptic ulcers (polyvalent) Preclinical studies
- ------------
(1) See "Business -- Government Regulation" for a description of the various
regulatory requirements.
(2) At least 90 days prior to marketing, the manufacturer of a reformulated
infant formula must submit to the FDA the description of any major
reformulation or change in processing and assurances that the reformulated
infant formula will not be marketed without complying with nutrient and
quality factor requirements and GMP control requirements. In the case of
NE-1340, the manufacturer must either submit a GRAS petition or food
additive petition prior to such FDA submission, or self-affirm GRAS, which
may be the fastest route to commercialization, at the time of such
submission. If the FDA does not object within 90 days of such submission,
the manufacturer may commence commercial sales of infant formula containing
the Company's additive in the United States. Approval of the reformulated
infant formula also will be necessary in a number of foreign countries. See
"Business -- Government Regulation."
- -------------------------------------------------------------------------------
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Nutritional Additives
Breast milk contains more than two dozen complex carbohydrates that are
believed to provide infants with protection against bacterial and viral
infections. Commercial infant formula products, which are based on either cow's
milk or soy extracts, do not contain breast milk oligosaccharides. Studies
indicate that breast-fed infants have fewer bacterial and viral infections than
formula-fed infants. The Company believes that this is due, in part, to the
presence of oligosaccharides in breast milk. Neose is using its core technology
to develop breast milk oligosaccharides for inclusion as additives to commercial
infant formula. Neose has entered into an exclusive license agreement with
Abbott, a leading provider of infant formula in the United States, to
commercialize the Company's nutritional additives.
Infant formula marketing strategies are designed to convince
pediatricians and hospitals to recommend the brand of choice to new parents.
Barring complications, switching brands of infant formula is uncommon, and price
competition has not played a significant role in brand selection. The Company
believes that infant formula manufacturers are increasingly seeking ways to
differentiate their products, and to provide an impetus to switch brands of
infant formula. The Company's breast milk oligosaccharide additive is intended
to provide effective product differentiation without requiring significant
pricing adjustments.
Utilizing Neose's MTR technology, Abbott is currently developing the
capability to manufacture the infant formula additive in commercial quantities.
At least 90 days prior to marketing, the manufacturer of a reformulated infant
formula must submit to the FDA the description of any major reformulation or
change in processing, and assurances that the reformulated infant formula will
not be marketed without complying with nutrient and quality factor requirements
and GMP control requirements. In the case of NE-1340, the manufacturer must
either submit a GRAS petition or food additive petition prior to such FDA
submission, or self-affirm GRAS, which may be the fastest route to
commercialization, at the time of such submission. If the FDA does not object
within 90 days of such submission, the manufacturer may commence commercial
sales of infant formula containing the Company's additive in the United States.
Approval of the reformulated infant formula also will be necessary in a number
of foreign countries. See "Business -- Strategic Alliance with Abbott" and
"Business -- Government Regulation."
Additionally, the Company and Abbott are exploring the development of
additional breast milk oligosaccharides for use in infant formula, and the
inclusion of breast milk oligosaccharides in nutritional supplement products for
the elderly, or for nutritionally-compromised adults. In addition, the Company
is exploring with other collaborators the development of other oligosaccharides
for other nutritional and non-prescription healthcare products.
Pharmaceuticals
Neose's initial pharmaceutical development programs are targeted at the
discovery and development of novel oligosaccharide anti-infectives, specifically
anti-bacterials. The Company believes that oligosaccharide anti-infectives will
have substantial benefits as compared with conventional antibiotics.
Oligosaccharides are naturally-occurring, are cost-effective to produce
utilizing the Company's technology, have relatively low toxicity, and are less
likely to cause adverse side-effects. Conventional antibiotics, currently the
primary treatment for bacterial infections, act by killing bacteria and do not
interfere with the initial step of infection. In addition, bacteria are
increasingly becoming resistant to existing antibiotics, severely limiting their
effectiveness. Antibiotics, which act by killing pathogens, select for, and
consequently facilitate the proliferation of strains of the pathogen that are
resistant to the antibiotics. Because the Company's anti-infective product
candidates do not act by killing pathogens, but rather by preventing attachment
of pathogens to cell surfaces, the Company believes that use of its
anti-infectives is less likely to result in the development of resistant
strains.
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Two of the Company's initial drug discovery and development efforts are
targeted to develop treatments for gastritis and peptic ulcers caused by H.
pylori infections and pediatric ear infections.
Gastritis and Peptic Ulcers. Neose is developing a naturally-occurring
human gastrointestinal oligosaccharide to treat gastritis and peptic ulcers
caused by H. pylori infections. H. pylori has been acknowledged to be the cause
of gastritis and over 80% of all peptic ulcer cases. An estimated four million
people suffer from active peptic ulcers each year in the United States, and
approximately 500,000 new cases are diagnosed annually. The Company estimates
that the direct medical costs of treating peptic ulcers in the United States
exceed $2.0 billion per year.
Until recently, treatment of gastritis and peptic ulcers focused on the
use of antagonists of acid secretion, such as the H-2 antagonists, Tagamet(R)
(cimetidine) and Zantac(R) (ranitidine), and the proton pump inhibitors,
Prilosec(R) (omeprazole) and Prevacid(R) (lansoprazole). While assisting in the
healing of gastritis and peptic ulcers, these drugs acting alone do not cure the
underlying H. pylori infection. Consequently, high rates of recurrence and the
need for chronic therapy are associated with these treatment regimes. One
approach currently used to treat gastritis and recurrent peptic ulcers involves
the administration of antibiotics, in combination with other drugs. Even the
most effective antibiotic treatments, however, may be complicated by (i) the
need to treat for prolonged periods with multiple drugs, (ii) side-effects and
problems with patient compliance, (iii) relapses if treatment is interrupted,
and (iv) the development of antibiotic-resistant strains of H. pylori.
NE-0080, Neose's product candidate for the treatment of H. pylori
infections, is a carbohydrate molecule that is identical to a human stomach cell
carbohydrate utilized by H. pylori to attach to its target cells. In in vitro
preclinical studies, NE-0080 prevented the attachment of H. pylori to human
stomach cell lines, and dislodged previously bound H. pylori bacteria from such
cells. Studies in two different animal models have shown that NE-0080 decreased
H. pylori levels. In November 1994, Neose completed preclinical studies of
NE-0080. The Company filed an IND with the FDA in December 1994 and completed
Phase IA and Phase IB clinical trials involving 24 healthy subjects in an
ascending single dose study in April 1995 and 32 subjects with asymptomatic H.
pylori infections in a 10-day repeat dose study in March 1996, respectively. The
results of these studies indicated that NE-0080 was well-tolerated and did not
cause any adverse side-effects. A Phase IC study, involving a 28-day repeat dose
study in 11 subjects with asymptomatic H. pylori infections, was completed in
November 1996. Although the study was designed primarily to test safety, the
Company also used the non-invasive UBT test to measure H. pylori loads in the
subjects over an eight-week period. NE-0080 caused a statistically significant
decrement in UBT values. The Company plans to initiate Phase II studies on
NE-0080 in early 1997. Neose also is developing NE-1327, a polyvalent
configuration of NE-0080 that is significantly more effective than the natural
monovalent molecule in inhibiting in vitro binding of H. pylori bacteria to
human stomach cells.
Pediatric Ear Infections. Neose is developing NE-1530, a
naturally-occurring human airway oligosaccharide, for the treatment of pediatric
ear infections. Middle ear infections are one of the most frequent reasons for
pediatrician visits. According to an industry report, there are an estimated 30
million office visits and prescriptions each year attributable to middle ear
infections. Healthcare costs in the United States associated with middle ear
infections exceed $2.0 billion annually. Current antibiotic therapies are losing
their effectiveness due to the development of resistant strains of the bacteria
that cause these infections.
NE-1530 contains a sugar sequence identical to that of airway
carbohydrates to which respiratory disease-causing bacteria attach, and
subsequently initiate colonization. In in vitro tests, the compound blocked the
attachment to human airway cells of Streptococcus pneumoniae, Hemophilus
influenzae, and Moraxella catarrhalis, the bacteria most frequently associated
with a variety of respiratory infections, including pediatric ear infections,
acute infections associated with chronic bronchitis, and pneumonia. In addition,
results of animal studies indicate that this compound inhibits and reverses the
attachment of these bacteria. The Company is developing a formulation of NE-1530
for nasal administration, is conducting further
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<PAGE>
preclinical studies, and intends to file an IND application in late 1997.
Although the Company has chosen initially to develop NE-1530 for pediatric ear
infections, the Company also may develop this compound in the future for other
indications, such as acute infections associated with chronic bronchitis and
pneumonia.
Xenotransplant Rejection. An estimated 20,000 human organ transplants
were performed in the United States in 1995 and many times that number of
patients are believed to die each year due to the lack of available human
organs. At the end of 1995, the waiting list for humans awaiting human organs
was approximately 44,000, and that list has grown significantly each year. There
have been efforts in the past to utilize animal organs, particularly pig organs
due to their size, availability, and physiological similarities to humans, to
address the shortage of human organs. These efforts, however, have not been
successful. Although substantial resources have been committed to develop animal
organs for human transplants, HAR, in which the transplanted organ is rejected
within minutes of transplantation, remains one of the most critical obstacles to
xenotransplantation. HAR results from an antibody-mediated response against an
oligosaccharide found on the cell surface of most mammals, but absent in humans.
In vitro studies and limited in vivo surgeries indicate that it may be
possible to prevent, to some extent, HAR by administering sufficient quantities
of the Company's specific oligosaccharide prior to and following surgery to bind
and neutralize the circulating antibodies. Animal studies have demonstrated that
the administration of the appropriate oligosaccharide may prevent HAR to a
sufficient degree, and for a sufficient period of time, to allow the recipient
to accommodate the grafted organ. Once HAR is overcome, existing
immunosuppressive pharmaceuticals are available to help the physician manage the
ongoing accommodation of the new organ in most patients.
Neose has synthesized significant quantities of the oligosaccharide
that is the target of the antibody responsible for HAR, and has collaborated
with a leading transplant surgeon in preclinical studies of this compound,
designated NE-0501, as a preventive agent for HAR in xenotransplants utilizing
pig organs. During 1996, the Company conducted preclinical studies in which
unmodified pig hearts were grafted into two baboons receiving NE-0501
intravenously to neutralize the target antibodies. These studies demonstrated
that NE-0501, while present in the bloodstream in adequate concentrations,
allows the in vivo survival of the transplanted organ and neutralizes the
antibodies that initiate HAR. The Company is collaborating with other companies
that are pursuing xenotransplantation with several different approaches,
including transgenic modification of pig organs, and chimeric tolerization of
donor organs. The Company believes that the use of oligosaccharides may be an
important part of the therapies that will ultimately be utilized in the possible
commercialization of xenotransplantation in the future.
Other Potential Products
Other clinically important infections mediated by complex carbohydrates
include dental and periodontal infections, vaginitis, tuberculosis, sexually
transmitted diseases, diarrhea, urinary tract infections, and corneal ulcers. To
the extent funding and other resources become available for research and
development, the Company intends to target compounds in the following three
areas: (i) oral hygiene (compounds that would inhibit the activity of plaque and
gingivitis-causing bacteria), (ii) urinary tract infections, and (iii)
anti-fungals (compounds that would inhibit the attachment of Candida albicans,
the fungus that causes common vaginal infections). Using its proprietary
technology, Neose believes it can manufacture complex carbohydrates for eventual
development as novel anti-infective drugs to combat one or more of these
infectious diseases.
The Company, in conjunction with Bracco, is also exploring the use of
complex carbohydrates for development as in vivo diagnostic imaging agents. See
"Business -- Other Collaborative Relationships -- Bracco." The Company also
intends to explore the use of its core technology to create structural molecules
for food industry applications, and to target compounds that would have
anti-bacterial and anti-inflammatory applications in the cosmetics industry.
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Strategic Alliance with Abbott
The Company and Abbott entered into collaborative agreements to develop
breast milk oligosaccharides as additives to infant formula and other
nutritional products. Abbott has manufacturing rights and manufacturing
development responsibilities for the nutritional additives. Under this strategic
alliance, Abbott has invested $6.0 million in Neose and Neose has received
approximately $5.2 million in contract payments, license fees, and milestone
payments from Abbott. In addition, Neose is to receive $5.0 million within 60
days of the first commercial sale, if any, of infant formula containing the
Company's nutritional additive. Abbott will manufacture the nutritional additive
for its own use and has agreed to pay Neose ongoing fees based on the dry weight
of the infant formula sold containing the nutritional additive. The Company is
required to credit $3.75 million of the license fees against the ongoing fees in
equal amounts over four years. In addition, Abbott has agreed to renegotiate the
fees due Neose on the sale of products containing the nutritional additive in
any case where Neose has made a contribution that both parties agree will result
in a substantial commercial advantage. Abbott is considering the utilization of
other proprietary technology exclusively licensed to Neose that may further
significantly reduce the cost of manufacture of the oligosaccharide additives to
infant nutritional formula. If Abbott determines to adopt this technology in its
manufacturing processes, Abbott has acknowledged to Neose that it would be
obligated under that provision of its agreement to renegotiate the financial
terms. There can be no assurance that Abbott will determine to utilize the Neose
technology in its manufacturing processes. Under the terms of the Abbott
agreements, if Abbott fails to make appropriate regulatory filings with the FDA
for the addition of Neose oligosaccharides in infant formula prior to December
31, 1997, Neose, at its option, may elect to convert the license of Neose
technology to a non-exclusive license to Abbott, in which event the license fees
payable by Abbott after commercialization would be reduced by 50%, and Abbott's
obligations to make contract and milestone payments, including the $5.0 million
milestone payment, would be terminated. Abbott may, at any time prior to the
first commercial sale, if any, of infant formula containing the Company's
nutritional additive, elect to make its license agreement non-exclusive, in
which event the license fees payable by Abbott after commercialization would be
reduced by 50%, and Abbott's obligations to make contract and milestone
payments, including the $5.0 million milestone payment, would be terminated.
Abbott also has the right to cancel the underlying license agreement upon 60
days' written notice and return the technology, in which event it would have no
further funding obligations to the Company. The Company anticipates that its
manufacturing arrangement with Abbott will assist the Company in developing its
own manufacturing capability.
Other Collaborative Relationships
Neose seeks to complement its internal resources through the formation
of relationships with universities and other companies. The Company has formed
several such collaborative relationships to date, and intends to enter into
additional relationships in the future. The Company's other collaborative
relationships are described below.
Bracco
Neose has entered into a collaborative research agreement with Bracco
Research USA Inc., a unit of Bracco Industria SpA and formerly the diagnostics
division of Bristol-Myers Squibb Company. Under the terms of the agreement,
Neose will supply Bracco with complex carbohydrates, which Bracco will attach to
diagnostically useful agents. If the resulting new molecules can highlight
specific targets, they may be promising candidates for development as human in
vivo imaging agents. Under the terms of the three-year agreement, Bracco has
paid Neose $375,000 to date and is obligated to pay Neose $375,000 over the next
18 months to fund research and development. This agreement is terminable at any
time upon 60 days' notice, in which event Bracco would have no further funding
obligations to the Company.
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The Rockefeller University
In October 1995, Neose licensed from The Rockefeller University
proprietary technology for a group of gene sequences that allow the recombinant
production of highly active and efficient enzymes involved in the synthesis of
carbohydrates. Neose expects that these enzymes will substantially reduce the
cost of manufacture of certain carbohydrates.
In addition, The Rockefeller University scientists have collaborated
with Neose in the area of carbohydrates involved in upper respiratory
infections. Neose has licensed one issued patent and one patent application from
The Rockefeller University directed toward the therapeutic uses of certain
oligosaccharides in these areas.
University of Pennsylvania
Neose has entered into an exclusive license agreement with the
University of Pennsylvania for the use, development, and commercialization of
patent and technology rights relating to the Company's proprietary MTR
technology substantially developed by Dr. Stephen A. Roth, the Company's
Chairman and Chief Executive Officer, while Professor of Biology at Penn. Penn
beneficially owns approximately 1.8% of the Common Stock and upon completion of
this offering, Penn will beneficially own approximately 1.6% of the Common
Stock.
Research and Development
The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company has assembled a
scientific staff with multidisciplinary skills in advanced research
technologies, including biochemistry, organic chemistry, analytic chemistry,
molecular biology, cell biology, microbiology, and enzymology. The Company
currently has 40 employees engaged in research and development. The Company's
research facilities include laboratories for each of the scientific staff's
disciplines, in vitro testing facilities, and formulation facilities.
In addition to its in-house research programs, the Company collaborates
with academic and research institutions to support research in areas of interest
to the Company. Usually, such research assistance is performed in conjunction
with additional in-house research. The faculty member supervising the outside
research effort may also participate as a consultant to the Company.
Patents and Proprietary Rights
The Company relies on patent rights, trade secrets, trademarks, and
nondisclosure agreements to establish and protect its proprietary rights in its
technologies and products. Despite these precautions, it may be possible for
unauthorized third parties to utilize the Company's technology or to obtain and
use information that the Company regards as proprietary. The Company may be
dependent on licensors or collaborators to prosecute certain of the Company's
patent applications and may be dependent on such parties to protect such patent
rights if patents issue. The laws of some foreign countries do not protect the
Company's proprietary rights in its technologies and products to the same extent
as do the laws of the United States.
To date, the Company, through its license with Penn, has obtained
exclusive, worldwide rights to two issued U.S. patents. Both patents expire in
2010. The first patent, for which certain corresponding foreign patents have
issued and other foreign patent applications are pending, is directed to an
apparatus for synthesizing carbohydrates or carbohydrate-containing compounds
utilizing three or more different glycosyltransferases. The second U.S. patent
is directed to an apparatus containing a specific pair of enzymes to synthesize
a breast milk oligosaccharide and to other apparatuses containing multiple
glycosyltransferases. In addition, the Company, through its license with Penn,
has received rights to a patent
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application directed to a process for obtaining glycosyltransferases from
natural sources. The Penn license terminates upon the expiration of the last to
expire licensed patent in each country. Penn may, at its option, terminate the
license upon 60 days' notice if the Company is not using its continuing best
efforts to develop or sell a product using the licensed technology. The Company
also has licensed from The Rockefeller University two issued patents and one
patent application. These are directed toward certain gene sequences and
therapeutic uses of certain oligosaccharides. In addition to the licensed
patents, three U.S. patents have issued to the Company within the past year.
These patents are directed toward manufacturing processes for, and therapeutic
uses of, oligosaccharides. The Company, both independently and through its
licenses, has rights to a number of U.S., and corresponding foreign, patent
applications.
No assurance can be given that the U.S. Patent and Trademark Office or
any foreign patent office will grant patent protection for the subject matter of
any pending patent applications, or that present or future patents will provide
meaningful protection to the Company's present or future technologies, products,
or processes. Furthermore, no assurance can be given that others will not
independently develop substantially equivalent proprietary information or obtain
access to the Company's know-how or that others will not be issued patents that
may prevent the sale of one or more of the Company's products, or require
licensing and the payment of significant fees or royalties by the Company to
third parties in order to enable the Company to conduct its business. Legal
standards relating to the scope of claims and the validity of patents in the
biotechnology field are still evolving, and no assurance can be given as to the
degree of protection any patents issued or licensed to the Company will afford,
the validity of any such patents, or the Company's ability to avoid violating or
infringing any patents issued to others. There can be no guarantee that any
patents issued to or licensed by the Company will not be infringed by the
products of others. Defense and prosecution of patent claims can be expensive
and time-consuming, even in those instances in which the outcome is favorable to
the Company, and can result in the diversion of substantial resources from the
Company's other activities. An adverse outcome could subject the Company to
significant liabilities to third parties, require the Company to obtain licenses
from third parties, or require the Company to cease any related research and
development activities or product sales. In addition, the laws of certain
countries may not protect the Company's intellectual property.
The Company's success is also dependent upon the skills, knowledge, and
experience of its scientific and technical personnel. To help protect its
rights, the Company requires all employees, consultants, advisors, and
collaborators to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company, and
requires disclosure and assignment to the Company of their ideas, developments,
discoveries, and inventions. There can be no assurance, however, that these
agreements will provide adequate protection for the Company's trade secrets,
know-how, or other proprietary information in the event of any unauthorized use
or disclosure. NEOSE is a trade name of the Company.
The Company's management and scientific personnel have been recruited
primarily from other scientific companies, pharmaceutical companies, and
academic institutions. In some cases, these individuals may be continuing
research in the same areas with which they were involved prior to joining the
Company. As a result, the Company could be subject to allegations of violation
of trade secrets and similar claims. The Company has not received any notice of
any such claims and knows of no basis of any such claims. See "Risk Factors --
Uncertainty Regarding Patents and Proprietary Rights."
Government Regulation
The Company's product candidates and manufacturing facilities are
subject to stringent regulation by a number of government authorities in the
United States and other countries, including the FDA, pursuant to the FDC Act
and regulations thereunder. The Company's infant formula additive may be subject
to FDA review as a food additive, and the infant formula containing this
additive will be subject to the provisions of the United States Infant Formula
Act. The Company is also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
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the Resource Conservation and Recovery Act, and other similar federal, state and
local laws, rules, and regulations governing laboratory activities, waste
disposal, handling of toxic, dangerous or radioactive materials, and other
matters. The Company is unable to predict whether any governmental agency will
adopt requirements, including regulations, which would have a material and
adverse effect on any future product applications involving biotechnology. The
Company currently voluntarily complies with the National Institutes of Health
Guidelines for Research Involving Recombinant DNA Technologies. Although the
Company believes that it is in compliance with all applicable laws, rules, and
regulations, these laws, rules, and regulations change frequently, and there can
be no assurance that federal or state governments will not impose upon all or a
portion of the Company's activities additional restrictions which might
adversely affect the Company's business, prospects, financial condition, or
results of operations. See "Risk Factors -- Government Regulation; No Assurance
of Product Approval."
Regulation of Infant Formula Additives
Food and food ingredients are subject to the provisions of the FDC Act
regarding adulteration and misbranding of food. Food additives are broadly
defined as any substances that may become a component, or otherwise affect the
characteristics, of food, and the safety of which is established by regulation
rather than general recognition among experts. All new food additives require
premarket clearances. The Company's breast milk oligosaccharide, which is
intended to be marketed as an additive for infant formula, may be subject to the
extensive and lengthy FDA review process for food additives.
Information supporting the safety of a food additive is submitted to
the FDA in the form of a food additive petition. Such a petition is required to
contain reports of safety investigations of the food additive and details
regarding its physical, chemical, and biological properties. All product safety
studies submitted to the FDA usually must be conducted in accordance with FDA
Good Laboratory Practices ("GLP") requirements. Submission of a food additive
petition does not assure that the FDA will issue a food additive regulation. The
information must establish to a reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The food
additive petition process generally is expensive and lengthy, frequently
requiring several years after the petition is submitted to the FDA. No assurance
can be given that the FDA will accept the petition or that, if accepted, such
petition will not result in the establishment of regulations concerning the use
of the product.
Substances that are GRAS are excluded from the definition of food
additives. A manufacturer may make an independent determination that qualified
experts would generally agree that a substance is GRAS for a particular use.
Alternatively, a GRAS affirmation petition may be submitted for the FDA to
review and affirm GRAS status by regulation. There can be no assurance that
Abbott will make an independent determination or that the FDA will agree with
such independent determination, if Abbott were to elect to make such a
determination. Accordingly, there is a risk that the FDA will disagree with the
independent determination. In such a circumstance, the manufacturer must submit
a GRAS affirmation petition for the FDA to review and affirm GRAS status by
regulation in order to market and sell the additive or formula containing the
additive. This process could be time-consuming and expensive and would have a
material adverse effect on the Company's business, financial condition, and
results of operations. Furthermore, a company's decision to rely on an
independent determination may limit the marketability of that company's products
as to food manufacturers, many of whom require confirmation of GRAS status from
the FDA before they will purchase substances for use in foods from third
parties.
The infant formula into which the Company's breast milk oligosaccharide
is introduced will be subject to review and approval under the Infant Formula
Act, which has detailed requirements for the manufacture, composition, and
labeling of infant formulas. Under the Infant Formula Act, infant formula
manufacturers are required to notify the FDA of any intent to revise, add, or
substitute any protein, fat, or carbohydrate in infant formula 90 days prior to
the intended date of commercial distribution. The submission must contain the
quantitative formulation of the new infant formula, a description of any
reformulation or change in processing, and assurances that the new infant
formula will not be marketed without complying
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with the nutrient and quality factor requirements and GMP control requirements.
Upon notification, the FDA has a 90-day period in which to request additional
information, or deny marketing rights for the new formula. If no response is
forthcoming from the FDA within 90 days of notification, the manufacturer may
proceed with commercial sales of the newly formulated product. Pursuant to the
Company's agreements with Abbott, Abbott is responsible for all regulatory
activities relating to the infant formula additive. There can be no assurance
that Abbott will be able to satisfy all applicable regulatory requirements.
In addition, Abbott may market infant formula containing the additive
in foreign countries. Infant formula regulatory requirements vary widely from
country to country, and may be more or less stringent than FDA requirements. The
time required to obtain required clearances, if required, in foreign countries
may be longer or shorter than that required in the United States.
If the Company's technology is incorporated in products claiming a
therapeutic benefit, such products could be regulated as a drug rather than as a
food. Regulation of these products as a drug would require extensive clinical
testing and review by the FDA to support the claims made for the product. The
uncertainty regarding the regulatory status of this type of product could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Regulation of Pharmaceutical Products
The Company's research and development activities regarding, and the
future manufacturing and marketing of, its pharmaceutical products will be
subject to significant regulation by numerous government authorities in the
United States and other countries. Pharmaceutical products intended for
therapeutic use in humans are governed principally by the FDC Act and by FDA
regulations in the United States and by comparable laws and regulations in
foreign countries. The FDC Act and other federal statutes and regulations govern
the testing, manufacture, safety, labeling, storage, record keeping, approval,
advertising, and promotion of such products. Failure to comply with applicable
requirements can result in fines, recall, or seizure of products, total or
partial suspension of production, withdrawal of existing product approvals,
refusal to approve new drug applications, and criminal prosecution. The process
of completing clinical testing and obtaining FDA approval for a new drug or
biological product requires a number of years and the expenditure of substantial
resources and there can be no assurance that approval will be granted.
Following drug discovery, the steps required before a new
pharmaceutical product may be marketed in the United States include: (1)
preclinical laboratory and animal tests; (2) the submission to the FDA of an IND
application; (3) clinical and other studies to assess safety and parameters of
use; (4) adequate and well-controlled clinical trials to establish the safety
and effectiveness of the drug; (5) the submission of a New Drug Application
("NDA") to the FDA; and (6) FDA approval of the NDA prior to any commercial sale
or shipment of the drug.
Typically, preclinical studies are conducted in the laboratory and in
animal model systems to gain preliminary information on the drug's pharmacology
and toxicology and to identify the potential safety problems that would preclude
testing in humans. The results of these studies are submitted to the FDA as part
of the IND application and are reviewed by the FDA prior to authorizing the
sponsor to conduct clinical trials in human subjects. Unless the FDA objects to
an IND, the IND will become effective 30 days following its receipt by the FDA.
Clinical trials of an investigational product in human subjects
typically are conducted in three phases and are subject to specific protocols
that are particularly detailed in Phases II and III. Each protocol indicating
how the clinical trial will be conducted must be submitted for review to the FDA
as part of the IND. Clinical trials using xenotransplants raise unique safety
issues and the FDA has developed and is expected to continue to develop
additional requirements for INDs for these types of trials. The FDA's review of
a study protocol does not necessarily mean that if the study is successful it
will constitute proof of efficacy or safety.
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The FDA may require changes in a protocol both prior to and after the
commencement of a trial. There is no assurance that the FDA will permit a study
to go forward or, once started, to be completed.
Phase I clinical trials are designed to determine the metabolic and
pharmacologic effects of the drug in humans, the side-effects associated with
increasing doses, and possibly, to obtain early indications of efficacy. These
studies generally involve a small number of healthy volunteer subjects, but may
be conducted on people with the disease the drug is intended to treat. Phase II
studies are conducted to evaluate the effectiveness of the drug for a particular
indication and thus involve patients with the disease under study. These studies
also provide evidence of the short term side-effects and risks associated with
the drug. Phase III studies are generally designed to provide the substantial
evidence of safety and effectiveness of a drug required to obtain FDA approval.
They often involve a substantial number of patients in multiple study centers
and may include chronic administration of the drug in order to assess the
overall benefit-risk relationship of the drug. A clinical trial may combine the
elements of more than one phase and typically two or more Phase III studies are
required. Typical estimates of the total time required for completing such
clinical testing vary between four and ten years.
Reports of results of the preclinical studies and clinical trials for
non-biologic drugs are submitted to the FDA in the form of an NDA for approval
of the marketing and commercial shipment. This application also includes details
of the manufacturing and testing processes, as well as proposed product
packaging and labeling. FDA approval of the NDA is required before the applicant
may market the new product in the United States. The clinical testing and FDA
review process for new drugs are likely to require substantial time, effort, and
expense. The FDA may refuse to approve an NDA if applicable statutory and/or
regulatory criteria are not satisfied, or may require additional testing or
information.
The Company has not submitted an NDA to the FDA or received approval
from any other regulatory authority to market any of its product candidates, and
there can be no assurance that any such product will ever be approved for
marketing, or that the Company will be able to obtain the labeling claims
desired for its products. The Company is and will continue to be dependent upon
and require that the laboratories and medical institutions conducting its
preclinical studies and clinical trials maintain both good laboratory and good
clinical practices and that the manufacturers of its compounds maintain
compliance with current GMP requirements. Data obtained from preclinical studies
and clinical trials are subject to varying interpretations that could delay,
limit, or prevent FDA regulatory approval. Delays or rejections may be
encountered based upon changes in FDA policy for drug approval during the period
of development and FDA regulatory review. Similar delays also may be encountered
in foreign countries. Any delay in obtaining, or failure to obtain, such
approvals would adversely affect the Company's ability to generate product
revenues or royalties. There can be no assurance that regulatory approval will
be obtained for any product developed by the Company. Moreover, even if approval
is granted, such approval may entail commercially unacceptable limitations on
the labeling claims for which a product may be marketed.
Even after initial FDA approval has been obtained, further studies may
be required to provide additional data on safety, or to gain approval for the
use of a product as a treatment in clinical indications other than those for
which the product was initially tested. The FDA may also require post-marketing
testing and surveillance programs to monitor the drug's effects. Side-effects
resulting from the use of pharmaceutical products may prevent or limit the
further marketing of products.
Once the sale of a product is approved, the FDA regulates production,
manufacturing, marketing, and other activities to ensure compliance with the FDC
Act and the FDA's implementing regulations. Product approvals may be withdrawn,
or other actions may be ordered, or sanctions imposed if compliance with
regulatory requirements is not maintained. Other countries in which any products
developed by the Company or its licensees may be marketed impose a similar
regulatory process. The Company cannot predict the impact of adverse
governmental action that might arise from future legislative and administrative
action.
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For marketing outside the United States, the Company will be subject to
foreign regulatory requirements governing human clinical trials and marketing
approval for drugs and devices. The requirements relating to the conduct of
clinical trials, product licensing, pricing, and reimbursement vary widely from
country to country.
Competition
The Company is engaged in highly competitive industries. The Company
competes with many public and private companies, including well-known
nutritional products manufacturers, pharmaceutical companies, chemical
companies, specialized biotechnology companies, and academic institutions. Many
of the Company's competitors have significantly greater financial, scientific,
and technical resources, and manufacturing and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience conducting preclinical studies and clinical trials of new
pharmaceutical products, and in obtaining regulatory approvals for
pharmaceutical products.
The Company is relying on Abbott to develop and commercialize its
infant formula additive. As a result, the success of the Company's infant
formula additive will depend, in significant part, on Abbott's ability to
compete in the highly competitive infant formula market. Abbott's principal
competitors in this market include Bristol-Myers Squibb Company, American Home
Products Corp., Nestle S.A., and Gerber Products Co. Competitors of the Company
and its collaborators may develop products that compete successfully with the
Company's products and may develop and commercialize such products more rapidly
than the Company and its collaborators. Competition may increase further as a
result of potential advances from the study of complex carbohydrates, and
greater availability of capital for investment in this field. There can be no
assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any being developed by
the Company, or that would render the Company's technology and products obsolete
or noncompetitive. Although Neose is not aware of any companies that are
developing breast milk oligosaccharides as additives to infant formula, other
companies are investigating potential infant formula additives. Such compounds
may compete as additives to infant formula, but are not directly substitutable
for, or competitive with, carbohydrate additives.
The anti-H. pylori market is currently dominated by large
pharmaceutical companies with products that generally kill bacteria on a
non-specific basis. In response to recent evidence that infection with the
bacterium H. pylori is the major cause of peptic ulcers, certain of these
pharmaceutical companies and others have initiated or expanded research programs
aimed at the eradication of H. pylori. However, many of these research programs
are focusing on conventional antibiotic agents, each of which has reported
incidences of side-effects and resistance. To date, no single product has alone
received FDA approval of a labeling indication for H. pylori, although the FDA
has approved several combinations of multiple products with a specific labeling
indication for eradication of H. pylori. The market for treatment of respiratory
infections and otitis media is currently dominated by large pharmaceutical
companies with antibiotics that kill bacteria non-specifically. The use of
antibiotics often results in the development of side-effects and resistance. Due
to the significant commercial opportunities for respiratory infection and otitis
media therapeutics, many pharmaceutical and biotechnology companies are believed
to be developing alternative therapeutics and vaccines for the treatment and
prevention of respiratory infections and otitis media. Due to the limited supply
of human organs, there is a developing need for alternatives. The Company is
aware of several other pharmaceutical companies that are doing work in the area
of xenotransplants.
Several companies are developing oligosaccharide therapeutics, and one
company produces by enzymatic means a limited number of oligosaccharides and
oligosaccharide precursors. The Company believes that none of these companies
has the ability currently to manufacture a wide variety of human oligosaccharide
products in quantities sufficient for commercialization. Other companies,
however, that are developing non-human oligosaccharides may have the capability
to produce, via fermentation, quantities sufficient for clinical studies and
commercialization. In addition, some companies are investigating novel methods
of organic synthesis, sometimes in combination with enzymatic steps, in order to
produce
38
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commercial quantities of complex carbohydrates. There can be no assurance that
these and other efforts by potential competitors will not be successful, or that
other methods of carbohydrate synthesis will not be developed to compete with
the Company.
Manufacturing
To be successful, the Company's products must be manufactured in
commercial quantities under GMP prescribed by the FDA, and at acceptable costs.
The Company has not yet manufactured any products in commercial quantities and
currently does not have the facilities to manufacture any products in commercial
quantities under GMP. Although the Company is formulating amounts sufficient to
conduct initial clinical trials of one pharmaceutical product candidate under
GMP conditions, existing facilities of the Company are not adequate for
commercial scale manufacturing. The Company plans to construct GMP manufacturing
facilities in its current Horsham facility during the first half of 1997
adequate to provide Neose capacity for the GMP production of amounts of NE-0080,
NE-1530, and NE-0501 necessary for the conduct of anticipated clinical trials of
those compounds. In addition, the expanded facility is expected to give Neose
the capacity to manufacture limited amounts of GMP carbohydrate materials for
third parties. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" for a description
of the anticipated financial aspects of this manufacturing expansion. The
Company will need to develop its own GMP manufacturing facility and/or depend on
its collaborators, licensees, or contract manufacturers for the commercial
manufacture of its products. In the event the Company determines to establish a
manufacturing facility, it will require substantial additional funds, the hiring
and retention of significant additional personnel and compliance with extensive
regulations applicable to such a facility. The Company has no experience in such
commercial manufacturing, and there can be no assurance that the Company will be
able to establish such a facility successfully and, if established, that it will
be able to manufacture products in commercial quantities for sale at competitive
prices. If the Company determines to rely on collaborators, licensees, or
contract manufacturers for the commercial manufacture of its products, the
Company will be dependent on such corporate partners or other entities for, and
will have only limited control over the commercial manufacturing of, its
products. There can be no assurance that the Company will be able to enter into
any such manufacturing arrangements on acceptable terms, if at all. If the
Company is not able to enter into commercial manufacturing agreements, it could
encounter delays in introducing its products into certain markets, or find that
the manufacture of its products in these markets is adversely affected. There
can be no assurance that the parties to the Company's future commercial
manufacturing agreements will perform their obligations as expected, or that any
revenue will be derived from these commercial manufacturing agreements. See
"Risk Factors -- No Commercial Manufacturing Capability or Experience."
Marketing, Distribution, and Sales
The Company has no experience in marketing, distributing, or selling
nutritional additives or pharmaceutical products, and will have to develop a
sales force and/or rely on its collaborators or licensees, or on arrangements
with others to provide for the marketing, distribution, and sales of its
products. There can be no assurance that the Company will be able to establish
marketing, distribution, and sales capabilities or make arrangements with third
parties to perform such activities on acceptable terms, if at all. See "Risk
Factors -- Limited Clinical Trial Experience; No Marketing or Sales Capability
or Experience."
Scientific Advisory Board
The Company has assembled a Scientific Advisory Board (the "SAB")
composed of eight members (the "Scientific Advisors") who are leaders in certain
of the Company's core disciplines, and who review the Company's research,
development, and clinical activities. Scientific Advisors are available for
consultation with the Company's management. The SAB meets as a group at
scheduled semi-annual meetings, and some Scientific Advisors meet more
frequently, on an individual basis, with the Company's scientific personnel and
management to discuss the Company's ongoing research and development projects.
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<PAGE>
Upon election to the SAB, Scientific Advisors receive a onetime grant
of an option to purchase 6,666 shares of Common Stock at fair market value,
vesting over a four-year period. Each member of the SAB is eligible to receive
$2,000 per day as compensation for consulting services, up to a maximum of
$24,000 per year. In addition, each Scientific Advisor was granted an option to
purchase 1,500 shares of Common Stock during 1996. Each member of the SAB has
agreed to transfer to the Company the rights to all technology invented that is
related to the business of the Company and that was derived directly or
indirectly from the proprietary information of the Company, and has further
agreed not to compete with the Company for a period of one year following
termination of his or her membership. The current members of the SAB are as
follows:
Baruch S. Blumberg, M.D., Ph.D., Neose's SAB Chairman, was
Master of Balliol College, Oxford University, and is the Fox Chase
Distinguished Scientist and Senior Advisor to the President, Fox Chase
Cancer Center in Philadelphia, and University Professor of Medicine and
Anthropology, University of Pennsylvania. Dr. Blumberg received the
Nobel Prize for Physiology or Medicine in 1976 for his research on the
hepatitis B virus, for his invention of the hepatitis B vaccine, and
for his discoveries of mechanisms relating to the origins and
dissemination of infectious diseases. Dr. Blumberg has received 22
honorary degrees, more than 25 distinguished scientific awards and, in
addition to his numerous current appointments, has published over 400
scientific articles and abstracts.
Merton Bernfield, M.D. is Chief of Newborn Medicine at the
Children's Hospital in Boston, chairs the Department of Newborn
Medicine at the Brigham & Women's and Beth Israel Hospitals, and serves
as the Clement A. Smith Professor of Pediatrics and Professor of Cell
Biology at Harvard Medical School. Dr. Bernfield has had numerous
senior academic and administrative appointments as well as an extensive
list of awards and honors. Dr. Bernfield currently serves on the
editorial boards of six scientific peer review journals, is a member of
the Institute of Medicine of the National Academy of Sciences, and has
authored and co-authored over 140 scientific publications.
Harold C. Neu, M.D. is Professor of Medicine and Pharmacology,
and was Chief, Division of Infectious Diseases at Columbia University.
Dr. Neu is a member of the Scientific Committee of the International
Society for Chemotherapy, was the Chairman of the Subcommittee on
Infectious Diseases, and served on the Committee on Public Health of
the New York Academy of Medicine. Dr. Neu currently serves on the
editorial boards of more than 20 peer review journals and has received
several awards for his scientific accomplishments.
Harry Schachter, M.D., Ph.D., FRSC is an expert of
international repute in glycoconjugates, and has served as Professor
and Chairman of the Department of Biochemistry at the University of
Toronto and as Head of the Division of Biochemistry Research at
Toronto's Hospital for Sick Children. Dr. Schachter has been awarded
numerous honors, and has authored over 120 scientific publications
related to glycoconjugates. He has served as the President of the
International Glycoconjugate Organization, and serves on the editorial
boards of several journals.
Stanton Segal, M.D. is Director of the Division of Biochemical
Development and Molecular Diseases at the Children's Hospital of
Philadelphia and Professor of Pediatrics and Medicine at the University
of Pennsylvania School of Medicine. Dr. Segal has published over 375
scientific articles on all aspects of carbohydrate metabolism and
metabolic defects. He has served on many national committees, and is on
the editorial board of both Metabolism and Enzyme and Protein.
Barry D. Shur, Ph.D. is Professor and Chairman, Department of
Anatomy and Cell Biology, Emory University School of Medicine. Dr. Shur
serves on the editorial board of Glycobiology and Developmental
Biology, and has authored or co-authored over 100 scientific
publications.
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Elaine Tuomanen, M.D. is Associate Professor and Head of the
Laboratory of Molecular Infectious Diseases at The Rockefeller
University, New York, where she has been engaged in full-time research
since 1981. Dr. Tuomanen is the author or co-author of over 100
publications, and her work has been recognized by awards from the
American Society of Microbiology, the American Lung Association, the
Society for Pediatric Research, and the Infectious Diseases Society of
America.
George Whitesides, Ph.D. is Mallinckrodt Professor of
Chemistry at Harvard University and the former Chairman of the
Department of Chemistry at Harvard. The recipient of many scientific
awards and accolades, Dr. Whitesides serves in numerous national
advisory positions and on the editorial boards of several peer review
journals.
Employees
As of December 31, 1996, Neose had 49 employees (13 of whom held Ph.D.,
Pharm.D., or M.D. degrees), consisting of 40 employees engaged in research and
development activities and nine employees devoted to business development,
finance, and administrative activities. The Company's staff includes
carbohydrate biochemists as well as scientists with expertise in organic
chemistry, analytic chemistry, molecular biology, microbiology, cell biology,
scale-up manufacture, and regulatory affairs. A significant number of the
Company's management and professional employees have prior experience with
pharmaceutical or biotechnology companies, and many have specialized training in
carbohydrate technology. None of the Company's employees is covered by
collective bargaining agreements, and Neose believes that it maintains good
relations with its employees.
Facilities
The Company currently leases approximately 45,000 square feet of
laboratory and office space in Horsham, Pennsylvania. Build-out has been
completed on approximately 25,000 square feet of this facility with
approximately 80% of such space being devoted to research and development. The
Company intends during the first half of 1997 to complete build-out of the
remaining approximately 20,000 square feet for use as pilot-scale manufacturing
and offices. In connection with the remaining build-out, the Company expects to
make capital expenditures in the total amount of approximately $7.5 million,
which began in the fourth quarter of 1996, to expand GMP manufacturing
capabilities for the Company's compounds under development. The Company's lease
terminates in 2002. The Company has the option to extend the lease for an
additional five years or to terminate the lease early, in either 1997 or 1999.
The Company has entered into a non-binding letter of intent with the owner of
its facility for the purchase of the facility, and is currently negotiating a
definitive purchase agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments" for a
discussion of the manufacturing expansion and anticipated financial aspects of
the facility purchase. The Company believes that its facility is adequate to
meet the Company's purposes for at least the next two years.
Legal Proceedings
The Company is not a party to any legal proceedings.
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MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth certain information with respect to the
directors, executive officers, and key employees of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stephen A. Roth, Ph.D................................ 54 Chairman, Chief Executive Officer, and Director
P. Sherrill Neff..................................... 45 President, Chief Financial Officer, and Director
Edward J. McGuire, Ph.D.............................. 59 Vice President, Research and Development
David A. Zopf, M.D................................... 54 Vice President, Drug Development
Robert L. Fleming.................................... 62 Director of Manufacturing and Operations
Marjorie Hurley, Pharm.D............................. 37 Director of Regulatory Affairs
Paul M. Simon, Ph.D.................................. 45 Director of Drug Development
William F. Hamilton, Ph.D. (1)(2).................... 57 Director
Douglas J. MacMaster, Jr. (2)........................ 66 Director
Lindsay A. Rosenwald, M.D. (2)....................... 41 Director
Lowell E. Sears (1).................................. 45 Director
Jerry A. Weisbach, Ph.D.............................. 63 Director
</TABLE>
- ------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Dr. Roth has served as a director of the Company since December 1989
and as its Chairman and Chief Executive Officer since August 1994. Dr. Roth
co-founded the Company, and from April 1992 until August 1994, he served as
Senior Vice President, Research and Development and Chief Scientific Officer of
the Company. Prior to joining the Company, he was a consultant to the Company.
Dr. Roth was on the faculty of the University of Pennsylvania from 1980 to 1994
and was Chairman of Biology from 1982 to 1987. Dr. Roth serves on the Editorial
Board of Current Research in Developmental Biology, The Quarterly Review of
Biology, and The Journal of Molecular Recognition. Dr. Roth received his A.B. in
biology from The Johns Hopkins University, his Ph.D. in developmental biology
from the Case Western Reserve University and completed his post-doctorate
training in carbohydrate chemistry at The Johns Hopkins University.
Mr. Neff has served as President, Chief Financial Officer, and a
director of Neose since December 1994. From February 1993 to December 1994, Mr.
Neff was Senior Vice President, Corporate Development at U.S. Healthcare, Inc.,
a managed healthcare company, where Mr. Neff had responsibility for managing the
growth of several subsidiary companies, and sustaining growth through strategic
acquisitions, investments, and partnerships. From March 1984 to February 1993,
Mr. Neff worked at Alex. Brown & Sons Incorporated, an investment banking firm,
where he was Managing Director and Co-Head of the Financial
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Services Group. Mr. Neff received his B.A. in religion from Wesleyan University
and his J.D. from the University of Michigan Law School. Mr. Neff is a director
of JeffBanks, Inc., a publicly traded bank holding company. Mr. Neff has been a
member of the Pennsylvania Bar since 1980.
Dr. McGuire has served as Vice President, Research and Development of
the Company since April 1990. He is responsible for leading the oligosaccharide
synthesis team. Dr. McGuire was on the faculty of the University of Pennsylvania
from 1985 to April 1990. From 1984 to 1985, Dr. McGuire served as a Senior
Researcher at Genetic Engineering, Inc., a biotechnology company, and from 1972
to 1984 he was a Research Biochemist at the National Jewish Hospital. Dr.
McGuire received his B.A. in biology from Blackburn College, his Ph.D. in
biochemistry/chemistry from the University of Illinois Medical School, and held
a National Institutes of Health ("NIH") post-doctoral fellowship at the
University of Michigan and The Johns Hopkins University.
Dr. Zopf has served as Vice President, Drug Development of the Company
since April 1992. From August 1991 to March 1992, Dr. Zopf was a consultant to
the Company on the biomedical applications of complex carbohydrates. From April
1988 to July 1991, Dr. Zopf served as Vice President and Chief Operating Officer
of BioCarb, Inc., a biotechnology company and the U.S. subsidiary of BioCarb AB,
where he managed the research and development programs of novel
carbohydrate-based diagnostics and therapeutics. Dr. Zopf worked at NIH from
1971 to 1988, most recently as Chief, Section on Biochemical Pathology at the
National Cancer Institute. Dr. Zopf currently serves on the editorial board of
Archives of Biochemistry and Biophysics. Dr. Zopf received his A.B. in zoology
from Washington University and his M.D. from Washington University School of
Medicine.
Mr. Fleming has served as Director of Manufacturing and Operations of
the Company since February 1993. Mr. Fleming served as Director, Production and
Facilities at Vestar Inc., a drug distribution and manufacturing company, from
1986 to February 1993 and from 1979 to 1986, he served as Vice President,
Operations for Adria Laboratories Inc., a pharmaceutical company. Prior to
joining Adria Laboratories Inc., Mr. Fleming held a number of positions,
including Plant Manager, at the Mead-Johnson division of Bristol-Myers Squibb
Company from 1957 to 1979. Mr. Fleming received his B.S. in chemical engineering
from Purdue University and his M.B.A. from the University of Evansville.
Dr. Hurley has served as Director of Regulatory Affairs of the Company
since November 1993. From 1987 to November 1993, Dr. Hurley served in various
positions, including as Assistant Director, Regulatory Affairs at Cytogen Corp.,
a biotechnology company. From 1984 to 1987, she held several positions,
including project coordinator at the Wyeth-Ayerst Laboratories division of
American Home Products Corp. Dr. Hurley received her B.S. in pharmacy and her
Pharm.D. from the University of Michigan.
Dr. Simon has served as Director of Drug Development of the Company
since November 1992 and has been responsible for in vitro and in vivo
preclinical testing of Neose compounds. From March 1983 to September 1992, he
was a research immunologist in the cellular immunology of cancer, AIDS,
transplantation, and autoimmune diseases at E.I. DuPont ("DuPont") and DuPont
Merck Pharmaceuticals. Prior to joining DuPont, Dr. Simon trained as a
post-doctoral fellow at the University of California at Los Angeles and at the
Dana Farber Cancer Institute, Harvard Medical School. Dr. Simon received his
B.S. in mathematics from City College of New York and received his Ph.D. in
biology from Syracuse University.
Dr. Hamilton has served as a director of the Company since September
1991. Dr. Hamilton has served on the University of Pennsylvania faculty since
1967 and is the Landau Professor of Management and Technology and Director of
the Jerome Fisher Program in Management and Technology at The Wharton School and
the School of Engineering and Applied Science at the University of Pennsylvania.
Dr. Hamilton serves as a director of Centocor, Inc., a biopharmaceutical
company, Hunt Manufacturing Co., a manufacturer of art and office supplies, and
Marlton Technologies, Inc., a trade show supply company. Dr. Hamilton received
his B.S. and his M.S. in chemical engineering and his M.B.A. from the University
of Pennsylvania and his Ph.D. in applied economics from the London School of
Economics.
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<PAGE>
Mr. MacMaster has served as a director of the Company since May 1993.
Mr. MacMaster served as Senior Vice President of Merck & Co., Inc. ("Merck")
from July 1988 to January 1992, where he was responsible for worldwide chemical
and pharmaceutical manufacturing, the Agvet Division, and the Specialty
Chemicals Group. From 1985 to 1988, Mr. MacMaster was President of the Merck
Sharp Dohme Division of Merck, with responsibility for the U.S. human healthcare
business. Mr. MacMaster was an employee of Merck for 30 years. Mr. MacMaster
serves as a director of American Precision Industries, Inc., a heat transfer and
precision equipment manufacturing company, Flamel Technologies, S.A., a polymer
chemistry and drug delivery company, Martek Biosciences Corp., a biological
products manufacturing company, Oravax, Inc., a biopharmaceutical company, and
United States Bioscience Inc., a biotechnology company, and is also on the Board
of Trustees of Thomas Jefferson University and Martha's Vineyard Hospital
Foundation. Mr. MacMaster received his B.A. from St. Francis Xavier University
and his J.D. from Boston College Law School.
Dr. Rosenwald has served as a director of the Company since January
1989, and served as its Chairman until August 1994. Dr. Rosenwald is a founder
of several biopharmaceutical companies, including Neose and Interneuron
Pharmaceuticals, Inc. In August 1991, Dr. Rosenwald founded the Castle Group,
Ltd., a New York-based venture capital and merchant banking firm and in March
1992 he founded Paramount Capital, Inc., an investment bank specializing in the
biopharmaceutical industry. In June 1994, Dr. Rosenwald founded Aries Financial
Services, Inc., a money management firm specializing in the health sciences
industry. Dr. Rosenwald served as a Managing Director of Corporate Finance at
the investment banking firm of D.H. Blair & Co., Inc. from June 1987 to February
1992, and as a Senior Securities Analyst at the investment banking firm of
Ladenburg, Thalmann & Co. Inc., from September 1986 to June 1987. Dr. Rosenwald
is also Chairman of the Board of Directors of Interneuron Pharmaceuticals, Inc.,
and a director of BioCryst Pharmaceuticals, Inc., Sparta Pharmaceuticals, Inc.,
and Atlantic Pharmaceuticals, Inc., which are pharmaceutical companies, and
Ansan, Inc., Xenometrix, Inc., Titan Pharmaceuticals, Inc., and Boston Life
Sciences, Inc., which are biotechnology companies. Dr. Rosenwald received his
B.A. in finance from Pennsylvania State University and his M.D. from Temple
University School of Medicine.
Mr. Sears has served as a director of the Company since September 1994.
Mr. Sears has been a private investor involved in portfolio management and life
sciences venture capital since April 1994. From October 1988 until April 1994,
Mr. Sears was Chief Financial Officer of Amgen Inc., a pharmaceutical company,
and from September 1992 until January 1994, Mr. Sears also served as Senior Vice
President responsible for the Asia-Pacific region. From August 1986 until
October 1988, Mr. Sears was Treasurer and Director of Planning for Amgen Inc.
From July 1976 to April 1986, Mr. Sears held senior financial and planning
positions at Atlantic Richfield Co. Mr. Sears is Chairman of the Board of
Directors of CoCensys, Inc., a neuropharmaceuticals company, and is a director
of Techne Corp., a biological products manufacturing company and Activated Cell
Therapy, Inc., a cell processing company. Mr. Sears received his B.A. in
economics from Claremont McKenna College and his M.B.A. from Stanford
University.
Dr. Weisbach has served as a director of the Company since May 1993.
From 1988 to July 1994, Dr. Weisbach served as Director of Technology Transfer
and Adjunct Professor at The Rockefeller University where he was responsible for
the licensing of technology. Dr. Weisbach served as Vice President of
Warner-Lambert Company from 1981 to 1987 and President, Pharmaceutical Research
Division from 1979 to 1987, where he was responsible for all pharmaceutical
research and development activities. Prior to joining Warner-Lambert, Dr.
Weisbach served at SmithKline and French Laboratories from 1960 to 1979, where
he was Vice President, Research from 1977 to 1979. Dr. Weisbach serves as a
Director of Hybridon, Inc., Xytronyx, Inc., and Exponential Biotherapies, Inc.,
which are biotechnology companies, Synthon Corporation, a chemical
intermediation company, and CIMA Laboratories, Inc., a drug delivery company.
Dr. Weisbach is also a member of the Scientific Advisory Boards of Magainin
Pharmaceuticals, Inc., Myco Pharmaceuticals Inc., and Receptor Laboratories,
Inc. Dr. Weisbach received his B.S. in chemistry from Brooklyn College and his
M.A. and his Ph.D. in chemistry from Harvard University.
44
<PAGE>
All directors hold office until the next annual meeting of stockholders
or until their successors have been elected and qualified.
The Audit Committee was established in January 1992 and reviews, acts
on, and reports to the Board of Directors with respect to various auditing and
accounting matters, including the selection of the Company's auditors, the scope
of the annual audits, fees to be paid to the auditors, the performance of the
Company's independent auditors, and the accounting practices of the Company.
The Compensation Committee was established in October 1991 and
determines the salaries and incentive compensation of the officers of the
Company and provides recommendations for the salaries and incentive compensation
of the other employees and the consultants of the Company. The Compensation
Committee also administers various incentive compensation, stock, and benefit
plans.
Director Compensation
Effective January 1, 1997, non-management members of the Board of
Directors, other than Dr. Rosenwald, receive an annual retainer of $14,000 as
consideration for their services as directors of the Company and are reimbursed
for reasonable travel expenses incurred in connection with their attendance at
such meetings. Non-management directors, other than Dr. Rosenwald, may also
receive consulting fees of $2,000 per day of additional service. Non-management
directors appointed or elected to the Board of Directors on or after February
15, 1996, will receive an option grant under the Company's 1995 Stock
Option/Stock Issuance Plan to purchase 16,666 shares of Common Stock, at the
fair market value at the date of the grant, vesting over a four-year period upon
each anniversary of the date of grant. In addition, on the date of each annual
meeting of stockholders held after February 15, 1996, each non-management
director who will continue to serve as a director for the following year, and
also has served as a director for at least six months prior to the date of the
annual meeting, shall receive an option to purchase 3,333 shares of Common
Stock, at the fair market value at the date of the grant, vesting over a
one-year period. Additionally, under the Director Fee Option Grant Program of
the Company's 1995 Stock Option/Stock Issuance Plan, the non-management
directors may elect to apply their annual retainer fees towards the acquisition
of options to purchase shares of Common Stock. Dr. Rosenwald receives no
compensation for his services as a director of the Company.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee consists of Dr. Hamilton, Mr. MacMaster, and
Dr. Rosenwald. Certain members of the Compensation Committee are parties to
transactions with the Company. See "Certain Transactions."
45
<PAGE>
Executive Compensation
The following table sets forth all compensation earned in 1996 and 1995
by the Company's Chief Executive Officer and the Company's four other most
highly compensated executive officers in 1996 (together, the "Named Executive
Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
------------
Annual Compensation Securities
--------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options(#) Compensation
- ---------------------------------------- -------- ---------- -------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Stephen A. Roth..................... 1996 $230,000 $52,500 90,000 $5,172(1)(2)
Chief Executive Officer 1995 200,000 50,000 90,000 5,172(1)(2)
P. Sherrill Neff.................... 1996 225,000 52,500 90,000 5,235(1)(3)
President, Chief Financial Officer 1995 225,000 50,000 90,000 5,172(1)(3)
Edward J. McGuire................... 1996 129,600 40,000 15,000 3,855(1)(4)
Vice President, Research and 1995 120,000 35,000 10,000 3,745(1)(4)
Development
David A. Zopf....................... 1996 151,200 40,000 15,000 4,372(1)(5)
Vice President, Drug Development 1995 144,000 30,000 6,666 5,046(1)(5)
David F. Pritchard(6)............... 1996 118,656 -- -- 3,518(1)(7)
Vice President, Business 1995 115,200 10,000 7,000 3,504(1)(7)
Development
</TABLE>
- ------------------
(1) Includes $552 in premiums paid for group term life insurance policy.
(2) Includes $4,620 in matching contributions in each of 1995 and 1996 to the
Company's tax-qualified employee savings and retirement plan (the "401(k)
Plan").
(3) Includes $4,683 and $4,620 in 1996 and 1995, respectively, in matching
contributions to the 401(k) Plan.
(4) Includes $3,303 and $3,193 in 1996 and 1995, respectively, in matching
contributions to the 401(k) Plan.
(5) Includes $3,820 and $4,494 in 1996 and 1995, respectively, in matching
contributions to the 401(k) Plan.
(6) Mr. Pritchard ceased being an executive officer of the Company effective as
of November 22, 1996, and ceased being an employee effective as of January
2, 1997. Effective as of January 2, 1997, Mr. Pritchard and the Company
entered into a separation and consulting agreement and general release. See
"-- Employment Agreements."
(7) Includes $2,966 and $2,952 in 1996 and 1995, respectively, in matching
contributions to the 401(k) Plan.
Stock Option Information
The following table sets forth certain information concerning grants of
stock options made during 1996 to each of the Named Executive Officers. No stock
appreciation rights were granted to any Named Executive Officer during fiscal
year 1996.
46
<PAGE>
Option Grants in 1996
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------
Potential Realizable Value
at Assumed Annual Rates of
Number of Percentage of Stock Price Appreciation for
Securities Total Option Term(3)
Underlying Options Exercise Expiration --------------------------
Name Options Granted(1) Granted(2) Price Date 5% 10%
- ---- ------------------ -------------- -------- ----------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Roth....... 90,000 26.6% $15.125 12/02/06 $856,083 $2,169,482
P. Sherrill Neff...... 90,000 26.6 15.125 12/02/06 856,083 2,169,482
Edward J. McGuire..... 15,000 4.4 15.125 12/02/06 142,680 361,580
David A. Zopf......... 15,000 4.4 15.125 12/02/06 142,680 361,580
David F. Pritchard.... -- -- -- -- -- --
</TABLE>
- -------------
(1) These options are exercisable in four annual installments commencing on the
first anniversary of the date of grant.
(2) Based on an aggregate of 338,850 options granted to employees in 1996,
including options granted to the Named Executive Officers.
(3) Potential realizable value is based on the assumption that the price per
share of Common Stock appreciates at the assumed annual rate of stock
appreciation for the option term. The assumed 5% and 10% annual rates of
appreciation (compounded annually) over the term of the option are set
forth in accordance with the rules and regulations adopted by the
Commission and do not represent the Company's estimate of stock price
appreciation.
The following table sets forth certain information concerning the
number and value of unexercised options held by each of the Named Executive
Officers on December 31, 1996. No stock appreciation rights were outstanding on
December 31, 1996. No stock appreciation rights were exercised during the fiscal
year ended December 31, 1996 by any of the Named Executive Officers.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Number of Securities
Shares Underlying Unexercised Value of Unexercised
Acquired Value Options(#) In-The-Money Options ($)
On Realized ---------------------------- --------------------------
Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen A. Roth....... -- -- 29,901 161,666 $249,839 $ 696,351
P. Sherrill Neff...... -- -- 82,500 197,500 860,850 1,119,300
Edward J. McGuire..... 2,000 $25,350(1) 40,500 22,500 632,400 110,625
David A. Zopf......... -- -- 30,366 21,665 480,872 116,605
David F. Pritchard.... 3,333 54,495(2) 8,417 8,583 133,881 116,619
</TABLE>
- --------------
(1) Based on the sales price of the Common Stock on the exercise date, less the
exercise price payable for such shares.
(2) Based on the fair value of the Common Stock at the exercise date, less the
exercise price payable for such shares. Pursuant to the terms of a
separation and consulting agreement and general release effective January
2, 1997 between Mr. Pritchard and the Company, effective January 2, 1997,
the vesting of options to purchase 7,083 shares of Common Stock held by Mr.
Pritchard accelerated and such options became immediately exercisable,
unvested options to purchase 1,500 shares of Common Stock were canceled,
and all vested options not exercised will terminate 90 days after January
2, 1997.
47
<PAGE>
1995 Stock Option/Stock Issuance Plan
The Company's 1995 Stock Option/Stock Issuance Plan (the "1995 Plan")
was adopted by the Board of Directors on March 23, 1995 and approved by the
stockholders on April 12, 1995. On December 6, 1995, the Board of Directors
approved an increase in the aggregate number of shares of Common Stock available
for issuance under the 1995 Plan. Stockholder approval of the increase was
obtained on December 19, 1995. On March 16, 1996, the Board of Directors
approved an amendment to the 1995 Plan to implement a Director Fee Option Grant
Program (the "Director Fee Program") pursuant to which non-employee members of
the Company's Board of Directors may elect to receive their annual retainer fee
in stock options rather than cash, effective as of January 1, 1997. Stockholder
approval of the amendment was obtained on June 14, 1996 at the Company's 1996
Annual Meeting of Stockholders. The 1995 Plan is intended to serve as the
successor equity incentive program to the Company's 1991 and 1992 Stock Option
Plans (the "Predecessor Plans"). The 1995 Plan became effective on the date of
its adoption by the Board, except that the Automatic Option Grant Program
described below became effective on the date of the Company's initial public
offering, February 15, 1996, and the Director Fee Program became effective on
June 14, 1996. As of January 6, 1997, a total of 1,390,374 shares of Common
Stock are authorized for issuance under the 1995 Plan. This amount includes (i)
the shares which remained available for issuance under the Predecessor Plans on
the effective date of the 1995 Plan, including the shares subject to outstanding
options thereunder, plus (ii) an increase of 333,333 shares authorized by the
Board of Directors on March 23, 1995, and (iii) an increase of 600,000 shares
authorized by the Board of Directors on December 6, 1995. In no event may any
one participant in the 1995 Plan receive option grants, separately exercisable
stock appreciation rights, or direct stock issuances for more than 250,000
shares over the term of the 1995 Plan.
The 1995 Plan is divided into four separate components: (i) the
Discretionary Option Grant Program under which employees, non-employee directors
(other than the members of the Compensation Committee), and consultants may, at
the discretion of the plan administrator, be granted options to purchase shares
of Common Stock at an exercise price not less than 85% of the fair market value
of the Common Stock on the grant date, (ii) the Stock Issuance Program under
which such persons may, at the plan administrator's discretion, be issued shares
of Common Stock directly, through the purchase of such shares at a price not
less than 85% of the fair market value of the Common Stock at the time of
issuance or as a bonus tied to the performance of services, (iii) the Automatic
Option Grant Program under which option grants will automatically be made at
periodic intervals to eligible non-employee directors to purchase shares of
Common Stock at an exercise price equal to 100% of the fair market value of the
Common Stock on the grant date, and (iv) the Director Fee Program under which
non-employee Board members may elect to apply all or a portion of their annual
retainer fees otherwise payable in cash to the acquisition of a special option
grant.
The Discretionary Option and the Stock Issuance Programs are
administered by a Compensation Committee appointed by the Board (the
"Compensation Committee"). The Compensation Committee, as plan administrator,
has complete discretion to determine which eligible individuals are to receive
option grants, stock appreciation rights or stock issuances, the time or times
when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance, and the maximum term for which any granted option is to remain
outstanding. All grants under the Automatic Option Grant Program and the
Director Fee Program will be made in strict compliance with the express
provisions of that program, and no administrative discretion is exercised by the
Compensation Committee with respect to those grants.
In the event that the Company is a party to certain corporate
transactions (as defined in the 1995 Plan), including, under certain
circumstances, a merger or asset sale, each outstanding option and unvested
stock issuance will, under certain circumstances, automatically accelerate in
full. Options and stock issuances that do not accelerate at the time of the
acquisition will accelerate in the event the individual's service is terminated,
whether involuntarily or through a resignation for good reason, within 18 months
following the acquisition. The plan administrator may also accelerate options
and unvested stock issuances upon a change
48
<PAGE>
in control (as defined in the 1995 Plan) of the Company or the termination of
the individual's service, whether involuntarily or through a resignation for
good reason, within a specified period following the change in control. Options
currently outstanding under the Predecessor Plans contain different acceleration
provisions in connection with an acquisition of the Company. Options outstanding
under the 1992 Stock Option Plan may, under certain circumstances, accelerate
upon a change in control but the options outstanding under the 1991 Stock Option
Plan do not contain any acceleration provisions in connection with such a change
in control. The plan administrator has the discretion, however, to extend the
acceleration provisions of the 1995 Plan to outstanding options under the
Predecessor Plans which are incorporated into the 1995 Plan.
Stock appreciation rights may be issued under the Discretionary Option
Grant Program which will allow the holders to surrender their outstanding
options for an appreciation distribution from the Company equal to the excess of
(i) the fair market value of the vested shares of Common Stock subject to the
surrendered option over (ii) the aggregate exercise price payable for such
shares. Such appreciation distribution may be made in cash or in shares of
Common Stock.
The plan administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
Under the Automatic Option Grant Program, each non-employee director
first elected or appointed to the Board of Directors after the effective date of
that program will automatically be granted an option for 16,666 shares of Common
Stock on the date of his or her election or appointment to the Board of
Directors, provided such individual has not been previously employed by the
Company. In addition, at each annual stockholders meeting held after the date of
the Company's initial public offering, February 15, 1996, each individual with
at least six months of Board service who is to continue to serve as a
non-employee director following the meeting will automatically be granted an
option for 3,333 shares of Common Stock, even if such individual has been
previously employed by the Company or joined the Board of Directors prior to the
offering.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of service on the Board of
Directors. Each automatic option will be immediately exercisable; however, any
shares purchased upon exercise of the option will be subject to repurchase
should the optionee's service as a non-employee director cease prior to vesting
of the shares. The initial 16,666 share grant will vest in successive equal
annual installments over the optionee's initial four-year period of Board
service. Each additional 3,333 share grant will vest upon the optionee's
completion of one year of service on the Board of Directors, as measured from
the grant date. However, each outstanding option will immediately vest upon
certain changes in the ownership or control of the Company.
Under the Director Fee Program, each non-employee Board member may
elect to apply all or a portion of his or her annual retainer fee otherwise
payable in cash to the acquisition of a special option grant under the Director
Fee Program. Such election must be filed with the Company prior to the start of
the calendar year of participation. The option grant will automatically be made
on the first trading day in January following the filing of the option-in-lieu
of cash election and will have an exercise price per share equal to one-third of
the fair market value of the option shares on the grant date. The number of
option shares will be determined by dividing the amount of the retainer fee
applied to the program (effective January 1, 1997, the non-employee directors
will receive a $14,000 annual retainer) by two-thirds of the fair market value
per share of Common Stock on the grant date. As a result, the total spread on
the option (the fair market value of the option shares on the grant date less
the aggregate exercise price payable for those shares) will be equal to the
portion of the retainer fee subject to the director's election.
49
<PAGE>
The option will become exercisable for the option shares in a series of
twelve successive equal monthly installments upon the optionee's completion of
each month of Board service during the calendar year for which the option grant
is made. The option will remain exercisable for such shares until the earlier of
(i) the expiration of the ten-year option term or (ii) the end of the three-year
period measured from the date of the optionee's cessation of Board service.
Should the optionee die or become disabled during his or her period of Board
service, then the option shares will immediately vest in full. In addition, upon
certain changes in the ownership or control of the Company, each outstanding
option will immediately vest in full.
The 1995 Plan will terminate on the earlier of (i) February 28, 2005 or
(ii) the date on which all shares for issuance under the Plan have been issued.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on December 6, 1995 and was approved by the
stockholders on December 19, 1995. The Purchase Plan is designed to allow
eligible employees of the Company and participating subsidiaries to purchase
shares of Common Stock, at semi-annual intervals, through periodic payroll
deductions under the Purchase Plan, and a reserve of 100,000 shares of Common
Stock has been established for this purpose.
The Purchase Plan will be implemented in a series of successive
offering periods, each with a maximum duration of 24 months. However, the
initial offering period began on February 15, 1996 and will end on the last
business day in January 1998. Each offering period will be comprised of
successive purchase intervals, each of a duration of six months. Shares of
Common Stock will be purchased for each participant at the end of each purchase
interval during the offering period. On July 31, 1996, participants in the
Purchase Plan acquired 5,631 shares of Common Stock under the Purchase Plan.
Payroll deductions may not exceed 10% of the participant's total cash
earnings each semi-annual period. The purchase price per share will be
eighty-five percent (85%) of the lower of (i) the fair market value of the
Common Stock on the participant's entry date into the offering period or (ii)
the fair market value on the semi-annual purchase date.
Employment Agreements
In December 1994, the Company entered into an employment agreement for
an initial period of three years, which may be extended for additional one-year
periods, with P. Sherrill Neff (the "Neff Agreement") whereby Mr. Neff is
employed as President and Chief Financial Officer of the Company. Pursuant to
the Neff Agreement, Mr. Neff receives a minimum base salary of $225,000 per year
and a performance incentive bonus of up to 50% of base salary at the discretion
of the Board of Directors or the Compensation Committee thereof. In connection
with the Neff Agreement, the Company granted to Mr. Neff options to purchase
100,000 shares of Common Stock at an exercise price of $5.70 per share, 20,000
of which vested immediately with the remainder vesting ratably over four years.
Pursuant to the terms of the Neff Agreement, Mr. Neff has entered into a
standard noncompetition and confidentiality agreement with the Company. In
addition, if Mr. Neff is involuntarily terminated without "cause" (as defined in
the Neff Agreement) or terminated voluntarily or involuntarily following certain
changes of control of the Company or a sale of all or substantially all of the
Company's assets in a complete liquidation or dissolution, the Company is
required to continue to pay Mr. Neff for 12 months after termination or such
shorter amount of time remaining in his employment term.
In April 1992, the Company entered into a one-year employment agreement
extendable in one-year increments, with David A. Zopf (the "Zopf Agreement")
whereby Dr. Zopf is employed as Vice President, Drug Development. The Zopf
Agreement provides for an annual base salary of $151,200 and a bonus of up to
25% of base salary at the discretion of the Chief Executive Officer. In
connection with the Zopf Agreement, the Company granted to Dr. Zopf options to
purchase 26,666 shares of Common Stock at fair market value,
50
<PAGE>
which options vest in four equal annual installments commencing on the first
anniversary of the Zopf Agreement. The Zopf Agreement contains certain
restrictive covenants, including provisions relating to noncompetition,
nonsolicitation, and the nondisclosure of proprietary information during his
employment with the Company and for specified periods thereafter.
Effective January 2, 1997, a separation and consulting agreement and
general release was entered into between the Company and David F. Pritchard, the
Company's former Vice President, Business Development. The agreement provided
for a lump-sum severance payment to Mr. Pritchard of approximately $50,000 on
that date and total consulting fees of approximately $60,000 during a six-month
consulting period beginning at the end of Mr. Pritchard's severance period (May
31, 1997) and ending on November 30, 1997, subject to reduction or termination
upon Mr. Pritchard's employment by or receipt of compensation for services from
another person before or during the consulting period. In addition, effective
January 2, 1997, the vesting of options to purchase 7,083 shares of Common Stock
held by Mr. Pritchard accelerated and such options became immediately
exercisable. All vested options not exercised will terminate 90 days after
January 2, 1997.
401(k) Plan
In July 1991, the Company adopted a tax-qualified employee savings and
retirement plan (the "401(k) Plan") covering all of the Company's eligible
employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce
their current compensation by up to the lesser of 15% of eligible compensation
or the annual limit prescribed by statute and have the amount of such reduction
contributed to the 401(k) Plan. The trustee under the 401(k) Plan, at the
direction of each participant, invests the assets of the 401(k) Plan in any of
six investment options. The 401(k) Plan is intended to qualify under Section 401
of the Internal Revenue Code so that contributions by employees to the 401(k)
Plan, and income earned on plan contributions, are not taxable to employees
until withdrawn, and so that the contributions by employees will be deductible
by the Company when made. The 401(k) Plan provides for matching cash
contributions to the 401(k) Plan by the Company equal to 50% of the amount
deferred up to 5% of compensation. The Company made matching contributions of
approximately $61,000, $62,000, $53,000, and $28,000 to the 401(k) Plan in 1996,
1995, 1994, and 1993, respectively. Matching contributions vest over a four-year
period.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation provides that, except to the
extent prohibited by the Delaware General Corporation Law, its directors shall
not be personally liable to the Company or its stockholders for monetary damages
for any breach of fiduciary duty as directors of the Company. Under Delaware
law, the directors have a fiduciary duty to the Company which is not eliminated
by this provision of the Certificate of Incorporation and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
non-monetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
directors' duty of loyalty to the Company, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited by
Delaware law. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. In addition, the Company has obtained
liability insurance for its officers and directors.
The Certificate of Incorporation also provides that the Company shall
indemnify, to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, all of its present and former officers and directors,
and any party agreeing to serve as an officer, director, or trustee of any
entity at the Company's request, in connection with any civil or criminal
proceeding threatened or instituted against such party by reason of actions or
omissions while serving in such capacity. Indemnification by the Company
includes payment of expenses in defense of the indemnified party in advance of
any proceeding or final disposition thereof if the indemnified party undertakes
to repay the Company upon an ultimate determination that the
51
<PAGE>
indemnified party was not entitled to indemnification by the Company. This
provision also requires board of director approval as a precondition to any
indemnification by the Company for proceedings instituted by the indemnified
party. The rights to indemnification provided in this provision do not preclude
the exercise of any other indemnification rights by any party pursuant to any
law, agreement, or vote of the stockholders or the disinterested directors of
the Company.
Section 145 of the Delaware General Corporation Law generally allows
the Company to indemnify the parties described in the preceding paragraph for
all expenses, judgments, fines, and amounts in settlement actually paid and
reasonably incurred in connection with any proceedings so long as such party
acted in good faith and in a manner reasonably believed to be in or not opposed
to the Company's best interests and, with respect to any criminal proceedings,
if such party had no reasonable cause to believe his or her conduct to be
unlawful. Indemnification may only be made by the Company if the applicable
standard of conduct set forth in Section 145 has been met by the indemnified
party upon a determination made (1) by the board of directors by a majority vote
of a quorum of directors who are not parties to such proceedings, or (2) if such
a quorum is not obtainable or if directed by a quorum of disinterested
directors, by independent legal counsel in a written opinion, or (3) by the
stockholders.
52
<PAGE>
CERTAIN TRANSACTIONS
In connection with this offering, Paramount Capital, Inc. ("Paramount")
is entitled to receive 2.875% of the proceeds obtained from investors in the
offering who are directed to the Placement Agent by Paramount, up to a maximum
of $287,500. Lindsay A. Rosenwald, the sole stockholder of Paramount, is a
director of the Company. During 1995, the Company paid $435,179 in commissions
and expenses to Paramount, which acted as placement agent in connection with the
sale of a portion of the Series F Convertible Preferred Stock of the Company
("Series F Stock"). In December 1995, the Company granted to an employee of
Paramount options to purchase an aggregate of 49,999 shares of Common Stock at a
weighted average exercise price of $17.94, vesting in various amounts over five
years, for financial advisory services. In connection with the private placement
of the Series E Convertible Preferred Stock of the Company ("Series E Stock")
during 1994, the Company paid $1,246,505 in commissions and expenses to
Paramount, the placement agent. Additionally, Paramount received warrants which
are currently exercisable for 119,961 shares of Common Stock. In February 1994,
Dr. Rosenwald advanced the Company $440,000 to fund the Company's restricted
funds account held in escrow pursuant to the Company's facility lease. The
Company repaid the full amount of the advance in April 1994. See "Plan of
Distribution."
In connection with the potential acquisition by the Company of its
leased facility, the Company intends to obtain credit support for the
transaction from Jefferson Bank and will pay the bank fees in connection
therewith. Mr. Neff, the Company's President and Chief Financial Officer, is a
director of JeffBanks, Inc., the parent holding company of Jefferson Bank. The
Company believes that the terms of the credit support arrangement generally will
be no less favorable than those that could be obtained from other lending
institutions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments."
In connection with the private placement of the Series F Stock during
1995, the following directors and persons affiliated with directors made
purchases of Series F Stock at a price equivalent to $12.00 per share of Common
Stock on an as-converted basis as set forth in the table below. All outstanding
shares of Preferred Stock of the Company were automatically converted into
shares of Common Stock upon the closing of the Company's initial public offering
in February 1996.
<TABLE>
<CAPTION>
Common Stock
Number of Shares issued upon
Directors and Persons Affiliated with Directors of Series F Stock conversion
- ----------------------------------------------- ----------------- -------------
<S> <C> <C>
Stephen A. Roth .......................................... 2,500 834
P. Sherrill Neff(1) ...................................... 37,500 12,501
William F. Hamilton ...................................... 6,250 2,084
Douglas J. MacMaster, Jr ................................. 25,000 8,334
Lindsay A. Rosenwald ..................................... 6,250 2,084
Sears Family Living Trust ................................ 10,000 3,334
Jerry A. Weisbach ........................................ 6,250 2,084
</TABLE>
- ------------------
(1) Includes 25,000 shares of Series F Stock, which were converted into 8,334
shares of Common Stock, purchased by Mr. Neff's father-in-law.
In June 1994, the Company sold 22,750 shares of Series E Stock at $4.75
per share to the Sears Family Living Trust, a trust for which Lowell E. Sears, a
director, is the trustee, and 421,053 shares of Series E Stock at $4.75 per
share to U.S. Healthcare, Inc. Mr. Neff was Senior Vice President, Corporate
Development of U.S. Healthcare at such time.
53
<PAGE>
From January 1, 1994 through December 31, 1996, the Company granted its
current directors and executive officers options to purchase a total of 608,327
shares of Common Stock at exercise prices ranging from $1.425 to $21.00 per
share. See "Management."
For information regarding employment agreements with Named Executive
Officers, see "Management -- Employment Agreements." For information regarding
compensation of Directors, see "Management -- Director Compensation."
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth at January 6, 1997 and as adjusted to
reflect the sale by the Company of the shares of Common Stock offered hereby,
certain information with respect to the beneficial ownership of the Common Stock
(i) by each person who is known by the Company to be the beneficial owner of
more than five percent of the outstanding shares of Common Stock, (ii) by each
of the Named Executive Officers, (iii) by each of the directors of the Company,
and (iv) by all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage
Beneficially
Owned
---------------------
Number of Shares
Beneficially Prior to After
Name Owned(1) Offering Offering
- ---- ---------------- -------- --------
<S> <C> <C> <C>
Lindsay A. Rosenwald, M.D.(2)............................... 606,791 7.4% 6.4%
c/o Paramount Capital, Inc.
787 7th Avenue
New York, NY 10019
Stephen A. Roth, Ph.D.(3)................................... 233,307 2.8 2.5
P. Sherrill Neff(4)......................................... 87,637 1.1 *
Edward J. McGuire, Ph.D.(5)................................. 118,611 1.4 1.2
David A. Zopf, M.D.(6)...................................... 33,985 * *
David F. Pritchard(7)....................................... 18,891 * *
William F. Hamilton, Ph.D.(8)............................... 29,360 * *
Douglas J. MacMaster, Jr.(9)................................ 20,194 * *
Lowell E. Sears(10)......................................... 27,188 * *
Jerry A. Weisbach, Ph.D.(11)................................ 13,944 * *
All current directors and executive officers as a group
(10 persons)(12)....................................... 1,189,908 14.0 12.2
</TABLE>
- -----------
* Less than one percent.
(1) Gives effect to the shares of Common Stock issuable within 60 days of
January 6, 1997 upon the exercise of all options and other rights
beneficially owned by the indicated stockholders on that date. Unless
otherwise indicated, the persons named in the table have sole voting and
sole investment control with respect to all shares beneficially owned.
Beneficial ownership is determined in accordance with the rules of the
Commission and includes voting and investment power with respect to shares.
(2) Includes (i) 75,624 shares of Common Stock owned by Dr. Rosenwald's wife
and (ii) 30,250 shares of Common Stock held by Dr. Rosenwald's wife as
custodian for Dr. Rosenwald's children, as to which Dr. Rosenwald disclaims
beneficial ownership.
(3) Includes (i) 15,758 shares of Common Stock owned by Dr. Roth's daughter and
(ii) 29,901 shares of Common Stock issuable upon exercise of stock options.
(4) Includes 82,500 shares of Common Stock issuable upon exercise of stock
options.
(5) Includes 40,500 shares of Common Stock issuable upon exercise of stock
options.
(6) Includes 30,366 shares of Common Stock issuable upon exercise of stock
options.
(7) Includes 15,500 shares of Common Stock issuable upon exercise of stock
options.
(8) Includes 27,276 shares of Common Stock issuable upon exercise of stock
options.
(9) Includes 11,860 shares of Common Stock issuable upon exercise of stock
options.
(10) Includes 9,264 shares of Common Stock issuable upon exercise of stock
options. Also includes 17,924 shares of Common Stock owned by the Sears
Family Living Trust, of which Mr. Sears is the trustee.
(11) Includes 11,860 shares of Common Stock issuable upon exercise of stock
options.
(12) See notes (2) through (11).
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the consummation of this offering, the Company's authorized
capital stock will consist of 30,000,000 shares of Common Stock, par value $0.01
per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value
$0.01 per share ("Preferred Stock").
Common Stock
At January 6, 1997, there were 8,218,607 shares of Common Stock
outstanding and held of record by approximately 450 stockholders. At January 6,
1997, there were options outstanding to purchase an aggregate of 1,199,643
shares of Common Stock with a weighted average exercise price of $10.04.
Each holder of Common Stock is entitled to one vote for each share held
of record on all matters submitted to a vote of the stockholders. Except as
required by applicable law, the holders of the Common Stock will vote together
with the holders of each series of outstanding Preferred Stock, who vote on an
as converted basis. There is no cumulative voting for the election of directors
and, as a consequence, minority stockholders will not be able to elect directors
on the basis of their votes alone. Subject to preferences that may be applicable
to the then outstanding shares of Preferred Stock, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." Upon
the liquidation, dissolution or winding up of the Company, the holders of Common
Stock then outstanding are entitled to share in the Company's assets remaining
after the payment of liabilities and the satisfaction of any liquidation
preference granted to the holders of any outstanding shares of Preferred Stock.
All shares of Common Stock outstanding and to be outstanding upon completion of
this offering are and will be fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock with such voting rights, designations, preferences and rights and such
qualifications, limitations or restrictions thereof, as may be determined by the
Board of Directors. Although the Company has no current plans to issue any
shares of Preferred Stock, the issuance of Preferred Stock or of rights to
purchase Preferred Stock could be used to discourage an unsolicited acquisition
proposal. In addition, the possible issuance of Preferred Stock could discourage
a proxy contest, make more difficult the acquisition of a substantial block of
the Company's Common Stock or limit the price that investors would be willing to
pay in the future for shares of the Company's Common Stock. Such Preferred Stock
could be issued with voting and conversion rights that could adversely affect
the voting power of holders of the Common Stock.
The Company believes that the Preferred Stock provides the Company with
increased flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that might arise. Having such
authorized shares available for issuance allows the Company to issue shares of
Preferred Stock without the expense and delay of holding a special stockholders'
meeting. The authorized shares of Preferred Stock, as well as shares of Common
Stock, will be available for issuance without further action by stockholders of
the Company, unless such action is required by applicable law or the rules of
any stock exchange or quotation system on which the Company's securities may be
listed or quoted.
Common Stock Warrants
The Company has warrants outstanding for the purchase of 147,690 shares
of Common Stock with a weighted average exercise price of $11.18 per share.
Warrants to purchase 8,334 shares of Common Stock at $19.50 per share were
issued in June 1993 to each of Aberlyn Capital Management Limited Partnership
("ACMLP") and Aberlyn Holding Company, Inc. ("AHC," and together with ACMLP,
"Aberlyn") in connection with a Master Lease Agreement and in consideration of
certain consulting services to the Company. Such warrants are immediately
exercisable and expire in June 1998. Warrants to purchase 3,536
56
<PAGE>
shares of Common Stock at $14.85 per share were issued in February 1994 to each
of ACMLP and AHC in connection with a Master Lease Agreement and in
consideration of certain consulting services to the Company. Such warrants are
immediately exercisable and expire in February 1999. Warrants to purchase an
aggregate of 119,961 shares of Common Stock at $9.45 per share were issued in
July 1994 to various individuals in connection with the offering of Series E
Stock, of which warrants to purchase 6,538 shares were exercised during 1996.
The remaining warrants issued in connection with the offering of Series E Stock
are immediately exercisable and expire in July 1999. Warrants to purchase 10,527
shares of Common Stock at $14.25 per share were issued in June 1995 to Financing
for Science International, Inc. ("FSI") in connection with the equipment lease
agreement entered into with FSI, which warrants are immediately exercisable and
expire in June 2002. The exercise price and number of shares of Common Stock
issuable upon exercise of the aforementioned warrants are subject to adjustment
upon the occurrence of certain events, including stock splits, stock dividends,
reorganization, recapitalization, merger, or sale. The warrants and shares of
Common Stock issuable upon exercise of the warrants are subject to certain
registration rights as described under "Registration Rights of Certain Holders"
below.
Registration Rights of Certain Holders
After the consummation of this offering, the holders (the "Holders") of
3,236,423 shares of Common Stock and warrants to purchase 147,690 shares of
Common Stock (the "Registrable Securities") or their transferees, will be
entitled to certain registration rights with respect to the Registrable
Securities. These rights are provided under the terms of the Registrable
Securities and agreements between the Company and the Holders. Such agreements
and Registrable Securities provide that (i) Holders of 2,523,921 shares of
Common Stock and warrants to purchase 123,950 shares of Common Stock are
entitled, commencing 18 months after the date of the closing of the Company's
initial public offering in February 1996, to require the Company to use its best
efforts to register their Registrable Securities under the Securities Act and
(ii) Holders of 195,591 shares of Common Stock and warrants to purchase 23,740
shares of Common Stock are entitled, commencing one year after the date of the
closing of the Company's initial public offering, to require the Company to use
its best efforts to register their Registrable Securities under the Securities
Act (the "Demand Registration Rights"), provided, however, that Holders of
1,725,018 of these shares will be restricted from exercising such rights until
180 days after the date of this Prospectus. In addition, pursuant to these
agreements, Holders of 3,236,423 shares of Common Stock and warrants to purchase
147,690 shares of Common Stock are entitled, subject to certain limitations, to
require the Company to use its best efforts to include their Registrable
Securities in future registration statements filed by the Company under the
Securities Act (the "Piggyback Registration Rights"). Where applicable to this
offering, the Company intends to obtain waivers of such Piggyback Registration
Rights prior to effectiveness. The Holders of 1,725,018 shares of Common Stock
also are entitled, upon the request of any such Holder, subject to certain
limitations, to require the Company to use its best efforts to register their
shares of Common Stock on Form S-3 once the Company is eligible to use a Form
S-3 in connection with such registrations (the "S-3 Registration Rights"),
provided, however, that Holders of these shares will be restricted from
exercising such rights until 180 days after the date of this Prospectus.
Registration of shares pursuant to the exercise of Demand Registration Rights,
S-3 Registration Rights or Piggyback Registration Rights under the Securities
Act would result in such shares becoming freely tradable without restriction
under the Securities Act immediately upon the effectiveness of such
registration. "Shares Eligible for Future Sale."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General
Corporation Law ("Section 203") which, subject to certain exceptions, prohibits
a Delaware corporation from engaging in certain business combinations with any
"interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting
57
<PAGE>
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (x) by persons who are directors and also officers and (y) by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such date,
the business combination is approved by the Board of Directors and authorized at
an annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market after
the offering, or the possibility of such sales occurring, could adversely affect
prevailing market prices for the Common Stock or the future ability of the
Company to raise capital through an offering of equity securities.
After the offering, the Company will have 9,468,607 shares of Common
Stock outstanding. Of these shares, the 1,250,000 shares offered hereby and an
additional 6,212,809 shares of Common Stock outstanding will be freely tradable
in the public market without restriction under the Securities Act, unless such
shares are held by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act. However, approximately 978,286 of these shares are
subject to a stockholders agreement whereby each holder who has signed the
stockholders agreement has agreed, until December 30, 1997, not to offer, sell
or otherwise dispose of, directly or indirectly, more than 2% per month, on a
cumulative basis, of the aggregate amount of shares held by such holder as of
the Company's initial public offering in February 1996, subject to certain
conditions.
The remaining 2,005,798 shares of Common Stock outstanding upon
completion of the offering will be "restricted securities" as that term is
defined in Rule 144 ("Restricted Shares"). The Restricted Shares were issued and
sold by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. Restricted Shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under the Securities Act, including an exemption under Rule
144, which is summarized below.
Pursuant to "lock-up" agreements, all of the Company's executive
officers and directors, who collectively hold 927,490 of such Restricted Shares,
have agreed not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any such shares for a period of 90 days from the date of
this Prospectus without the prior written consent of Vector Securities
International, Inc. The Company also has agreed that it will not offer, sell or
otherwise dispose of Common Stock for a period of 90 days from the date of this
Prospectus, other than pursuant to outstanding warrants, existing stock option
and employee stock purchase plans, and in connection with potential corporate
collaborations and acquisitions, without the prior written consent of Vector
Securities International, Inc. Upon termination of such lock-up agreements,
approximately 908,906 of the "locked-up" Restricted Shares will be eligible for
immediate sale, beginning 90 days after the date of this Prospectus, in the
public market subject to certain volume, manner of sale and other limitations
under Rule 144. Vector Securities International, Inc. may, at its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such lock-up agreements.
The Commission has recently proposed amendments to Rule 144 and Rule
144(k) that would permit resale of restricted shares under Rule 144 after a
one-year, rather than a two-year holding period, subject to compliance with the
other provisions of Rule 144, and would permit resale of restricted shares by
non-affiliates under Rule 144(k) after a two-year, rather than a three-year
holding period. Adoption of such amendments could result in resale of Restricted
Shares sooner than would be the case under Rule 144 and Rule 144(k) as currently
in effect.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares of the Company are aggregated) who has beneficially owned
Restricted Shares for at least two years (including the holding period of any
prior owner who is not an affiliate of the Company) 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 then outstanding shares of Common Stock
(approximately 94,686 shares immediately after the offering), or (ii) the
average weekly trading volume of the Common Stock 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 and notice requirements and to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least three years
59
<PAGE>
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
As of January 6, 1997, options to purchase a total of 1,199,643 shares
of Common Stock were outstanding, of which options to purchase 415,694 shares
were exercisable. Of such shares subject to options, approximately 708,963
shares are subject to lock-up agreements for a period of 90 days from the date
of this Prospectus. As of January 6, 1997, an additional 355,098 shares were
available for future option grants and employee stock purchases under the
Company's stock option and employee stock purchase plans. All of the shares
issued, issuable or reserved for issuance under the Company's stock option and
employee stock purchase plans or upon the exercise of options issued or issuable
under such plans are covered by an effective registration statement. Such shares
may be sold in the open market, subject, in the case of certain holders, to the
Rule 144 limitations applicable to affiliates, the above-referenced lock-up
agreements and vesting restrictions imposed by the Company.
After the closing of the offering, holders of an aggregate of 3,236,423
shares of Common Stock will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. In addition, the 147,690
shares issuable upon exercise of outstanding warrants have similar registration
rights. See "Description of Capital Stock -- Registration Rights of Certain
Holders," "Risk Factors -- Shares Eligible for Future Sale" and "Risk Factors --
Possible Volatility of Common Stock Price; Dilution."
60
<PAGE>
PLAN OF DISTRIBUTION
The Common Stock is being offered for sale by the Company on a best
efforts, all or nothing, basis to selected institutional investors. Vector
Securities International, Inc., the Placement Agent, has been retained pursuant
to a placement agency agreement to act as the exclusive agent for the Company in
connection with the arrangement of offers and sales of the Common Stock on a
best efforts basis.
The Placement Agent is not obligated to and does not intend to itself
take (or purchase) any of the shares of Common Stock. It is anticipated that the
Placement Agent will obtain indications of interest from potential investors for
the amount of the offering and that effectiveness of the Registration Statement
will not be requested until indications of interest have been received for the
amount of the offering. No investor funds will be accepted until indications of
interest have been received for the amount of the offering and no investor funds
will be accepted prior to effectiveness of the Registration Statement.
Confirmations and definitive prospectuses will be distributed to all investors
at the time of pricing, informing investors of the closing date, which will be
scheduled for three business days after pricing. After the Registration
Statement is declared effective and prior to the closing date, all investor
funds will promptly be placed in escrow with Citibank, N.A., as Escrow Agent, in
an escrow account established for the benefit of the investors. The Escrow Agent
will invest such funds in accordance with Rule 15c2-4 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Prior to the
closing date, the Escrow Agent will advise the Company that payment for the
purchase of the shares of Common Stock offered hereby has been affirmed by the
investors and that the investors have deposited the requisite funds in the
escrow account at the Escrow Agent. Upon receipt of such notice, the Company
will deposit with DTC the shares of Common Stock to be credited to the
respective accounts of the investors. Investor funds, together with interest
thereon, if any, will be collected by the Company through the facilities of the
Escrow Agent on the scheduled closing date. The offering will not continue after
the closing date. In the event that investor funds are not received in the full
amount necessary to satisfy the requirements of the offering, all funds
deposited in the escrow account will promptly be returned.
The Company has agreed (i) to pay to the Placement Agent 5.75% of the
proceeds of this offering as the selling commission, (ii) to indemnify the
Placement Agent against certain liabilities, including liabilities under the
Securities Act, and (iii) to reimburse the Placement Agent for up to $80,000 for
certain expenses incurred by it in connection with the offering.
Paramount, a NASD member firm, will act as a sub-placement agent in
connection with the sale of the Common Stock for which it will receive a fee of
2.875% of the proceeds of the sales arranged by it, up to a maximum of $287,500.
See "Certain Transactions."
The Company has agreed not to issue, and certain officers and directors
of the Company have agreed that they will not, directly or indirectly, offer,
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable for, or any rights to purchase or acquire,
Common Stock for a period of 90 days from the date of this Prospectus, without
the prior written consent of Vector Securities International, Inc.
61
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock being offered hereby will be
passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering will be
passed upon for the Placement Agent by Stroock & Stroock & Lavan, New York, New
York.
EXPERTS
The financial statements of the Company as of December 31, 1994 and
1995, for the years ended December 31, 1993, 1994, and 1995, and for the period
from inception (January 17, 1989) to December 31, 1995, included in this
Prospectus and in the Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the offices of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the following regional offices of the Commission: Seven World Trade Center,
13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material
also may be accessed electronically by means of the Commission's home page on
the Internet (http://www.sec.gov). In addition, such reports, proxy statements
and other information concerning the Company can be inspected at the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on
Form S-1, including amendments thereto, under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain parts of which were omitted in accordance with the
rules and regulations of the Commission. For further information with respect to
the Company and such Common Stock, reference is made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and, in each instance, if
such contract or document is filed as an exhibit to the Registration Statement,
reference is made to such exhibit for a more complete description, each such
statement being qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's Public Reference Section, Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part
of such material may be obtained from the Commission at its principal office
above after payment of fees prescribed by the Commission.
62
<PAGE>
NEOSE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS........................... F-2
BALANCE SHEETS..................................................... F-3
STATEMENTS OF OPERATIONS........................................... F-4
STATEMENTS OF STOCKHOLDERS' EQUITY................................. F-5
STATEMENTS OF CASH FLOWS........................................... F-6
NOTES TO FINANCIAL STATEMENTS...................................... F-8
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Neose Technologies, Inc.:
We have audited the accompanying balance sheets of Neose Technologies, Inc. (a
Delaware corporation in the development stage), formerly Neose Pharmaceuticals,
Inc., as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1995 and for the period from inception (January
17, 1989) to December 31, 1995. 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 Neose Technologies, Inc. as of
December 31, 1994 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 and for the
period from inception (January 17, 1989) to December 31, 1995, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pa.,
February 22, 1996
F-2
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ SEPTEMBER 30,
1994 1995 1996
-------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,362,830 $ 11,189,001 $ 35,717,379
Restricted funds.......................................... 353,920 148,300 110,648
Prepaid expenses and other................................ 56,651 118,680 252,878
-------------- -------------- --------------
Total current assets................................... 5,773,401 11,455,981 36,080,905
PROPERTY AND EQUIPMENT, net................................. 2,199,933 2,685,613 2,935,777
DEFERRED FINANCING COSTS.................................... -- 409,003 --
RESTRICTED FUNDS............................................ 219,199 73,066 --
OTHER ASSETS................................................ 3,400 15,049 15,049
-------------- -------------- --------------
$ 8,195,933 $ 14,638,712 $ 39,031,731
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... $ 369,254 $ 764,552 $ 753,901
Accounts payable.......................................... 218,156 301,023 311,102
Accrued compensation...................................... 369,294 191,318 208,000
Other accrued expenses.................................... 98,587 297,605 130,582
Deferred revenue.......................................... -- 41,667 354,167
-------------- -------------- --------------
Total current liabilities.............................. 1,055,291 1,596,165 1,757,752
OTHER LIABILITIES........................................... 53,060 74,986 79,359
LONG-TERM DEBT.............................................. 736,035 1,234,527 682,500
COMMITMENTS (Note 9)
STOCKHOLDERS' EQUITY:
Convertible preferred stock............................... 44,762 57,802 --
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued................................ -- -- --
Common stock, $.01 par value, 30,000,000 shares
authorized; 2,523,250, 3,145,256 and 8,203,616 shares
issued and outstanding................................. 25,232 31,453 82,036
Additional paid-in capital................................ 20,597,026 31,385,927 60,704,631
Deferred compensation..................................... -- (359,900) (292,419)
Deficit accumulated during the
development stage...................................... (14,315,473) (19,382,248) (23,982,128)
-------------- -------------- --------------
Total stockholders' equity............................. 6,351,547 11,733,034 36,512,120
-------------- -------------- --------------
$ 8,195,933 $ 14,638,712 $ 39,031,731
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
NINE MONTHS ENDED (JANUARY 17, (JANUARY 17,
YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1989) TO 1989) TO
--------------------------------------- ------------------------- DECEMBER 31 SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES FROM COLLABORATIVE
AGREEMENTS................... $ 2,600,000 $ 47,500 $ 1,198,863 $ 875,833 $ 1,006,100 $ 3,846,363 $ 4,852,463
----------- ----------- ----------- ----------- ----------- ------------ ------------
OPERATING EXPENSES:
Research and development..... 3,399,444 5,003,780 4,732,788 3,425,864 4,899,734 16,476,557 21,376,291
General and administrative... 1,576,864 1,318,884 1,665,320 1,171,781 1,788,343 6,688,728 8,477,071
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total operating expenses... 4,976,308 6,322,664 6,398,108 4,597,645 6,688,077 23,165,285 29,853,362
----------- ----------- ----------- ----------- ----------- ------------ ------------
Operating loss............. (2,376,308) (6,275,164) (5,199,245) (3,721,812) (5,681,977) (19,318,922) (25,000,899)
INTEREST INCOME................ 59,534 257,264 322,309 198,910 1,278,245 815,985 2,094,230
INTEREST EXPENSE............... (106,143) (194,349) (189,839) (126,116) (196,148) (879,311) (1,075,459)
----------- ----------- ----------- ----------- ----------- ------------ ------------
NET LOSS....................... $(2,422,917) $(6,212,249) $(5,066,775) $(3,649,018) $(4,599,880) $(19,382,248) $(23,982,128)
----------- ----------- ----------- ----------- ----------- ------------ ------------
----------- ----------- ----------- ----------- ----------- ------------ ------------
PRO FORMA NET LOSS PER SHARE... $ (1.06) $ (0.60)
----------- -----------
----------- -----------
PRO FORMA WEIGHTED AVERAGE
SHARES OUTSTANDING............ 4,761,000 7,728,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED
---------------------- --------------------- PAID-IN COMPEN-
SHARES AMOUNT SHARES AMOUNT CAPITAL SATION
--------- ----------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 17, 1989 (inception)............ -- $ -- -- $ -- $ -- $ --
Initial issuance of common stock................ -- -- 1,302,000 13,020 (3,020) --
Shares issued for consulting and licensing...... -- -- 325,500 3,255 (1,255) --
Sale of common stock............................ -- -- 133,334 1,333 1,267 --
Shares issued pursuant to antidilutive
agreements.................................... -- -- 2,864 29 (29) --
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1990....................... -- -- 1,763,698 17,637 (3,037) --
Sale of Series A preferred stock................ 100,000 1,000 -- -- 269,000 --
Sale of Series B preferred stock................ 1,416,695 14,167 -- -- 4,195,952 --
Sale of common stock............................ -- -- 420,284 4,203 33,619 (7,264)
Shares issued for consulting services........... -- -- 7,584 76 606 --
Shares issued pursuant to antidilutive
agreements.................................... -- -- 137,193 1,372 (1,372) --
Capital contribution............................ -- -- -- -- 9,971 --
Dividends on Series A preferred stock........... -- -- -- -- (18,000) --
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1991....................... 1,516,695 15,167 2,328,759 23,288 4,486,739 (7,264)
Shares issued pursuant to exercise of stock
options....................................... -- -- 8,334 83 16,167 --
Sale of Series C preferred stock................ 235,295 2,353 -- -- 1,847,647 --
Sale of Series D preferred stock................ 25,000 250 -- -- 199,750 --
Shares issued pursuant to redemption of notes
payable....................................... -- -- 24,120 241 462,165 --
Exercise of stock warrants pursuant to
redemption of notes payable................... -- -- 83,339 833 220,609 --
Shares issued pursuant to exercise of
warrants...................................... -- -- 12,501 125 34,562 --
Dividends on Series A preferred stock........... -- -- -- -- (36,000) --
Sale of common stock............................ -- -- 16,989 170 295,458 --
Amortization of deferred compensation........... -- -- -- -- -- 4,843
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1992....................... 1,776,990 17,770 2,474,042 24,740 7,527,097 (2,421)
Sale of Series D preferred stock................ 250,000 2,500 -- -- 1,997,500 --
Dividends on Series A preferred stock........... -- -- -- -- (36,000) --
Shares issued to the University of
Pennsylvania.................................. -- -- 3,482 35 (35) --
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- -- 924 9 17,991 --
Amortization of deferred compensation........... -- -- -- -- -- 2,421
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ----------- --------- -----------
BALANCE, DECEMBER 31, 1993....................... 2,026,990 20,270 2,478,448 24,784 9,506,553 --
Sales of Series D preferred stock............... 250,000 2,500 -- -- 1,997,500 --
Shares issued pursuant to exercise of stock
options....................................... -- -- 35,328 353 13,713 --
Sale of Series E preferred stock................ 2,199,238 21,992 -- -- 9,043,355 --
Dividends on Series A preferred stock........... -- -- -- -- (18,000) --
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- -- 9,474 95 53,905 --
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1994....................... 4,476,228 44,762 2,523,250 25,232 20,597,026 --
Sale of Series F preferred stock................ 2,720,656 27,207 -- -- 10,064,668 --
Dividends on Series A preferred stock........... -- -- -- -- (36,000) --
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- -- 3,158 32 17,968 --
Shares issued pursuant to exercise of stock
options....................................... -- -- 15,638 156 30,525 --
Shares issued to employees in lieu of cash
compensation.................................. -- -- 7,810 78 44,395 --
Shares issued pursuant to exercise of
warrants...................................... -- -- 99,751 998 298,235 --
Deferred compensation related to grant of stock
options....................................... -- -- -- -- 359,900 (359,900)
Shares issued to stockholder in connection with
the offering.................................. -- -- 23,400 234 (234) --
Conversion of Series B preferred stock into
common stock.................................. (1,416,695) (14,167) 472,249 4,723 9,444 --
Net loss........................................ -- -- -- -- -- --
--------- ----------- --------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1995....................... 5,780,189 57,802 3,145,256 31,453 31,385,927 (359,900)
Sale of common stock in initial public offering,
net of offering costs (unaudited)............. -- -- 2,587,500 25,875 29,101,286 --
Conversion of Series A, C, D, E and F preferred
stock into common stock (unaudited)........... (5,780,189) (57,802) 2,410,702 24,107 33,695 --
Shares issued pursuant to exercise of stock
options (unaudited)........................... -- -- 52,001 520 141,974 --
Shares issued pursuant to exercise of warrants
(unaudited)................................... -- -- 2,526 25 (25) --
Shares issued pursuant to Employee Stock
Purchase Plan (unaudited)..................... -- -- 5,631 56 59,774 --
Dividends on Series A Preferred Stock
(unaudited)................................... -- -- -- -- (18,000) --
Amortization of deferred compensation
(unaudited)................................... -- -- -- -- -- 67,481
Net loss (unaudited)............................ -- -- -- -- -- --
--------- ----------- --------- ---------- ----------- -----------
BALANCE, SEPTEMBER 30, 1996 (unaudited).......... -- $ -- 8,203,616 $ 82,036 $60,704,631 $ (292,419)
--------- ----------- --------- ---------- ----------- -----------
--------- ----------- --------- ---------- ----------- -----------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT STOCKHOLDERS'
STAGE EQUITY
----------- -------------
BALANCE, JANUARY 17, 1989 (inception)............ $ -- $ --
Initial issuance of common stock................ -- 10,000
Shares issued for consulting and licensing...... -- 2,000
Sale of common stock............................ -- 2,600
Shares issued pursuant to antidilutive
agreements.................................... -- --
Net loss........................................ (460,307) (460,307)
----------- -----------
BALANCE, DECEMBER 31, 1990....................... (460,307) (445,707)
Sale of Series A preferred stock................ -- 270,000
Sale of Series B preferred stock................ -- 4,210,119
Sale of common stock............................ -- 30,558
Shares issued for consulting services........... -- 682
Shares issued pursuant to antidilutive
agreements.................................... -- --
Capital contribution............................ -- 9,971
Dividends on Series A preferred stock........... -- (18,000)
Net loss........................................ (1,865,026) (1,865,026)
----------- -----------
BALANCE, DECEMBER 31, 1991....................... (2,325,333) 2,192,597
Shares issued pursuant to exercise of stock
options....................................... -- 16,250
Sale of Series C preferred stock................ -- 1,850,000
Sale of Series D preferred stock................ -- 200,000
Shares issued pursuant to redemption of notes
payable....................................... -- 462,406
Exercise of stock warrants pursuant to
redemption of notes payable................... -- 221,442
Shares issued pursuant to exercise of
warrants...................................... -- 34,687
Dividends on Series A preferred stock........... -- (36,000)
Sale of common stock............................ -- 295,628
Amortization of deferred compensation........... -- 4,843
Net loss........................................ (3,354,974) (3,354,974)
----------- -----------
BALANCE, DECEMBER 31, 1992....................... (5,680,307) 1,886,879
Sale of Series D preferred stock................ -- 2,000,000
Dividends on Series A preferred stock........... -- (36,000)
Shares issued to the University of
Pennsylvania.................................. -- --
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- 18,000
Amortization of deferred compensation........... -- 2,421
Net loss........................................ (2,422,917) (2,422,917)
----------- -----------
BALANCE, DECEMBER 31, 1993....................... (8,103,224) 1,448,383
Sales of Series D preferred stock............... -- 2,000,000
Shares issued pursuant to exercise of stock
options....................................... -- 14,066
Sale of Series E preferred stock................ -- 9,065,347
Dividends on Series A preferred stock........... -- (18,000)
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- 54,000
Net loss........................................ (6,212,249) (6,212,249)
----------- -----------
BALANCE, DECEMBER 31, 1994....................... (14,315,473) 6,351,547
Sale of Series F preferred stock................ -- 10,091,875
Dividends on Series A preferred stock........... -- (36,000)
Shares issued to Series A preferred stockholder
in lieu of cash dividends..................... -- 18,000
Shares issued pursuant to exercise of stock
options....................................... -- 30,681
Shares issued to employees in lieu of cash
compensation.................................. -- 44,473
Shares issued pursuant to exercise of
warrants...................................... -- 299,233
Deferred compensation related to grant of stock
options....................................... -- --
Shares issued to stockholder in connection with
the offering.................................. -- --
Conversion of Series B preferred stock into
common stock.................................. -- --
Net loss........................................ (5,066,775) (5,066,775)
----------- -----------
BALANCE, DECEMBER 31, 1995....................... (19,382,248) 11,733,034
Sale of common stock in initial public offering,
net of offering costs (unaudited)............. -- 29,127,161
Conversion of Series A, C, D, E and F preferred
stock into common stock (unaudited)........... -- --
Shares issued pursuant to exercise of stock
options (unaudited)........................... -- 142,494
Shares issued pursuant to exercise of warrants
(unaudited)................................... -- --
Shares issued pursuant to Employee Stock
Purchase Plan (unaudited)..................... -- 59,830
Dividends on Series A Preferred Stock
(unaudited)................................... -- (18,000)
Amortization of deferred compensation
(unaudited)................................... -- 67,481
Net loss (unaudited)............................ (4,599,880) (4,599,880)
----------- -----------
BALANCE, SEPTEMBER 30, 1996 (unaudited)..........($23,982,128) $36,512,120
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
NINE MONTHS (JANUARY 17, (JANUARY 17,
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, 1989) TO 1989) TO
------------------------------------- ------------------------ DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
----------- ----------- ----------- ----------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss..................... $(2,422,917) $(6,212,249) $(5,066,775) $(3,649,018) $(4,599,880) $(19,382,248) $(23,982,128)
Adjustments to reconcile net
loss to cash used in
operating activities --
Depreciation and
amortization............. 194,454 309,303 389,331 278,244 484,467 1,175,595 1,660,062
Common stock issued for
non-cash charges and
other.................... 2,421 -- -- -- -- 34,962 34,962
Changes in operating
assets and liabilities --
Restricted funds......... 197,338 (112,466) 351,753 314,850 110,718 (221,366) (110,648)
Prepaid expenses and
other.................. (14,169) (20,686) (62,030) (65,459) (134,198) (118,681) (252,879)
Other assets............. 1,500 416 (11,649) (11,649) -- (15,049) (15,049)
Accounts payable......... 145,926 (112,219) 82,868 179,944 10,079 301,024 311,103
Accrued compensation..... 219,418 149,876 (135,880) (177,197) 16,682 13,996 30,678
Other accrued expenses... (32,754) 84,794 201,394 (5,287) (167,023) 519,399 352,376
Deferred revenue......... -- -- 41,667 250,000 312,500 41,667 354,167
Other liabilities........ 186,666 (133,606) 21,926 17,953 4,373 74,986 79,359
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net cash used in
operating activities... (1,522,117) (6,046,837) (4,187,395) (2,867,619) (3,962,282) (17,575,715) (21,537,997)
----------- ----------- ----------- ----------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and
equipment.................. (490,894) (975,175) (875,010) (613,072) (667,150) (3,103,307) (3,770,457)
Purchase of short-term
investments................ -- -- -- -- -- (3,177,000) (3,177,000)
Proceeds from sale of short-
term investments........... -- -- -- -- -- 3,177,000 3,177,000
Proceeds from sale-leaseback
of equipment............... -- -- 1,382,027 829,589 -- 1,382,027 1,382,027
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net cash provided by
(used in) investing
activities............... (490,894) (975,175) 507,017 216,517 (667,150) (1,721,280) (2,388,430)
----------- ----------- ----------- ----------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
NINE MONTHS ENDED (JANUARY 17, (JANUARY 17,
YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1989) TO 1989) TO
---------------------------------- ----------------------- DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996 1995 1996
---------- ---------- ----------- ---------- ----------- ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from the issuance
of notes................... $ -- $ -- $ -- $ -- $ -- $ 1,225,000 $ 1,225,000
Repayment of notes payable... (150,000) -- -- -- -- (565,250) (565,250)
Proceeds from issuance of
short-term debt............ -- -- -- -- -- 290,000 290,000
Repayment of short-term
debt....................... -- -- -- -- -- (290,000) (290,000)
Proceeds from issuance of
long-term debt............. 1,010,869 100,000 -- -- -- 1,110,869 1,110,869
Repayment of long-term
debt....................... (167,943) (294,324) (488,237) (326,146) (562,678) (998,267) (1,560,945)
Proceeds from issuance of
preferred stock, net....... 2,000,000 11,065,347 10,091,875 5,352,583 -- 29,497,297 29,497,297
Proceeds from issuance of
common stock, net.......... -- -- -- -- 59,830 320,835 380,665
Proceeds from Initial Public
Offering, net.............. -- -- (409,003) -- 29,536,164 (409,003) 29,127,161
Proceeds from exercise of
warrants, net.............. -- -- 299,233 37,500 -- 333,920 333,920
Proceeds from exercise of
stock options.............. -- 14,066 30,681 5,728 142,494 60,997 203,491
Dividends paid............... -- -- (18,000) (18,000) (18,000) (54,000) (72,000)
Issuance costs resulting from
conversion of notes to
common stock............... -- -- -- -- -- (36,402) (36,402)
---------- ---------- ----------- ---------- ----------- ----------- ------------
Net cash provided by
financing activities..... 2,692,926 10,885,089 9,506,549 5,051,665 29,157,810 30,485,996 59,643,806
---------- ---------- ----------- ---------- ----------- ----------- ------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS......... 679,915 3,863,077 5,826,171 2,400,563 24,528,378 11,189,001 35,717,379
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD.......... 819,838 1,499,753 5,362,830 5,362,830 11,189,001 -- --
---------- ---------- ----------- ---------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END
OF PERIOD.................... $1,499,753 $5,362,830 $11,189,001 $7,763,393 $35,717,379 $11,189,001 $ 35,717,379
---------- ---------- ----------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ---------- ----------- ----------- ------------
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest....... $ 128,643 $ 158,575 $ 200,008 $ 141,967 $ 203,125 $ 793,193 $ 996,318
---------- ---------- ----------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ---------- ----------- ----------- ------------
Noncash financing activities --
Issuance of common stock
for dividends............ $ 18,000 $ 54,000 $ 18,000 $ 18,000 $ -- $ 90,000 $ 90,000
---------- ---------- ----------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ---------- ----------- ----------- ------------
Issuance of common stock
to employees in lieu of
cash compensation........ $ -- $ -- $ 44,473 $ 44,473 $ -- $ 44,473 $ 44,473
---------- ---------- ----------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ---------- ----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
1. BACKGROUND:
Neose Technologies, Inc., a development-stage company, formerly Neose
Pharmaceuticals, Inc. (the Company), is focused on the enzymatic synthesis of
complex carbohydrates and discovers and develops complex carbohydrates for
nutritional and pharmaceutical uses. The Company's products in development
include breast milk oligosaccharide additives to infant formula, and
pharmaceuticals to treat various bacterial infections, such as gastrointestinal
and pediatric ear infections and to prevent xenotransplant rejection. The
Company has developed proprietary technologies that it believes enables, for the
first time, the rapid and cost-efficient production of naturally-occurring
oligosaccharides.
The Company's initial public offering of common stock (the 'Offering')
closed on February 22, 1996. The Company sold 2,587,500 shares, including the
exercise of the underwriters' over-allotment option on March 4, 1996, of common
stock at a public offering price of $12.50 per share. The net proceeds to the
Company from the Offering after the underwriting discount and payment of
offering expenses were $29,127,000. In connection with the Offering all
outstanding shares of Series A, C, D, E, and F Convertible Preferred Stock
converted into 2,410,702 shares of common stock (Note 6).
The Company was incorporated in January 1989, and commenced operations in
August 1990. Since its inception, the Company has derived substantially all of
its revenues from its strategic alliance with Abbott Laboratories (Note 3); no
product revenues have been generated to date. The Company has incurred losses
since its inception. The Company anticipates incurring additional losses over at
least the next several years. Such losses may fluctuate significantly from
quarter to quarter and are expected to increase as the Company expands its
research and development activities. Substantial financing will be needed by the
Company to fund its operations and to commercially develop its products. There
is no assurance that such financing will be available when needed. Operations of
the Company are subject to certain risks and uncertainties including, among
others, uncertainty of product development, technological uncertainty,
dependence on Abbott Laboratories and other collaborative partners, uncertainty
regarding patents and proprietary rights, substantial competition, risk of
technological obsolescence, comprehensive government regulations, no assurance
of product approval, no commercial manufacturing, marketing, or sales capability
or experience, limited clinical trial experience, and dependence on key
personnel.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Statements
The financial statements as of September 30, 1996 and for the nine months
ended September 30, 1995 and 1996 and the period from inception (January 17,
1989) to September 30, 1996 are unaudited and, in the opinion of management,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the financial condition and results of
operations for these interim periods. The results of operations for the nine
months ended September 30, 1996 are not necessarily indicative of the results to
be expected for any other interim period or the entire year.
F-8
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid investments consisting of purchases
with an original maturity of three months or less to be cash equivalents. Cash
equivalents at December 31, 1995 and September 30, 1996 consist of $10,114,000
and $35,144,000, respectively of overnight repurchase agreements secured by
United States Treasury Notes.
Property and Equipment
Property and equipment are stated at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the related assets or the lease term, whichever is shorter. The Company uses
lives of two to seven years for office, research, and manufacturing equipment.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, 'Accounting for Income Taxes,'
the objective of which is to recognize the amount of current and deferred income
taxes payable or refundable at the date of the financial statements as a result
of all events that have been recognized in the financial statements as measured
by enacted tax laws.
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $5,953,000. In addition, the
Company had federal research and development credit carryforwards of
approximately $561,000. The net operating loss and credit carryforwards begin to
expire in 2004 and are subject to review and possible adjustment by the Internal
Revenue Service. The Tax Reform Act of 1986 contains provisions that may limit
the net operating loss carryforwards available to be used in any given year in
the event of significant changes in ownership interest.
The approximate income tax effect of each type of temporary difference and
carryforward is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Net operating loss carryforwards...................................... $ 1,569,788 $ 2,024,094
Research and development credit carryforwards......................... 454,727 561,058
Start-up costs........................................................ 1,487,248 2,027,935
Capitalized research and development.................................. 1,497,947 2,109,947
Deferred revenue...................................................... -- 14,167
Nondeductible accruals................................................ 38,284 --
Nondeductible depreciation and amortization........................... 265,395 397,768
Deferred rent......................................................... 18,040 25,495
Valuation allowance................................................... (5,331,429) (7,160,464)
------------- -------------
$ -- $ --
============= =============
</TABLE>
F-9
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED)
Due to the uncertainty surrounding the realization of the deferred tax
asset, the Company has provided a full valuation allowance against this amount.
Revenue Recognition
The Company records revenue from collaborative agreements when the
specified services are performed or ratably over the respective terms of the
agreements.
Pro Forma Net Loss Per Share (unaudited)
Pro forma net loss per share was computed using the weighted average number
of common shares outstanding during the period, and includes all convertible
preferred stock which converted into shares of common stock immediately prior to
the closing of the Offering as if they were converted into common stock on their
original dates of issuance. Common stock equivalents were excluded for all
periods presented because they are antidilutive.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, 'Accounting for Stock-Based Compensation.' The
Company is required to adopt this standard for the year ending December 31,
1996. The Company has elected to adopt the disclosure requirement of this
pronouncement. The adoption of this pronouncement will have no impact on the
Company's statements of operations.
Recapitalization
In December 1995, the Company's stockholders approved the following actions
which became effective upon the closing of the Offering: (i) a one-for-three
reverse stock split of the Company's common shares, (ii) a change in the number
of authorized shares of common stock and preferred stock to 30,000,000 and
5,000,000, respectively, and (iii) a change in the par value of common stock to
$.01 per share. All references in the financial statements to the number of
common shares, per share amounts, and stock options and warrants exercisable
into common stock have been retroactively restated to reflect these changes.
3. AGREEMENTS WITH ABBOTT LABORATORIES:
The Company and Abbott Laboratories ('Abbott') entered into collaborative
agreements (the 'Abbott Agreements') to develop breast milk oligosaccharides as
additives to infant formula and other nutritional products. Abbott has
manufacturing rights and further manufacturing development responsibilities for
the nutritional additives. Under this strategic alliance, the Company has
received approximately $4.7 million in contract payments, license fees, and
milestone payments through September 30, 1996. In addition, the Company is to
receive $500,000 in January 1997, and $5.0 million within 60 days of the first
commercial sale, if any, of infant formula containing the Company's nutritional
additive. Abbott will manufacture the nutritional additive for its own use and
has agreed to pay the Company ongoing fees based on the dry weight of the infant
formula sold containing the nutritional additive. The Company is required to
credit $3.75 million of the license fees against the ongoing fees in equal
amounts over four years. In addition, Abbott has agreed to renegotiate the fees
due the Company on the sale of products containing the nutritional additive in
any
F-10
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
3. AGREEMENTS WITH ABBOTT LABORATORIES: -- (CONTINUED)
case where the Company has made a contribution that both parties agree will
result in a substantial commercial advantage. Abbott may, at any time prior to
the first commercial sale, if any, of infant formula containing the Company's
nutritional additive, elect to make its license agreement non-exclusive, in
which event the license fees payable by Abbott after commercialization would be
reduced by 50% and Abbott's obligations to make contract and milestone payments,
including the January 1997 payment, and the $5.0 million milestone payment would
be terminated. Abbott also has the right to cancel the underlying license
agreement upon 60 days' written notice and return the technology, in which event
it would have no further funding obligations to the Company. Under the terms of
the Abbott agreements, if Abbott fails to make appropriate regulatory filings
with the FDA for the addition of Neose oligosaccharides in infant formula prior
to December 31, 1997, Neose, at its option, may elect to convert the license of
Neose technology to a non-exclusive license to Abbott, in which event the
license fees payable by Abbott after commercialization would be reduced by 50%,
and Abbott's obligations to make contract and milestone payments, including the
$5.0 million milestone payment, would be terminated. The Company anticipates
that its manufacturing arrangement with Abbott will assist the Company in
developing its own manufacturing capability. As part of the strategic alliance,
in January 1993, and April 1994, Abbott invested an aggregate of $4.0 million to
acquire 500,000 shares of the Company's Series D Convertible Preferred Stock at
$8.00 per share. In February 1996, Abbott invested $2.0 million to acquire
160,000 shares of the Company's common stock in the Company's Offering (Note 1).
During 1995, Abbott made contractual payments to the Company under the
Agreements totaling $1,000,000. In addition, Abbott purchased raw materials from
the Company for $105,000 which was included in revenue for the year ended
December 31, 1995. In the nine months ended September 30, 1996, Abbott made
additional contractual payments to the Company under the Abbott Agreements
totaling $1,000,000.
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Research equipment.................................................. $ 1,138,253 $ 1,413,646 $ 1,630,868
Leasehold improvements.............................................. 731,504 1,447,100 1,713,428
Construction in progress............................................ 220,709 -- 105,169
Manufacturing equipment............................................. 532,554 601,950 650,938
Computer and office equipment....................................... 173,134 208,469 237,912
------------- ------------- --------------
2,796,154 3,671,165 4,338,315
Less -- Accumulated depreciation and amortization................... (596,221) (985,552) (1,402,538)
------------- ------------- --------------
$ 2,199,933 $ 2,685,613 $ 2,935,777
============= ============= ==============
</TABLE>
Depreciation and amortization expense was $194,454, $309,303, $389,331,
$278,244 and $416,986 for the years ended December 31, 1993, 1994, and 1995 and
for the nine months ended September 30, 1995 and 1996, respectively.
During 1995, the Company financed certain property including leasehold
improvements, manufacturing equipment and construction in progress, in
accordance with the lease
F-11
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
4. PROPERTY AND EQUIPMENT: -- (CONTINUED)
agreement described in Note 10. Total property and equipment under this capital
lease was $1,382,027 at December 31, 1995. Amortization of assets recorded under
the capital lease was included with depreciation. Title to this property is
owned by the leasing company. At December 31, 1995, other property and equipment
totaling $1,116,869 were pledged as collateral for equipment loans (Note 5).
5. LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1994 1995 1996
------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Tenant improvement loan due to landlord, interest at 10%, monthly
principal and interest payments of $10,858 through April 1997...... $ 270,169 $ 162,018 $ 73,537
Equipment loan due to a finance company, interest at 15.5%, monthly
principal and interest payments for
48 months subsequent to each drawdown of funds..................... 739,550 496,729 288,414
Equipment loan due to a municipal development corporation, interest
at 5%, monthly principal
and interest payments of $1,887 through September
1999............................................................... 95,570 77,288 62,965
Capital lease obligation (Note 9).................................... -- 1,263,044 1,011,485
------------- ------------- --------------
1,105,289 1,999,079 1,436,401
Less -- Current portion.............................................. (369,254) (764,552) (753,901)
------------- ------------- --------------
$ 736,035 $ 1,234,527 $ 682,500
============= ============= ==============
</TABLE>
The Company entered into a Master Equipment Loan ('Equipment Loan') with a
finance company. As of September 30, 1996, $1,010,869 had been borrowed. In
connection with the Equipment Loan, the Company granted the finance company
warrants to purchase 16,668 and 7,072 shares of common stock at $19.50 and
$14.85 per share, respectively (Note 7).
Minimum principal repayments of long-term debt as of December 31, 1995,
excluding capitalized lease obligations, were as follows:
1996............................................................... $ 421,971
1997............................................................... 273,994
1998............................................................... 23,436
1999............................................................... 16,634
-----------
$ 736,035
-----------
-----------
6. STOCKHOLDERS' EQUITY:
Common Stock
The Company's initial public offering closed on February 22, 1996. The
Company sold 2,587,500 shares, including the exercise of the underwriters'
over-allotment option on March 4, 1996, of common stock at a public offering
price of $12.50 per share. The net proceeds to the Company from the Offering
after the underwriting discount and payment of offering
F-12
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
6. STOCKHOLDERS' EQUITY: -- (CONTINUED)
expenses were $29,127,000. In connection with the Offering all outstanding
shares of Series A, C, D, E, and F Convertible Preferred Stock converted into
2,410,702 shares of common stock. Certain of these common shares have
registration rights.
From 1991 through 1995, the Company sold 7,196,884 shares of Convertible
Preferred Stock Series A, B, C, D, E and F. On December 7, 1995, all outstanding
shares of Series B Convertible Preferred Stock converted into 472,249 shares of
common stock. As of December 31, 1995, 5,780,189 shares of convertible preferred
stock were outstanding (liquidation preference of $25,629,004 at December 31,
1995). As discussed above, in connection with the Offering, all outstanding
shares of Series A, C, D, E and F converted into 2,410,702 shares of common
stock (unaudited).
In 1991, the Company issued $1,225,000 in subordinated notes, with warrants
to purchase 204,180 shares of common stock at $3.00 per share. In 1992 and 1993,
the Company redeemed the subordinated notes and accrued interest of $183,750
with the Company's common stock or with cash, at the election of the holder.
This redemption resulted in the issuance of 107,459 shares of common stock and
the payment of $688,500.
During the year ended December 31, 1995, 99,751 shares of common stock were
issued at an exercise price of $3.00 per share, pursuant to the exercise of
warrants by the noteholders, 8,589 of the noteholders' warrants expired, 7,810
shares of common stock were issued at fair market value of $5.70 per share as
payment for bonuses and other compensation, and 23,400 shares of common stock
were issued to a stockholder in connection with the Offering. The deemed value
of the shares for accounting purposes were recorded as Offering costs.
In connection with the issuance of the Series E Convertible Preferred Stock
('Series E'), the Company issued warrants to the placement agent to purchase
Series E, which in connection with the Offering converted into warrants to
purchase 119,961 shares of common stock at $9.45 per share. During the nine
months ended September 30, 1996, 6,538 warrants were exercised to purchase 2,526
shares of common stock via a cashless exercise provision contained in the
warrant (Notes 7 and 10).
7. EQUITY PLANS:
Stock Option Plans
The Company has three Stock Option Plans, the 1991, 1992, and 1995 Plans,
under which maximums of 250,000, 333,333 and 933,333 options, respectively, may
be granted at prices not less than 100% of the fair market value of the
Company's common stock on the date of grant. The 1995 Stock Option Plan (the
'Plan') incorporates the two predecessor plans and provides for the granting of
both incentive stock options and non-qualified stock options to employees,
officers, directors, and consultants of the Company as well as issuing shares of
common stock directly either through the immediate purchase of shares or as a
bonus tied to the individual's performance or the Company's attainment of
prescribed milestones. In addition, the Plan includes stock appreciation rights
to be provided at the Plan administrator's discretion. The stock options are
exercisable over a period determined by the Board of Directors, but no longer
than ten years after the date of grant. Information with respect to options
under the above plans is as follows:
F-13
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
7. EQUITY PLANS: -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
AVAILABLE PRICE AGGREGATE
FOR GRANT SHARES PER SHARE PRICE
---------- ---------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992.............................. 191,307 383,692 $ .09-19.50 $ 1,481,128
Granted............................................... (119,659) 119,659 .90-19.50 392,887
Canceled.............................................. 43,832 (43,832) 1.95-19.50 (476,989)
---------- ---------- -------------
Balance, December 31, 1993.............................. 115,480 459,519 .09- 9.00 1,397,026
Granted............................................... (201,750) 201,750 .09- 5.70 810,338
Exercised............................................. -- (35,328) .09- 5.70 (14,066)
Canceled.............................................. 113,895 (113,895) .90- 3.75 (321,467)
---------- ---------- -------------
Balance, December 31, 1994.............................. 27,625 512,046 .09- 9.00 1,871,831
Authorized............................................ 933,333 -- -- --
Granted............................................... (349,644) 349,644 5.70-12.54 3,559,636
Granted outside the Plan.............................. -- 69,998 13.80-24.84 1,255,756
Exercised............................................. -- (15,638) .09- 9.00 (30,681)
Canceled.............................................. 5,389 (5,389) .09- 9.00 (21,439)
---------- ---------- -------------
Balance, December 31, 1995.............................. 616,703 910,661 .09-24.84 6,635,103
Granted (unaudited)................................... (47,932) 47,932 12.13-21.00 852,060
Exercised (unaudited)................................. -- (52,001) .09- 9.00 (142,494)
Canceled (unaudited).................................. 10,998 (10,998) .90-18.25 (92,313)
---------- ---------- -------------
Balance September 30, 1996 (unaudited).................. 579,769 895,594 $ .09-24.84 $ 7,252,356
========== ========== =============
</TABLE>
At December 31, 1995, options for the issuance of 298,630 shares were
exercisable at prices ranging from $.09 to $9.00 per share. At September 30,
1996, options for the issuance of 318,962 shares were exercisable at prices
ranging from $.09 to $18.00 (unaudited). At December 31, 1995 and September 30,
1996, the aggregate exercise price of these options was $1,150,815 and
$1,313,775, respectively.
During 1995, options were granted outside of the Plan for 69,998 shares of
Common Stock at a weighted average exercise price of $17.94 per share. In
December 1995, the Company issued options to employees and recorded deferred
compensation of $359,900 for the difference between the deemed value for
accounting purposes per share and the exercise price per share and will amortize
the deferred compensation amount over the four-year vesting period.
Stock Warrants
The following table summarizes outstanding warrants at September 30, 1996.
All warrants are currently exercisable and the exercise price is subject to
adjustment as set forth in the warrant agreement.
F-14
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
7. EQUITY PLANS: -- (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING EXERCISE
WARRANTS PRICE ISSUANCE DATE EXPIRATION DATE
- --------- --------- ------------------------ ------------------------
<S> <C> <C> <C>
16,668 $ 19.50 June 30, 1993 June 30, 1998
7,072 14.85 February 16, 1994 February 16, 1999
113,423 9.45 July 31, 1994 July 31, 1999
10,527 14.25 June 30, 1995 June 30, 2002
- ---------
147,690
=========
</TABLE>
8. 401(K) PLAN:
The Company has a 401(k) Savings Plan (the '401(k) Plan') for employees.
Employee contributions are voluntary and are determined on an individual basis
with a maximum annual amount equal to the lesser of the maximum amount allowable
under federal income tax regulations or 15% of the participant's compensation.
The Company matches employee contributions up to specified limits. The Company
contributed $28,300, $53,171, $62,270, $48,531, and $47,138 to the 401(k) Plan
for the years ended December 31, 1993, 1994, and 1995 and for the nine months
ended September 30, 1995 and 1996, respectively.
9. COMMITMENTS:
Agreements with the University of Pennsylvania:
License Agreement
In 1990, the Company entered into an agreement whereby the University of
Pennsylvania ('Penn') granted to the Company an exclusive license to use Penn's
patent rights and technology to produce certain products. In consideration, the
Company issued common stock to Penn pursuant to a Stock Purchase Agreement (see
below). In addition, the Company is required to pay Penn royalties based on
sales of applicable products. The Company is also required to reimburse Penn for
all reasonable fees incident to the acquisition and maintenance of Penn's patent
rights. The Company paid $89,530, $70,979, $21,469, $22,201, and $30,563 in
patent-related fees on Penn's behalf for the years ended December 31, 1993,
1994, and 1995 and for the nine months ended September 30, 1995 and 1996,
respectively. This agreement will terminate upon the expiration of the patent
rights.
Stock Purchase Agreement
Under the Stock Purchase Agreement, the Company in 1991 issued Penn 147,063
shares of the Company's common stock related to the license agreement and for
consulting services.
Sponsored Research Agreement
The Company had an agreement with Penn to support research and development
activities relating to oligosaccharides. This agreement expired in 1992. Under
the agreement, the Company paid Penn research grants of $206,000 in 1992.
F-15
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
9. COMMITMENTS: -- (CONTINUED)
Agreement with Bracco Research U.S.A., Inc.:
In September 1995, the Company entered into a collaborative research
agreement with Bracco Research U.S.A., Inc. ('Bracco'). Under the terms of the
agreement, the Company will supply Bracco with complex carbohydrates, which
Bracco will attach to diagnostically useful agents. The resulting new molecules
will be tested and developed. In consideration, Bracco committed to six
semiannual payments to Neose in the amount of $125,000, for a total of $750,000.
The Company recognized $83,333, $20,833, and $187,500 of revenue under this
agreement for the year ended December 31, 1995 and for the nine months ended
September 30, 1995 and 1996, respectively.
Employment Agreements
In November 1994, the Company entered into a three-year employment
agreement with its President and Chief Financial Officer which provides for
certain annual base salaries and bonuses of up to 50% of base salary at the
discretion of the Compensation Committee of the Board of Directors. In
connection with this agreement, the Company granted options to purchase 100,000
shares of common stock at $5.70 per share, 20,000 of which vested immediately
with the remainder vesting ratably over four years (Note 7).
In April 1996, the Company entered into a one-year employment agreement
with its Vice President of Drug Development. The employment agreement provides
for an annual base salary and a bonus of up to 25% of base salary at the
discretion of the Chief Executive Officer.
Leases
In January 1992, the Company entered into a ten-year operating lease for
office and laboratory facilities effective May 1992. The lease includes
escalation clauses and is cancelable by the Company after five or seven years.
Pursuant to this lease, the Company is required to maintain an escrow balance
which is reduced ratably over the lease term.
On August 30, 1996, the Company entered into a construction agreement for
the planned expansion of its manufacturing capabilities. For this expansion, the
Company expects to make capital expenditures totaling approximately $7.5
million, beginning in the fourth quarter of 1996. In connection with this
expansion, on December 5, 1996, the Company entered into a non-binding letter of
intent with the owner of the leased facility to purchase the facility for
approximately $3.8 million contingent upon, among other things, the Company
obtaining financing for the acquisition.
In June 1995, the Company entered into a master equipment lease agreement
with a finance company which provides for up to $1,500,000 in financing, of
which $1,382,027 had been drawn as of September 30, 1996. In connection with the
lease, the Company granted the lessor warrants to purchase 10,527 shares of
common stock at $14.25 per share (Note 7).
F-16
<PAGE>
NEOSE TECHNOLOGIES, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION
(JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED)
9. COMMITMENTS: -- (CONTINUED)
Future minimum lease payments under the Company's leases as of December 31,
1995 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- -------------
<S> <C> <C>
1996......................................................... $ 310,277 $ 527,382
1997......................................................... 107,862 527,382
1998......................................................... -- 563,695
----------- -------------
Total minimum lease payments................................. $ 418,139 1,618,459
===========
Less -- Amount representing interest......................... (355,415)
-------------
Present value of future minimum lease payments............... 1,263,044
Less -- Current portion...................................... (342,581)
-------------
$ 920,463
=============
</TABLE>
Rent expense was $220,644, $322,275, $309,249, $231,937, and $231,937 for
the years ended December 31, 1993, 1994 and 1995, and for the nine months ended
September 30, 1995 and 1996, respectively. In addition, the Company has recorded
a deferred rent liability for escalating rent payments in future years of
$74,986 at December 31, 1995.
10. RELATED PARTY TRANSACTIONS:
In 1994, the Company entered into an agreement with Paramount Capital, Inc.
('Paramount') for the private placement of the Series E. The sole shareholder of
Paramount is a member of the Company's Board of Directors. The Company paid
$1,246,505 in commissions and expenses pursuant to the agreement. Additionally,
Paramount received warrants to purchase 216,780 shares of the Company's Series E
at $5.23 per share.
In 1995, Paramount acted as a placement agent for a portion of the Series F
Convertible Preferred Stock. The Company paid $425,247 in commissions to
Paramount in the year ended December 31, 1995. In addition, in December 1995 the
Company granted to an employee of Paramount options to purchase 49,999 shares of
Common Stock at a weighted average exercise price of $17.94 per share, vesting
in various amounts over five years, for financial advisory services.
In February 1994, a member of the Company's Board of Directors advanced the
Company $440,000 to fund the Company's restricted funds account held in escrow
pursuant to the Company's facility lease. In April 1994, the Company repaid this
balance.
F-17
<PAGE>
[This page intentionally left blank]
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering, other than those made in this Prospectus, and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company, or the Placement Agent. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
shares of Common Stock to which it relates, or an offer to, or a solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof.
------------------------
TABLE OF CONTENTS
Page
Prospectus Summary.......................................3
Risk Factors.............................................7
Use of Proceeds.........................................16
Dividend Policy.........................................16
Price Range of Common Stock.............................16
Capitalization..........................................17
Dilution................................................18
Selected Financial Data.................................19
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........20
Business................................................25
Management..............................................42
Certain Transactions....................................53
Principal Stockholders..................................55
Description of Capital Stock............................56
Shares Eligible for Future Sale.........................59
Plan of Distribution....................................61
Legal Matters...........................................62
Experts.................................................62
Available Information...................................62
Index to Financial Statements..........................F-1
1,250,000 Shares
[NEOSE TECHNOLOGIES, INC. LOGO]
Common Stock
-----------------------
PROSPECTUS
-----------------------
Vector Securities International, Inc.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth an estimate of the expenses to be
incurred by the Registrant in connection with the sale of Common Stock being
registered. All amounts are estimates except the SEC registration fee, the NASD
filing fee and the Nasdaq National Market listing fee.
Amount to
Be Paid
---------
SEC registration fee..................................... $ 7,866.00
NASD filing fee.......................................... 2,728.00
Nasdaq National Market listing fee....................... 17,500.00
Placement Agent out-of-pocket expenses................... 80,000.00
Escrow agent fees........................................ 6,000.00
Printing and engraving................................... 25,000.00
Legal fees and expenses.................................. 100,000.00
Accounting fees and expenses............................. 35,000.00
Blue sky fees and expenses............................... 5,000.00
Miscellaneous............................................ 5,906.00
------------
Total........................................... $285,000.00
===========
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court
to award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IX of the Registrant's Second Amended
and Restated Certificate of Incorporation provides for indemnification of its
directors and officers and permissible indemnification of employees and other
agents to the maximum extent permitted by the Delaware General Corporation Law.
Reference is also made to Section 7 of the Underwriting Agreement contained in
Exhibit 1.1 to the Company's Registration Statement on Form S-1 (File No.
33-80693) filed with the Securities and Exchange Commission (the "Commission")
on December 21, 1995, as amended, which sets forth certain indemnification
provisions. The Registrant has obtained liability insurance for its officers and
directors.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities during the
past three years:
In April 1994, the Registrant issued 250,000 shares of Series D
Convertible Preferred Stock to one accredited investor at a price of $8.00 per
share.
From March 1994 to July 1994, the Registrant issued 2,199,238 shares of
Series E Convertible Preferred Stock to various accredited investors at a price
of $4.75 per share.
II-1
<PAGE>
From July 1995 to December 1995, the Registrant issued 2,720,656 shares
of Series F Convertible Preferred Stock to various accredited investors at a
price of $4.00 per share.
The Registrant from time to time has granted stock options to
employees, directors, and consultants. The following table sets forth certain
information regarding such grants:
No. of Range of
Shares Exercise Prices
------ ---------------
1992......................................... 275,322 $ 1.95 - 19.50
1993......................................... 119,659 0.90 - 19.50
1994......................................... 201,750 0.90 - 5.70
1995......................................... 419,642 5.70 - 24.84
1996......................................... 369,182 12.125 - 21.00
The Registrant from time to time has issued stock to employees,
directors, and consultants who have exercised their stock options. The following
table sets forth certain information regarding such issuances:
No. of Range of
Shares Exercise Prices
------ ---------------
1992......................................... 8,334 $ 1.95
1993......................................... -- --
1994......................................... 35,328 0.09 - 5.70
1995......................................... 15,638 0.90 - 9.00
1996......................................... 63,009 0.90 - 9.00
The above securities were offered and sold by the Registrant in
reliance upon an exemption from registration under either (i) Section 4(2) of
the Securities Act as transactions not involving any public offering or (ii)
Rule 701 under the Securities Act. No underwriters were involved in connection
with the sales of securities referred to in this Item 15.
Certain shares of stock issued and issuable upon the exercise of
options as set forth above have been registered by the Registrant on a
Registration Statement on Form S-8 filed with the Commission on February 15,
1996.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
The following is a list of exhibits filed as part of this Registration
Statement.
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
1.1* Form of Placement Agency Agreement.
1.2* Form of Escrow Agreement.
3.1 Second Amended and Restated Certificate of Incorporation of the Registrant. (Exhibit 3.1)(1)
3.2 Amended and Restated By-Laws of the Registrant. (Exhibit 3.2)(1)
4.1 Specimen certificate for shares of the Registrant's Common Stock. (Exhibit 4.1)(1)
4.2 See Exhibits 3.1 and 3.2 for provisions of the Second Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws of the Registrant defining rights of holders of Common Stock of the Registrant.
5* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of Common Stock being registered.
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between the Registrant and the University of Pennsylvania.
(Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between the Registrant and the University of Pennsylvania, as
amended to date. (Exhibit 10.2)(1)
10.3 Form of Common Stock Subscription Agreement. (Exhibit 10.3)(1)
10.4 Form of Series A Preferred Stock Subscription Agreement. (Exhibit 10.4)(1)
10.5 Form of Series B Preferred Stock Subscription and Stock Purchase Agreement. (Exhibit 10.5)(1)
10.6 Form of Series C Preferred Stock Subscription Agreement. (Exhibit 10.6)(1)
10.7 Form of Series D Preferred Stock Subscription Agreement. (Exhibit 10.7)(1)
10.8(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30, 1992, between the Registrant and Abbott
Laboratories. (Exhibit 10.8(a))(1)
10.8(b)+ Supply Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories. (Exhibit
10.8(b))(1)
10.8(c)+ Research and License Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories.
(Exhibit 10.8(c))(1)
10.8(d)+* Amendment to the Research and License Agreement, dated as of January 18, 1995, between the Registrant and Abbott
Laboratories.
10.9 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit 10.9)(1)
10.10 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit 10.10)(1)
10.11 Form of Warrant to Purchase Common Stock, dated as of February 20, 1991. (Exhibit 10.11)(1)
10.12 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993. (Exhibit 10.12)(1)
10.13 Form of Warrant to Purchase Common Stock, dated as of February 16, 1994. (Exhibit 10.13)(1)
10.14 Form of Warrant to Purchase Series E Preferred Stock, dated as of July 29, 1994. (Exhibit 10.14)(1)
II-3
<PAGE>
10.15 Warrant for the Purchase of Common Stock, dated as of June 30, 1995, between the Registrant and Financing for
Science International, Inc. (Exhibit 10.15)(1)
10.16* 1995 Stock Option/Stock Issuance Plan, as amended.
10.17 Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.18 Lease Agreement dated January 9, 1992 between the Registrant and Pennsylvania Business Campus Delaware, Inc., as
amended to date. (Exhibit 10.18)(1)
10.19 Employment Agreement dated December 1, 1994 between the Registrant and P. Sherrill Neff. (Exhibit 10.19)(1)
10.20 Employment Agreement dated April 1, 1992 between the Registrant and David A. Zopf, as amended to date. (Exhibit
10.20)(1)
10.21* Design-Build Agreement dated August 30, 1996 between the Registrant and Irwin & Leighton, Inc.
11* Statement re: Computation of Per Share Earnings.
23.1* Consent of Arthur Andersen LLP.
23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto).
24* Powers of Attorney (included on signature page to this Registration Statement).
27* Financial Data Schedule.
</TABLE>
- ------------------
* Filed herewith
+ Portions of this Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an order of the Commission granting
the Registrant's application for confidential treatment filed pursuant to
Rule 406 under the Securities Act.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(File No. 33-80693) filed with the Commission on December 21, 1995, as
amended.
(b) Financial Statement Schedules:
Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in Financial Statements or notes
thereto.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Second Amended
and Restated Certificate of Incorporation of the Registrant, the Placement
Agency Agreement, or otherwise, the Registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities 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 hereunder, 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
II-4
<PAGE>
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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) For the purpose of determining any liability under the Securities
Act, 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Horsham, Pennsylvania,
on January 13, 1997.
NEOSE TECHNOLOGIES, INC.
By /s/Stephen A. Roth
------------------------
Stephen A. Roth
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
EACH PERSON IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS STEPHEN
A. ROTH AND P. SHERRILL NEFF, AND EACH OF THEM ACTING ALONE, HIS TRUE AND LAWFUL
ATTORNEY-IN-FACT, WITH FULL POWER OF SUBSTITUTION, TO EXECUTE AND CAUSE TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO THE REQUIREMENTS
OF THE SECURITIES ACT OF 1933, AS AMENDED, ANY AND ALL AMENDMENTS AND
POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT, AND INCLUDING ANY
REGISTRATION STATEMENT FOR THE SAME OFFERING THAT IS TO BE EFFECTIVE UPON FILING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, WITH EXHIBITS THERETO AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, AND HEREBY RATIFIES AND CONFIRMS ALL
THAT SAID ATTORNEY-IN-FACT OR HIS SUBSTITUTE OR SUBSTITUTES MAY DO OR CAUSE TO
BE DONE BY VIRTUE HEREOF.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/Stephen A. Roth Chief Executive Officer and January 13, 1997
------------------ Chairman of the Board
Stephen A. Roth (Principal Executive
Officer)
/s/P. Sherrill Neff President and Chief January 13, 1997
------------------- Financial Officer and
P. Sherrill Neff Director (Principal
Financial and Accounting
Officer)
/s/William F. Hamilton Director January 13, 1997
----------------------
William F. Hamilton
/s/Douglas J. MacMaster, Jr. Director January 13, 1997
----------------------------
Douglas J. MacMaster, Jr.
/s/Lindsey A. Rosenwald Director January 13, 1997
-----------------------
Lindsey A. Rosenwald
/s/Lowell E. Sears Director January 13, 1997
------------------
Lowell E. Sears
/s/Jerry A. Weisbach Director January 13, 1997
--------------------
Jerry A. Weisbach
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Sequential Sequential
Number Description Page Number
- ---------- ----------- -----------
<S> <C> <C>
1.1* Form of Placement Agency Agreement.
1.2* Form of Escrow Agreement.
3.1 Second Amended and Restated Certificate of Incorporation of the Registrant. (Exhibit 3.1)(1)
3.2 Amended and Restated By-Laws of the Registrant. (Exhibit 3.2)(1)
4.1 Specimen certificate for shares of the Registrant's Common Stock. (Exhibit 4.1)(1)
4.2 See Exhibits 3.1 and 3.2 for provisions of the Second Amended and Restated Certificate of Incorporation and
Amended and Restated By-Laws of the Registrant defining rights of holders of Common Stock of the Registrant.
5* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of Common Stock being registered.
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between the Registrant and the University of Pennsylvania.
(Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between the Registrant and the University of Pennsylvania, as
amended to date. (Exhibit 10.2)(1)
10.3 Form of Common Stock Subscription Agreement. (Exhibit 10.3)(1)
10.4 Form of Series A Preferred Stock Subscription Agreement. (Exhibit 10.4)(1)
10.5 Form of Series B Preferred Stock Subscription and Stock Purchase Agreement. (Exhibit 10.5)(1)
10.6 Form of Series C Preferred Stock Subscription Agreement. (Exhibit 10.6)(1)
10.7 Form of Series D Preferred Stock Subscription Agreement. (Exhibit 10.7)(1)
10.8(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30, 1992, between the Registrant and Abbott
Laboratories. (Exhibit 10.8(a))(1)
10.8(b)+ Supply Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories. (Exhibit
10.8(b))(1)
10.8(c)+ Research and License Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories.
(Exhibit 10.8(c))(1)
10.8(d)+* Amendment to the Research and License Agreement, dated as of January 18, 1995, between the Registrant and Abbott
Laboratories.
10.9 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit 10.9)(1)
10.10 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit 10.10)(1)
10.11 Form of Warrant to Purchase Common Stock, dated as of February 20, 1991. (Exhibit 10.11)(1)
<PAGE>
10.12 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993. (Exhibit 10.12)(1)
10.13 Form of Warrant to Purchase Common Stock, dated as of February 16, 1994. (Exhibit 10.13)(1)
10.14 Form of Warrant to Purchase Series E Preferred Stock, dated as of July 29, 1994. (Exhibit 10.14)(1)
10.15 Warrant for the Purchase of Common Stock, dated as of June 30, 1995, between the Registrant and Financing for
Science International, Inc. (Exhibit 10.15)(1)
10.16* 1995 Stock Option/Stock Issuance Plan, as amended.
10.17 Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.18 Lease Agreement dated January 9, 1992 between the Registrant and Pennsylvania Business Campus Delaware, Inc., as
amended to date. (Exhibit 10.18)(1)
10.19 Employment Agreement dated December 1, 1994 between the Registrant and P. Sherrill Neff. (Exhibit 10.19)(1)
10.20 Employment Agreement dated April 1, 1992 between the Registrant and David A. Zopf, as amended to date. (Exhibit
10.20)(1)
10.21* Design-Build Agreement dated August 30, 1996 between the Registrant and Irwin & Leighton, Inc.
11* Statement re: Computation of Per Share Earnings.
23.1* Consent of Arthur Andersen LLP.
23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto).
24* Powers of Attorney (included on signature page to this Registration Statement).
27* Financial Data Schedule.
</TABLE>
- ------------------
* Filed herewith
+ Portions of this Exhibit were omitted and filed separately with the
Secretary of the Commission pursuant to an order of the Commission granting
the Registrant's application for confidential treatment filed pursuant to
Rule 406 under the Securities Act.
(1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1
(File No. 33-80693) filed with the Commission on December 21, 1995, as
amended.
<PAGE>
NEOSE TECHNOLOGIES, INC.
1,250,000 Shares of Common Stock, $0.01 par value per share
FORM OF PLACEMENT AGENCY AGREEMENT
January , 1997
Vector Securities International, Inc.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015,
As Placement Agent
Dear Sir or Madam:
Neose Technologies, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell 1,250,000 shares (the "Shares") of common stock, par value
$.01 per share (the "Common Stock"), to certain investors (collectively, the
"Investors"). The Company desires to engage you as its placement agent (the
"Placement Agent") in connection with such issuance and sale. The Common Stock,
is more fully described in the Registration Statement (as hereinafter defined).
The Company hereby confirms as follows its agreements with the Placement
Agent.
1. Agreement to Act as Placement Agent.
On the basis of the representations, warranties and agreements of the
Company herein contained and subject to all the terms and conditions of this
Agreement, the Placement Agent agrees to act as the Company's exclusive
placement agent in connection with the issuance and sale, on a best efforts
basis, by the Company of the Shares to the Investors. The Company shall pay to
the Placement Agent ____% of the proceeds received by the Company from the sale
of the Shares as set forth on the cover page of the Prospectus (as hereinafter
defined).
2. Delivery and Payment. Concurrently with the execution and delivery of
this Agreement, the Company, the Placement Agent, and Citibank N.A., as escrow
agent (the "Escrow Agent"), shall enter into an Escrow Agreement substantially
in the form of Exhibit A attached hereto (the "Escrow Agreement"), pursuant to
which an escrow account will be established, at the Company's expense, for the
benefit of the Investors (the "Escrow Account"). Prior to the Closing Date
(defined below), (i) each of the Investors will deposit an amount equal
<PAGE>
to the price per Share as shown on the cover page of the Prospectus (as
hereinafter defined) multiplied by the number of Shares purchased by it in the
Escrow Account, and (ii) the Escrow Agent will notify the Company and the
Placement Agent in writing whether the Investors have deposited in the Escrow
Account funds in the amount equal to the proceeds of the sale of all of the
Shares offered hereby (the "Requisite Funds") into the Escrow Account. At 10:00
a.m., New York City time, on January , 1997, or at such other time on such other
date as may be agreed upon by the Company and the Placement Agent but in no
event prior to the date on which the Escrow Agent shall have received all of the
Requisite Funds (such date is hereinafter referred to as the "Closing Date"),
the Escrow Agent will release the Requisite Funds from the Escrow Account for
collection by the Company and the Placement Agent as provided in the Escrow
Agreement and the Company shall deliver the Shares to the Investors, which
delivery may be made through the facilities of the Depository Trust Company. The
closing (the "Closing") shall take place at the office of Stroock & Stroock &
Lavan, Seven Hanover Square, New York, New York 10004. All actions taken at the
Closing shall be deemed to have occurred simultaneously.
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in such denominations as the Placement Agent shall
request by written notice to the Company. For the purpose of expediting the
checking and packaging of certificates for the Shares, the Company agrees to
make such certificates available for inspection at least 24 hours prior to
delivery to the Investors.
3. Representations and Warranties of the Company. The Company represents
and warrants and covenants to the Placement Agent that:
(a) A registration statement (Registration No. 333-_______) on Form S-1
relating to the Shares, including a preliminary prospectus relating to the
Shares and such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company, under
the provisions of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (collectively referred to as the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Commission has not issued any order
preventing or suspending the use of the Prospectus or the Preliminary Prospectus
(as defined below). The term "Preliminary Prospectus" as used herein means a
preliminary prospectus relating to the Shares as contemplated by Rule 430 or
Rule 430A ("Rule 430A") of the Rules and Regulations included at any time as
part of the registration statement. Copies of such registration statement and
amendments and of each related Preliminary Prospectus have been delivered to the
Placement Agent. If such registration statement has not become effective, a
further amendment to such registration statement, including a form of final
prospectus, necessary to permit such registration statement to become effective
will be filed promptly by the Company with the Commission. If such registration
statement has become effective, a final prospectus relating to the Shares
containing information permitted to be omitted at the time of effectiveness by
Rule 430A will be filed by the Company with the Commission in accordance with
Rule 424(b) of the Rules and Regulations promptly after execution and delivery
of this
-2-
<PAGE>
Agreement. The term "Registration Statement" means the registration statement as
amended at the time it becomes or became effective (the "Effective Date"),
including all material incorporated by reference therein and any information
deemed to be included by Rule 430A. The term "Prospectus" means the prospectus
relating to the Shares as first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no such filing is required, the form
of final prospectus relating to the Shares included in the Registration
Statement at the Effective Date, in either case, including all material, if any,
incorporated by reference therein.
(b) On the date that any Preliminary Prospectus was filed with the
Commission, the date the Prospectus is first filed with the Commission pursuant
to Rule 424(b) (if required), at all times subsequent to and including the
Closing Date and when any post-effective amendment to the Registration Statement
becomes effective or any amendment or supplement to the Prospectus is filed with
the Commission, the Registration Statement, each Preliminary Prospectus and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did or will comply with all applicable
provisions of the Act and the Rules and Regulations and did or will contain all
statements required to be stated therein in accordance with the Act and the
Rules and Regulations. On the Effective Date and when any post-effective
amendment to the Registration Statement becomes effective, no part of the
Registration Statement or any such amendment did or will 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 not
misleading. At the Effective Date, at the date the Prospectus or any amendment
or supplement to the Prospectus is filed with the Commission and at the Closing
Date the Prospectus did not or will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Company has not distributed any offering material in connection
with the offering or sale of the Common Stock, other than the Registration
Statement, the Preliminary Prospectus and the Prospectus.
(c) The Company is, and at the Closing Date will be, duly organized,
validly existing and in good standing under the laws of Delaware. The Company
has, and at the Closing Date will have, full power and authority to conduct all
the activities conducted by it, to own or lease all the assets owned or leased
by it and to conduct its business as described in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, in the most recent
Preliminary Prospectus). The Company is, and at the Closing Date will be, duly
licensed or qualified to do business and in good standing as a foreign
organization in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it makes such
licensing or qualification necessary, except where the failure to be so licensed
or qualified will not have a material adverse effect on the ability of the
Company or its Subsidiaries to carry on its business as presently conducted.
Except as disclosed or incorporated by reference into the Registration
Statement, the Company does not own, and at the Closing Date will not own,
directly or indirectly, any shares of stock or any
-3-
<PAGE>
other equity or long-term debt securities of any corporation or have any equity
interest in any firm, partnership, joint venture, association or other entity.
Complete and correct copies of the articles or certificate of incorporation and
of the bylaws of the Company and all amendments thereto have been delivered to
the Placement Agent, and no changes therein will be made subsequent to the date
hereof and prior to the Closing Date.
(d) The issued and outstanding shares of capital stock of the Company
have been validly issued, are fully paid and nonassessable and, other than as
set forth in the Registration Statement, are not subject to any preemptive or
similar rights. Except as set forth in the Registration Statement and the
Prospectus such shares are not subject to any preemptive or similar rights. The
Company has an authorized, issued and outstanding capitalization as set forth
in the Prospectus as of the dates referred to therein. The description of the
securities of the Company in the Registration Statement and the Prospectus is,
and at the Closing Date will be, complete and accurate in all respects. Except
as set forth in the Registration Statement and the Prospectus, the Company does
not have outstanding, and at the Closing Date will not have outstanding, any
options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or exchangeable for, or any
contracts or commitments to issue or sell, any shares of capital stock or other
securities.
(e) This Agreement has been duly authorized and validly executed and
delivered by the Company and is a legal, valid and binding agreement of the
Company enforceable against the Company in accordance with its terms, subject to
the effect of applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and equitable principles of general applicability.
The Escrow Agreement has been duly authorized and validly executed and delivered
by the Company and is a legal, valid and binding agreement of the Company
enforceable against the Company in accordance with its terms, subject to the
effect of applicable bankruptcy, insolvency or similar laws affecting creditors'
rights generally and equitable principles of general applicability.
(f) The issuance and sale of the Shares have been duly authorized by the
Company, and the Shares, when issued and paid for in accordance with this
Agreement, will be duly and validly issued, fully paid and nonassessable and
will not be subject to preemptive or similar rights. The holders of the Shares
will not be subject to personal liability by reason of being such holders. The
Shares, when issued, will conform to the description thereof set forth in the
Prospectus.
(g) The financial statements and the related notes and schedules
included in the Registration Statement and the Prospectus present fairly the
financial condition of the Company as of the dates thereof and the results of
operations, stockholders' equity (deficit) and cash flows of the Company at the
dates and for the periods covered thereby, all in conformity with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the entire period involved, except as otherwise disclosed therein. No other
financial statements or schedules of the Company or any other entity are
required by the Act or the Rules and Regulations to be included in the
Registration Statement or the Prospectus.
-4-
<PAGE>
Arthur Andersen LLP (the "Accountants"), who have reported on such financial
statements and schedules, are independent accountants with respect to the
Company as required by the Act and the Rules and Regulations. The financial
statements of the Company and the related notes and schedules included in the
Registration Statement and the Prospectus have been prepared in conformity with
the requirements of the Act and the Rules and Regulations and present fairly the
information shown therein.
(h) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(i) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus and prior to the Closing Date,
except as set forth in or contemplated by the Registration Statement and the
Prospectus, (i) there has not been and will not have been any change in the
capitalization of the Company other than non-material changes in the ordinary
course of business, or any material adverse change in the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company arising for any reason whatsoever, (ii) the Company has not
incurred nor will it incur any material liabilities or obligations, direct or
contingent, nor has the Company entered into nor will it enter into any material
transactions other than pursuant to this Agreement, the Registration Statement
and the transactions referred to herein and therein and (iii) the Company has
not and will not have paid or declared any dividends or other distributions of
any kind on any class of its capital stock.
(j) Any real property and buildings held under lease to the Company are
held or leased by the Company under valid, binding and enforceable leases
conforming to the description thereof set forth in or incorporated by reference
into the Registration Statement and the Prospectus), with such exceptions as do
not interfere with the use made and proposed to be made of such property and
buildings by the Company.
(k) The Company is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(l) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or to the
Company's best knowledge, threatened against or affecting the Company or any of
its officers in their capacity as such, before or by any Federal or state court,
commission, regulatory body, administrative
-5-
<PAGE>
agency or other governmental body, domestic or foreign, wherein an unfavorable
ruling, decision or finding would reasonably be likely to materially adversely
affect the business, properties, prospects, condition (financial or otherwise)
or results of operations of the Company taken as a whole.
(m) The Company has, and at the Closing Date will have, (i) all
governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to carry on its business as presently conducted except
where the failure to have such governmental licenses, permits, consents, orders,
approvals and other authorizations would not have a material adverse effect on
the business, properties, prospects, condition (financial or otherwise) or
results of operation of the Company, (ii) complied with all laws, regulations
and orders applicable to either it or its business, where the failure to so
comply would have a material adverse effect on the business, properties,
prospects, condition (financial or otherwise) or results of operations of the
Company, and (iii) performed all its obligations required to be performed, and
is not, and at the Closing Date will not be, to the Company's best knowledge, in
default, under any indenture, mortgage, deed of trust, voting trust agreement,
loan agreement, bond, debenture, note agreement, lease, contract or other
agreement or instrument (collectively, a "contract or other agreement") to which
it is a party or by which its property is bound or affected, except as otherwise
set forth in the Registration Statement and the Prospectus and except where such
default would not have a material adverse effect on the business, properties,
prospects, condition (financial or otherwise) or results of operations of the
Company, and, to the Company's best knowledge, no other party under any contract
or other agreement to which it is a party is in default in any respect
thereunder. The Company is not in violation of any provision of its
organizational or governing documents.
(n) The Company has all corporate power and authority to enter into this
Agreement and the Escrow Agreement, and to carry out the provisions and
conditions hereof and thereof, and all consents, authorizations, approvals and
orders required in connection herewith and therewith have been obtained.
(o) Neither (i) the issuance, offering and sale of the Shares pursuant
hereto, nor (ii) the compliance by the Company with the other provisions hereof
require the consent, approval, authorization, registration or qualification of
or with any governmental authority, except such as have been obtained, such as
may be required under state securities or Blue Sky laws or the bylaws and rules
of the National Association of Securities Dealers, Inc. (the "NASD") and, if the
Registration Statement is not effective under the Act as of the time of
execution hereof, such as may be required (and shall be obtained as provided in
either this Agreement) under the Act.
(p) Neither the execution of this Agreement or the Escrow Agreement, nor
the issuance, offering or sale of the Shares, nor the consummation of any of the
transactions contemplated herein or in the Escrow Agreement, nor the compliance
by the Company with the terms and provisions hereof or thereof will conflict
with, or will result in a breach of, any of the terms and provisions of, or has
constituted or will constitute a default
-6-
<PAGE>
under, or has resulted in or will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company pursuant
to the terms of any contract or other agreement to which the Company may be
bound or to which any of the property or assets of the Company is subject,
except such conflicts, breaches or defaults as may have been waived; nor will
such action result in any violation of the provisions of the Company's
organizational or governing documents, or any statute or any order, rule or
regulation applicable to the Company or of any court or of any federal, state or
other regulatory authority or other government body having jurisdiction over the
Company.
(q) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company is a party have been duly
authorized, executed and delivered by the Company, constitute valid and binding
agreements of the Company, and are enforceable against the Company in accordance
with the terms thereof, subject to the effect of applicable bankruptcy,
insolvency or similar laws affecting creditors' rights generally and equitable
principles of general applicability.
(r) No statement, representation or warranty made by the Company in this
Agreement or made in any certificate or document required by this Agreement or
the Escrow Agreement to be delivered to the Placement Agent, the Investors or
the Escrow Agent was or will be, when made, inaccurate, untrue or incorrect in
any material respect.
(s) The Company and its directors, officers or controlling persons have
not taken, directly or indirectly, any action intended, or which might
reasonably be expected, to cause or result, under the Act or otherwise, in, or
which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Common Stock.
(t) No holder of securities of the Company has rights to the
registration of any securities of the Company as a result of the filing of the
Registration Statement, other than rights which are not exercisable due to the
Placement Agent's determination to include only securities sold directly from
the Company, except for such rights as have been waived which have been
disclosed to the Placement Agent.
(u) The Common Stock is currently listed on the Nasdaq National Market
(the "NNM").
(v) The Company is not involved in any material labor dispute nor is any
such dispute threatened.
(w) Neither the Company nor any of its employees or agents has made any
payment of funds of the Company received, or retained any funds in violation of
any law, rule or regulation of a character required to be disclosed in the
Prospectus.
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<PAGE>
(x) The Company is insured as described in the Prospectus. The Company
has no reason to believe that its current insurance arrangements are
insufficient for the Company to carry on its business as presently conducted.
(y) Except as set forth in the Registration Statement and the
Prospectus, the business, operations and properties of the Company has been and
is being conducted in compliance with all applicable laws, ordinances, rules,
regulations, licenses, permits, approvals, plans, authorizations or requirements
relating to occupational safety and health, or pollution, or protection of
health or the environment (including, without limitation, those relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants or hazardous or toxic substances, materials or wastes into ambient
air, surface water, groundwater or land, or relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of chemical substances, pollutants, contaminants or hazardous or toxic
substances, materials or wastes, whether solid, gaseous or liquid in nature) of
any governmental department, commission, board, bureau, agency or
instrumentality of the United States, any state or political subdivision
thereof, or any foreign jurisdiction, and all applicable judicial or
administrative agency or regulatory decrees, awards, judgments and orders
relating thereto, except where the failure to be in such compliance will not,
individually or in the aggregate, have a material adverse effect on the ability
of the Company to carry on its business as presently conducted; and the Company
has not received any notice from any governmental instrumentality or any third
party alleging any material violation thereof or liability thereunder
(including, without limitation, liability for costs of investigating or
remediating sites containing hazardous substances and/or damages to natural
resources).
(z) The Company is not aware of any infringement as to any of its
patents, either issued or allowed in the United States or Europe, nor is it
aware of any infringement of any confidentiality or non-compete agreement.
(aa) Each officer and director of the Company listed on Exhibit B
hereto has delivered to the Placement Agent an agreement in the form of
Attachment A hereto to the effect that he or she will not, for a period of 90
days after the date hereof, without the prior written consent of the Placement
Agent, offer to sell, sell, contract to sell, grant any option to purchase or
otherwise dispose (or announce any offer, sale, grant of any option to purchase
or other disposition) of any shares of capital stock of the Company or
securities convertible into, or exchangeable or exercisable for, shares of
capital stock of the Company.
(bb) The Company has delivered to the Placement Agent an agreement
in the form of Attachment B hereto to the effect that it will not, for a period
of 180 days after the date hereof, without the prior written consent of the
Placement Agent, offer to sell, sell, contract to sell, grant any option to
purchase or otherwise dispose (or announce any offer, sale, grant of any option
to purchase or other disposition) of any shares of capital stock of the Company
or securities convertible into, or exchangeable or exercisable for, shares of
capital stock of the Company, except with respect to the issuance of shares of
Common Stock upon the exercise of stock options and warrants outstanding as of
the date hereof and upon the conversion of shares
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<PAGE>
of Preferred Stock outstanding as of the date hereof and the issuance of Common
Stock or stock options under any benefit plan of the Company.
4. Agreements of the Company. The Company covenants and agrees with the
Placement Agent as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus would be required by law to be
delivered in connection with sales of the Shares by an underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Placement Agent within a reasonable period of time prior to the filing thereof
and the Placement Agent shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the Registration
Statement to become effective, and will notify the Placement Agent promptly, and
will confirm such advice in writing, (1) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, (2) of any request by the securities or other governmental authority
(including, without limitation, the Commission) of any jurisdiction for
amendments or supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by any securities or other
governmental authority (including, without limitation, the Commission) of any
jurisdiction of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose or the threat
thereof, (4) of the happening of any event during the period mentioned in the
second sentence of Section 4(c) that in the judgment of the Company makes any
statement made in the Registration Statement or the Prospectus untrue or that
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances in which they are made, not misleading and (5) of receipt by the
Company or any representative or attorney of the Company of any other
communication from the securities or other governmental authority (including,
without limitation, the Commission) of any jurisdiction relating to any of the
Registration Statement, any Preliminary Prospectus or the Prospectus. If at any
time any securities or other governmental authority (including, without
limitation, the Commission) of any jurisdiction shall issue any order suspending
the effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement, pursuant to Rule 430A, it will use its best efforts to
comply with the provisions of and make all requisite filings with the Commission
pursuant to said Rule 430A and to notify the Placement Agent promptly of all
such filings.
(c) If, at any time when a Prospectus relating to the Shares is required
to be delivered under the Act, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would, in the judgment of counsel
to the Company or counsel to the Placement Agent, include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which
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<PAGE>
they were made, not misleading, or the Registration Statement, as then amended
or supplemented, would, in the judgment of counsel to the Company or counsel to
the Placement Agent, include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading,
or if for any other reason it is necessary, in the judgment of counsel to the
Company or counsel to the Placement Agent, at any time to amend or supplement
the Prospectus or the Registration Statement to comply with the Act or the Rules
and Regulations, the Company will promptly notify the Placement Agent and,
subject to Section 4(a) hereof, will promptly prepare and file with the
Commission, at the Company's expense, an amendment to the Registration Statement
or an amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance and will deliver to the Placement Agent,
without charge, such number of copies thereof as the Placement Agent may
reasonably request. The Company consents to the use of the Prospectus or any
amendment or supplement thereto by the Placement Agent.
(d) The Company will furnish to the Placement Agent and its counsel,
without charge, (i) two signed copies of the registration statement described in
Section 3(a) hereof and each pre-effective amendment thereto, including
financial statements and schedules, and all exhibits thereto and (ii) so long as
a prospectus relating to the Shares is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Placement Agent may reasonably request.
(e) The Company will comply with all the undertakings contained in the
Registration Statement.
(f) Prior to the sale of the Shares to the Investors, the Company will
cooperate with the Placement Agent and its counsel in connection with the
registration or qualification of the Shares for offer and sale under the state
securities or Blue Sky laws of such jurisdictions as the Placement Agent may
request; provided, that in no event shall the Company be obligated to qualify to
do business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(g) During the period of five years commencing on the Effective Date,
the Company will furnish to the Placement Agent copies of such financial
statements and other periodic and special reports as the Company may from time
to time distribute generally to the holders of any class of its capital stock,
and will furnish to the Placement Agent a copy of each annual or other report it
shall be required to file with the Commission.
(h) The Company will make generally available to holders of its
securities, as soon as may be practicable, but in no event later than the last
day of the fifteenth full calendar month following the calendar quarter in which
the Effective Date falls, a consolidated earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months ended
commencing after the Effective Date, and satisfying the
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<PAGE>
provisions of Section 11(a) of the Act (including Rule 158 of the Rules and
Regulations).
(i) The Company will not at any time, directly or indirectly, take any
action intended, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the Shares to facilitate
the sale or resale of any of the Shares.
(j) The Company will apply the net proceeds from the offering and sale
of the Shares in the manner set forth in the Prospectus under the caption "Use
of Proceeds."
5. Expenses. Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement is terminated, the Company will pay all costs
and expenses incident to the performance of the obligations of the Company under
this Agreement, including but not limited to costs and expenses of or relating
to (1) the preparation, printing and filing of the Registration Statement
(including each pre- and post-effective amendments thereto) and exhibits
thereto, each Preliminary Prospectus, the Prospectus and any amendment or
supplement to the Prospectus, including all fees, disbursements and other
charges of counsel to the Company, (2) the preparation and delivery of
certificates representing the Shares, (3) furnishing (including costs of
shipping and mailing) such copies of the Registration Statement (including all
pre- and post-effective amendments thereto), the Prospectus and any Preliminary
Prospectus, and all amendments and supplements to the Prospectus, as may be
requested for use in connection with the direct placement of the Shares, (4) the
listing of the Common Stock on the NMS, (5) any filings required to be made by
the Placement Agent with the NASD, and the fees, disbursements and other charges
of counsel for the Placement Agent in connection therewith, (6) the registration
or qualification of the Shares for offer and sale under the securities or Blue
Sky laws of such jurisdictions designated pursuant to Section 4(f), including
the reasonable fees, disbursements and other charges of counsel to the Placement
Agent in connection therewith and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (7) fees, disbursements and other
charges of counsel to the Company and (8) the fees of the Escrow Agent. The
Company shall reimburse the Placement Agent, on a fully accountable basis, for
all travel, legal and other out-of-pocket expenses incurred in connection with
the engagement hereunder, up to a maximum of $80,000; provided however, that if
the transactions contemplated herein do not occur for reasons other than those
arising pursuant to Section 8(a) hereof, the Company shall only reimburse the
Placement Agent for one half of its actual out-of-pocket expenses incurred
through such date of termination, up to a maximum of $40,000.
6. Conditions of the Obligations of the Placement Agent. The obligations of
the Placement Agent hereunder are subject to the following conditions:
(a) Notification that the Registration Statement has become effective
shall be received by the Placement Agent not later than 5:00 p.m., New York City
time, on the date of this Agreement or at such later date and time as shall be
consented to in writing by the Placement Agent and all filings required by Rule
424 of the Rules and Regulations and Rule
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<PAGE>
430A shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued, and no proceedings for that purpose shall be
pending or threatened by any securities or other governmental authority
(including, without limitation, the Commission), (ii) no order suspending the
effectiveness of the Registration Statement or the qualification or registration
of the Shares under the securities or Blue Sky laws of any jurisdiction shall be
in effect and no proceeding for such purpose shall be pending before or
threatened or contemplated by any securities or other governmental authority
(including, without limitation, the Commission), (iii) any request for
additional information on the part of the staff of any securities or other
governmental authority (including, without limitation, the Commission) shall
have been complied with to the satisfaction of the staff of the Commission or
such authorities and (iv) after the date hereof no amendment or supplement to
the Registration Statement or the Prospectus shall have been filed unless a copy
thereof was first submitted to the Placement Agent and the Placement Agent did
not object thereto in good faith, and the Placement Agent shall have received
certificates, dated the Closing Date and signed by the President and Chief
Executive Officer or the Chairman of the Board of Directors of the Company, and
the Chief Financial Officer of the Company (who may, as to proceedings
threatened, rely upon the best of their information and belief), to the effect
of clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company, whether or not arising from transactions in the
ordinary course of business, in each case other than as set forth in or
contemplated by the Registration Statement and the Prospectus and (ii) the
Company shall not have sustained any material loss or interference with its
business or properties from fire, explosion, flood or other casualty, whether or
not covered by insurance, or from any labor dispute or any court or legislative
or other governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus, if in the judgment of the Placement
Agent any such development makes it impracticable or inadvisable to consummate
the sale and delivery of the Shares to Investors at the public offering price.
(d) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no litigation
or other proceeding instituted against the Company or any of its officers or
directors in their capacities as such, before or by any Federal, state or local
court, commission, regulatory body, administrative agency or other governmental
body, domestic or foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding would materially and adversely affect the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company.
(e) Each of the representations and warranties of the Company
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<PAGE>
contained herein shall be true and correct in all material respects at the
Closing Date, as if made on such date, and all covenants and agreements herein
contained to be performed on the part of the Company and all conditions herein
contained to be fulfilled or complied with by the Company at or prior to the
Closing Date shall have been duly performed, fulfilled or complied with.
(f) The Placement Agent shall have received an opinion, dated the
Closing Date (or such other date as may be set forth in a representation or
warranty), of Morgan, Lewis & Bockius LLP, as counsel to the Company, in form
and substance reasonably satisfactory to the Placement Agent:
(g) Concurrently with the execution and delivery of this Agreement, or,
if the Company elects to rely on Rule 430A, on the date of the Prospectus, the
Accountants shall have furnished to the Placement Agent a letter, dated the date
of its delivery (the "Original Letter"), addressed to the Placement Agent and in
form and substance satisfactory to the Placement Agent, confirming that (i) they
are independent public accountants with respect to the Company within the
meaning of the Act and the Rules and Regulations; (ii) in their opinion, the
financial statements and any supplementary financial information and schedules
(and pro forma financial information) included in the Registration Statement and
examined by them comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations; (iii) on the
basis of procedures, not constituting an examination in accordance with
generally accepted auditing standards, set forth in detail in the Original
Letter, a reading of the latest available interim financial statements of the
Company, inspections of the minute books of the Company since the latest audited
financial statements included in the Prospectus, inquiries of officials of the
Company responsible for financial and accounting matters and such other
inquiries and procedures as may be specified in the Original
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<PAGE>
Letter to a date not more than five days prior to the date of the Original
Letter, nothing came to their attention that caused them to believe that: (A) as
of a specified date not more than five days prior to the date of the Original
Letter, there have been any changes in the capital stock of the Company or any
increase in the long-term debt of the Company, or any decreases in net current
assets or net assets or other items specified by the Placement Agent, or any
increases in any items specified by the Placement Agent, in each case as
compared with amounts shown in the latest balance sheet included in the
Prospectus, except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described in the
Original Letter; and (B) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred to in
Clause (A), there were any decreases in revenues or the total or per share
amounts of net income or other items specified by the Placement Agent, or any
increases in any items specified by the Placement Agent, in each case as
compared with the comparable period of the preceding year and with any other
period of corresponding length specified by the Placement Agent, except in each
case for decreases or increases which the Prospectus discloses have occurred or
may occur or which are described in the Original Letter; and (iv) in addition to
the examination referred to in their reports included in the Prospectus and the
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an examination in accordance with
generally accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the Placement Agent, which
are derived from the general accounting, financial or other records of the
Company, as the case may be, which appear in the Prospectus or in Part II of, or
in exhibits or schedules to, the Registration Statement, and have compared such
amounts, percentages and financial information with such accounting, financial
and other records and have found them to be in agreement. At the Closing Date,
the Accountants shall have furnished to the Placement Agent a letter, dated the
date of its delivery, which shall confirm, on the basis of a review in
accordance with the procedures set forth in the Original Letter, that nothing
has come to their attention during the period from the date of the Original
Letter referred to in the prior sentence to a date (specified in the letter) not
more than five days prior to the Closing Date which would require any change in
the Original Letter if it were required to be dated and delivered at the Closing
Date.
(h) The Placement Agent shall have received an opinion, dated the
Closing Date, of Patent Counsel in form and substance satisfactory to the
Placement Agent as to certain intellectual property matters referenced in the
Registration Statement.
(i) At the Closing Date, there shall be furnished to the Placement Agent
a certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to the Placement Agent to the effect that to the best of
such person's knowledge:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, (x) the Registration Statement does not 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
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<PAGE>
the statements therein not misleading and (y) the Prospectus does not
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 light of the circumstances under which they were
made, not misleading and (B) since the Effective Date no event has occurred
as a result of which it is necessary to amend or supplement the Prospectus
in order to make the statements therein not untrue or misleading in any
material respect.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects.
(iii) Each of the covenants required herein to be performed by the
Company on or prior to the date of such certificate has been duly, timely
and fully performed and each condition herein required to be complied with
by the Company on or prior to the delivery of such certificate has been
duly, timely and fully complied with.
(iv) No stop order suspending the effectiveness of the Registration
Statement or of any part thereof has been issued and no proceedings for
that purpose have been instituted or are contemplated by the Securities and
Exchange Commission.
(v) Subsequent to the date of the most recent financial statements in
the Prospectus, there has been no material adverse change in the financial
position or results of operations of the Company, except as set forth in or
contemplated by the Prospectus.
(j) The Shares shall be qualified for sale in such states as the
Placement Agent may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing
Date; provided that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take any
action which would subject it to general service of process in any jurisdiction
where it is not now so subject.
(k) The Company shall have furnished to the Placement Agent such
certificates, in addition to those specifically mentioned herein, as the
Placement Agent may have reasonably requested as to the accuracy and
completeness at the Closing Date of any statement in the Registration Statement
or the Prospectus, as to the accuracy at the Closing Date of the representations
and warranties of the Company as to the performance by the Company of its
obligations hereunder, or as to the fulfillment of the conditions concurrent and
precedent to the obligations hereunder of the Placement Agent.
7. Indemnification.
(a) The Company shall indemnify and hold harmless the Placement
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Agent, the directors, officers, employees and agents of the Placement Agent and
each person, if any, who controls the Placement Agent within the meaning of
Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), from and against any and all losses, claims,
liabilities, expenses and damages, joint or several, (including any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which it, or any of them, may become subject under the Act
or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based on (i) any untrue statement or alleged untrue
statement made by the Company in Section 3 of this Agreement, (ii) any untrue
statement or alleged untrue statement of any material fact contained in (A) any
Preliminary Prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus and (B)
any application or other document, or any amendment or supplement thereto,
executed by the Company based upon written information furnished by or on behalf
of the Company filed in any jurisdiction in order to qualify the Shares under
the securities or Blue Sky laws thereof or filed with the Commission or any
securities association or securities exchange (each, an "Application") or (iii)
the omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any supplement to the Registration
Statement or the Prospectus or any Application a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided, however, that
the Company will not be liable to the extent that such loss, claim, liability,
expense or damage arises from the sale of the Shares in the public offering to
any person and is based solely on an untrue statement or omission or alleged
untrue statement or omission made in reliance on and in conformity with
information relating to the Placement Agent furnished in writing to the Company
by the Placement Agent expressly for inclusion in the Registration Statement,
any Preliminary Prospectus or the Prospectus; and provided further, that such
indemnity with respect to any Preliminary Prospectus shall not inure to the
benefit of any Placement Agent (or any person controlling such Placement Agent)
from whom the person asserting any such loss, claim, damage, liability or action
purchased Shares which are the subject thereof to the extent that any such loss,
claim, damage or liability (i) results from the fact that such Placement Agent
failed to send or give a copy of the Prospectus (as amended or supplemented) to
such person at or prior to the confirmation of the sale of such Shares to such
person in any case where such delivery is required by the Act and (ii) arises
out of or is based upon an untrue statement or omission of a material fact
contained in such Preliminary Prospectus that was corrected in the Prospectus
(or any amendment or supplement thereto), unless such failure to deliver the
Prospectus (as amended or supplemented) was the result of noncompliance by the
Company with Section 5(d). This indemnity agreement will be in addition to any
liability which the Company may otherwise have. The Company will not, without
the prior written consent of the Placement Agent (which will not be unreasonably
withheld), settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Placement Agent or
any person who controls such Placement Agent within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act is a party to each claim, action, suit
or proceeding), unless such
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settlement, compromise or consent includes an unconditional release of the
Placement Agent and each such controlling person from all liability arising out
of such claim, action, suit or proceeding.
(b) The Placement Agent will indemnify and hold harmless the Company,
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, each director of the Company and
each officer of the Company who signs the Registration Statement to the same
extent as the foregoing indemnity from the Company to the Placement Agent, but
only insofar as losses, claims, liabilities, expenses or damages arise out of or
are based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to the
Placement Agent furnished in writing to the Company by the Placement Agent
expressly for use in the Registration Statement, any Preliminary Prospectus or
the Prospectus. This indemnity agreement will be in addition to any liability
that the Placement Agent might otherwise have. The Company acknowledges that,
for all purposes under this Agreement, the statements set forth under the
heading "Plan of Distribution" in any Preliminary Prospectus and the Prospectus
constitute the only information relating to the Placement Agent furnished in
writing to the Company by the Placement Agent expressly for inclusion in the
Registration Statement, any Preliminary Prospectus or the Prospectus.
(c) Any party that proposes to assert the right to be indemnified under
this Section 7 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 7, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 7 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after notice
from the indemnifying party to the indemnified party of its election to assume
the defense, the indemnifying party will not be liable to the indemnified party
for any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on advice of counsel) that a conflict or potential conflict
exists (based on advice of counsel to the indemnified party) between the
indemnified party and the indemnifying party (in which case the indemnifying
party will not have the right to direct the
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defense of such action on behalf of the indemnified party) or (3) the
indemnifying party has not in fact employed counsel to assume the defense of
such action within a reasonable time after receiving notice of the commencement
of the action, in each of which cases the reasonable fees, disbursements and
other charges of counsel will be at the expense of the indemnifying party or
parties. It is understood that the indemnifying party or parties shall not, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the reasonable fees, disbursements and other charges of more than
one separate firm admitted to practice in such jurisdiction at any one time for
all such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. The Company will not, without the prior written consent of the
Placement Agent (which consent will not be unreasonably withheld), settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not the Placement Agent or any person who controls
the Placement Agent within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act is a party to such claim, action, suit or proceeding), unless
such settlement, compromise or consent includes an unconditional release of the
Placement Agent and each such controlling person from all liability arising out
of such claim, action, suit or proceeding. An indemnifying party will not be
liable for any settlement of any action or claim effected without its written
consent (which consent will not be unreasonably withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 7 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Placement Agent,
the Company and the Placement Agent will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from persons other than the
Placement Agent such as persons who control the Company within the meaning of
the Act or the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company, who also may be liable for contribution)
to which the Company and the Placement Agent may be subject in such proportion
as shall be appropriate to reflect the relative benefits received by the Company
on the one hand and the Placement Agent on the other. The relative benefits
received by the Company on the one hand and the Placement Agent on the other
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting Company expenses) received by the Company as set
forth in the table on the cover page of the Prospectus bear to the fee received
by the Placement Agent hereunder. If, but only if, the allocation provided by
the foregoing sentence is not permitted by applicable law, the allocation of
contribution shall be made in such proportion as is appropriate to reflect not
only the relative benefits referred to in the foregoing sentence but also the
relative fault of the Company, on the one hand, and the Placement Agent on the
other, with respect to the statements or omissions which resulted in such loss,
claim, liability, expense or damage, or action in respect thereof, as well as
any other relevant equitable considerations with respect to such offering. Such
relative fault shall be determined by reference to whether the untrue or
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<PAGE>
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or the
Placement Agent, the intent of the parties and their relative knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company and the Placement Agent agree that it would not be just and
equitable if contributions pursuant to this Section 7(d) were to be determined
by pro rata allocation or by any other method of allocation which does not take
into account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, liability,
expense or damage, or action in respect thereof, referred to above in this
Section 7(d) shall be deemed to include, for purpose of this Section 7(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), the Placement Agent shall
not be required to contribute any amount in excess of the fee received by it,
and no person found guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) will be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of this
Section 7(d), any person who controls a party to this Agreement within the
meaning of the Act or the Exchange Act will have the same rights to contribution
as that party, and each officer of the Company who signed the Registration
Statement will have the same rights to contribution as the Company, subject in
each case to the provisions hereof. Any party entitled to contribution, promptly
after receipt of notice of commencement of any action against such party in
respect of which a claim for contribution may be made under this Section 7(d),
will notify any such party or parties from whom contribution may be sought, but
the omission so to notify will not relieve the party or parties from whom
contribution may be sought from any other obligation it or they may have under
this Section 7(d). No party will be liable for contribution with respect to any
action or claim settled without its written consent (which consent will not be
unreasonably withheld).
8. Termination.
(a) The obligations of the Placement Agent under this Agreement may be
terminated at any time prior to the Closing Date, by notice to the Company from
the Placement Agent, without liability on the part of the Placement Agent to the
Company if, prior to delivery and payment for the Shares, in the sole judgment
of the Placement Agent (i) trading in the Common Stock of the Company shall have
been suspended by the Commission or by the NNM, (ii) trading in securities
generally on the New York Stock Exchange or the NNM shall have been suspended or
limited or minimum or maximum prices shall have been generally established on
any of such exchanges, or additional material governmental restrictions, not in
force on the date of this Agreement, shall have been imposed upon trading in
securities generally by any of such exchanges or by order of the Commission or
any court or other governmental authority, (iii) a general banking moratorium
shall have been declared by Federal or New York State authorities, (iv) any
material adverse change in the financial or securities markets in the United
States or any outbreak or material escalation of hostilities or declaration by
the United States of a national emergency or war or other calamity or crisis
shall have occurred, the effect of any of which is such as to make it, in the
sole judgment of the Placement Agent, impracticable or inadvisable to market the
Shares on the terms and in the manner
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<PAGE>
contemplated by the Prospectus.
(b) The obligations of the parties under this Agreement shall be
automatically terminated in the event that the Requisite Funds have not been
deposited by the Investors into the Escrow Account by the close of business on
the Closing Date.
9. Notices. Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at the office of the Company, 102 Witmer
Road, Horsham, PA 19044, Attention: Stephen A. Roth or (b) if to the Placement
Agent, at the office of Vector Securities International, Inc., 1751 Lake Cook
Road, Suite 350, Deerfield, Illinois, 60015, Attention: Marina Bozilenko. Any
such notice shall be effective only upon receipt. Any notice under Section 7 may
be made by facsimile or telephone, but if so made shall be subsequently
confirmed in writing.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers and the
Placement Agent set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, any of
its officers or directors, the Placement Agent or any controlling person
referred to in Section 7 hereof and (ii) delivery of and payment for the Shares.
The respective agreements, covenants, indemnities and other statements set forth
in Sections 5 and 7 hereof shall remain in full force and effect, regardless of
any termination or cancellation of this Agreement.
11. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the Placement Agent, the Company and their respective successors
and legal representatives, and nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of such
persons and for the benefit of no other person except that (i) the
indemnification and contribution contained in Sections 7(a) and (d) of this
Agreement shall also be for the benefit of the directors, officers, employees
and agents of the Placement Agent and any person or persons who control the
Placement Agent within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act and (ii) the indemnification and contribution contained in Sections
7(b) and (d) of this Agreement shall also be for the benefit of the directors of
the Company, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act. No Investor shall be
deemed a successor because of such purchase.
12. APPLICABLE LAW. THE VALIDITY AND INTERPRETATIONS OF THIS AGREEMENT, AND
THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN
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<PAGE>
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY
PROVISIONS RELATING TO CONFLICTS OF LAWS.
13. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14. Entire Agreement. This Agreement constitutes the entire understanding
between the parties hereto as to the matters covered hereby and supersedes all
prior understandings, written or oral, relating to such subject matter.
Please confirm that the foregoing correctly sets forth the agreement
between the Company and the Placement Agent.
Very truly yours,
NEOSE TECHNOLOGIES, INC.
By:
----------------------------
Name:
Title:
Confirmed as of the date first
above mentioned:
VECTOR SECURITIES INTERNATIONAL, INC.
By:
----------------------------
Name:
Title:
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<PAGE>
EXHIBIT A
[ESCROW AGREEMENT]
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<PAGE>
EXHIBIT B
LOCK UP LETTERS
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<PAGE>
ATTACHMENT A
Vector Securities International, Inc.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Ladies and Gentlemen:
Reference is made to a Placement Agency Agreement (the "Placement Agency
Agreement"), which will be executed between Neose Technologies, Inc., a Delaware
corporation (the "Company"), and Vector Securities International, Inc. (the
"Placement Agent").
In consideration of the Placement Agency Agreement, the undersigned hereby
agrees not to, without the prior written consent of the Placement Agent, offer,
sell or otherwise dispose of any shares of the Company's Common Stock, par value
$.01 per share (the "Common Stock"), or any securities convertible into or
exercisable or exchangeable for, or any rights to purchase or acquire, Common
Stock owned by the undersigned for a period of 90 days after the date of the
Placement Agency Agreement.
Dated: _______________ , 1997
Very truly yours,
----------------------------
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<PAGE>
ATTACHMENT B
Vector Securities International, Inc.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Ladies and Gentlemen:
Reference is made to a Placement Agency Agreement (the "Placement Agency
Agreement"), which will be executed between Neose Technologies, Inc., a Delaware
corporation (the "Company"), and Vector Securities International, Inc. (the
"Placement Agent").
In consideration of the Placement Agency Agreement, the undersigned hereby
agrees not to, without the prior written consent of the Placement Agent, offer,
sell or otherwise dispose of any shares of the Company's Common Stock, par value
$.01 per share (the "Common Stock"), or any securities convertible into or
exercisable or exchangeable for, or any rights to purchase or acquire, Common
Stock owned by the undersigned for a period of 90 days after the date of the
Placement Agency Agreement except with respect to the issuance of shares of
Common Stock upon the exercise of stock options and warrants outstanding as of
the date hereof and upon the conversion of shares of Preferred Stock outstanding
as of the date hereof and the issuance of Common Stock or stock options under
any benefit plan of the Company.
Dated: _____________ , 1997
Very truly yours,
NEOSE TECHNOLOGIES, INC.
--------------------------------
Name:
Title:
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FORM OF ESCROW AGREEMENT
ESCROW AGREEMENT, dated as of January __, 1997, by and among
Neose Technologies, Inc., a Delaware corporation (the "Company"), Vector
Securities International, Inc. (the "Placement Agent") and Citibank N.A., a
national banking institution incorporated under the laws of the United States of
America (the "Escrow Agent").
WHEREAS, the Company proposes to sell an aggregate of
1,250,000 shares of its common stock, par value $.01 per share (the "Shares"),
for an aggregate of $ _______, all as described in the Company's registration
statement on Form S-1 (Registration No. 333- ) (which, together with all
amendments or supplements thereto is referred to herein as the "Registration
Statement");
WHEREAS, the Shares are being offered by the Company to
investors whom the Placement Agent has introduced to the Company, pursuant to
registration under the Securities Act of 1933, as amended, and pursuant to
registration or exemptions from registration under state securities laws;
WHEREAS, the offering of the Shares will terminate on
January __, 1997 (the "Closing Date") and, if subscriptions for the total number
of Shares being offered pursuant to the Registration Statement have not been
received by the Company on or before the Closing Date, no Shares will be sold
and all payments made by subscribers will be refunded by the Escrow Agent with
interest earned thereon, if any; and
WHEREAS, with respect to all subscription payments received
from subscribers, the Company proposes to establish an escrow account with the
Escrow Agent at the office of its Escrow Administration, 120 Wall Street, New
York, New York 10043, Attention: Bryan Gartenberg.
NOW THEREFORE, it is agreed as follows:
1. Establishment of Escrow. The Escrow Agent hereby agrees to
receive and disburse the proceeds from the offering of the Shares and any
interest earned thereon in accordance herewith.
2. Deposit of Escrowed Property. The Placement Agent, on
behalf of the subscribers for the Shares, shall from time to time, but in no
event later than 12:00 noon on the date following the date of receipt by the
Placement Agent, cause to be wired to or deposited with, or, cause the
subscribers for the Shares to wire or deposit with, the Escrow Agent funds or
checks of the subscribers delivered in payment for Shares (the "Escrowed
Property"). Such Escrowed Property shall be wired to or deposited with the
Escrow Agent not later than 12:00 noon on the date following the date on which
it is received by the Placement Agent. Any checks delivered to the Escrow Agent
pursuant to the terms hereof shall be made payable to or endorsed to the order
of the Escrow Agent. The Escrow Agent upon receipt of such checks shall present
such checks for payment to the drawee-bank under such checks. Any checks not
honored by the drawee-bank
<PAGE>
thereunder after the first presentment for payment shall be returned to the
Placement Agent, on behalf of such subscriber, in the same manner notices are
delivered pursuant to Section 6. Upon receipt of funds or checks from the
Placement Agent, the Escrow Agent shall credit such funds and the amount of such
checks to a non-interest-bearing account (the "Escrow Account") held by the
Escrow Agent. If following the credit of the amount of any check to the Escrow
Account such check is dishonored, the Escrow Agent, if such dishonored check
amount shall have been invested pursuant to Section 3, shall liquidate to the
extent of such dishonored check amount such investments and debit the Escrow
Account for the amount of such dishonored check plus, if any, the amount of
interest and other income earned with respect to any investment of such
dishonored check amount.
3. Investment of Escrowed Property. The Escrow Agent on the
second business day ("business day" defined for purposes of this Escrow
Agreement as any day which is not a Saturday, a Sunday or a day on which banks
or trust companies in the City and State of New York are authorized or obligated
by law, regulation or executive order to remain closed) succeeding (unless such
deposit is made in federal or other immediately available or "same day" funds,
in which case, on the business day next succeeding) the credit of any
subscription proceeds to the Escrow Account pursuant to Section 2 and until
release of such proceeds in accordance with the terms hereof, shall deposit such
proceeds in a Citibank Money Market Deposit Account, pursuant to Rule 15c2-4
promulgated by the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, in accordance with the terms set forth on
Exhibit A hereto (made a part of this Escrow Agreement as if herein set forth).
The Escrow Agent shall in no event be liable for any loss resulting from any
change in interest rates applicable to proceeds invested pursuant to this
Section. Interest on proceeds invested pursuant to this Section shall accrue
from the date of investment of such proceeds until the termination of such
investment pursuant to the terms hereof and shall be paid as set forth in
Section 5.
4. List of Subscribers. The Placement Agent shall furnish or
cause to be furnished to the Escrow Agent, at the time of each deposit of funds
or checks pursuant to Section 2, a list, substantially in the form of Exhibit B
hereto, containing the name of, the address of, the number of Shares subscribed
for by, the subscription amount delivered to the Escrow Agent on behalf of, and
the social security or taxpayer identification number, if applicable, of each
subscriber whose funds are being deposited, and to which is attached a completed
W-9 form (or, in the case of any subscriber who is not a United States citizen
or resident, a W-8 form) for each listed subscriber. The Escrow Agent shall
notify the Placement Agent and the Company of any discrepancy between the
subscription amounts set forth on any list delivered pursuant to this Section 4
and the subscription amounts received by the Escrow Agent. The Escrow Agent is
authorized to revise such list to reflect the actual subscription amounts
received and the release of any subscription amounts pursuant to Section 5.
5. Withdrawal of Subscription Amounts. (a) If the Escrow
Agent shall receive a notice, substantially in the form of Exhibit C hereto (an
"Offering Termination Notice"), from the Company, the Escrow Agent shall (i)
promptly after receipt of such Offering Termination Notice and the clearance of
all checks received by the Escrow Agent as Escrowed Property, liquidate any
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<PAGE>
investments that shall have been made pursuant to Section 3 and send to each
subscriber listed on the list held by the Escrow Agent pursuant to Section 4
whose total subscription amount shall not have been released pursuant to
paragraph (b) or (c) of this Section 5, in the manner set forth in paragraph
(e) of this Section 5, a check to the order of such subscriber in the amount of
the remaining subscription amount held by the Escrow Agent as set forth on such
list held by the Escrow Agent, and (ii) promptly after the fourth business day
of the month immediately following the month in which the investments made
pursuant to Section 3 were terminated pursuant to this paragraph, send, in the
manner set forth in paragraph (e) of this Section 5, a check to the order of
each such subscriber in the amount of interest and other income earned and not
yet paid with respect to any investment of such subscriber's funds. The Escrow
Agent shall notify the Company and the Placement Agent of the distribution of
such funds to the subscribers.
(b) In the event that (i) the Shares have been subscribed
for and funds in respect thereof shall have been deposited with the Escrow Agent
on or before the Closing Date and (ii) no Offering Termination Notice shall have
been delivered to the Escrow Agent, the Company and the Placement Agent, shall
deliver to the Escrow Agent a joint notice, substantially in the form of Exhibit
D hereto (a "Closing Notice"), designating the date on which Shares are to be
sold and delivered to the subscribers thereof as the Closing Date, which date
shall not be earlier than the clearance of any checks received by the Escrow
Agent as Escrowed Property, the proceeds of which are to be distributed on such
Closing Date, and identifying the subscribers and the number of Shares to be
sold to each thereof on such Closing Date. Such Closing Notice, unless the
parties otherwise agree, shall be delivered not less than two (2) nor more than
seven (7) business days prior to such Closing Date. The Escrow Agent, after
receipt of such Closing Notice and the clearance of such checks:
(i) on or prior to the Closing Date identified in such
Closing Notice, shall liquidate any investments that shall have been
made pursuant to Section 3 to the extent of the subscription amount to
be distributed pursuant to the immediately succeeding clause (ii);
(ii) on such Closing Date, pay to the Company and the
Placement Agent, in federal or other immediately available funds and
otherwise in the manner and amount specified by the Company and the
Placement Agent in such Closing Notice, an amount equal to the aggregate
of the subscription amounts paid by the subscribers identified in such
Closing Notice for the Shares to be sold on such Closing Date as set
forth on the list held by the Escrow Agent pursuant to Section 4; and
(iii) promptly after the fourth business day of the month
immediately following the month in which the investments made pursuant
to Section 3 were terminated pursuant to such Closing Notice, shall
send, in the manner set forth in paragraph (e) of this Section 5, a
check to the order of each subscriber identified in such Closing Notice
in the amount of interest and other income earned and not yet paid with
respect to any investment of each such subscriber's funds distributed on
such Closing Date. At the time of such transfer, the Escrow Agent shall
identify in writing to the Company and the Placement Agent the amount of
the interest earned for the account of each subscriber and the date such
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<PAGE>
subscription was received.
(c) If at any time and from time to time prior to the
release of any subscriber's total subscription amount pursuant to paragraph (a)
or (b) of this Section 5 from escrow, the Company shall deliver to the Escrow
Agent a notice, substantially in the form of Exhibit E hereto (a "Subscription
Termination Notice"), to the effect that any or all of the subscriptions of such
subscriber have been rejected by the Company (a "Rejected Subscription"), the
Escrow Agent (i) promptly after receipt of such Subscription Termination Notice
and, if such subscriber delivered a check in payment of its Rejected
Subscription, after the clearance of such check, shall liquidate, to the extent
of the sum of such subscriber's Rejected Subscription amount as set forth in the
Subscription Termination Notice, any investments that shall have been made
pursuant to Section 3 and send to such subscriber, in the manner set forth in
paragraph (e) of this Section 5, a check to the order of such subscriber in the
amount of such Rejected Subscription amount, and (ii) promptly after the fourth
business day of the month immediately following the month in which the
investments made pursuant to Section 3 were terminated pursuant to this
paragraph, shall send to such subscriber, in the manner set forth in paragraph
(e) of this Section 5, a check to the order of such subscriber in the amount of
interest and other income earned and not yet paid with respect to any investment
of such subscriber's Rejected Subscription amount. At the time of such transfer,
the Escrow Agent shall identify in writing to the Company and the Placement
Agent the amount of the interest earned for the account of each subscriber and
the date such subscription was received.
(d) On a date following the transfer of any interest earned
for the account of each subscriber pursuant to Section 5(a), (b) or (c), but not
later than January 1, 1998, the Escrow Agent shall provide each subscriber with
tax form 1099 setting forth the amount of such interest.
(e) For the purposes of this Section 5, any check that the
Escrow Agent shall be required to send to any subscriber shall be sent to such
subscriber by first class mail, postage prepaid, at such subscriber's address
furnished to the Escrow Agent pursuant to Section 4.
6. Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be (a) delivered
by hand or (b) sent by mail, registered or certified, with proper postage
prepaid, and addressed as follows:
if to the Company, to:
Neose Technologies, Inc.
102 Witmer Road
Horsham, PA 19044
Attention: Chief Executive Officer
with a copy to:
Morgan Lewis & Bockius LLP
2000 One Logan Square
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<PAGE>
Philadelphia, PA 19103
Attention: David R. King, Esq.
if to the Placement Agent, to:
Vector Securities International, Inc.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Attention: Marina Bozilenko
with a copy to:
Stroock & Stroock & Lavan
Seven Hanover Square
New York, New York 10004-2696
Attention: James R. Tanenbaum, Esq.
if to the Escrow Agent, to:
Citibank N.A.
120 Wall Street
New York, New York 10043
Attention: Bryan Gartenberg
or to such other address as the person to whom notice is to be given may have
previously furnished to the others in the above-referenced manner. All such
notices and communications, if mailed, shall be effective when deposited in the
mails, except that notices and communications to the Escrow Agent and notices of
changes of address shall not be effective until received.
7. Concerning the Escrow Agent. To induce the Escrow Agent to
act hereunder, it is further agreed by the Company and Placement Agent that:
(a) The Escrow Agent shall not be under any duty to give
the Escrowed Property held by it hereunder any greater degree of care than it
gives its own similar property and shall not be required to invest any funds
held hereunder except as directed in this Escrow Agreement. Uninvested funds
held hereunder shall not earn or accrue interest.
(b) This Escrow Agreement expressly sets forth all the
duties of the Escrow Agent with respect to any and all matters pertinent hereto.
No implied duties or obligations shall be read into this Escrow Agreement
against the Escrow Agent. The Escrow Agent shall not be bound by the provisions
of any agreement among the other parties hereto except this Escrow Agreement.
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<PAGE>
(c) The Escrow Agent shall not be liable, except for its
own negligence or willful misconduct, and, except with respect to claims based
upon such negligence or willful misconduct that are successfully asserted
against the Escrow Agent, and the other parties hereto shall jointly and
severally indemnify and hold harmless the Escrow Agent (and any successor Escrow
Agent) from and against any and all losses, liabilities, claims, actions,
damages and expenses, including reasonable attorneys' fees and disbursements,
arising out of and in connection with this Escrow Agreement. Without limiting
the foregoing, the Escrow Agent shall in no event be liable in connection with
its investment or reinvestment of any cash held by it hereunder in good faith,
in accordance with the terms hereof, including without limitation any liability
for any delays (not resulting from gross negligence or willful misconduct) in
the investment or reinvestment of the Escrowed Property, or any loss of interest
incident to any such delays.
(d) The Escrow Agent shall be entitled to rely upon any
order, judgment, certification, demand, notice, instrument or other writing
delivered to it hereunder without being required to determine the authenticity
or the correctness of any fact stated therein or the propriety or validity of
the service thereof. The Escrow Agent may act in reliance upon any instrument or
signature believed by it in good faith to be genuine and may assume, if in good
faith, that any person purporting to give notice or receipt or advice or make
any statement or execute any document in connection with the provisions hereof
has been duly authorized to do so.
(e) The Escrow Agent may act pursuant to the advice of
counsel with respect to any matter relating to this Escrow Agreement and shall
not be liable for any action taken or omitted in good faith and in accordance
with such advice.
(f) The Escrow Agent does not have any interest in the
Escrowed Property deposited hereunder but is serving as escrow holder only. Any
payments of income from the Escrow Account shall be subject to withholding
regulations then in force with respect to United States taxes. The parties
hereto will provide the Escrow Agent with appropriate W-9 forms for tax I.D.,
number certification, or non-resident alien certifications.
This paragraph (f) and paragraph (c) of this Section 7 shall
survive notwithstanding any termination of this Escrow Agreement or the
resignation of the Escrow Agent.
(g) The Escrow Agent makes no representation as to the
validity, value, genuineness or the collectibility of any security or other
document or instrument held by or delivered to it.
(h) The Escrow Agent shall not be called upon to advise
any party as to the wisdom of selling or retaining or taking or refraining from
any action with respect to any securities or other property deposited hereunder.
(i) The Escrow Agent (and any successor escrow agent) at
any time may be discharged from its duties and obligations hereunder by the
delivery to it of notice of termination signed by both the Company and the
Placement Agent or at any time may resign by giving written
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<PAGE>
notice to such effect to the Company and the Placement Agent. Upon any such
termination or resignation, the Escrow Agent shall deliver the Escrowed Property
to any successor escrow agent jointly designated by the other parties hereto in
writing, or to any court of competent jurisdiction if no such successor escrow
agent is agreed upon, whereupon the Escrow Agent shall be discharged of and from
any and all further obligations arising in connection with this Escrow
Agreement. The termination or resignation of the Escrow Agent shall take effect
on the earlier of (i) the appointment of a successor (including a court of
competent jurisdiction) or (ii) the day that is 30 days after the date of
delivery: (A) to the Escrow Agent of the other parties' notice of termination or
(B) to the other parties hereto of the Escrow Agent's written notice of
resignation. If at that time the Escrow Agent has not received a designation of
a successor escrow agent, the Escrow Agent's sole responsibility after that time
shall be to keep the Escrowed Property safe until receipt of a designation of
successor escrow agent or a joint written disposition instruction by the other
parties hereto or any enforceable order of a court of competent jurisdiction.
(j) The Escrow Agent shall have no responsibility for the
contents of any writing of any third party contemplated herein as a means to
resolve disputes and may rely without any liability upon the contents thereof.
(k) In the event of any disagreement among or between the
other parties hereto and/or the subscribers of the Shares resulting in adverse
claims or demands being made in connection with the Escrowed Property, or in the
event that the Escrow Agent in good faith is in doubt as to what action it
should take hereunder, the Escrow Agent shall be entitled to retain the Escrowed
Property until the Escrow Agent shall have received (i) a final and
non-appealable order of a court of competent jurisdiction directing delivery of
the Escrowed Property or (ii) a written agreement executed by the other parties
hereto and consented to by the subscribers directing delivery of the Escrowed
Property, in which event the Escrow Agent shall disburse the Escrowed Property
in accordance with such order or agreement. Any court order referred to in (i)
above shall be accompanied by a legal opinion by counsel for the presenting
party satisfactory to the Escrow Agent to the effect that said court order is
final and non-appealable. The Escrow Agent shall act on such court order and
legal opinion without further question.
(l) As consideration for its agreement to act as Escrow
Agent as herein described, the Company agrees to pay the Escrow Agent fees
determined in accordance with the terms set forth on Exhibit F hereto (made a
part of this Escrow Agreement as if herein set forth). In addition, the Company
agrees to reimburse the Escrow Agent for all reasonable expenses, disbursements
and advances incurred or made by the Escrow Agent in performance of its duties
hereunder (including reasonable fees, expenses and disbursements of its
counsel).
(m) The other parties hereto irrevocably (i) submit to the
jurisdiction of any New York State or federal court sitting in New York City in
any action or proceeding arising out of or relating to this Escrow Agreement,
(ii) agree that all claims with respect to such action or proceeding shall be
heard and determined in such New York State or federal court and (iii) waive, to
the fullest extent possible, the defense of an inconvenient forum. The other
parties hereby consent to and grant any such court jurisdiction over the persons
of such parties and over the subject matter
-7-
<PAGE>
of any such dispute and agree that delivery or mailing of process or other
papers in connection with any such action or proceeding in the manner provided
hereinabove, or in such other manner as may be permitted by law, shall be valid
and sufficient service thereof.
(n) No printed or other matter in any language (including,
without limitation, the Registration Statement, notices, reports and promotional
material) which mentions the Escrow Agent's name or the rights, powers, or
duties of the Escrow Agent shall be issued by the other parties hereto or on
such parties' behalf unless the Escrow Agent shall first have given its specific
written consent thereto. The Escrow Agent hereby consents to the use of its name
and the reference to the escrow arrangement in the Registration Statement.
8. Miscellaneous.
(a) This Escrow Agreement shall be binding upon and inure
solely to the benefit of the parties hereto and their respective successors and
assigns, heirs, administrators and representatives, and the subscribers of the
Shares and shall not be enforceable by or inure to the benefit of any other
third party except as provided in paragraph (i) of Section 7 with respect to the
termination of, or resignation by, the Escrow Agent. No party may assign any of
its rights or obligations under this Escrow Agreement without the written
consent of the other parties.
(b) This Escrow Agreement shall be construed in
accordance with and governed by the internal law of the State of New York
(without reference to its rules as to conflicts of law).
(c) This Escrow Agreement may only be modified by a
writing signed by all of the parties hereto and consented to by the subscribers
of the Shares adversely affected by such modifications. No waiver hereunder
shall be effective unless in a writing signed by the party to be charged.
(d) This Escrow Agreement shall terminate upon the
payment pursuant to Section 5 of all amounts held in the Escrow Account.
(e) The section headings herein are for convenience only
and shall not affect the construction thereof. Unless otherwise indicated,
references to Sections are to Sections contained herein.
(f) This Escrow Agreement may be executed in one or more
counterparts but all such separate counterparts shall constitute but one and the
same instrument; provided that, although executed in counterparts, the executed
signature pages of each such counterpart may be affixed to a single copy of this
Agreement which shall constitute an original.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Escrow
Agreement to be executed as of the day and year first above written.
NEOSE TECHNOLOGIES, INC.
By:
--------------------------------
Name:
Title:
VECTOR SECURITIES INTERNATIONAL, INC.
By:
--------------------------------
Name:
Title:
CITIBANK N.A.
By:
--------------------------------
Name:
Title:
-9-
<PAGE>
EXHIBIT A
Citibank Insured Money Market Deposit Accounts
Deposits/Withdrawals may be made to the Citibank Money Market
Deposit Account ("MMDA") established under the Escrow Agreement to which this
Exhibit is attached only through the Escrow Account. All transaction and balance
reporting of the MMDA will be included as part of the Escrow Account Statement.
Activity in the MMDA will be reflected as the equivalent of dollars on deposit
in a Citibank Money Market Deposit Account. Deposits/Withdrawals to the MMDA
will be made only as permitted by the Escrow Agreement to which this Exhibit is
attached. The MMDA has certain regulatory restrictions as well as some minimum
requirements:
1. By regulation, Citibank, N.A. is required to reserve the
right to require seven days' prior notice of any withdrawals of funds from an
account; provided, however, that, if Citibank, N.A. elects to exercise its right
to require seven days' prior notice, it shall exercise such right as to all such
accounts established.
2. A daily balance of $10,000 must be maintained on deposit
in the MMDA. If the MMDA should fall below $10,000 on any day, Citibank, N.A.
will be authorized to transfer the remaining balance to the Escrow Account.
3. Rates will be determined by Citibank, N.A. and can be
determined by calling your custody account officer.
4. Balances up to $100,000 (total on deposit at Citibank,
N.A.) are FDIC-insured.
-1-
<PAGE>
EXHIBIT B
SUMMARY OF CASH RECEIVED
NEW PARTICIPANT DEPOSIT
Date:----------------------------
Deposit Date: List Number:---------------------
Investment Date: Page --- of ---------------------
Batch Number: Approved By:---------------------
JOB#:----------------------------
For Bank use only
TITLE:-------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
* *AMOUNT OF * *TAX ID NO./ | | FOR BANK
NAME * DEPOSIT *SHARES * ADDRESS |SOC.SEC. NO. * * USE ONLY
- ----------------------- ------------ ----------- -------------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
* * * * * * TAX CODE
* * * * * * EXEMPT(Y/N)
* * * * * * W-9(YR) NRA
* * * * * * W-8(YR)
* * * * * * 1008(87)
* * * * * *
- ----------------------------------------------------------------------------------------------------------------------------------
Broker Misc. * * * * Misc. II * Misc. III | TAX CODE
* * * * * * EXEMPT(Y/N)
* * * * * * W-2(YR) NRS
* * * * * * W-8(YR)
* * * * * * 1008(87)
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
* * * * * *
- ----------------------------------------------------------------------------------------------------------------------------------
Broker Misc. * * * * Misc. II * Misc. III | TAX CODE
* * * * * * EXEMPT(Y/N)
* * * * * * W-2(YR) NRS
* * * * * * W-8(YR)
* * * * * * 1008(87)
* * * * * *
- ----------------------------------------------------------------------------------------------------------------------------------
Broker Misc. * * * * Misc. II * Misc. III | TAX CODE
* * * * * * EXEMPT(Y/N)
* * * * * * W-2(YR) NRS
* * * * * * W-8(YR)
* * * * * * 1000(87)
* * * * * *
- ----------------------------------------------------------------------------------------------------------------------------------
Broker Misc. * * * * Misc. II * Misc. III |
* * * * * *
</TABLE>
EXHIBIT C
[Form of Offering Termination Notice]
-1-
<PAGE>
Citibank, N.A.
Corporate Trust
Escrow Administration
120 Wall Street, 13th Floor
New York, New York 10043
Attention:
Dear :
C-2
<PAGE>
Pursuant to Section 5(a) of the Escrow Agreement dated as of
___________, 1997 (the "Escrow Agreement") among NEOSE TECHNOLOGIES, INC., (the
"Company"), Vector Securities International, Inc. and you, the Company hereby
notifies you of the termination of the offering of the Shares (as that term is
defined in the Escrow Agreement) and directs you to make payments to subscribers
as provided for in Section 5(a) of the Escrow Agreement.
Very truly yours,
NEOSE TECHNOLOGIES, INC.
By: _______________________________
Name:
Title:
C-3
<PAGE>
EXHIBIT D
[Form of Closing Notice]
________________, 1997
Citibank, N.A.
Corporate Trust
Escrow Administration
120 Wall Street, 13th Floor
New York, New York 10043
Attention:
Ladies and Gentlemen:
Pursuant to Section 5(b) of the Escrow Agreement dated as of ________,
1997, (the "Escrow Agreement") among Neose Technologies, Inc. (the "Company"),
Vector Securities International, Inc. and you, the Company hereby certifies that
it has received subscriptions for the Shares (as that term is defined in the
Escrow Agreement) and the Company will sell and deliver Shares to the
subscribers thereof at a closing to be held on ________, 1997 (the "Closing
Date"). The names of the subscribers concerned, the number of Shares subscribed
for by each of such subscribers and the related subscription amounts are set
forth on Schedule I annexed hereto.
Please accept these instructions as standing instructions for the
closing to be held on the Closing Date. The parties hereto certify that they do
not wish to have a call back regarding these
D-1
<PAGE>
instructions.
We hereby request that the aggregate subscription amount be paid to the
Placement Agent and us as follows:
1. To the Company, $_________;
2. To Vector Securities International, Inc., $_________; and
3. To the Escrow Agent, $_________.
D-2
<PAGE>
These instructions may be executed in any number of counterparts,
each of which shall be deemed to be an original, and all of which together shall
constitute one and the same instrument.
Very truly yours,
NEOSE TECHNOLOGIES, INC.
By: _____________________________
Name:
Title:
VECTOR SECURITIES INTERNATIONAL, INC.
By: ______________________________
Name:
Title:
D-3
<PAGE>
SCHEDULE I
----------
Name of Number of Subscription
Subscriber Shares Amount
- ---------- ------ ------
<PAGE>
EXHIBIT E
[Form of Subscription Termination Notice]
Citibank, N.A.
Corporate Trust
Escrow Administration
120 Wall Street, 13th Floor
New York, New York 10043
Attention:
Dear :
Pursuant to Section 5(c) of the Escrow Agreement dated as of
January __, 1997 (the "Escrow Agreement") among Neose Technologies, Inc. (the
"Company"), Vector Securities International, Inc. and you, the Company hereby
notifies you that the following subscription(s) have been rejected:
E-1
<PAGE>
Amount of Dollar
Subscribed Amount of
Name of Shares Rejected
Subscriber Rejected Subscription
- ---------- -------- ------------
Very truly yours,
NEOSE TECHNOLOGIES, INC.
By: ____________________________
Name:
Title:
E-2
<PAGE>
EXHIBIT F
Fee to Citibank N.A.: $
F-1
<PAGE>
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
215-963-5000
Fax: 215-963-5299
January 10, 1997
Neose Technologies, Inc.
102 Witmer Road
Horsham, PA 19044
Re: Neose Technologies, Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Neose Technologies, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of a Registration Statement
on Form S-1 (the "Registration Statement"), to be filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), relating to the offering of 1,250,000 shares (the "Shares")
of the Company's common stock, par value $0.01 per share (the "Common Stock").
In rendering the opinion set forth below, we have reviewed (a) the Registration
Statement and the exhibits thereto; (b) the Company's Second Amended and
Restated Certificate of Incorporation; (c) the Company's Amended and Restated
By-Laws; (d) certain records of the Company's corporate proceedings as reflected
in its minute and stock books; (e) the draft of the Placement Agency Agreement;
(f) the draft of the Escrow Agreement; and (g) such statutes, records and other
documents as we have deemed relevant. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals and the conformity with the originals of all documents submitted to
us as copies thereof.
Based upon the foregoing, we are of the opinion that the Shares will be validly
issued, fully paid and nonassessable shares of Common Stock when issued by the
Company in accordance with the resolutions adopted by the Board of Directors of
the Company and the plan of distribution described in the Registration
Statement.
Our opinion set forth above is limited to the General Corporation Law of the
State of Delaware, as amended.
<PAGE>
Neose Technologies, Inc.
January 10, 1997
Page 2
We hereby consent to the use of this opinion as Exhibit 5 to the Registration
Statement and to the reference to this firm under the caption "Legal Matters."
In giving such opinion and consenting to such reference, we do not thereby admit
that we are acting within the category of persons whose consent is required
under Section 7 of the Act and the rules or regulations of the Commission
thereunder.
The opinion expressed herein is solely for your benefit and may be relied upon
only by you.
Very truly yours,
/s/Morgan, Lewis & Bockius LLP
Stephen Roth, Ph.D.
Neose Pharmaceuticals, Inc.
January 18, 1995
Page 1
Abbott Laboratories
625 Cleveland Avenue
Columbus, OH 43215
January 18, 1995
Stephen Roth, Ph.D.
Chairman and CEO
Neose Pharmaceuticals, Inc.
102 Witmer Road
Horsham, Pennsylvania 19044
Dear Dr. Roth:
Once signed by you, this letter shall constitute an amendment (the "Amendment")
to the Research and License Agreement between Neose Pharmaceuticals, Inc.
("Neose") and Abbott Laboratories ("Abbott"), dated December 30, 1992
(the "R & L Agreement) and, to the extent applicable, to the Supply Agreement,
which is Exhibit B to the R & L Agreement (collectively, the "Agreements").
The provisions of this Amendment are hereby made a part of the Agreements; any
conflict between the provisions of this Amendment and the Agreements shall be
resolved in favor of this provisions of this Amendment. All capitalized terms
used in this Amendment and not defined herein shall have the same meanings as
given to them in the Agreements. Any disputes regarding the Agreements or this
Amendment shall be resolved in accordance with Article XII of the Supply
Agreement, as if such Article were set forth herein in its entirety.
The Agreements shall be modified as follows:
1. Mutual Waiver of Possible Breaches. Abbott and Neose each hereby waive the
right to declare any possible breaches that may have occurred prior to the
date of this Amendment in accordance with the provisions of the R & L
Agreement. Neose hereby waives payment associated with Milestone No. 3 of
the R & L Agreement.
2. Milestones No. 4 and No. 5. Abbott hereby releases Neose from its
obligations to meet Milestones No. 4 and No. 5 as set forth in Section 4.1
and Exhibit A of the R & L Agreement. Such release shall not be construed
as a breach as set forth in Section 10.4 of the R & L Agreement. Neose
hereby waives any right to declare any breach by Abbott regarding Milestone
No. 4 and Milestone No. 5. Neose will not be entitled to and Abbott will
not be obligated to pay any Milestone payments for Milestone No. 4 or
Milestone No. 5.
1
<PAGE>
Stephen Roth, Ph.D.
Neose Pharmaceuticals, Inc.
January 18, 1995
Page 2
3. Grant of License
(a) Upon execution of this Amendment and continuing so long as payment of
the amounts specified in Section 4(b) of this Amendment in accordance
with their terms is made on a timely basis, Abbott shall have a
temporary license for manufacturing rights under Licensed Patents, and
shall take all responsibility from Neose for the manufacture of human
milk oligosaccharides and/or carbohydrates for Abbott's use in Human
Nutritional Products under Licensed Patents. Abbott shall manufacture
such human milk oligosaccharides and/or carbohydrates under its
existing Exclusive License granted under Article 8 of the R & L
Agreement. Abbott's right to make and have made human milk
oligosaccharides and/or carbohydrates under its Exclusive License
shall not be contingent on Sections 3.2(a)-(e) of the Supply
Agreement.
(b) Upon payment of the consideration set forth in Section 4(c) of this
Amendment, the Exclusive License granted Abbott described in (a) above
shall become irrevocable.
4. Consideration. In consideration for the license of manufacturing rights
set forth in Section 3 above, Abbott:
(a) commencing upon execution of this Amendment, shall pay Neose in five
installments of five hundred thousand dollars ($500,000.00) each, such
payments due and payable on January 1, 1995, July 1, 1995, January 1,
1996, July 1, 1996 and January 1, 1997, such payments totaling two
million five hundred thousand dollars ($2,500,000.00). All such
payments shall be credited against the future fee payments set forth
in Section 2.10 and Schedule B of the Supply Agreement. Such credits
shall be applied in four equal amounts, one such credit occurring in
each of the first four years of commercial sales; and
(b) within sixty (60) days of the first commercial sale of a Licensed
Product, shall pay Neose five million dollars ($5,000,000.00), one
million two hundred fifty thousand dollars ($1,250,000.00) of which
shall be credited against future payments set forth in Section 2.10
and Schedule B of the Supply Agreement. Such credits shall be applied
in four equal amounts, one credit occurring in each of the first four
years of commercial sales.
2
<PAGE>
Stephen Roth, Ph.D.
Neose Pharmaceuticals, Inc.
January 18, 1995
Page 3
5. Fee Negotiation In the event that Neose is able to demonstrate to Abbott,
and Abbott, at its reasonable discretion accepts, material improvements or
cost efficiencies in the proposed methods or processes of manufacture of
human milk oligosaccharides or carbohydrates subject to the Agreements, or
is able to identify a compound or compounds with materially improved
prospects of commercial feasibility compared to the compounds currently
being considered for manufacture by Abbott, then Neose and Abbott agree to
negotiate in good faith a revision of Schedule B of the Supply Agreement to
reflect an appropriate sharing of the benefits of such improvement,
efficiencies, or compounds.
6. Abbott Effort Abbott will expend at least [REDACTED]* dollars ([REDACTED]*)
for internal and external research and development work including scale-up
of manufacturing as well as safety, efficacy and clinical studies over the
period commencing with the execution of this Amendment and ending
[REDACTED*]. This expenditure will replace any other such expenditure under
the Agreements.
7. Scientific Steering Committee and Conferences The Scientific Steering
Committee as defined in the R & L Agreement shall be disbanded. A new
Committee made up of the appropriate Neose and Abbott employees will be
formed. Members of this Committee will be identified and a definition of a
scope of responsibility for the Committee will be decided at the earliest
date convenient to both Neose and Abbott, but not later than sixty (60)
days following execution of this Amendment.
8. Nonexclusive Right
(a) Prior to commencement of the Supply Agreement, Abbott may at any time
upon sixty (60) days prior written notice to Neose elect to convert
its Exclusive License to a worldwide, nonexclusive license, with the
right to sublicense, to make, have made, use and sell human milk
oligosaccharides or carbohydrates for use in Human Nutritional
Products under Licensed Patents ("Nonexclusive License"). All payments
made by Abbott to Neose prior to such election shall be
nonreimbursable, but creditable as set forth in Section 4. Fees due
Neose as set
- --------
*[REDACTED] indicates material that has been omitted and for which
confidential treatment has been granted by the Securities and Exchange
Commission (the "Commission"). All such omitted material has been filed
separately with the Commission pursuant to Rule 406.
3
<PAGE>
Stephen Roth, Ph.D.
Neose Pharmaceuticals, Inc.
January 18, 1995
Page 4
forth in Section 2.10 and Schedule B will be reduced by one-half under
the Nonexclusive License.
(b) Abbott's Exclusive License (i) shall become a Nonexclusive License in
any country in which it fails to make a commercial sale or file a
regulatory submission, if such governmental approval is required prior
to a commercial sale, of a Licensed Product within eighteen (18)
months of the first commercial sale of such Licensed Product in the
United States if Neose gives Abbott written notice sixty (60) days of
such failure and Abbott does not cure the failure within thirty (30)
days of notice; or (ii) shall become a Nonexclusive License in any
country in which it discontinues sales of all Licensed Products, such
nonexclusivity becoming effective twelve (12) months after Abbott
discontinues sales of such Licensed Products. Fees due Neose as set
forth in Section 2.10 and Schedule B for such countries will be
reduced by one-half under the Nonexclusive License.
(c) Neose may, at its option, convert Abbott's Exclusive License to a
Nonexclusive License if Abbott has failed to file an appropriate
regulatory document with the FDA, such document seeking approval to
market a Human Nutritional Product containing a human milk
oligosaccharide or carbohydrate, by December 1, 1997 and Neose gives
Abbott written notice within sixty (60) days of such failure and
Abbott doesn't cure the failure within thirty (30) days of notice. In
such an event, fees due Neose as set forth in Section 2.10 and
Schedule B will be reduced by one-half under the Nonexclusive License.
(d) If Abbott's Exclusive License is converted to a Nonexclusive License
pursuant to Section 8(a) or 8(c) of the Amendment, then
notwithstanding any other provision of the Agreements, after the
notice and/or cure period ends, Abbott will have no further payment
obligation under Section 4 of the Amendment. Similarly, if Abbott's
Exclusive License is converted to a Nonexclusive License pursuant to
Section 8(a) or 8(c) of the Amendment, then notwithstanding any other
provision of the Agreements, after the notice and/or cure period ends,
Neose will have no further obligation to provide Abbott with access to
technology, compounds or know-how discovered or developed after the
effective date of the Nonexclusive License.
9. Supply Agreement Commencement. In accordance with its terms, the Supply
Agreement as amended by this Amendment, shall begin upon the commencement
date of the first
4
<PAGE>
Stephen Roth, Ph.D.
Neose Pharmaceuticals, Inc.
January 18, 1995
Page 5
Contract Year. The definition of Contract Year at Section 1.5 shall be
modified so that the first Contract Year commences on the date of the first
commercial sale of a Licensed Product to a third party as evidenced by the
date on the invoice to such third party. Neose's and Abbott's performance
under the Supply Agreement shall be governed in accordance with the
parties' rights and obligations arising as if Abbott had acquired its
manufacturing rights in accordance with Section 3.2(f) of the Supply
Agreement, except as such rights and obligations have been specifically
modified in this Amendment.
10. Termination
(a) Abbott shall have the right to terminate the Agreements at any time
and for any reason by providing Neose with sixty (60) days written
notice of its intention to terminate. Upon the effective date of
termination, all rights to the Licensed Patents under the Agreements
except any Abbott interest in Joint Intellectual Property shall revert
to Neose. Such right to terminate is in addition to and not in place
of Abbott's right to terminate the Agreements or the Exclusive License
as set forth in the Agreements. Any payments under Section 4 of this
Amendment that fall due during the notification period shall be paid
according to the terms and conditions of Section 4 of this Amendment.
Upon termination, pursuant to this Section 10(a), Abbott shall have no
further payment obligations to Neose.
(b) Neose shall have the right to terminate the R & L Agreement and this
Amendment if Abbott fails to make the payments set forth in Section 4
of this Amendment, or fails to commercialize a Licensed Product by
[REDACTED]*; upon such termination, all rights to the Licensed Patents
except any Abbott interest in Joint Intellectual Property shall revert
to Neose. Any such termination by Neose shall be done in accordance
with the notice and cure provision of Section 10.4 of the R & L
Agreement.
11. Liability The terms of this Amendment are neither to be construed as an
assumption by Abbott of Neose's obligations under the R & L Agreement nor
to accelerate the time frame of any obligations of Abbott under the R & L
Agreement or the Supply
- --------
*[REDACTED] indicates material that has been omitted and for which
confidential treatment has been granted by the Commission. All such omitted
material has been filed separately with the Commission pursuant to Rule 406.
5
<PAGE>
Stephen Roth, Ph.D.
Neose Pharmaceuticals, Inc.
January 18, 1995
Page 6
Agreement. Further, Abbott will not incur any liability nor be subject to
any remedy for failure to successfully manufacture or otherwise use in a
Licensed Product any human milk oligosaccharide or carbohydrate, except to
the extent specifically addressed in the R & L Agreement, the Supply
Agreement, or this Amendment.
12. Existing Agreements' Terms All other terms and conditions of the Agreements
shall be effective to the extent they are not inconsistent with this
Amendment as set forth in the introductory paragraph of this Amendment.
6
<PAGE>
Stephen Roth, Ph.D.
Neose Pharmaceuticals, Inc.
January 18, 1995
Page 7
If you are in agreement with this letter, please sign one copy and return to
Thomas A. Picone, Ph.D., Director, Licensing, Ross Products Division.
Sincerely,
/s/Thomas M. McNally
Thomas M. McNally
President
Ross Products Division
Agreed to and accepted this 20th day
of January, 1995.
Neose Pharmaceuticals, Inc.
By: /s/Stephen Roth
-------------------------
Stephen Roth, Ph.D.
Chairman and CEO
7
NEOSE TECHNOLOGIES, INC.
1995 STOCK OPTION/STOCK ISSUANCE PLAN
(Amended and Restated as of March 16, 1996)
ARTICLE ONE
GENERAL
I. PURPOSE OF THE PLAN
A. This 1995 Stock Option/Stock Issuance Plan (the "Plan") is
intended to promote the interests of Neose Technologies, Inc., a Delaware
corporation (the "Corporation"), by providing eligible individuals with the
opportunity to obtain an equity interest, or otherwise increase their equity
interest, in the Corporation. This Plan shall serve as the successor equity
incentive program to the Corporation's 1992 Stock Option Plan and 1991 Stock
Option Plan.
B. The Discretionary Option Grant and Stock Issuance Programs of the
Plan became effective immediately upon the adoption of the Plan by the
Corporation's Board of Directors. Such date is hereby designated the "Plan
Effective Date." The Automatic Option Grant Program became effective upon the
execution and final pricing of the Underwriting Agreement for the initial public
offering of the Corporation's Common Stock. The execution date of such
Underwriting Agreement is hereby designated as the Automatic Option Grant
Program Effective Date. The Director Fee Option Grant Program became effective
on March 16, 1996, subject to stockholder approval at the 1996 Annual
Stockholders Meeting.
II. DEFINITIONS
A. For the purposes of this Plan, the following definitions shall be
in effect:
Board: the Corporation's Board of Directors.
Change in Control: a change in ownership or control of the
Corporation effected through either of the following transactions:
-- the direct or indirect acquisition by any person or related
group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control
with, the Corporation) of beneficial ownership (within the meaning of
Rule l3d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's shareholders which the Board does not
recommend such shareholders to accept, or
-- a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of
<PAGE>
individuals who either (a) have been Board members continuously since
the beginning of such period or (b) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (a) who were still in office at
the time such election or nomination was approved by the Board.
Code: the Internal Revenue Code of 1986, as amended.
Committee: the committee of two (2) or more non-employee Board
members appointed by the Board to administer the Plan.
Common Stock: shares of the Corporation's common stock.
Corporate Transaction: either of the following shareholder-approved
transactions to which the Corporation is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the Corporation's assets in complete liquidation
or dissolution of the Corporation.
Employee: an individual who performs services while in the employ of
the Corporation or one or more parent or subsidiary corporations, subject to the
control and direction of the employer entity not only as to the work to be
performed but also as to the manner and method of performance.
Exercise Date: the date on which the Corporation shall have received
written notice of the option exercise.
Fair Market Value: the Fair Market Value per share of Common Stock
determined in accordance with the following provisions:
-- If the Common Stock is at the time traded on the Nasdaq
National Market, the Fair Market Value shall be the closing selling
price per share on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no reported closing selling
price for the Common Stock on the date in question, then the Fair
Market Value shall be the closing selling price on the last preceding
date for which such quotation exists.
-- If the Common Stock is at the time listed or admitted to
trading on any national securities exchange, then the Fair Market Value
shall be the closing selling price per share on the date in question on
the exchange determined by the
2
<PAGE>
Plan Administrator to be the primary market for the Common Stock, as
such price is officially quoted in the composite tape of transactions
on such exchange. If there is no reported sale of Common Stock on such
exchange on the date in question, then the Fair Market Value shall be
the closing selling price on the exchange on the last preceding date
for which such quotation exists.
-- If the Common Stock is on the date in question neither
listed nor admitted to trading on any national securities exchange nor
traded on the Nasdaq National Market, then the Fair Market Value of the
Common Stock on such date shall be determined by the Plan Administrator
after taking into account such factors as the Plan Administrator shall
deem appropriate.
Hostile Take-Over: a change in ownership of the Corporation effected
through the following transaction:
-- the direct or indirect acquisition by any person or related
group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control
with, the Corporation) of beneficial ownership (within the meaning of
Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made
directly to the Corporation's shareholders which the Board does not
recommend such shareholders to accept, and
-- the acceptance of more than fifty percent (50%) of the
securities so acquired in such tender or exchange offer from holders
other than the officers and directors of the Corporation subject to the
short-swing profit restrictions of Section 16 of the 1934 Act.
Incentive Option: a stock option which satisfies the requirements of
Code Section 422.
Involuntary Termination: the termination of the Service of any
Optionee or Participant which occurs by reason of:
-- such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
-- such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her level of responsibility, (B) a reduction in his or
her level of compensation (including base salary, fringe benefits and
any non-discretionary and objective-standard incentive payment or bonus
award) by more than ten percent (10%) in the aggregate or (C) a
relocation of such individual's place of employment by more than fifty
(50) miles, provided and only if such change, reduction or relocation
is effected by the Corporation without the individual's consent.
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Misconduct: the commission of any act of fraud, embezzlement or
dishonesty by the Optionee or Participant, any unauthorized use or disclosure by
such individual of confidential information or trade secrets of the Corporation
or its parent or subsidiary corporations, any failure to perform specific lawful
direction of the Corporation's Board or officers of the Corporation, any refusal
or neglect to perform such individual's duties, any conviction of, or entering
of a plea of nolo contendre to, a crime which constitutes a felony or any other
Misconduct by such individual adversely affecting the business or affairs of the
Corporation. The foregoing definition shall not be deemed to be inclusive of all
the acts or omissions which the Corporation or any parent or subsidiary may
consider as grounds for the dismissal or discharge of any Optionee, Participant
or other individual in the Service of the Corporation.
1934 Act: the Securities Exchange Act of 1934, as amended.
Non-Statutory Option: a stock option not intended to meet the
requirements of Code Section 422.
Optionee: a person to whom an option is granted under the
Discretionary Option Grant Program.
Participant: a person who is issued Common Stock under the Stock
Issuance Program.
Permanent Disability: the inability of an individual to engage in
any substantial gainful activity by reason of any medically determinable
physical or mental impairment which is expected to result in death or which has
lasted or can be expected to last for a continuous period of not less than
twelve (12) months.
Plan Administrator: either the Board or the Committee, to the extent
the Committee is at the time responsible for the administration of the Plan in
accordance with Section IV of Article One.
Predecessor Plans: the Corporation's 1992 Stock Option Plan and 1991
Stock Option Plan.
Service: the performance of services on a periodic basis for the
Corporation (or any parent or subsidiary corporation) in the capacity of an
Employee, a non-employee member of the board of directors or an independent
consultant, except to the extent otherwise specifically provided in the
applicable stock option or stock issuance agreement.
Section 12(g) Registration Date: the date on which the initial
registration of the Common Stock under Section 12(g) of the 1934 Act became
effective.
10% Shareholder: the owner of stock (as determined under Code
Section 424(d)) possessing ten percent (10%) or more of the total combined
voting power of all classes of stock of the Corporation or any parent or
subsidiary corporation.
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Take-Over Price: the greater of (a) the Fair Market Value per share
of Common Stock on the date the particular option to purchase such stock is
surrendered to the Corporation in connection with a Hostile Take-Over or (b) the
highest reported price per share of Common Stock paid by the tender offeror in
effecting such Hostile Take-Over. However, if the cancelled option is an
Incentive Option, then the Take-Over Price shall not exceed the clause (a) price
per share.
B. The following provisions shall be applicable in determining the
parent and subsidiary corporations of the Corporation:
Any corporation (other than the Corporation) in an unbroken
chain of corporations ending with the Corporation shall be considered
to be a parent of the Corporation, provided each such corporation in
the unbroken chain (other than the Corporation) owns, at the time of
the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
Each corporation (other than the Corporation) in an unbroken
chain of corporations beginning with the Corporation shall be
considered to be a subsidiary of the Corporation, provided each such
corporation (other than the last corporation) in the unbroken chain
owns, at the time of the determination, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
III. STRUCTURE OF THE PLAN
A. The Plan shall be divided into four separate components: the
Discretionary Option Grant Program specified in Article Two, the Stock Issuance
Program specified in Article Three, the Automatic Option Grant Program specified
in Article Four and the Director Fee Option Grant Program specified in Article
Five. Under the Discretionary Option Grant Program, eligible individuals may, at
the discretion of the Plan Administrator, be granted options to purchase shares
of Common Stock in accordance with the provisions of Article Two at a price not
less than eighty-five percent (85%) of the Fair Market Value of such shares on
the grant date. Under the Stock Issuance Program, eligible individuals may be
issued shares of Common Stock directly, either through the immediate purchase of
the shares (at Fair Market Value or at discounts of up to 15%) or as a bonus
tied to the individual's performance of services or the Corporation's attainment
of prescribed milestones. Under the Automatic Option Grant Program, each
individual serving as a non-employee Board member on the Automatic Option Grant
Program Effective Date and each individual who first joins the Board as a
non-employee director at any time after such Effective Date shall at periodic
intervals receive option grants to purchase shares of Common Stock in accordance
with the provisions of Article Four, with the first such grants to be made on
the such Effective Date. Under the Director Fee Option Grant Program, each
non-employee Board member may elect to apply all or a portion of his or her
annual retainer fee otherwise payable in cash to a special below-market option
grant.
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B. Unless the context clearly indicates otherwise, the provisions of
Articles One and Six shall apply to all equity programs under the Plan and shall
accordingly govern the interests of all individuals under the Plan.
IV. ADMINISTRATION OF THE PLAN
A. The Discretionary Option Grant and Stock Issuance Programs shall
be administered solely and exclusively by the Committee, subject to such
conditions and limitations as the Board may decide, to the extent permissible
under applicable securities and tax laws requirements. No non-employee Board
member shall be eligible to serve on the Committee if such individual has,
within the relevant period designated below, received an option grant or direct
stock issuance under this Plan or any other stock plan of the Corporation (or
any parent or subsidiary corporation), other than pursuant to the Automatic
Option Grant or Director Fee Option Grant Program:
-- for each of the initial members of the Committee, the
period commencing with the Section 12(g) Registration Date and ending
with the date of his or her appointment to the Committee, or
-- for any successor or substitute member, the twelve (12)
month period immediately preceding the date of his or her appointment
to the Committee or (if shorter) the period commencing with the Section
12(g) Registration Date and ending with the date of his or her
appointment to the Committee.
B. Members of the Committee shall serve for such period of time as
the Board may determine and shall be subject to removal by the Board at any
time.
C. The Plan Administrator shall have full power and authority
(subject to the express provisions of the Plan) to establish rules and
regulations for the proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding option
grants or stock issuances thereunder as it may deem necessary or advisable.
Decisions of the Plan Administrator shall be final and binding on all parties
who have an interest in the Discretionary Option Grant or Stock Issuance Program
or any outstanding option grant or share issuance thereunder.
D. Administration of the Automatic Option Grant and Director Fee
Option Grant Programs shall be self-executing in accordance with the express
terms and conditions of those programs, and the Plan Administrator shall
exercise no discretionary functions with respect to option grants made pursuant
to those programs.
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V. OPTION GRANTS AND STOCK ISSUANCES
A. The persons eligible to participate in the Discretionary Option
Grant Program under Article Two and the Stock Issuance Program under Article
Three shall be limited to the following:
(i) officers and other employees of the Corporation (or any
parent or subsidiary corporation);
(ii) non-employee members of the Board or the non-employee
members of the board of directors of any parent or subsidiary
corporation; and
(iii) consultants who provide valuable services to the
Corporation (or any parent or subsidiary corporation).
B. The non-employee Board members serving as Plan Administrator
shall not, during their period of service from and after the Section 12(g)
Registration Date, be eligible to participate in the Discretionary Option Grant
and Stock Issuance Programs or in any other stock option, stock purchase, stock
bonus or other stock plan of the Corporation (or its parent or subsidiary
corporations). Such individuals shall, however, be eligible to receive automatic
option grants pursuant to Article Four and to participate in the Director Fee
Option Grant Program pursuant to Article Five.
C. The Plan Administrator shall have full authority to determine,
(i) with respect to the option grants made under the Discretionary Option Grant
Program, which eligible individuals are to receive option grants, the time or
times when such grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times at which each granted option is to
become exercisable and the maximum term for which the option may remain
outstanding, and (ii) with respect to stock issuances under the Stock Issuance
Program, the number of shares to be issued to each Participant, the vesting
schedule (if any) to be applicable to the issued shares, and the consideration
to be paid by the Participant for such shares.
VI. STOCK SUBJECT TO THE PLAN
A. Shares of Common Stock shall be available for issuance under the
Plan and shall be drawn from either the Corporation's authorized but unissued
shares of Common Stock or from reacquired shares of Common Stock, including
shares repurchased by the Corporation on the open market. The maximum number of
shares of Common Stock which may be issued over the term of the Plan shall not
exceed 1,457,366* shares, subject to adjustment from time to time in accordance
with the provisions of this Section VI. Such authorized share reserve is
comprised of (i) the number of shares which remained for issuance, as of the
Plan Effective
- --------
* Reflects the 1-for-3 reverse stock split that was effected immediately prior
to the consummation of the initial public offering of the Common Stock.
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Date, under the Predecessor Plans as last approved by the Corporation's
shareholders, including the shares subject to the outstanding options
incorporated into this Plan and any other shares which would have been available
for future option grant under the Predecessor Plans as last approved by the
shareholders, plus (ii) an additional increase of 333,333* shares authorized by
the Board on the Plan Effective Date and (iii) an additional increase of
600,000* shares authorized by the Board on December 6, 1995. As one or more
outstanding options under the Predecessor Plans which have been incorporated
into this Plan are exercised, the number of shares issued with respect to each
such option shall reduce, on a share-for-share basis, the number of shares
available for issuance under this Plan.
B. In no event shall the aggregate number of shares of Common Stock
for which any one individual participating in the Plan may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances exceed 250,000* shares over the term of the Plan.
C. Should one or more outstanding options under this Plan (including
options incorporated from the Predecessor Plans) expire or terminate for any
reason prior to exercise in full (including any option cancelled in accordance
with the cancellation-regrant provisions of Section IV of Article Two of the
Plan), then the shares subject to the portion of each option not so exercised
shall be available for subsequent issuance under the Plan. Shares subject to any
stock appreciation rights exercised under the Plan and all share issuances under
the Plan, whether or not the shares are subsequently repurchased by the
Corporation pursuant to its repurchase rights under the Plan, shall reduce on a
share-for-share basis the number of shares of Common Stock available for
subsequent issuance under the Plan. In addition, should the exercise price of an
outstanding option under the Plan be paid with shares of Common Stock or should
shares of Common Stock otherwise issuable under the Plan be withheld by the
Corporation in satisfaction of the withholding taxes incurred in connection with
the exercise of an outstanding option under the Plan or the vesting of a direct
share issuance made under the Plan, then the number of shares of Common Stock
available for issuance under the Plan shall be reduced by the gross number of
shares for which the option is exercised or which vest under the share issuance,
and not by the net number of shares of Common Stock actually issued to the
holder of such option or share issuance.
D. Should any change be made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the maximum number and/or class of
securities for which any one individual participating in the Plan may be granted
stock options, separately exercisable stock appreciation rights and direct stock
issuances in the aggregate over the term of the Plan, (iii) the number and/or
class of securities for which automatic option grants are to be subsequently
made per eligible non-employee Board member
- --------
* Reflects the 1-for-3 reverse stock split that was effected immediately prior
to the consummation of the initial public offering of the Common Stock.
8
<PAGE>
under the Automatic Option Grant Program, (iv) the number and/or class of
securities and price per share in effect under each option outstanding under the
Discretionary Option Grant, Automatic Option Grant or Director Fee Option Grant
Program and (v) the number and/or class of securities and price per share in
effect under each outstanding option incorporated into this Plan from the
Predecessor Plans. Such adjustments to the outstanding options are to be
effected in a manner which shall preclude the enlargement or dilution of rights
and benefits under such options. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.
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<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. TERMS AND CONDITIONS OF OPTIONS
Options granted pursuant to the Discretionary Option Grant
Program shall be authorized by action of the Plan Administrator and may, at the
Plan Administrator's discretion, be either Incentive Options or Non-Statutory
Options. Individuals who are not Employees of the Corporation or its parent or
subsidiary corporations may only be granted Non-Statutory Options. Each granted
option shall be evidenced by one or more instruments in the form approved by the
Plan Administrator; provided, however, that each such instrument shall comply
with the terms and conditions specified below. Each instrument evidencing an
Incentive Option shall, in addition, be subject to the applicable provisions of
Section II of this Article Two.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan
Administrator in accordance with the following provisions:
(i) The exercise price per share of Common Stock subject to an
Incentive Option shall in no event be less than one hundred percent
(100%) of the Fair Market Value of such Common Stock on the grant date.
(ii) The exercise price per share of Common Stock subject to a
Non-Statutory Option shall in no event be less than eighty-five percent
(85%) of the Fair Market Value of such Common Stock on the grant date.
(iii) If any individual to whom an Incentive Option is granted
is a 10% Shareholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per
share of Common Stock on the grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Six, be payable in one or more of the forms specified below:
(i) cash or check made payable to the Corporation,
(ii) in shares of Common Stock held by the Optionee for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date, or
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<PAGE>
(iii) to the extent the option is exercised for vested shares,
through a special sale and remittance procedure pursuant to which the
Optionee shall concurrently provide irrevocable written instructions
(a) to a Corporation designated brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares
plus all applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of such
purchase and (b) to the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale transaction.
3. Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. Term and Exercise of Options. Each option granted under this Plan
shall be exercisable at such time or times and during such period as is
determined by the Plan Administrator and set forth in the instrument evidencing
the grant. No such option, however, shall have a maximum term in excess of ten
(10) years measured from the grant date. During the lifetime of the Optionee,
the option, together with any related stock appreciation right, shall be
exercisable only by the Optionee and shall not be assignable or transferable by
the Optionee, except for a transfer of the option by will or by the laws of
descent and distribution following the Optionee's death.
C. Termination of Service.
1. Except to the extent otherwise provided pursuant to subsection
C.2 below, the following provisions shall govern the exercise period applicable
to any options held by the Optionee at the time of cessation of Service or
death:
(i) Should the Optionee cease to remain in Service for any
reason other than death, Permanent Disability or Misconduct, then the
period during which each outstanding option held by such Optionee is to
remain exercisable shall be limited to the three (3)-month period
following the date of such cessation of Service.
(ii) Should the Optionee's Service terminate by reason of
Permanent Disability, then the period during which each outstanding
option held by the Optionee is to remain exercisable shall be limited
to the twelve (12)- month period following the date of such cessation
of Service.
(iii) Should the Optionee die while holding one or more
outstanding options, then the period during which each such option is
to remain exercisable shall be limited to the twelve (12)-month period
following the date of the Optionee's death. During such limited period,
the option may be exercised by the personal representative of the
Optionee's estate or by the person or persons
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<PAGE>
to whom the option is transferred pursuant to the Optionee's will or in
accordance with the laws of descent and distribution.
(iv) Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to be outstanding.
(v) Under no circumstances, however, shall any such option be
exercisable after the specified expiration date of the option term.
(vi) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number
of vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be exercisable for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate
and cease to be outstanding with respect to any option shares for which
the option is not at that time exercisable or in which the Optionee is
not otherwise at that time vested.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time the option is granted or at any time while the
option remains outstanding,
-- to extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service or
death from the limited period in effect under subsection C.1 of this
Article Two to such greater period of time as the Plan Administrator
shall deem appropriate; provided, that in no event shall such option be
exercisable after the specified expiration date of the option term;
and/or
-- to permit one or more options held by the Optionee under
this Article Two to be exercised, during the limited post-Service
exercise period applicable under this paragraph C., not only with
respect to the number of vested shares of Common Stock for which each
such option is exercisable at the time of the Optionee's cessation of
Service but also with respect to one or more subsequent installments
for which the option would otherwise have become exercisable had such
cessation of Service not occurred.
D. Shareholder Rights. An Optionee shall have no shareholder rights
with respect to any shares covered by the option until such individual shall
have exercised the option and paid the exercise price for the purchased shares.
E. Unvested Shares. The Plan Administrator shall have the discretion
to authorize the issuance of unvested shares of Common Stock under the Plan.
Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right
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<PAGE>
to repurchase, at the exercise price paid per share, any or all of those
unvested shares. The terms and conditions upon which such repurchase right shall
be exercisable (including the period and procedure for exercise and the
appropriate vesting schedule for the purchased shares) shall be established by
the Plan Administrator and set forth in the agreement evidencing such repurchase
right. All outstanding repurchase rights under the Plan shall terminate
automatically upon the occurrence of any Corporate Transaction, except to the
extent the repurchase rights are expressly assigned to the successor corporation
(or parent thereof) in connection with the Corporate Transaction.
F. First Refusal Rights. Until such time, as the Corporation's
outstanding shares of Common Stock are first registered under Section 12(g) of
the 1934 Act, the Corporation shall have the right of first refusal with respect
to any proposed sale or other disposition by the Optionee (or any successor in
interest by reason of purchase, gift or other transfer) of any shares of Common
Stock issued under the Plan. Such right of first refusal shall be exercisable in
accordance with the terms and conditions established by the Plan Administrator
and set forth in the agreement evidencing such right.
II. INCENTIVE OPTIONS
Incentive Options may only be granted to individuals who are
Employees, and the terms and conditions specified below shall be applicable to
all Incentive Options granted under the Plan. Except as modified by the
provisions of this Section II, all the provisions of Articles One, Two and Five
of the Plan shall be applicable to all Incentive Options granted hereunder. Any
Options specifically designated as Non-Statutory shall not be subject to such
terms and conditions.
A. Dollar Limitation. The aggregate Fair Market Value (determined as
of the respective date or dates of grant) of the Common Stock for which one or
more options granted to any Employee under this Plan (or any other option plan
of the Corporation or its parent or subsidiary corporations) may for the first
time become exercisable as incentive stock options under the Federal tax laws
during any one calendar year shall not exceed the sum of One Hundred Thousand
Dollars ($100,000). To the extent the Employee holds two (2) or more such
options which become exercisable for the first time in the same calendar year,
the foregoing limitation on the exercisability of such options as incentive
stock options under the Federal tax laws shall be applied on the basis of the
order in which such options are granted. Should the number of shares of Common
Stock for which any Incentive Option first becomes exercisable in any calendar
year exceed the applicable One Hundred Thousand Dollar ($100,000) limitation,
then that option may nevertheless be exercised in that calendar year for the
excess number of shares as a Non-Statutory Option under the Federal tax laws.
B. 10% Shareholder. If any individual to whom an Incentive Option is
granted is a 10% Shareholder, then the option term shall not exceed five (5)
years measured from the grant date.
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III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each option which is
at the time outstanding under this Article Two shall automatically accelerate so
that each such option shall, immediately prior to the specified effective date
for such Corporate Transaction, become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of such shares as fully-vested shares.
However, an outstanding option under this Article Two shall not so accelerate if
and to the extent: (i) such option is, in connection with such Corporate
Transaction, either to be assumed by the successor corporation or parent thereof
or to be replaced with a comparable option to purchase shares of the capital
stock of the successor corporation or parent thereof, (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the option spread existing at the time of such Corporate Transaction
and provides for subsequent payout in accordance with the same vesting schedule
applicable to such option, (iii) such option is to be replaced by another
incentive program which the Plan Administrator determines is reasonably
equivalent in value to the program contemplated by either clause (i) or (ii)
above, or (iv) the acceleration of such option is subject to other limitations
imposed by the Plan Administrator at the time of the option grant. However, upon
an Optionee's cessation of Service by reason of an Involuntary Termination
(other than for Misconduct) within eighteen (18) months after a Corporate
Transaction in which his or her outstanding options are assumed or replaced
pursuant to clause (i), (ii) or (iii) above, each such option under clause (i)
shall automatically accelerate and become fully exercisable with respect to the
total number of shares of Common Stock at the time subject to such option and
may be exercised for all or any portion of such shares as fully-vested shares,
the cash incentive program under clause (ii) shall become fully vested and the
benefits under a clause (iii) replacement program shall become fully vested. The
option as so accelerated shall remain exercisable until the earlier of (i) the
expiration of the option term or (ii) the expiration of a ninety (90) day period
measured from the date of such Involuntary Termination. The determination of
option comparability under clause (i) or program comparability under clause
(iii) above shall be made by the Plan Administrator, and its determination shall
be final, binding and conclusive.
B. Immediately following the consummation of a Corporate
Transaction, all outstanding options under this Article Two shall terminate and
cease to remain outstanding, except to the extent assumed by the successor
corporation or its parent company.
C. Each outstanding option under this Article Two that is assumed in
connection with a Corporate Transaction shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply and pertain to the number
and class of securities which would have been issued to the option holder, in
consummation of such Corporate Transaction, had such person exercised the option
immediately prior to such, Corporate Transaction. Appropriate adjustments shall
also be made to the exercise price payable per share, provided the aggregate
exercise price payable for such securities shall remain the same. In addition,
the class and number of securities available for issuance under the Plan on both
an aggregate and participant basis following the consummation of such Corporate
Transaction shall be appropriately adjusted.
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D. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under this Article Two (and the termination of one or
more of the Corporation's outstanding repurchase rights under this Article Two)
upon the occurrence of a Change in Control. The Plan Administrator shall also
have full power and authority to condition any such option acceleration (and the
termination of any outstanding repurchase rights) upon the Optionee's cessation
of Service by reason of an Involuntary Termination (other than for Misconduct)
within a specified period following such Change in Control.
E. Any options accelerated in connection with a Change in Control
shall remain fully exercisable until the expiration or sooner termination of the
option term or the surrender of such option in accordance with Section V of this
Article Two.
F. The grant of options under this Article Two shall in no way
affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
G. The portion of any Incentive Option accelerated under this
Section III in connection with a Corporate Transaction or Change in Control
shall remain exercisable as an incentive stock option under the Federal tax laws
only to the extent the dollar limitation of Section II of this Article Two is
not exceeded. To the extent such dollar limitation is exceeded, the accelerated
portion of such option shall be exercisable as a non-statutory option under the
Federal tax laws.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected Optionees, the
cancellation of any or all outstanding options under this Article Two (including
outstanding options under the Predecessor Plans incorporated into this Plan) and
to grant in substitution new options under the Plan covering the same or
different numbers of shares of Common Stock but with an exercise price per share
not less than (i) one hundred percent (100%) of the Fair Market Value on the new
grant date in the case of a grant of an Incentive Option, (ii) one hundred ten
percent (110%) of such Fair Market Value in the case of an Incentive Option
grant to a 10% Shareholder or (iii) eighty-five percent (85%) of such Fair
Market Value in the case of all other grants.
V. STOCK APPRECIATION RIGHTS
A. Provided and only if the Plan Administrator determines in its
discretion to implement the stock appreciation right provisions of this Section
V, one or more Optionees may be granted the right, exercisable upon such terms
and conditions as the Plan Administrator may establish, to surrender all or part
of an unexercised option under this Article Two in exchange for a distribution
from the Corporation in an amount equal to the excess of (i) the Fair Market
Value (on the option surrender date) of the number of shares in which the
Optionee is
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at the time vested under the surrendered option (or surrendered portion thereof)
over (ii) the aggregate exercise price payable for such vested shares.
B. No surrender of an option shall be effective hereunder unless it
is approved by the Plan Administrator. If the surrender is so approved, then the
distribution to which the Optionee shall accordingly become entitled under this
Section V may be made in shares of Common Stock valued at Fair Market Value on
the option surrender date, in cash, or partly in shares and partly in cash, as
the Plan Administrator shall in its sole discretion deem appropriate.
C. If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee had
under the surrendered option (or surrendered portion thereof) on the option
surrender date and may exercise such rights at any time prior to the later of
(i) five (5) business days after the receipt of the rejection notice or (ii) the
last day on which the option is otherwise exercisable in accordance with the
terms of the instrument evidencing such option, but in no event may such rights
be exercised more than ten (10) years after the date of the option grant.
D. One or more officers of the Corporation subject to the
short-swing profit restrictions of the Federal securities laws may, in the Plan
Administrator's sole discretion, be granted limited stock appreciation rights in
tandem with their outstanding options under this Article Two. Upon the
occurrence of a Hostile Take-Over at a time when the Corporation's outstanding
Common Stock is registered under Section 12(g) of the 1934 Act, each such
officer holding one or more options with such a limited stock appreciation right
in effect for at least six (6) months shall have the unconditional right
(exercisable for a thirty (30)-day period following such Hostile Take-Over) to
surrender each such option to the Corporation, to the extent the option is at
the time exercisable for fully vested shares of Common Stock. The officer shall
in return be entitled to a cash distribution from the Corporation in an amount
equal to the excess of (i) the Take-Over Price of the vested shares of Common
Stock at the time subject to each surrendered option (or surrendered portion of
such option) over (ii) the aggregate exercise price payable for such vested
shares. Such cash distribution shall be made within five (5) days following the
option surrender date. Neither the approval of the Plan Administrator nor the
consent of the Board shall be required in connection with such option surrender
and cash distribution. Any unsurrendered portion of the option shall continue to
remain outstanding and become exercisable in accordance with the terms of the
instrument evidencing such grant.
E. The shares of Common Stock subject to any option surrendered for
an appreciation distribution pursuant to this Section V shall not be available
for subsequent issuance under the Plan.
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ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. TERMS AND CONDITIONS OF STOCK ISSUANCES
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate purchases without any intervening stock
option grants. The issued shares shall be evidenced by a Stock Issuance
Agreement ("Issuance Agreement") that complies with the terms and conditions of
this Article Three.
A. Consideration.
1. Shares of Common Stock may be issued under the Stock Issuance
Program for one or more of the following items of consideration which the Plan
Administrator may deem appropriate in each individual instance:
(i) full payment in cash or check made payable to the
Corporation's order;
(ii) a promissory note payable to the Corporation's order in
one or more installments; or
(iii) past services rendered to the Corporation or any parent
or subsidiary corporation.
2. The shares may, in the absolute discretion of the Plan
Administrator, be issued for consideration with a value less than one hundred
percent (100%) of the Fair Market Value of such shares at the time of issuance,
but in no event less than eighty-five percent (85%) of such Fair Market Value.
B. Vesting Provisions.
1. Shares of Common Stock issued under the Stock Issuance Program
may, in the absolute discretion of the Plan Administrator, be fully and
immediately vested upon issuance (as a bonus for past services) or may vest in
one or more installments over the Participant's period of Service or the
Corporation's attainment of performance milestones. The elements of the vesting
schedule applicable to any unvested shares of Common Stock issued under the
Stock Issuance Program, namely:
(i) the Service period to be completed by the Participant or
the performance objectives to be achieved by the Corporation,
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(ii) the number of installments in which the shares are to
vest,
(iii) the interval or intervals (if any) which are to lapse
between installments, and
(iv) the effect which death, Permanent Disability or other
event designated by the Plan Administrator is to have upon the vesting
schedule, shall be determined by the Plan Administrator and
incorporated into the Stock Issuance Agreement executed by the
Corporation and the Participant at the time such unvested shares are
issued.
2. The Participant shall have full shareholder rights with
respect to any shares of Common Stock issued to him or her under the Plan,
whether or not his or her interest in those shares is vested. Accordingly, the
Participant shall have the right to vote such shares and to receive any regular
cash dividends paid on such shares. Any new, additional or different shares of
stock or other property (including money paid other than as a regular cash
dividend) which the Participant may have the right to receive with respect to
his or her unvested shares by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration or by reason of any Corporate Transaction shall be
issued, subject to (i) the same vesting requirements applicable to his or her
unvested shares and (ii) such escrow arrangements as the Plan Administrator
shall deem appropriate.
3. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock under the Stock Issuance
Program, then the Corporation shall have the right to require the Participant to
surrender those shares immediately to the Corporation for cancellation, and the
Participant shall cease to have any further shareholder rights with respect to
the surrendered shares. To the extent the surrendered shares were previously
issued to the Participant for consideration paid in cash or cash equivalent
(including the Participant's purchase-money promissory note), the Corporation
shall repay to the Participant the cash consideration paid for the surrendered
shares and shall cancel the unpaid principal balance of any outstanding
purchase-money note of the Participant attributable to such surrendered shares.
4. The Plan Administrator may in its discretion elect to waive
the surrender and cancellation of one or more unvested shares of Common Stock
(or other assets attributable thereto) which would otherwise occur upon the
non-completion of the vesting schedule applicable to such shares. Such waiver
shall result in the immediate vesting of the Participant's interest in the
shares of Common Stock as to which the waiver applies. Such waiver may be
effected at any time, whether before or after the Participant's cessation of
Service or the attainment or non-attainment of the applicable performance
objectives.
C. First Refusal Rights. Until such time as the
Corporation's outstanding shares of Common Stock are first registered under
Section 12(g) of the 1934 Act, the Corporation shall have a right of first
refusal with respect to any proposed disposition by the
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Participant (or any successor in interest by reason of purchase, gift or other
transfer) of any shares of Common Stock issued under this Article Three. Such
right of first refusal shall be exercisable in accordance with the terms and
conditions established by the Plan Administrator and set forth in the agreement
evidencing such right.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. All of the Corporation's outstanding repurchase rights under this
Article Three shall automatically terminate upon the occurrence of a Corporate
Transaction, except to the extent the Corporation's outstanding repurchase
rights are expressly assigned to the successor corporation (or parent thereof)
in connection with such Corporate Transaction. However, any assigned repurchase
rights covering the unvested shares held by a Participant under this Article
Three shall immediately terminate should there occur an Involuntary Termination
of that Participant's Service (other than for Misconduct) within eighteen (18)
months after such Corporate Transaction.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the shares are issued under this Article Three or
at any time while those shares remain outstanding, to provide for the automatic
termination of the Corporation's repurchase rights with respect to those shares
should there occur a Change in Control. The Plan Administrator shall also have
full power and authority to condition the termination of those repurchase rights
upon the Participant's cessation of Service by reason of an Involuntary
Termination (other than for Misconduct) within a specified period following such
Change in Control.
III. SHARE ESCROW/TRANSFER RESTRICTIONS
A. Unvested shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing such unvested shares. To the extent an
escrow arrangement is utilized, the unvested shares and any securities or other
assets distributed with respect to such shares (other than regular cash
dividends) shall be delivered in escrow to the Corporation to be held until the
Participant's interest in such shares (or the distributed securities or assets)
vests.
B. The Participant shall have no right to transfer any unvested
shares of Common Stock issued to him or her under the Stock Issuance Program.
For purposes of this restriction, the term "transfer" shall include (without
limitation) any sale, pledge, assignment, encumbrance, gift or other disposition
of such shares, whether voluntary or involuntary. Upon any such attempted
transfer, the unvested shares shall immediately be cancelled in accordance with
substantially the same procedure in effect under Section I.B.3 of this Article
Three, and neither the Participant nor the proposed transferee shall have any
rights with respect to such cancelled shares. However, the Participant shall
have the right to make a gift of unvested shares acquired under the Stock
Issuance Program to his or her spouse or issue, including adopted children, or
to a trust established for such spouse or issue, provided the transferee of such
shares
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delivers to the Corporation a written agreement to be bound by all the
provisions of the Stock Issuance Program and the Stock Issuance Agreement
applicable to the gifted shares.
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ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. ELIGIBILITY
The individuals eligible to receive automatic option grants pursuant
to the provisions of this Article Four program shall be limited to (i) those
individuals who are serving as non-employee Board members on the Automatic
Option Grant Program Effective Date, (ii) those individuals who are first
elected or appointed as non-employee Board members on or after such Effective
Date, whether through appointment by the Board or election by the Corporation's
shareholders, and (iii) those individuals who are re-elected to serve as
non-employee Board members at one or more Annual Shareholders Meetings held
after the Section 12(g) Registration Date. In no event, however, shall a
non-employee Board member be eligible to receive an automatic option grant
pursuant to clause (i) or (ii) above if such individual has at any time been in
the prior employ of the Corporation (or any parent or subsidiary corporation),
but such individual shall be eligible to receive one or more automatic option
grants pursuant to clause (iii). Each non-employee Board member eligible to
receive one or more automatic option grants pursuant to the foregoing criteria
shall be designated an Eligible Director for purposes of the Plan.
II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS
A. Grant Dates. Option grants shall be made under this Article Three
on the dates specified below:
1. Initial Grant. Each Eligible Director who is first elected or
appointed as a non-employee Board member after the Automatic Option Grant
Program Effective Date shall automatically be granted, on the date of such
initial election or appointment (as the case may be), a Non-Statutory Option to
purchase 16,666 shares of Common Stock upon the terms and conditions of this
Article Four.
2. Annual Grant. On the date of each Annual Shareholders Meeting,
beginning with the first Annual Meeting held after the Section 12(g)
Registration Date, each individual who will continue to serve as an Eligible
Director shall automatically be granted, whether or not such individual is
standing for re-election as a Board member at that Annual Meeting, a
Non-Statutory Option to purchase an additional 3,333 shares of Common Stock upon
the terms and conditions of this Article Four, provided he or she has served as
a non-employee Board member for at least six (6) months prior to the date of
such Annual Meeting.
3. No Limitation. There shall be no limit on the number of shares
for which any one Eligible Director may be granted stock options under this
Article Four over his or her period of Board service.
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B. Exercise Price. The exercise price per share of Common Stock
subject to each automatic option grant made under this Article Four shall be
equal to one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the automatic grant date.
C. Payment. The exercise price shall be payable in one of the
alternative forms specified below. To the extent the option is exercised for any
unvested shares, the Optionee must execute and deliver to the Corporation a
stock purchase agreement for those unvested shares which provides the
Corporation with the right to repurchase, at the exercise price paid per share,
any unvested shares held by the Optionee at the time of cessation of Board
service and which precludes the sale, transfer or other disposition of the
purchased shares at any time while those shares remain subject to the
Corporation's repurchase right.
(i) full payment in cash or check drawn to the Corporation's
order;
(ii) full payment in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date (as such term is defined below);
(iii) full payment in a combination of shares of Common Stock
held for the requisite period necessary to avoid a charge to the
Corporation's earnings for financial reporting purposes and valued at
Fair Market Value on the Exercise Date and cash or check drawn to the
Corporation's order; or
(iv) to the extent the option in exercised for vested shares,
full payment through a sale and remittance procedure pursuant to which
the Optionee shall provide irrevocable written instructions to (a) a
Corporation designated brokerage firm to effect the immediate sale of
the purchased shares and remit to the Corporation, out of the sale
proceeds available on the settlement date, sufficient funds to cover
the aggregate exercise price payable for the purchased shares and (b)
the Corporation to deliver the certificates for the purchased shares
directly to such brokerage firm in order to complete the sale
transaction.
Except to the extent the sale and remittance procedure
specified above is used for the exercise of the option for vested shares,
payment of the exercise price for the purchased shares must accompany the
exercise notice.
D. Option Term. Each automatic grant under this Article Four shall
have a maximum term of ten (10) years measured from the automatic grant date.
E. Exercisability/Vesting. Each automatic grant shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the
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Optionee's cessation of Board service prior to vesting in those shares in
accordance with the applicable schedule below:
Initial Grant. Each initial 16,666-share automatic grant shall
vest, and the Corporation's repurchase right shall lapse, in a series
of four successive and equal annual installments over the Optionee's
period of continued service as a Board member, with the first such
installment to vest upon Optionee's completion of one (1) year of Board
service measured from the automatic grant date.
Annual Grant. Each additional 3,333-share automatic grant
shall vest, and the Corporation's repurchase right shall lapse, upon
the Optionee's completion of one (1) year of Board service measured
from the automatic grant date.
Vesting of the option shares shall be subject to acceleration,
as provided in Section II.G.3 and Section III of this Article Four. In no event
shall any additional option shares vest after the Optionee's cessation of Board
service, except as otherwise provided in Section II.G.3 of this Article Four.
F. Non-Transferability. During the lifetime of the Optionee, each
automatic option grant, together with the limited stock appreciation right
pertaining to that option, shall be exercisable only by the Optionee and shall
not be assignable or transferable by the Optionee, except for a transfer of the
option by will or by the laws of descent and distribution following Optionee's
death.
G. Effect of Termination of Board Service.
1. Should the Optionee cease to serve as a Board member for any
reason (other than death or Permanent Disability) while holding one or more
automatic option grants under this Article Four, then such individual shall have
a six (6)-month period following the date of such cessation of Board service in
which to exercise each such option for any or all of the shares of Common Stock
in which the Optionee is vested at the time of such cessation of Board service.
However, each such option shall immediately terminate and cease to be
outstanding, at the time of such cessation of Board service, with respect to any
shares in which the Optionee is not otherwise at that time vested under that
option.
2. Should the Optionee die within six (6) months after cessation
of Board service, then any automatic option grant held by the Optionee at the
time of death may subsequently be exercised, for any or all of the shares of
Common Stock in which the Optionee is vested at the time of his or her cessation
of Board service (less any option shares subsequently purchased by the Optionee
prior to death), by the personal representative of the Optionee's estate or by
the person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution. The
right to exercise such option shall lapse upon the expiration of a twelve
(12)-month period measured from the date of the Optionee's death.
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3. Should the Optionee die or become Permanently Disabled while
serving as a Board member, then the shares of Common Stock at the time subject
to each automatic option grant held by such Optionee under this Article Four
which are vested may be purchased by the Optionee pursuant to the option for (or
the representative of the Optionee's estate or the person or persons to whom the
option is transferred upon the Optionee's death) pursuant to the option for a
twelve (12)-month period following the date of the Optionee's cessation of Board
service.
4. In no event shall any automatic grant under this Article Four
remain exercisable after the expiration date of the ten (10)-year option term.
Upon the expiration of the applicable post-service exercise period under
subparagraphs 1. through 3. above or (if earlier) upon the expiration of the ten
(10)-year option term, the automatic grant shall terminate and cease to be
outstanding for any option shares in which the Optionee was vested at the time
of his or her cessation of Board service but for which such option was not
subsequently exercised.
H. Shareholder Rights. The holder of an automatic option grant under
this Article Three shall have none of the rights of a shareholder with respect
to any shares subject to such option until such individual shall have exercised
the option and paid the exercise price for the purchased shares.
I. Remaining Terms. The remaining terms and conditions of each
automatic option grant shall be as set forth in the form Automatic Stock Option
Agreement attached as Exhibit A to the plan.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option under this Article Four but
not otherwise vested shall automatically vest in full so that each such option
shall, immediately prior to the specified effective date for the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to that option and may be exercised for all or any portion of
those shares as fully vested shares. Immediately following the consummation of
the Corporate Transaction, all automatic option grants under this Article Four
shall terminate and cease to be outstanding, except to the extent one or more of
those grants are assumed by the acquiring entity or its parent corporation.
B. In connection with any Change in Control of the Corporation, the
shares of Common Stock at the time subject to each outstanding option under this
Article Four but not otherwise vested shall automatically vest in full so that
each such option shall, immediately prior to the specified effective date for
the Change in Control, become fully exercisable for all of the shares of Common
Stock at the time subject to that option and may be exercised for all or any
portion of those shares as fully vested shares. Each such option shall remain so
exercisable for all the option shares following the Change in Control, until the
expiration or sooner termination of the option term.
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C. Should a Hostile Take-Over occur at any time following the
Section 12(g) Registration Date, then the optionee shall have a thirty (30)-day
period in which to surrender to the Corporation each option held by him or her
under this Article Four for a period of at least six (6) months. The optionee
shall in return be entitled to a cash distribution from the Corporation in an
amount equal to the excess of (i) the Take-Over Price of the shares of Common
Stock at the time subject to the surrendered option (whether or not those shares
are otherwise at the time fully vested) over (ii) the aggregate exercise price
payable for such shares. The cash distribution shall be paid within five (5)
days following the surrender of the option to the Corporation. Neither the
approval of the Plan Administrator nor the consent of the Board shall be
required in connection with such option surrender and cash distribution. The
shares of Common Stock subject to each option surrendered in connection with the
Hostile Take-Over shall not be available for subsequent issuance under the Plan.
D. The automatic option grants outstanding under this Article Four
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. AMENDMENT OF THE AUTOMATIC GRANT PROVISIONS
The provisions of this Automatic Option Grant Program, together with
the automatic option grants outstanding under this Article Four, may not be
amended at intervals more frequently than once every six (6) months, other than
to the extent necessary to comply with applicable Federal income tax laws and
regulations.
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ARTICLE FIVE
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
Each non-employee Board member may elect to apply all or any portion
of the annual retainer fee otherwise payable in cash for his or her service on
the Board to the acquisition of a special option grant under this Director Fee
Option Grant Program. Such election must be filed with the Corporation's Chief
Financial Officer prior to first day of July in the calendar year immediately
preceding the calendar year for which the annual retainer fee which is the
subject of that election is otherwise payable. Each non-employee Board member
who files such a timely election shall automatically be granted an option under
this Director Fee Option Grant Program on the first trading day in January in
the calendar year for which the annual retainer fee which is the subject of that
election would otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms
and conditions specified below.
A. Exercise Price.
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon exercise
of the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.
B. Number of Option Shares. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A divided by (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the non-
employee Board member's election, and
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B is the Fair Market Value per share of Common Stock
on the option grant date.
C. Exercise and Term of Options. The option shall become exercisable
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Board service in the calendar
year for which the annual retainer fee which is the subject of his or her
election under this Article Five would otherwise be payable. Each option shall
have a maximum term of ten (10) years measured from the option grant date.
D. Effect of Termination of Service. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while holding
one or more options under this Article Five, then each such option shall remain
exercisable, for any or all of the shares for which the option is exercisable at
the time of such cessation of Board service, until the earlier of (i) the
expiration of the ten (10)-year option term or (ii) the expiration of the three
(3)-year period measured from the date of such cessation of Board service.
However, each option held by the Optionee under this Article Five at the time of
his or her cessation of Board service shall immediately terminate and cease to
remain outstanding with respect to any and all shares of Common Stock for which
the option is not otherwise at that time exercisable.
E. Death or Permanent Disability. Should the Optionee's service as a
Board member cease by reason of death or Permanent Disability, then each option
held by such Optionee under this Article Five shall immediately become
exercisable for all the shares of Common Stock at the time subject to that
option, and the option may, during the three (3)-year period following such
cessation of Board service, be exercised for any or all of those shares as
fully-vested shares.
Should the Optionee die while holding one or more options under this
Article Five, then each such option may be exercised, for any or all of the
shares for which the option is exercisable at the time of the Optionee's
cessation of Board service (less any shares subsequently purchased by Optionee
prior to death), by the personal representative of the Optionee's estate or by
the person or persons to whom the option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution. Such
right of exercise shall lapse, and the option shall terminate, upon the earlier
of (i) the expiration of the ten (10)-year option term or (ii) the three
(3)-year period measured from the date of the Optionee's cessation of Board
service.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction while the Optionee
remains a Board member, each outstanding option held by such Optionee under this
Director Fee Option Grant Program shall automatically accelerate so that each
such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such
outstanding option shall be assumed by the successor corporation (or parent
thereof) in the Corporate Transaction and shall remain exercisable for the
fully-vested shares until the earlier of (i) the
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expiration of the ten (10)-year option term or (ii) the expiration of the three
(3)-year period measured from the date of the Optionee's cessation of Board
service.
B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Director Fee
Option Grant Program shall automatically accelerate so that each such option
shall immediately become fully exercisable with respect to the total number of
shares of Common Stock at the time subject to such option and may be exercised
for any or all of those shares as fully-vested shares of Common Stock. The
option shall remain so exercisable until the earlier or (i) the expiration of
the ten (10)-year option term or (ii) the expiration of the three (3)-year
period measured from the date of the Optionee's cessation of Service.
C. The grant of options under the Director Fee Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.
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ARTICLE SIX
MISCELLANEOUS
I. LOANS OR INSTALLMENT PAYMENTS
A. The Plan Administrator may, in its discretion, assist any
Optionee or Participant (including an Optionee or Participant who is an officer
of the Corporation) in the exercise of one or more options granted to such
Optionee under the Discretionary Option Grant and Automatic Option Grant
Programs or the purchase of one or more shares issued to such Participant under
the Stock Issuance Program, including the satisfaction of any Federal, state and
local income and employment tax obligations arising therefrom, by:
(i) authorizing the extension of a loan from the Corporation
to such Optionee or Participant, or
(ii) permitting the Optionee or Participant to pay the
exercise price or purchase price for the purchased Common Stock in
installments over a period of years.
B. The terms of any loan or installment method of payment (including
the interest rate and terms of repayment) shall be upon such terms as the Plan
Administrator specifies in the applicable option or issuance agreement or
otherwise deems appropriate at the time such exercise price or purchase price
becomes due and payable. Loans or installment payments may be authorized with or
without security or collateral. In all events, the maximum credit available to
the Optionee or Participant may not exceed the option or purchase price of the
acquired shares (less the par value of such shares) plus any Federal, state and
local income and employment tax liability incurred by the Optionee or
Participant in connection with the acquisition of such shares.
C. The Plan Administrator may, in its absolute discretion, determine
that one or more loans extended under this Section I shall be subject to
forgiveness by the Corporation in whole or in part upon such terms and
conditions as the Plan Administrator may in its discretion deem appropriate.
II. AMENDMENT OF THE PLAN AND AWARDS
A. The Board has complete and exclusive power and authority to amend
or modify the Plan (or any component thereof) in any or all respects whatsoever.
However, (i) no such amendment or modification shall adversely affect rights and
obligations with respect to options at the time outstanding under the Plan, nor
adversely affect the rights of any Participant with respect to Common Stock
issued under the Stock Issuance Program prior to such action, unless the
Optionee or Participant consents to such amendment. In addition, the Board may
not, without the approval of the Corporation's shareholders, amend the Plan to
(i) increase the
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maximum number of shares issuable under the Plan or the maximum number of shares
for which any one individual participating in the Plan may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances in the aggregate over the term of the Plan, except for permissible
adjustments under Article One, (ii) materially modify the eligibility
requirements for Plan participation, or (iii) otherwise materially increase the
benefits accruing to Plan participants.
B. (i) Options to purchase shares of Common Stock may be granted
under the Discretionary Option Grant Program and (ii) shares of Common Stock may
be issued under the Stock Issuance Program, which are in both instances in
excess of the number of shares then available for issuance under the Plan,
provided any excess shares actually issued under the Discretionary Option Grant
or the Stock Issuance Programs are held in escrow until shareholder approval is
obtained for a sufficient increase in the number of shares available for
issuance under the Plan. If such shareholder approval is not obtained within
twelve (12) months after the date the first such excess option grants or excess
share issuances are made, then (i) any unexercised excess options shall
terminate and cease to be exercisable and (ii) the Corporation shall promptly
refund the purchase price paid for any excess shares actually issued under the
Plan and held in escrow, together with interest (at the applicable Short Term
Federal Rate) for the period the shares were held in escrow.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of any stock options granted under Article Two or upon the
issuance of any shares under Article Three shall be subject to the satisfaction
of all applicable Federal, state and local income and employment tax withholding
requirements.
B. The Plan Administrator may, in its discretion and in accordance
with the provisions of this Section III of Article Five and such supplemental
rules as the Plan Administrator may from time to time adopt (including the
applicable safe-harbor provisions of Rule 16b-3 of the Securities and Exchange
Commission), provide any or all holders of Non-Statutory Options or unvested
shares under the Plan with the right to use shares of Common Stock in
satisfaction of all or part of the Federal, state and local income and
employment tax liabilities incurred by such holders in connection with the
exercise of their options or the vesting of their shares (the "Taxes"). Such
right may be provided to any such holder in either or both of the following
formats:
-- The holder of the Non-Statutory Option or unvested shares
may be provided with the election to have the Corporation withhold,
from the shares of Common Stock otherwise issuable upon the exercise of
such Non-Statutory Option or the vesting of such shares, a portion of
those shares with an aggregate Fair Market Value equal to the
percentage of the applicable Taxes (not to exceed one hundred percent
(100%)) designated by the holder.
-- The Plan Administrator may, in its discretion, provide the
holder of the Non-Statutory Option or the unvested shares with the
election to deliver to
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the Corporation, at the time the Non-Statutory Option is exercised or
the shares vest, one or more shares of Common Stock previously acquired
by such individual (other than in connection with the option exercise
or share vesting triggering the Taxes) with an aggregate Fair Market
Value equal to the percentage of the Taxes incurred in connection with
such option exercise or share vesting (not to exceed one hundred
percent (100%)) designated by the holder.
IV. EFFECTIVE DATE AND TERM OF PLAN
A. The Discretionary Option Grant and Stock Issuance Programs of
this Plan became effective immediately upon adoption of the Plan by the Board on
March 23, 1995 (the "Plan Effective Date"). The Plan was approved by the
Corporation's shareholders on April 12, 1995. On December 9, 1995, the Board
approved an increase of 600,000 shares (which number reflects the 1-for-3
reverse stock split that was effected immediately prior to the consummation of
the initial public offering of the Common Stock) in the aggregate number of
shares issuable under the Plan; such increase was approved by the Corporation's
shareholders on December 19, 1995. The Automatic Option Grant Program of this
Plan became effective on the Automatic Option Grant Program Effective Date.
B. The Plan was amended by the Board on March 16, 1996 to implement
the Director Fee Option Grant Program, subject to approval of the amendment at
the 1996 Annual Stockholders Meeting. If such stockholder approval is not
obtained, then the Director Fee Option Grant Program will terminate.
C. Each stock option grant outstanding under the Predecessor Plans
immediately prior to the Plan Effective Date shall be incorporated into this
Plan and treated as an outstanding option under this Plan, but each such option
shall continue to be governed solely by the terms and conditions of the
instrument evidencing such grant, and nothing in this Plan shall be deemed to
affect or otherwise modify the rights or obligations of the holders of such
options with respect to their acquisition of shares of Common Stock thereunder.
However, the Plan Administrator shall have complete discretion to extend, under
such circumstances as it may deem appropriate, one or more provisions of this
Plan to any or all of the stock options which are incorporated into this Plan
from the Predecessor Plans but which do not otherwise contain such provisions.
D. No further option grants or stock issuances shall be made under
the Predecessor Plans from and after the Plan Effective Date.
E. The Plan shall terminate upon the earlier of (i) February 28,
2005 or (ii) the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of the options or stock
appreciation rights granted under the Plan or the issuance of shares (whether
vested or unvested) under the Stock Issuance Program. If the date of termination
is determined under clause (i) above, then all option grants and unvested share
issuances outstanding on such date shall thereafter continue to have force and
effect in accordance with the provisions of the instruments evidencing such
option grants or share issuances.
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V. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Corporation in establishing the Plan, nor
any action taken by the Plan Administrator hereunder, nor any provision of the
Plan shall be construed so as to grant any individual the right to remain in the
employ or service of the Corporation (or any parent or subsidiary corporation)
for any period of specific duration, and the Corporation (or any parent or
subsidiary corporation retaining the services of such individual) may terminate
such individual's employment or service at any time and for any reason, with or
without cause.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares pursuant to option grants or share issuances under the Plan shall be used
for general corporate purposes.
VII. REGULATORY APPROVALS
The implementation of the Plan, the granting of any option under the
Plan, the issuance of any shares under the Stock Issuance Program, and the
issuance of Common Stock upon the exercise or surrender of the option grants
made hereunder shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it, and the Common Stock issued
pursuant to it.
VIII. MISCELLANEOUS PROVISIONS
A. The right to acquire Common Stock or other assets under the Plan
may not be assigned, encumbered or otherwise transferred by any Optionee or
Participant.
B. The provisions of the Plan relating to the exercise of options
and the vesting of shares shall be governed by the laws of the State of
Pennsylvania as such laws are applied to contracts entered into and performed in
such State.
C. The provisions of the Plan shall inure to the benefit of, and be
binding upon, the Corporation and its successors or assigns, whether by
Corporate Transaction or otherwise, and the Participants and Optionees, the
legal representatives of their respective estates, their respective heirs or
legatees and their permitted assignees.
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STANDARD FORM OF DESIGN-BUILD AGREEMENT AND
GENERAL CONDITIONS BETWEEN OWNER AND CONTRACTOR
(Where the Basis of Payment is the Cost of the Work Plus a Fee, with
a Guaranteed Maximum Price Option)
ARTICLE 1
AGREEMENT
This Agreement is made this 30th day of August in the year 1996, by and
between the
OWNER NEOSE TECHNOLOGIES, INC.
(Name and Address) 102 Witmer Road
Horsham, PA 19044
and the
CONTRACTOR IRWIN & LEIGHTON, INC.
(Name and Address) 460 North Gulph Road
King of Prussia, PA 19406
for services in connection with the following
PROJECT CLINICAL SUPPLIES PILOT PLANT FACILITY
102 Witmer Road
Horsham, PA 19044
Notice to the parties shall be given at the above addresses.
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ARTICLE 2
GENERAL PROVISIONS
2.1 TEAM RELATIONSHIP The Owner and the Contractor agree to proceed with the
Project on the basis of trust, good faith and fair dealing, and shall take all
actions reasonably necessary to perform this Agreement in an economical and
timely manner, including consideration of design modifications and alternative
materials or equipment that will permit the Work to be constructed within the
Guaranteed Maximum Price (GMP) and by the date of Substantial Completion, if
they are established by Amendment No. 1. The Contractor agrees to procure the
architectural and engineering services set forth below, and to furnish
construction and administration of the Work.
2.2 ARCHITECT/ENGINEER Architectural and engineering services shall be procured
from licensed, independent design professionals retained by the Contractor or
furnished by licensed employees of the Contractor, or as permitted by the law of
the state where the Project is located. The person or entity providing
architectural and engineering services shall be referred to as the
Architect/Engineer. If the Architect/Engineer is an independent design
professional, the architectural and engineering services shall be procured
pursuant to a separate agreement between the Contractor and the
Architect/Engineer. The Architect/Engineer for the Project is Francis Cauffman
Foley Hoffmann.
2.3 EXTENT OF AGREEMENT This Agreement is solely for the benefit of the parties,
represents the entire and integrated agreement between the parties, and
supersedes all prior negotiations, representations or agreements, either written
or oral.
2.4 DEFINITIONS
.1 The Contract Documents consist of:
a. Change Orders and written amendments to this Agreement signed by
both the Owner and Contractor, including Amendment No. 1 if executed;
b. this Agreement except for the existing Contract Documents set forth
in item e below;
c. the most current Documents approved by the Owner pursuant to
Subparagraphs 3.1.4, 3.1.5 or 3.1.6;
d. the information provided by the Owner pursuant to Clause 4.1.2.1;
e. the Contract Documents in existence at the time of execution of
this Agreement which are set forth in Article 15;
f. the Owner's Program provided pursuant to Subparagraph 4.1.1.
In case of any inconsistency, conflict or ambiguity among the Contract
Documents, the Documents shall govern in the order in which they are listed
above.
.2 The Work is the Design Phase Services procured in accordance with
Paragraph 3.1, the GMP Proposal provided in accordance with Paragraph 3.2,
the Construction Phase Services provided in accordance with Paragraph 3.3,
Additional Services that may be provided in accordance with Paragraph 3.8,
and other services which are necessary to complete the Project in
accordance with and reasonably inferable from the Contract Documents.
.3 The term Day shall mean calendar day.
.4 A Subcontractor is a person or entity who has an agreement with the
Contractor to perform any portion of the Work. The term Subcontractor does
not include the Architect/Engineer or any separate contractor employed by
the Owner or any separate contractor's subcontractors.
.5 A Subsubcontractor is a person or entity who has an agreement with a
Subcontractor to perform any portion of the Subcontractor's work.
.6 Substantial Completion of the Work, or of a designated portion, occurs
on the date when construction is sufficiently complete in accordance with
the Contract Documents so that the Owner can occupy or utilize the Project,
or a designated portion, for the use for which it is intended. This date
shall be confirmed by a certificate of Substantial Completion signed by the
Owner and Contractor. The certificate shall state the respective
responsibilities of the Owner and Contractor for security, maintenance,
heat, utilities, damage to the Work, and insurance. The certificate shall
also list the items to be completed or corrected, and establish the time
for their completion and correction.
.7 The Owner's Program is an initial description of the Owner's objectives,
including budgetary and time criteria, space requirements and
relationships, flexibility and expandability requirements, special
equipment and systems, and site requirements.
ARTICLE 3
CONTRACTOR'S RESPONSIBILITIES
The Contractor shall be responsible for procuring the design and for the
construction of the Work consistent with the Owner's Program, as such Program
may be modified by the Owner during the course of the Work. The Contractor shall
exercise reasonable skill and judgment in the performance of its services, but
does not warrant or guarantee schedules and estimates other than those that are
part of the GMP proposal.
3.1 DESIGN PHASE SERVICES
3.1.1 PRELIMINARY EVALUATION The Contractor shall provide a preliminary
evaluation of the Project's feasibility based on the Owner's Program and other
relevant information.
3.1.2 PRELIMINARY SCHEDULE The Contractor shall prepare a preliminary schedule
of the Work for the Owner's written approval. The schedule shall show the
activities of the Owner, Architect/Engineer and Contractor necessary to meet the
Owner's completion requirements. The schedule shall be updated periodically with
the level of detail for each schedule update reflecting the information then
available. If an update indicates that a previously approved schedule will not
be met, the Contractor shall recommend corrective action to the Owner in
writing.
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3.1.3 PRELIMINARY ESTIMATE When sufficient Project information has been
identified, the Contractor shall prepare for the Owner's written approval a
preliminary estimate utilizing area, volume or similar conceptual estimating
techniques. The estimate shall be updated periodically with the level of detail
for each estimate update reflecting the information then available. If the
preliminary estimate or any update exceeds the Owner's budget, the Contractor
shall make written recommendations to the Owner.
3.1.4 SCHEMATIC DESIGN DOCUMENTS The Contractor shall submit for the Owner's
written approval Schematic Design Documents, based on the Owner's Program and
other relevant information. Schematic Design Documents shall include drawings,
outline specifications and other conceptual documents illustrating the Project's
basic elements, scale, and their relationship to the site. One set of these
documents shall be furnished to the Owner. The Contractor shall update the
preliminary schedule and estimate based on the Schematic Design Documents.
3.1.5 DESIGN DEVELOPMENT DOCUMENTS The Contractor shall submit for the Owner's
written approval Design Development Documents based on the approved Schematic
Design Documents. The Design Development Documents shall further define the
Project including drawings and outline specifications fixing and describing the
Project size and character, and other appropriate elements incorporating the
structural, architectural, mechanical and electrical systems. One set of these
documents shall be furnished to the Owner. The Contractor shall update the
schedule and estimate based on the Design Development Documents.
3.1.6 CONSTRUCTION DOCUMENTS The Contractor shall submit for the Owner's written
approval Construction Documents based on the approved Design Development
Documents. The Construction Documents shall set forth in detail the requirements
for construction of the Work, and shall consist of drawings and specifications
based upon codes, laws or regulations enacted at the time of their preparation.
Construction shall be in accordance with these approved Construction Documents.
One set of these documents shall be furnished to the Owner prior to commencement
of construction. If a GMP has not been established, the Contractor shall prepare
a further update of the schedule and estimate.
3.1.7 OWNERSHIP OF DOCUMENTS All Documents shall remain the property of the
Contractor and are not to be used by the Owner without the written consent of
the Contractor.
3.2 GUARANTEED MAXIMUM PRICE (GMP) PROPOSAL
3.2.1 When the drawings and specifications are sufficiently complete, the
Contractor shall, propose a GMP, which shall be the sum of the estimated
Cost of the Work as defined in Article 8 and the Contractor's Fee as defined in
Article 7. The GMP is subject to modification as provided in Article 9.
3.2.2 [Intentionally Omitted]
3.2.3 The estimated Cost of the Work may include the Contractor's contingency,
a sum established by the Contractor for use at the Contractor's discretion
to cover costs which are properly reimbursable as a Cost of the Work but are not
the basis for a Change Order.
3.2.4 BASIS OF GUARANTEED MAXIMUM PRICE The Contractor shall include with the
GMP proposal a written statement of its basis, which shall include:
.1 a list of the drawings and specifications, including all addenda, which
were used in preparation of the GMP proposal;
.2 a list of allowances and a statement of their basis;
.3 a list of the assumptions and clarifications made by the Contractor in
the preparation of the GMP proposal to supplement the information contained
in the drawings and specifications;
.4 the date of Substantial Completion upon which the proposed GMP is based,
and the Schedule of Work upon which the date of Substantial Completion is
based;
.5 schedule of applicable alternate prices;
.6 schedule of applicable unit prices;
.7 statement of Additional Services included, if any; and
.8 the time limit for acceptance of the GMP proposal.
3.2.5 The Contractor shall meet with the Owner to review the GMP proposal. In
the event that the Owner discovers any inconsistencies or inaccuracies in the
information presented, the Owner shall promptly give written notice to the
Contractor, who shall make appropriate adjustments to the GMP, its basis or
both.
3.2.6 Unless the Owner accepts the GMP proposal in writing on or before the date
specified in the proposal for such acceptance and so notifies the Contractor,
the GMP proposal shall not be effective without written acceptance by the
Contractor.
3.2.7 Prior to the Owner's acceptance of the Contractor's GMP proposal, the
Contractor shall incur costs to be reimbursed as part of the Cost of the Work,
as provided in this Agreement or as the Owner may specifically authorize in
writing.
3.2.8 Upon acceptance by the Owner of the GMP proposal, the GMP and its basis
shall be set forth in Amendment No. 1. The GMP and the date of Substantial
Completion shall be subject to modification by changes in the Work as provided
in Articles 6 and 9.
3.2.9 The GMP shall include in the Cost of the Work those taxes which are
applicable at the time the GMP is established. If in accordance with the Owner's
direction an exemption is claimed for taxes, the Owner agrees to indemnify,
defend and hold the Contractor harmless for any liability, penalty, interest,
fine, tax assessment, attorneys fees or other expense or cost incurred by the
Contractor as a result of any action taken by the Contractor in accordance with
the Owner's direction.
3.3 CONSTRUCTION PHASE SERVICES
3.3.1 The Construction Phase will commence upon the issuance by the Owner
of a written notice to proceed with
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construction. If construction commences prior to execution of Amendment No. 1,
the Owner's written notice to proceed shall list the documents that are
applicable to the part of the Work which the Owner has authorized.
3.3.2 In order to complete the Work, the Contractor shall provide all necessary
construction supervision, inspection, construction equipment, labor, materials,
tools, and subcontracted items.
3.3.3 The Contractor shall give all notices and comply with all laws and
ordinances legally enacted at the date of execution of the Agreement which
govern the proper performance of the Work.
3.3.4 The Contractor shall prepare and submit a Schedule of Work for the Owner's
written approval. This schedule shall indicate the dates for the start and
completion of the various stages of the construction including the dates when
information and approvals are required from the Owner. It shall be revised as
required by the conditions of the Work.
3.3.5 The Contractor shall secure the building permits necessary for the
construction of the Project.
3.3.6 The Contractor shall take necessary precautions for the safety of its
employees on the Project, and shall comply with all applicable provisions of
federal, state and municipal safety laws to prevent accidents or injury to
persons on, about or adjacent to the Project site. The Contractor, directly or
through its Subcontractors, shall erect and properly maintain at all times, as
required by the conditions and progress of the Work, necessary safeguards for
the protection of workers and the public. The Contractor, however, shall not be
responsible for the elimination or abatement of safety hazards created or
otherwise resulting from work at the Project site carried on by the Owner or its
employees, agents, separate contractors or tenants. The Owner agrees to cause
its employees, agents, separate contractors and tenants to abide by and fully
adhere to all applicable provisions of federal, state and municipal safety laws
and regulations. The above provision shall not relieve Subcontractors of their
responsibility for the safety of persons or property in the performance of their
work, nor for compliance with all applicable provisions of relevant laws.
3.3.7 The Contractor shall keep such full and detailed accounts as may be
necessary for proper financial management under this Agreement. The Owner shall
be afforded access to all the Contractor's records, books, correspondence,
instructions, drawings, receipts, vouchers, memoranda and similar data relating
to this Agreement. The Contractor shall preserve all such records for a period
of three years after the final payment or longer where required by law.
3.3.8 The Contractor shall provide periodic written reports to the Owner on the
progress of the Work as agreed to by the Owner and Contractor.
3.3.9 The Contractor shall develop a system of cost reporting for the Work,
including regular monitoring of actual costs for activities in progress and
estimates for uncompleted tasks and proposed changes in the Work. The reports
shall be presented to the Owner at mutually agreeable intervals.
3.3.10 At all times the Contractor shall maintain the site of the Work free
from debris and waste materials resulting from the Work. At the completion of
the Work, the Contractor shall remove from the premises all construction
equipment, tools, surplus materials, waste materials and debris.
3.4 HAZARDOUS MATERIAL
3.4.1 A Hazardous Material is any substance or material identified now or in the
future as hazardous under any federal, state or local law or regulation, or any
other substance or material which may be considered hazardous or otherwise
subject to statutory or regulatory requirements governing handling, disposal
and/or clean-up. The Contractor shall not be obligated to commence or continue
Work until any known or suspected Hazardous Material discovered at the Project
site has been removed, rendered or determined to be harmless by the Owner as
certified by an independent testing laboratory and approved by the appropriate
government agency.
3.4.2 If after the commencement of the Work, known or suspected Hazardous
Material is discovered at the Project site, the Contractor shall be entitled to
immediately stop Work in the affected area, and the Contractor shall report the
condition to the Owner and, if required, the government agency with
jurisdiction.
3.4.3 The Contractor shall not be required to perform any Work relating to or in
the area of known or suspected Hazardous Material without written mutual
agreement.
3.4.4 The Owner shall be responsible for retaining an independent testing
laboratory to determine the nature of the material encountered and whether it is
a Hazardous Material requiring corrective measures and/or remedial action. Such
measures shall be the sole responsibility of the Owner, and shall be performed
in a manner minimizing any adverse effect upon the Work of the Contractor. The
Contractor shall resume Work in the area affected by any Hazardous Material only
upon written agreement between the parties after the Hazardous Material has been
removed or rendered harmless.
3.4.5 If the Contractor incurs additional costs and/or is delayed due to the
presence of known or suspected Hazardous Material, the Contractor shall be
entitled to an equitable adjustment in the GMP and/or the date of Substantial
Completion.
3.4.6 To the fullest extent permitted by law, the Owner shall defend, indemnify
and hold harmless the Contractor, Architect/Engineer, Subcontractors and
Subsubcontractors, and the agents, officers, directors and employees of each of
them, from and against any and all claims, damages, losses, costs and expenses,
whether direct, indirect or consequential, including but not limited to
attorney's fees, costs and expenses incurred in connection with litigation or
arbitration, arising out of or relating to the performance of the Work in any
area affected by Hazardous Material. To the fullest extent permitted by law,
such indemnification shall apply regardless of the fault, negligence, breach of
warranty or contract, or strict liability of the indemnitee.
3.4.7 The terms of this Paragraph 3.4 shall survive the completion of the Work
under this Agreement and/or any termination of this Agreement.
3.5 ROYALTIES, PATENTS AND COPYRIGHTS The Contractor shall pay all royalties and
license fees which may be due on the inclusion of any patented or copyrighted
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materials, methods, equipment, or systems selected by the Contractor and
incorporated in the Work. The Contractor shall defend, indemnify and hold the
Owner harmless from all suits or claims for infringement of any patent rights or
copyrights arising out of such selection. The Owner agrees to defend, indemnify
and hold the Contractor harmless from any suits or claims of infringement of any
patent rights or copyrights arising out of any patented or copyrighted
materials, methods, equipment or systems specified by the Owner.
3.6 TAX EXEMPTION If in accordance with the Owner's direction an exemption is
claimed for taxes, the Owner agrees to defend, indemnify and hold the Contractor
harmless from any liability, penalty, interest, fine, tax assessment, attorneys
fees or other expense or cost incurred by the Contractor as a result of any
action taken by the Contractor in accordance with the Owner's direction.
3.7 WARRANTIES AND COMPLETION
3.7.1 The Contractor warrants that all materials and equipment furnished under
the Construction Phase of this Agreement will be new unless otherwise specified,
of good quality, in conformance with the Contract Documents, and free from
defective workmanship and materials. Warranties shall commence on the date of
Substantial Completion of the Work or of a designated portion. The Contractor
agrees to correct all construction performed under this Agreement which proves
to be defective in workmanship and materials within a period of one year from
the date of Substantial Completion or for such longer periods of time as may be
set forth with respect to specific warranties required by the Contract
Documents.
3.7.2 Those products, equipment, systems or materials incorporated in the Work
at the direction of or upon the specific request of the Owner (e.g. process
equipment) shall be covered exclusively by the warranty of the manufacturer.
There are no warranties which extend beyond the description on the face thereof.
All other warranties expressed or implied including the warranty of
merchantability and the warranty of fitness for a particular purpose are
expressly disclaimed.
3.7.3 The Contractor shall secure required certificates of inspection, testing
or approval and deliver them to the Owner.
3.7.4 The Contractor shall collect all written warranties and equipment manuals
and deliver them to the Owner.
3.7.5 With the assistance of the Owner's maintenance personnel, the Contractor
shall direct the checkout of utilities and operations of systems and equipment
for readiness, and assist in their initial start-up and testing. Validation of
building support and process systems shall be performed as agreed upon with
Owner.
3.8 ADDITIONAL SERVICES The Contractor shall provide or procure the following
Additional Services upon the request of the Owner. A written agreement between
the Owner and Contractor shall define the extent of such Additional Services. If
a GMP has been established for the Work or any portion of the Work, such
Additional Services shall be considered a Change in the Work, unless they are
specifically included in the statement of the basis of the GMP as set forth in
Amendment No. 1.
.1 Documentation of the Owner's Program, establishing the Project budget,
investigating sources of financing, general business planning and other
information and documentation as may be required to establish the
feasibility of the Project.
.2 Consultations, negotiations, and documentation supporting the
procurement of Project financing.
.3 Surveys, site evaluations, legal descriptions and aerial photographs.
.4 Appraisals of existing equipment, existing properties, new equipment and
developed properties.
.5 Soils, subsurface and environmental studies, reports and investigations
required for submission to governmental authorities or others having
jurisdiction over the Project.
.6 Consultations and representations other than normal assistance in
securing building permits, before governmental authorities or others having
jurisdiction over the Project.
.7 Investigation or making measured drawings of existing conditions or the
verification of drawings or other Owner-provided information.
.8 Artistic renderings, models and mockups of the Project or any part of
the Project or the Work.
.9 Inventories of existing furniture, fixtures, furnishings and equipment
which might be under consideration for incorporation into the Work.
.10 Interior design and related services including procurement and
placement of furniture, furnishings, artwork and decorations.
.11 Making revisions to the Schematic Design, Design Development,
Construction Documents or documents forming the basis of the GMP after they
have been approved by the Owner, and which are due to causes beyond the
control of the Contractor.
.12 Design, coordination, management, expediting and other services
supporting the procurement of materials to be obtained, or work to be
performed, by the Owner, including but not limited to telephone systems,
computer wiring networks, sound systems, alarms, security systems and other
specialty systems which are not a part of this Agreement.
.13 Estimates, proposals, appraisals, consultations, negotiations and
services in connection with the repair or replacement of an insured loss.
.14 The premium portion of overtime work ordered by the Owner including
productivity impact costs.
.15 Document reproduction exceeding the limits provided for in this
Agreement.
.16 Out-of-town travel by the Architect/Engineer in connection with the
Work, except between the Architect/Engineer's office, Contractor's office,
Owner's office and the Project site.
.17 Obtaining service contractors and training maintenance personnel,
assisting and consulting in the use of systems and equipment after the
initial start up, and adjusting and balancing of systems and equipment.
.18 Services for tenant or rental spaces not a part of this Agreement.
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.19 Services requested by the Owner or required by the Work which are not
specified in the Contract Documents and which are not normally part of
generally accepted design and construction practice.
.20 Serving or preparing to serve as an expert witness in connection with
any proceeding, legal or otherwise, regarding the Project.
.21 Preparing reproducible record drawings from marked-up prints, drawings
or other documents that incorporate significant changes in the Work made
during the Construction Phase.
ARTICLE 4
OWNER'S RESPONSIBILITIES
4.1 INFORMATION AND SERVICES PROVIDED
BY OWNER
4.1.1 The Owner shall provide full information in a timely manner regarding
requirements for the Project, including the Owner's Program and other relevant
information.
4.1.2 The Owner shall provide:
.1 all necessary information describing the physical characteristics of the
site, including surveys, site evaluations, legal descriptions, existing
conditions, subsurface and environmental studies, reports and
investigations;
.2 inspection and testing services during construction as required by law
or as mutually agreed; and
.3 unless otherwise provided in the Contract Documents, necessary
approvals, site plan review, rezoning, easements and assessments, necessary
permits, fees and charges required for the construction, use, occupancy or
renovation of permanent structures, including legal and other required
services.
4.1.3 The Owner shall provide reasonable evidence satisfactory to the
Contractor, prior to commencing the Work and during the progress of the Work,
that sufficient funds are available and committed for the entire cost of the
Project, including an allowance for changes in the Work as may be approved in
the course of the Work. Unless such reasonable evidence is provided, the
Contractor shall not be required to commence or continue the Work. The
Contractor may stop Work after seven (7) days' written notice to the Owner if
such evidence is not presented within a reasonable time. The failure of the
Contractor to insist upon the providing of this evidence at any one time shall
not be a waiver of the Owner's obligation to make payments pursuant to this
Agreement, nor shall it be a waiver of the Contractor's right to request or
insist that such evidence be provided at a later date.
4.1.4 The Contractor shall be entitled to rely on the completeness and accuracy
of the information and services required by this Paragraph 4.1.
4.2 OWNER'S RESPONSIBILITIES
DURING DESIGN PHASE
4.2.1 The Owner shall provide the Owner's Program at the inception of the Design
Phase and shall review and timely approve schedules, estimates, Schematic Design
Documents, Design Development Documents and Construction Documents furnished
during the Design Phase as set forth in Paragraph 3.1, and the GMP proposal as
set forth in Paragraph 3.2.
4.3 OWNER'S RESPONSIBILITIES
DURING CONSTRUCTION PHASE
4.3.1 The Owner shall review and timely approve the Schedule of the Work as
set forth in Subparagraph 3.3.4
4.3.2 If the Owner becomes aware of any error, omission or failure to meet the
requirements of the Contract Documents or any fault or defect in the Work, the
Owner shall give prompt written notice to the Contractor
4.3.3 The Owner shall communicate with the Contractor's Subcontractors,
suppliers and Architect/Engineer only through the Contractor. The Owner shall
have no contractual obligations to Subcontractors, suppliers, or the
Architect/Engineer.
4.3.4 The Owner shall provide insurance for the Project as provided in Article
11.
4.4 OWNER'S REPRESENTATIVE The Owner's representative is Mr. Edward McGuire or
Mr. Robert Fleming who is agreed to by the Contractor. The representative:
.1 shall be fully acquainted with the Project;
.2 agrees to furnish the information and services required of the Owner
pursuant to Paragraph 4.1 so as not to delay the Contractor's Work; and
.3 shall have authority to bind the Owner in all matters requiring the
Owner's approval, authorization or written notice. If the Owner changes its
representative or the representative's authority as listed above, the Owner
shall notify the Contractor in advance in writing. The Contractor shall
have the right to approve any successor representative.
ARTICLE 5
SUBCONTRACTS
Work not performed by the Contractor with its own forces shall be performed by
Subcontractors.
5.1 RETAINING SUBCONTRACTORS The Contractor shall not retain any Subcontractor
to whom the Owner has a reasonable and timely objection, provided that the Owner
agrees to compensate the Contractor for any additional costs incurred by the
Contractor as a result of such objection. The Contractor shall not be required
to retain any Subcontractor to whom the Contractor has a reasonable objection.
5.2 MANAGEMENT OF SUBCONTRACTORS The Contractor shall be responsible for the
management of the Subcontractors in the performance of their work.
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5.3 ASSIGNMENT OF SUBCONTRACT AGREEMENTS The Contractor shall provide for
assignment of subcontract agreements in the event that the Owner terminates this
Agreement for cause as provided in Paragraph 12.2. Following such termination,
the Owner shall notify in writing those subcontractors whose assignments will be
accepted, subject to the rights of sureties.
ARTICLE 6.
CONTRACT TIME
6.1 COMMENCEMENT OF THE WORK The Work shall commence on or about *________, and
shall proceed in general accordance with the Schedule of Work as such schedule
may be amended from time to time, subject, however, to the provisions of
Paragraph 3.4 and Subparagraph 4.1.3.
6.2 SUBSTANTIAL COMPLETION At such time as a GMP is accepted, a date of
Substantial Completion of the Work shall be established as set forth in
Amendment No. 1. If a GMP is not established and the parties desire to establish
a date of Substantial Completion, it shall be set forth in Amendment No.1. If
such a date is established, time shall be of the essence of this Agreement.
6.3 DELAYS IN THE WORK
6.3.1 If causes beyond the Contractor's control delay the progress of the Work,
then the GMP, compensation for Design Phase Services, the Contractor's Fee
and/or the date of Substantial Completion shall be modified by Change Order as
appropriate. Such causes shall include but not be limited to: changes ordered in
the Work, acts or omissions of the Owner or separate contractors employed by the
Owner, the Owner preventing the Contractor from performing the Work pending
dispute resolution, Hazardous Materials, differing site conditions, adverse
weather conditions not reasonably anticipated, fire, unusual transportation
delays, labor disputes, or unavoidable accidents or circumstances.
6.3.2 In the event delays to the project are encountered for any reason, the
parties agree to undertake reasonable steps to mitigate the effect of such
delays.
*Preconstruction services including design and ordering of long-lead equipment
commence immediately; onsite work starts as permits and documentation are
available.
ARTICLE 7
COMPENSATION
7.1 [Intentionally Omitted]
7.2 Design Phase Compensation
7.2.1 The cost of services performed directly by the Architect/Engineer is
computed separately and is independent from the Contractor's compensation for
work or services directly performed by the Contractor; these costs shall be
shown as separate items on applications for payment. If an Architect/Engineer is
retained by the Contractor, the payments to the Architect/Engineer shall be as
detailed in a separate agreement between the Contractor and Architect/Engineer.
7.2.2 The Owner shall compensate the Contractor for services performed during
the Design Phase as described in Paragraph 3.1, including preparation of a GMP
proposal as described in Paragraph 3.2, as follows:
(State whether a stipulated sum, actual cost, or other basis. If a stipulated
sum, state what portion of the sum shall be payable each month.)
.1 Reimbursement of all costs for Design & Engineering and Validation
.2 Reimbursement for other costs as outlined in Article 8.1
.3 Reimbursement for personnel as per attached hourly billing rates
.4 Contractor's stated percentage fee as per 7.3.1 applicable to items .1
through .3 above.
7.2.3 Compensation for Design Phase Services shall be equitably adjusted if such
services extend beyond six months from the date of this Agreement for reasons
beyond the reasonable control of the Contractor or as provided in Paragraph 9.1.
For changes in Design Phase Services, compensation shall be adjusted as follows:
To be negotiated.
7.2.4 Payments for Design Phase Services shall be due and payable within twenty
(20) days following presentation of the Contractor's monthly invoice to the
Owner. If the Owner fails to pay the Contractor as agreed, then the Contractor
shall have the right to stop the Work and be entitled to payments due plus
interest as provided in Subparagraphs 10.1.3 and 10.1.4.
7.3 CONSTRUCTION PHASE COMPENSATION
7.3.1 The Owner shall compensate the Contractor for Work performed following the
commencement of the Construction Phase on the following basis:
.1 the Cost of the Work as allowed in Article 8; and
.2 the Contractor's Fee in the amount of 2.95% of the accepted GMP fee; to
be fixed upon acceptance of GMP. ($ To be determined subject to adjustment
as provided in Paragraph 7.5. The Contractor's Fee shall be paid
proportionately to the ratio that the monthly Cost of the Work bears to the
total estimated Cost of the Work.)
7.3.2 The compensation to be paid under this Paragraph 7.3 shall be limited
to the GMP established in Amendment No. 1,
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as the GMP may be adjusted under Article 9. In the event the Cost of the Work
plus the Contractor's Fee shall be less than the GMP as adjusted by Change
Orders, the resulting savings shall be shared by the Owner and the Contractor in
accordance with attached Rider 1.
7.3.3 Payment for Construction Phase Services shall be as set forth in Article
10. If Design Phase Services continue to be provided after construction has
commenced, the Contractor shall also continue to be compensated as provided in
Paragraph 7.2, or as mutually agreed.
7.3.4 Schedule Incentive - See attached Rider 2.
7.4 CONTRACTOR'S FEE The Contractor's Fee includes the following:
.1 salaries and other mandatory or customary compensation of the
Contractor's employees at its principal and branch offices, except
employees listed in Subparagraph 8.2.2;
.2 general and administrative expenses of the Contractor's principal and
branch offices other than the field office, except as may be expressly
included in Article 8; and
.3 the Contractor's capital expenses, including interest on the
Contractor's capital employed for the Work.
7.5 ADJUSTMENT IN THE CONTRACTOR'S FEE Adjustment in the Contractor's Fee shall
be made as follows.
.1 for changes in the Work as provided in Article 9, the Contractor's Fee
shall be adjusted as follows:
To be negotiated.
.2 for delays in the Work not caused by the Contractor, there will be an
equitable adjustment in the Contractor's Fee to compensate the Contractor
for increased expenses; and
.3 if the Contractor is placed in charge of managing the replacement of an
insured or uninsured loss, the Contractor shall be paid an additional Fee
in the same proportion that the Contractor's Fee bears to the estimated
Cost of the Work.
ARTICLE 8
COST OF THE WORK
The Owner agrees to pay the Contractor for the Cost of the Work as defined in
this Article. This payment shall be in addition to the Contractor's Fee
stipulated in Article 7.
8.1 COST ITEMS FOR DESIGN PHASE SERVICES
8.1.1 Compensation for Design Phase Services as provided
in Paragraph 7.2.
8.2 COST ITEMS FOR CONSTRUCTION PHASE SERVICES
8.2.1 Wages paid for labor in the direct employ of the Contractor in the
performance of the Work.
8.2.2 Salaries of Contractor's employees when stationed at the field office, in
whatever capacity employed, employees engaged on the road expediting the
production or transportation of material and equipment, and employees from the
principal or branch office performing the functions listed on the attached
Personnel Schedule. Personnel to be charged in accordance with billing rates
listed on the attached Personnel Schedule.
8.2.3 Cost of all employee benefits and taxes including but not limited to
workers' compensation, unemployment compensation, Social Security, health,
welfare, retirement and other fringe benefits as required by law, labor
agreements, or paid under the Contractor's standard personnel policy, insofar as
such costs are paid to employees of the Contractor who are included in the Cost
of the Work under Subparagraphs 8.2.1 and 8.2.2.
8.2.4 Reasonable transportation, travel, hotel and moving expenses of the
Contractor's personnel incurred in connection with the Work.
8.2.5 Cost of all materials, supplies and equipment incorporated in the
Work, including costs of inspection, testing, transportation, storage and
handling.
8.2.6 Payments made by the Contractor to Subcontractors for work performed under
this Agreement.
8.2.7 Fees and expenses for design services procured by the Contractor except as
provided by the A/E and compensated in Paragraph 7.2.
8.2.8 Cost, including transportation and maintenance of all materials, supplies,
equipment, temporary facilities and hand tools not owned by the workers that are
used or consumed in the performance of the Work, less salvage value; and cost
less salvage value on such items used, but not consumed that remain the property
of the Contractor.
8.2.9 Rental charges of all necessary machinery and equipment, exclusive of
hand tools owned by workers, used at the site of the Work, whether rented from
the Contractor or others, including installation, repair and replacement, dis-
mantling, removal, maintenance, transportation and delivery costs at rental
charges consistent with those prevailing in the area.
8.2.10 Cost of the premiums for all insurance and surety bonds which the
Contractor is required to procure or deems necessary.
8.2.11 Sales, use, gross receipts or other taxes, tariffs or duties related to
the Work for which the Contractor is liable.
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8.2.12 Permits, fees, licenses, tests, royalties, damages for infringement of
patents and/or copyrights, including costs of defending related suits for which
the Contractor is not responsible as set forth in Paragraph 3.5, and deposits
lost for causes other than the Contractor's negligence.
8.2.13 Losses, expenses or damages to the extent not compensated by insurance or
otherwise, and the cost of corrective work during the Construction Phase and for
a period of one year following the date of Substantial Completion.
8.2.14 All costs associated with establishing, equipping, operating, maintaining
and demobilizing the field office.
8.2.15 Reproduction costs, photographs, cost of telegrams, facsimile
transmissions, long distance telephone calls, data processing services, postage,
express delivery charges, telephone service at the site and reasonable petty
cash expenses at the field office.
8.2.16 All water, power and fuel costs necessary for the Work.
8.2.17 Cost of removal of all nonhazardous substances, debris and waste
materials.
8.2.18 Costs incurred due to an emergency affecting the safety of persons
and/or property.
8.2.19 Legal, mediation and arbitration fees and costs, other than those
arising from disputes between the Owner and Contractor, reasonably and properly
resulting from the Contractor's performance of the Work.
8.2.20 All costs directly incurred in the performance of the Work or in
connection with the Project, and not included in the Contractor's Fee as set
forth in Article 7, which are reasonably inferable from the Contract Documents
as necessary to produce the intended results.
8.3 DISCOUNTS All discounts for prompt payment shall accrue to the Owner to the
extent such payments are made directly by the Owner. To the extent payments are
made with funds of the Contractor, all cash discounts shall accrue to the
Contractor. All trade discounts, rebates and refunds, and all returns from sale
of surplus materials and equipment, shall be credited to the Cost of the Work.
ARTICLE 9
CHANGES IN THE WORK
Changes in the Work which are within the general scope of this Agreement may be
accomplished by Change Order without invalidating this Agreement.
9.1 CHANGE ORDERS A Change Order is a written instrument, issued after execution
of this Agreement, signed by the Owner and Contractor stating their agreement
upon a change and the adjustment in the GMP, compensation for Design Phase
Services, the Contractor's Fee and/or the date of Substantial Completion. Each
adjustment in the GMP resulting from a Change Order shall clearly separate the
amount attributable to compensation for Design Phase Services, other Cost of the
Work and the Contractor's Fee.
9.2 DETERMINATION OF COST An increase or decrease in the GMP resulting from a
change in the Work shall be determined by one or more of the following methods:
.1 unit prices set forth in this Agreement or as subsequently agreed;
.2 a mutually accepted, itemized lump sum;
.3 costs determined as defined in Paragraph 7.2 and Article 8 and a
mutually acceptable Contractor's Fee as determined in Subparagraph
7.5.1; or
.4 if an increase or decrease cannot be agreed to as set forth in
Subparagraphs 9.2.1 through 9.2.3 and the Owner issues a written order for
the Contractor to proceed with the change, the cost of the change in the
Work shall be determined by the reasonable expense and savings of the
performance of the Work resulting from the change. If there is a net
increase in the GMP, the Contractor's Fee shall be adjusted as set forth in
Subparagraph 7.5.1. In case of a net decrease in the GMP, the Contractor's
Fee shall not be adjusted. The Contractor shall maintain a documented,
itemized accounting evidencing the expenses and savings.
9.3 NO OBLIGATION TO PERFORM The Contractor shall not be obligated to perform
changed Work until a Change Order has been executed by the Owner and Contractor,
except as provided in Subparagraph 9.2.4.
9.4 ADJUSTMENT OF UNIT PRICES If a proposed Change Order alters original
quantities to a degree that application of previously agreed to unit prices
would be inequitable to either the Owner or the Contractor, the unit prices and
the GMP shall be equitably adjusted.
9.5 UNKNOWN CONDITIONS If in the performance of the Work the Contractor finds
latent, concealed or subsurface physical conditions which differ from the
conditions the Contractor reasonably anticipated, or if physical conditions are
materially different from those normally encountered and generally recognized as
inherent in the kind of work provided for in this Agreement, then the GMP
compensation for Design Phase Services, the Contractor's Fee, and/or the date of
Substantial Completion shall be equitably adjusted by Change Order within a
reasonable time after the conditions are first observed.
9.6 CLAIMS FOR ADDITIONAL COST OR TIME For any claim for an increase in the GMP,
compensation for Design Phase Services, the Contractor's Fee and/or an extension
in the date of Substantial Completion, the Contractor shall give the Owner
written notice of the claim within twenty-one (21) days after the occurrence
giving rise to the claim or within twenty-one (21) days after the Contractor
first recognizes the condition giving rise to the claim, whichever is later.
Except in an emergency, notice shall be given before proceeding with the Work.
Claims for design and estimating costs incurred in connection with possible
changes requested by the Owner, but which do not proceed, shall be made within
twenty-one (21) days after the decision is made not to proceed. Any change in
the GMP, compensation for Design Phase Services, the Contractor's Fee, and/or
date of Substantial Completion resulting from such claim shall be authorized by
Change Order.
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9.7 EMERGENCIES In any emergency affecting the safety of persons and/or
property, the Contractor shall act, at its discretion, to prevent threatened
damage, injury or loss. Any change in the GMP, compensation for Design Phase
Services, the Contractor's Fee and/or extension of the date of Substantial
Completion on account of emergency work shall be determined as provided in this
Article.
ARTICLE 10
PAYMENT FOR CONSTRUCTION PHASE SERVICES
10.1 PROGRESS PAYMENTS
10.1.1 On the last day of each month after the Construction Phase has
commenced, the Contractor shall submit to the Owner an Application for Payment
consisting of the Cost of the Work performed up to the last day of the current
month, including the cost of material stored on the site or at other locations
approved by the Owner, along with a proportionate share of the Contractor's Fee.
Prior to submission of the next Application for Payment, the Contractor shall
furnish to the Owner a statement accounting for the disbursement of funds
received under the previous Application. The extent of such statement shall be
as agreed upon between the Owner and Contractor.
10.1.2 Within twenty (20) days after receipt of each monthly Application for
Payment, the Owner shall pay directly to the Contractor the appropriate amount
for which Application for Payment is made, less amounts previously paid by the
Owner.
10.1.3 If the Owner fails to pay the Contractor at the time payment of any
amount becomes due, then the Contractor may, at any time thereafter, upon
serving written notice that the Work will be stopped within five (5) days after
receipt of the notice by the Owner, and after such five (5) day period, stop the
Work until payment of the amount owing has been received.
10.1.4 Payments due but unpaid shall bear interest at the rate the Owner is
paying on its construction loan or at the current "prime rate" whichever is
higher.
10.1.5 The Contractor warrants and guarantees that title to all Work, materials
and equipment covered by an Application for Payment, whether incorporated in the
Project or not, will pass to the Owner upon receipt of such payment by the
Contractor free and clear of all liens, claims, security interests or
encumbrances, hereinafter referred to as "liens."
10.1.6 The Owner's progress payment, occupancy or use of the Project, whether in
whole or in part, shall not be deemed an acceptance of any Work not conforming
to the requirements of the Contract Documents.
10.1.7 Upon Substantial Completion of the Work, the Owner shall pay the
Contractor the unpaid balance of the Cost of the Work, compensation for Design
Phase Services and the Contractor's Fee, less a sum equal to the Contractor's
estimated cost of completing any unfinished items as agreed to between the Owner
and Contractor as to extent and time for completion. The Owner thereafter shall
pay the Contractor monthly the amount retained for unfinished items as each item
is completed.
10.2 FINAL PAYMENT
10.2.1 Final payment, consisting of the unpaid balance of the Cost of the Work,
compensation for Design Phase Services and the Contractor's Fee, less the
initial payment made under Paragraph 7.1, shall be due and payable when the Work
is fully completed. Before issuance of final payment, the Owner may request
satisfactory evidence that all payrolls, materials bills and other indebtedness
connected with the Work have been paid or otherwise satisfied.
10.2.2 In making final payment the Owner waives all claims except for:
.1 outstanding liens;
.2 improper workmanship or defective materials appearing within one year
after the date of Substantial Completion;
.3 Work not in conformance with the Contract Documents; and
.4 terms of any special warranties required by the Contract Documents.
10.2.3 In accepting final payment, the Contractor waives all claims except those
previously made in writing and which remain unsettled.
ARTICLE 11
INDEMNITY, INSURANCE AND WAIVER OF SUBROGATION
11.1 INDEMNITY
11.1.1 To the fullest extent permitted by law, the Contractor shall defend,
indemnify and hold the Owner harmless from all claims for bodily injury and
property damage (other than to the Work itself and other property insured under
Paragraph 11.5), including resulting loss of use that may arise from the
performance of the Work, to the extent of the negligence attributed to such acts
or omissions by the Contractor, Subcontractors or anyone employed directly or
indirectly by any of them or by anyone for whose acts any of them may be liable.
The Contractor shall not be required to defend, indemnify or hold harmless the
Owner for any acts, omissions or negligence of the Owner, Owner's employees,
agents or separate contractors.
11.1.2 The Owner shall cause any other contractor who may have a contract with
the Owner to perform work in the areas where Work will be performed under this
Agreement, to agree to indemnify the Contractor, Subcontractors or anyone
employed directly or indirectly by any of them or anyone for whose acts any of
them may be liable and hold them harmless from all claims for bodily injury and
property damage, other than property insured under Paragraph 11.5, that may
arise from that contractor's operations. Such provisions shall be in a form
satisfactory to the Contractor.
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11.2 CONTRACTOR'S LIABILITY INSURANCE
11.2.1 The Contractor shall obtain and maintain insurance coverage for the
following claims which may arise out of the performance of this Agreement,
whether resulting from the Contractor's operations or by the operations of any
Subcontractor, anyone in the employ of any of them, or by an individual or
entity for whose acts they may be liable:
.1 workers' compensation, disability and other employee benefit claims
under acts applicable to the Work;
.2 under applicable employers liability law, bodily injury, occupational
sickness, disease or death claims of the Contractor's employees;
.3 bodily injury, sickness, disease or death claims for damages to persons
not employed by the Contractor;
.4 usual personal injury liability claims for damages directly or
indirectly related to the person's employment by the Contractor or for
damages to any other person;
.5 damage to or destruction of tangible property, including resulting loss
of use, claims for property other than the Work itself and other property
insured under Paragraph 11.5;
.6 bodily injury, death or property damage claims resulting from motor
vehicle liability in the use, maintenance or ownership of any motor
vehicle; and
.7 contractual liability claims involving the Contractor's obligations
under Subparagraph 11.1.1.
11.2.2 The Contractor's Commercial General and Automobile Liability Insurance as
required by Subparagraph 11.2.1 shall be written for not less than the following
limits of liability:
.1 Commercial General Liability Insurance
a. Each Occurrence Limit $1,000,000
b. General Aggregate $2,000,000
c. Products/Completed
Operations Aggregate $1,000,000
d. Personal and Advertising
Injury Limit $1,000,000
.2 Comprehensive Automobile Liability Insurance
a. Combined Single Limit
Bodily Injury and
Property Damage $1,000,000
Each Occurrence
or
b. Bodily Injury $---------
Each Person
$---------
Each Occurrence
c. Property Damage $---------
Each Occurrence
.3 Umbrella Liability Coverage $20,000,000
11.2.3 Commercial General Liability Insurance may be arranged under a single
policy for the full limits required or by a combination of underlying policies
and an Excess or Umbrella Liability policy.
11.2.4 The policies shall contain a provision that coverage will not be
cancelled or not renewed until at least thirty (30) days' prior written notice
has been given to the Owner. Certificates of insurance showing required coverage
to be in force shall be filed with the Owner prior to commencement of the Work.
11.2.5 Products and Completed Operations insurance shall be maintained for a
minimum period of at least 5 year(s) after either ninety (90) days following the
date of Substantial Completion or final payment, whichever is earlier.
11.3 PROFESSIONAL LIABILITY INSURANCE The Architect/Engineer's professional
liability insurance for claims arising from the negligent performance of
professional services under this Agreement shall be written for not less than
$1,000,000 per claim and in the aggregate with a deductible not to exceed
$2,000,000. These requirements shall be continued in effect for 3 year(s) after
the date of Substantial Completion. If the Architect/Engineer retains
consultants for a portion of the design, their professional liability insurance
coverage, including deductible amounts, shall be set forth in Article 14 of this
Agreement.
11.4 OWNER'S LIABILITY INSURANCE The Owner shall be responsible for obtaining
and maintaining its own liability insurance. Insurance for claims arising out of
the performance of this Agreement may be purchased and maintained at the Owner's
discretion.
11.5 INSURANCE TO PROTECT PROJECT
11.5.1 The Owner shall obtain and maintain property insurance in a form
acceptable to the Contractor upon the entire Project for the full cost of
replacement at the time of any loss. This insurance shall include as named
insureds the Owner, Contractor, Architect/Engineer, Subcontractors and
Subsubcontractors. This insurance shall insure against loss from the perils of
fire and extended coverage, and shall include "all risk" insurance for physical
loss or damage including without duplication of coverage at least: theft,
vandalism, malicious mischief, transit, collapse, falsework, temporary
buildings, debris removal, flood, earthquake, testing, and damage resulting from
defective design, workmanship or material. The Owner shall increase limits of
coverage, if necessary, to reflect estimated replacement cost. The Owner shall
be responsible for any co-insurance penalties or deductibles.
11.5.2 If the Owner occupies or uses a portion of the Project prior to its
Substantial Completion, such occupancy or use shall not commence prior to a time
mutually agreed to by the Owner and the Contractor and to which the insurance
company or companies providing the property insurance have consented by
endorsing the policy or policies. This insurance shall not be cancelled or
lapsed on account of partial occupancy. Consent of the Contractor to such early
occupancy or use shall not be unreasonably withheld.
11.5.3 The Owner shall obtain and maintain boiler and machinery insurance as
necessary. The interests of the Owner, Contractor, Architect/Engineer,
Subcontractors and Subsubcontractors shall be protected under this coverage.
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11.5.4 The Owner shall purchase and maintain insurance to protect the Owner,
Contractor, Architect/Engineer, Subcontractors and Subsubcontractors against
loss of use of Owner's property due to those perils insured pursuant to
Paragraph 11.5. Such policy will provide coverage for expediting expenses
of materials, continuing overhead of the Owner and the Contractor,
Architect/Engineer, Subcontractors and Subsubcontractors, necessary labor
expense including overtime, loss of income by the Owner and other determined
exposures. Exposures of the Owner, Contractor, Architect/Engineer,
Subcontractors and Subsubcontractors, shall be determined by mutual agreement
with separate limits of coverage fixed for each item.
11.5.5 Upon the Contractor's request, the Owner shall provide the Contractor
with a copy of all policies before an exposure to loss may occur. Copies of any
subsequent endorsements shall be furnished to the Contractor. The Contractor
shall be given thirty (30) days' notice of cancellation, non-renewal, or any
endorsements restricting or reducing coverage. The Owner shall give written
notice to the Contractor before commencement of the Work if the Owner will not
be obtaining property insurance. In that case, the Contractor may obtain
insurance in order to protect its interest in the Work as well as the interest
of Architect/Engineer, Subcontractors and Subsubcontractors in the Work. The
cost of this insurance shall be a Cost of the Work pursuant to Article 8, and
the GMP shall be increased by Change Order. It the Contractor is damaged by
failure of the Owner to purchase or maintain property insurance or to so notify
the Contractor, the Owner shall bear all reasonable costs incurred by the
Contractor arising from the damage.
11.6 PROPERTY INSURANCE LOSS ADJUSTMENT
11.6.1 Any insured loss shall be adjusted with the Owner and the Contractor and
made payable to the Owner and Contractor as trustees for the insureds, as their
interests may appear, subject to any applicable mortgagee clause.
11.6.2 Upon the occurrence of an insured loss, monies received will be deposited
in a separate account and the trustees shall make distribution in accordance
with the agreement of the parties in interest, or in the absence of such
agreement, in accordance with an arbitration award pursuant to Article 13. If
the trustees are unable to agree between themselves on the settlement of the
loss, such dispute shall also be submitted for resolution pursuant to
Article 13.
11.7 WAIVER OF SUBROGATION
11.7.1 The Owner and Contractor waive all rights against each other, the
Architect/Engineer, and any of their respective employees, agents, consultants,
subcontractors and subsubcontractors for damages caused by risks covered by
insurance provided in Paragraph 11.5 to the extent they are covered by that
insurance, except such rights as they may have to the proceeds of such insurance
held by the Owner and Contractor as trustees. The Contractor shall require
similar waivers from the Architect/Engineer and all Subcontractors, and shall
require each of them to include similar waivers in their subsubcontracts and
consulting agreements.
11.7.2 The Owner waives subrogation against the Contractor, Architect/Engineer,
Subcontractors and Subsubcontractors on all property and consequential loss
policies carried by the Owner on adjacent properties and under property and
consequential loss policies purchased for the Project after its completion.
11.7.3 If the policies of insurance referred to in this Paragraph require an
endorsement to provide for continued coverage where there is a waiver of
subrogation, the owners of such policies will cause them to be so endorsed.
ARTICLE 12
TERMINATION OF THE AGREEMENT AND OWNER'S
RIGHT TO PERFORM CONTRACTOR'S
RESPONSIBILITIES
12.1 TERMINATION BY THE CONTRACTOR
12.1.1 Upon seven (7) days' written notice to the Owner, the Contractor may
terminate this Agreement for any of the following reasons:
.1 if the Work has been stopped for a thirty (30) day period
a. under court order or order of other governmental authorities having
jurisdiction;
b. as a result of the declaration of a national emergency or other
governmental act during which, through no act or fault of the
Contractor, materials are not available; or
c. because of the Owner's failure to pay the Contractor in accordance
with this Agreement;
.2 if the Work is suspended by the Owner for sixty (60) days;
.3 if the Owner materially delays the Contractor in the performance of
the Work;
.4 if the Owner otherwise materially breaches this Agreement; or
.5 if the Owner fails to furnish reasonable evidence that sufficient
funds are available and committed for the entire cost of the Project in
accordance with Subparagraph 4.1.3 of this Agreement.
12.1.2 Upon termination by the Contractor in accordance with Subparagraph
12.1.1, the Contractor shall be entitled to recover from the Owner payment for
all Work executed and for any proven loss, cost or expense in connection with
the Work, plus all demobilization costs and reasonable damages. In addition, the
Contractor shall be paid an amount calculated as set forth either in
Subparagraph 12.3.1 or 12.3.2, depending on when the termination occurs, and
Subparagraphs 12.3.3 and 12.3.4.
12.2 OWNER'S RIGHT TO PERFORM CONTRACTOR'S OBLIGATIONS AND TERMINATION BY THE
OWNER FOR CAUSE
12.2.1 If the Contractor persistently fails to perform any of its obligations
under this Agreement, the Owner may, after seven (7) days' written notice,
during which period the Contractor fails to perform such obligation, undertake
to perform
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such obligations. The GMP shall be reduced by the cost to the Owner of
performing such obligations.
12.2.2 Upon seven (7) days' written notice to the Contractor and the
Contractor's surety, if any, the Owner may terminate this Agreement for any of
the following reasons:
.1 if the Contractor persistently utilizes improper materials and/or
inadequately skilled workers;
.2 if the Contractor does not make proper payment to laborers, material
suppliers or Subcontractors;
.3 if the Contractor persistently fails to abide by the orders,
regulations, rules, ordinances or laws of governmental authorities having
jurisdiction; or
.4 if the Contractor otherwise materially breaches this Agreement.
If the Contractor fails to proceed to cure within the seven (7) days, the Owner,
without prejudice to any other right or remedy, may take possession of the site
and complete the Work utilizing any reasonable means. In this event, the
Contractor shall not have a right to further payment until the Work is
completed.
12.2.3 If the Contractor files a petition under the Bankruptcy Code, this
Agreement shall terminate if the Contractor or the Contractor's trustee rejects
the Agreement or, if there has been a default, the Contractor is unable to give
adequate assurance that the Contractor will perform as required by this
Agreement or otherwise is unable to comply with the requirements for assuming
this Agreement under the applicable provisions of the Bankruptcy Code.
12.2.4 In the event the Owner exercises its rights under Subparagraph 12.2.1 or
12.2.2, upon the request of the Contractor the Owner shall provide a detailed
accounting of the cost incurred by the Owner.
12.3 TERMINATION BY OWNER WITHOUT CAUSE If the Owner terminates this Agreement
other than as set forth in Paragraph 12.2, the Owner shall pay the Contractor
for all Work executed and for any proven loss, cost or expense in connection
with the Work, plus all demobilization costs. In addition, the Contractor shall
be paid an amount calculated as set forth below:
.1 If the Owner terminates this Agreement prior to commencement of the
Construction Phase, the Contractor shall be paid the balance of the
Contractor's Design Phase compensation as set forth in Subparagraph 7.2.2,
and 25% of the Contractor's Fee as set forth in Clause 7.3.1.2.
.2 If the Owner terminates this Agreement after commencement of the
Construction Phase, the Contractor shall be paid the balance of the
Contractor's Design Phase compensation as set forth in Subparagraph 7.2.2
and 100% of the Contractor's Fee as set forth in Clause 7.3.1.2.
.3 In either event, the initial payment as provided in Paragraph 7.1 shall
be credited to the Owner's account at the time of termination.
.4 The Owner shall also pay to the Contractor fair compensation, either by
purchase or rental at the election of the Owner, for any equipment
retained. The Owner shall assume and become liable for obligations,
commitments and unsettled claims that the Contractor has previously
undertaken or incurred in good faith in connection with the Work or as a
result of the termination of this Agreement. As a condition of receiving
the payments provided under this Article 12, the Contractor shall cooperate
with the Owner by taking all steps necessary to accomplish the legal
assignment of the Contractor's rights and benefits to the Owner, including
the execution and delivery of required papers.
12.4 SUSPENSION BY THE OWNER FOR CONVENIENCE
12.4.1 The Owner may order the Contractor in writing to suspend, delay or
interrupt all or any part of the Work without cause for such period of time as
the Owner may determine to be appropriate for its convenience.
12.4.2 Adjustments caused by suspension, delay or interruption shall be made for
increases in the GMP, compensation for Design Phase Services, the Contractor's
Fee and/or the date of Substantial Completion. No adjustment shall be made if
the Contractor is or otherwise would have been responsible for the suspension,
delay or interruption of the Work, or if another provision of this Agreement is
applied to render an equitable adjustment.
ARTICLE 13
DISPUTE RESOLUTION
13.1 INITIAL DISPUTE RESOLUTION If a dispute arises out of or relates to this
Agreement or its breach, the parties shall endeavor to settle the dispute first
through direct discussions. If the dispute cannot be settled through direct
discussions, the parties shall endeavor to settle the dispute by mediation under
the Construction Industry Mediation Rules of the American Arbitration
Association before recourse to arbitration. Issues to be mediated are subject to
the exceptions in Paragraph 13.2 for arbitration. The location of the mediation
shall be the location of the Project. Once one party files a request for
mediation with the other contracting party and with the American Arbitration
Association, the parties agree to conclude such mediation within sixty (60) days
of filing of the request.
13.2 AGREEMENT TO ARBITRATE Any controversy or claim arising out of or relating
to this Agreement or its breach not resolved by mediation, except for claims
which have been waived by the making or acceptance of final payment, shall be
decided by arbitration in accordance with the Construction Industry Arbitration
Rules of the American Arbitration Association then in effect unless the parties
mutually agree otherwise. Notwithstanding Paragraph 14.2, this agreement to
arbitrate shall be governed by the Federal Arbitration Act.
13.3 NOTICE OF DEMAND A written demand for arbitration shall be filed with the
American Arbitration Association and the other party to this Agreement within a
reasonable time after the dispute or claim has arisen, but in no event after the
applicable statute of limitations for a legal or equitable proceeding would
have run.
14
<PAGE>
13.4 AWARD The arbitration award shall be final. Judgment upon the award may be
confirmed in any court having jurisdiction.
13.5 WORK CONTINUANCE AND PAYMENT Unless otherwise agreed in writing, the
Contractor shall continue the Work and maintain the approved schedules during
any arbitration proceedings. If the Contractor continues to perform, the Owner
shall continue to make payments in accordance with this Agreement.
13.6 [Intentionally Omitted]
13.7 COST OF DISPUTE RESOLUTION The prevailing party in any dispute arising out
of or relating to this Agreement or its breach that is resolved by arbitration
or litigation shall be entitled to recover from the other party reasonable
attorney's fees, costs and expenses incurred by the prevailing party in
connection with such arbitration or litigation.
ARTICLE 14
MISCELLANEOUS PROVISIONS
14.1 ASSIGNMENT Neither the Owner nor the Contractor shall assign their interest
in this Agreement without the written consent of the other except as to the
assignment of proceeds.
14.2 GOVERNING LAW This Agreement shall be governed by the law in effect at the
location of the Project.
14.3 SEVERABILITY The partial or complete invalidity of any one or more
provisions of this Agreement shall not affect the validity or continuing force
and effect of any other provlslon.
14.4 NO WAIVER OF PERFORMANCE The failure of either party to insist, in any one
or more instances, on the performance of any of the terms, covenants or
conditions of this Agreement, or to exercise any of its rights, shall not be
construed as a waiver or relinquishment of such term, covenant, condition or
right with respect to further performance.
14.5 TITLES The title given to the Articles of this Agreement are for ease of
reference only and shall not be relied upon or cited for any other purpose.
14.6 OTHER PROVISIONS
ARTICLE 15
EXISTING CONTRACT DOCUMENTS
The Contract Documents in existence at the time of execution of this Agreement
are as follows:
This Agreement is entered into as of the date entered in Article 1.
OWNER: NEOSE TECHNOLOGIES, INC.
----------------------------
ATTEST: /s/ Darlene Lane BY: /s/ P. Sherrill Neff
-------------------------- -------------------------------
PRINT NAME: P. Sherrill Neff
-----------------------
PRINT TITLE: PRESIDENT
----------------------
CONTRACTOR: IRWIN & LEIGHTON, INC.
-----------------------
ATTEST: /s/ Sandra J. Wentzel BY: /s/ James F. Brecker, Jr.
-------------------------- -------------------------------
PRINT NAME: JAMES F. BRECKER, JR.
-----------------------
PRINT TITLE: PRESIDENT
----------------------
15
EXHIBIT 11
Computation of Pro Forma Net Loss Per Common Share
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, 1995 Ended September 30, 1996
----------------- ------------------------
<S> <C> <C>
Net loss ....................................................................... $(5,067) $(4,600)
======= =======
Pro forma weighted average shares outstanding:
Common stock .............................................................. 2,551 7,357
Convertible preferred stock ............................................... 2,210 371
------- -------
Pro forma weighted average shares
outstanding ........................................................... 4,761 7,728
======= =======
Pro forma net loss per share ................................................... $ (1.06) $ (0.60)
======= =======
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Neose Technologies, Inc.:
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 Form
S-1 Registration Statement.
Arthur Andersen LLP
Philadelphia, Pa.,
January 10, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from 12/31/95
Audited Financial Statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 11,189,001 35,717,379
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,455,981 36,080,905
<PP&E> 3,671,165 4,338,315
<DEPRECIATION> 985,552 1,402,538
<TOTAL-ASSETS> 14,638,712 39,031,731
<CURRENT-LIABILITIES> 1,596,165 1,757,752
<BONDS> 0 0
0 0
0 0
<COMMON> 31,453 82,036
<OTHER-SE> 11,701,581 36,430,084
<TOTAL-LIABILITY-AND-EQUITY> 14,638,712 39,031,731
<SALES> 0 0
<TOTAL-REVENUES> 1,198,863 1,006,100
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 6,398,108 6,688,077
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 189,839 196,148
<INCOME-PRETAX> (5,066,775) (4,599,880)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,066,775) (4,599,880)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,066,775) (4,599,880)
<EPS-PRIMARY> (1.06) (.60)
<EPS-DILUTED> (1.06) (.60)
</TABLE>
