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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to ________
Commission File Number 0-27718
NEOSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3549286
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 Witmer Road
Horsham, Pennsylvania 19044
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 441-5890
Securities registered pursuant to Section 12(b) of the Act:
None None
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(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
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(Title of class)
Common Stock, par value $.01 per share
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 15, 1999, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was $123,444,681. Such aggregate market
value was computed by reference to the closing sale price of the Common Stock as
reported on the National Market segment of The Nasdaq Stock Market on such date.
For purposes of making this calculation only, the registrant has defined
affiliates as including all directors and executive officers of the Company.
As of March 15, 1999, there were 9,904,469 shares of the registrant's
Common Stock outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Annual Report on Form 10-K or any amendment to
this Annual Report on Form 10-K.[X]
DOCUMENTS INCORPORATED BY REFERENCE
As stated in Part III of this Annual Report on Form 10-K, portions of the
registrant's definitive proxy statement for the registrant's 1999 Annual Meeting
of Stockholders are incorporated by reference in Part III of this Annual Report
on Form 10-K.
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TABLE OF CONTENTS
PART I
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<S> <C> <C>
ITEM 1. Business..................................................................................... 1
ITEM 2. Properties................................................................................... 26
ITEM 3. Legal Proceedings............................................................................ 26
ITEM 4. Submission of Matters to a Vote of Security Holders.......................................... 26
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters....................... 27
ITEM 6. Selected Financial Data...................................................................... 28
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 29
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.................................... 33
ITEM 8. Financial Statements and Supplementary Data.................................................. 33
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures........ 33
PART III
ITEM 10. Directors and Executive Officers of the Company.............................................. 33
ITEM 11. Executive Compensation....................................................................... 33
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............................... 34
ITEM 13. Certain Relationships and Related Transactions............................................... 34
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............................ 34
</TABLE>
NEOSE is one of our trademarks. This Form 10-K also includes trademarks and
trade names of other companies.
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PART I
ITEM 1. BUSINESS.
Forward-looking statements
The statements in this Form 10-K and the Exhibits that are not facts
are forward-looking statements. Forward-looking statements involve predictions.
Our actual results, performance, or achievements could differ materially from
the results expressed in, or implied by, these forward-looking statements.
Potential risks and uncertainties that could affect our actual results,
performance, or achievements include the "Risk Factors" set forth below, and
general financial, economic, regulatory, and political conditions affecting the
biotechnology industry in general. Given these uncertainties, you should not
base your decision to invest in our common stock on any forward-looking
statements. In addition, we do not have any obligation or intent to update any
of these risk factors or forward-looking statements to reflect future events or
developments.
Risk Factors
An investment in our common stock is very risky. You should consider
carefully the following risk factors, in addition to the other information in
this Form 10-K, before investing in our common stock.
We have a history of operating losses, we have not yet commercialized any
products or technologies, and we may not become profitable.
Although we began operations in 1990, we have not generated any
revenues from operations, except for interest income and revenues from
collaborative agreements. We have incurred increasingly large losses each year.
As of December 31, 1998, we had an accumulated deficit of approximately $46.5
million. We expect increased losses over at least the next several years as we
expand research and development efforts, conduct additional clinical trials,
expand manufacturing scale-up activities, and begin sales and marketing
activities.
We have not yet commercialized any products or technologies. We do not
know if or when we will generate significant revenues from the commercialization
of our products or technologies. Before we can commercialize any of our products
or technologies, we must overcome many hurdles. Even if we commercialize one or
more of our products or technologies, we may not become profitable.
We may need to raise additional money before we become profitable, but we may
not be able to raise money when we need it or on terms favorable to
stockholders.
We may need to sell additional stock, borrow additional money, or enter
into new collaborative agreements both to fund operations until we become
profitable and to make capital investments. The timing and amount of our future
capital requirements will depend on many factors including those discussed in
this "Risk Factors" section.
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We may not be able to raise money when we need it. If we fail to obtain
adequate funds when needed:
o we may delay or eliminate our research and development activities, or
other aspects of our business;
o we may have to license or sell our technologies on unfavorable terms; or
o we may have to reduce or cease operations.
If we raise money by selling additional stock or borrowing additional
money, the terms may not be favorable and may be dilutive to our stockholders. A
debt financing may contain restrictive covenants, and, if we default, may
provide the lender with rights to some or all of our assets. For example, an
important covenant of our debt financing arrangements for the purchase and
improvement of our facility requires us to maintain at least $20 million of cash
and short-term investments. If we fail to comply with this covenant, we are
required to deposit with the lender cash collateral up to, but not more than,
the unpaid balance of the loan, which as of December 31, 1998 was $8.9 million.
There has been only very limited development and commercialization of
synthesized complex carbohydrates.
Neose is developing synthetic processes to manufacture oligosaccharides, or
complex carbohydrates. We are using these manufacturing processes to discover,
develop, and commercialize complex carbohydrates for pharmaceutical,
nutritional, and consumer uses. Most complex carbohydrates sold today are
derived from natural sources. There has been only very limited development and
commercialization of synthesized complex carbohydrates. We believe that
manufacturing limitations have been the primary barrier to further development
and commercialization of synthesized complex carbohydrates. Although we believe
that our technology will allow for this further development, we still may fail
to complete successfully all the other activities required to commercialize any
synthesized complex carbohydrate.
We depend upon our collaborative relationships to become profitable.
We have significant collaborative agreements with Johnson & Johnson,
Bristol-Myers Squibb Company, and Abbott Laboratories. Our strategy for the
development and commercialization of other product candidates includes entering
into further collaborative agreements with pharmaceutical and other companies.
The following discussion describes the significant terms and risks of each
current agreement.
Johnson & Johnson (McNeil Specialty Products Company)
Under our agreement with J&J, we are jointly developing novel technologies
for the efficient, large-scale manufacture of a particular class of complex
carbohydrates for human healthcare applications. Either party may terminate the
agreement upon sixty days prior notice.
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The collaboration with J&J will require:
o intellectual property protection for the novel technology;
o manufacturing scale-up;
o compliance with regulatory requirements;
o successful sales and marketing of products manufactured using the novel
technology; and
o further agreement on the structure and financing of a large-scale
manufacturing facility and start-up operating expenses.
Our business, financial condition and results of operations will be
materially and adversely affected if the agreement is terminated, or if we
jointly fail to commercialize any products.
Bristol-Myers Squibb Company
In June 1998, we entered into an agreement with Bristol-Myers Squibb
Company to develop proprietary processes for the manufacture of complex
carbohydrates for two cancer vaccines being developed by Bristol-Myers. If we
complete milestones under the agreement, we will receive additional money. We
may not successfully complete the milestones according to the time frame
anticipated, if at all. Bristol-Myers may terminate the agreement upon ninety
days prior notice.
Even if we successfully complete development of these processes, and
fulfill all of our obligations to Bristol-Myers, either or both of these cancer
vaccines may not be clinically safe and effective, and Bristol-Myers may not
obtain regulatory approval to market either or both of these vaccines. If
Bristol-Myers decides to purchase any complex carbohydrates from us after
commercializing either of its vaccines, we will need to negotiate the terms of a
manufacturing supply agreement. Our business, financial condition, and results
of operations may be materially and adversely affected if:
o we fail to complete successful development of these processes;
o Bristol-Myers fails to obtain regulatory approval to market either or
both of its cancer vaccines; or
o we fail to enter into a manufacturing supply agreement with
Bristol-Myers.
Abbott Laboratories
Under our agreements, Abbott Laboratories has the exclusive right to use
our technology to manufacture and commercialize, for nutritional purposes only,
any complex carbohydrate naturally found in breast milk. If Abbott
commercializes any products manufactured using our technology, Abbott will owe
us a commercialization fee and royalties. Abbott may terminate the agreements
upon sixty days prior notice, and upon termination, Abbott would have no further
payment obligations to us. At any time prior to the first commercial sale of any
product manufactured using our technology, Abbott has the option to make the
agreements non-exclusive.
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We also have the option to make the agreements non-exclusive. If either
party makes the agreements non-exclusive, Abbott will not be required to pay a
$5 million fee otherwise due upon commercialization, and royalties payable by
Abbott would be reduced by 50%.
Abbott is completely responsible for developing, manufacturing, and
commercializing nutritional products under our agreements. The amount and timing
of resources Abbott commits to these activities are entirely within its control.
We do not know or control if or when Abbott will commercialize any products
under the agreements. Our business, financial condition, and results of
operations may be materially and adversely affected if Abbott fails to
commercialize any products manufactured using our technology.
We depend upon our patents and other intellectual property.
Our success will depend in part on our ability to obtain patent protection
for our products and manufacturing processes, preserve our 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.
We have an exclusive license from the University of Pennsylvania to five
U.S. patents and a number of related U.S. patent applications and foreign
patents and patent applications. 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 sixty days prior notice if we are not using our
continuing best efforts to develop or sell a product using the licensed
technology.
As of March 15, 1999, we also have licensed from four other universities an
additional six issued U.S. patents and a number of related U.S. and foreign
patent applications. See "Our Business--Recent Development." If we commercialize
any products manufactured by use of technology licensed in from another party,
we will be required to make payments as specified in the applicable license
agreement. Our business, financial condition, and results of operations may be
materially and adversely affected if any of these agreements are terminated.
Under our agreements, we may depend on licensors or collaborators to
prosecute patents and protect our intellectual property. Patent applications
that we have filed or licensed may not result in issued patents. Issued patents
that we own or have licensed may be challenged and invalidated. Our patents may
not be adequate to prevent others from engaging in activities for which we have
sought proprietary protection. In addition, others may obtain patents that
prevent the manufacture or sale of one or more of our products.
Defense and prosecution of patent claims can be expensive and
time-consuming, regardless of whether the outcome is favorable to us. We may be
required to divert substantial financial, management, and other resources from
our other activities. An adverse outcome could:
o subject us to significant liabilities to third parties;
o require us to seek licenses from third parties; or
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o require us to cease any related research and development, manufacturing
activities, or product sales.
If we need to seek a license from another party, the other party may be
unwilling to license technology to us on acceptable terms. In addition, the laws
of some countries may not adequately protect our intellectual property.
In addition to patents and patent applications, we depend upon trade
secrets and proprietary know-how. To help protect our rights, we require all
employees, consultants, advisors, and collaborators to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to any other parties. We require that our employees and consultants
disclose and assign to us their ideas, developments, discoveries, and
inventions. These agreements may not, however, provide adequate protection for
our trade secrets, know-how, or other proprietary information in the event of
any unauthorized use or disclosure.
Some of our management and scientific personnel have been recruited from
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 us. As a result, we could be subject to allegations of
violation of trade secrets and similar claims.
Clinical trials for our pharmaceutical product candidates will be expensive and
their outcome is uncertain.
Clinical trials are lengthy, time-consuming, and expensive. Before
obtaining regulatory approvals for the sale of any pharmaceutical products, we
must demonstrate that our product candidates are safe and effective for humans.
We will incur substantial expense for, and devote a significant amount of time
to, preclinical testing and clinical trials.
Completion of clinical trials may take several years or more. Historically,
the results from preclinical testing and early clinical trials have often not
been predictive of results obtained in later clinical trials. A number of
potential drugs have shown promising results early in clinical trials, but
subsequently failed to generate sufficient safety and efficacy data to obtain
necessary regulatory approvals. In addition, changes in regulatory policy during
the period of product development could lead to regulatory delays or rejections.
Two of our product candidates, NE-1530 for treatment of pediatric ear
infections and NE-0080 for treatment of gastritis and peptic ulcers, are
currently in clinical trials. Clinical trials of these, or any other potential
pharmaceutical product candidates, may not demonstrate sufficient safety and
efficacy to obtain the requisite regulatory approvals. Regulatory authorities
may not permit us to conduct any additional clinical trials for our product
candidates.
Our other pharmaceutical product candidates are in preclinical development.
We have not submitted investigational new drug applications, and as a result
have not begun clinical trials for these product candidates. We may not
successfully complete preclinical or clinical development of any of our
pharmaceutical product candidates.
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We have limited experience in designing, conducting, and managing clinical
trials. We rely on third parties to assist us in managing, monitoring, and
conducting clinical trials. We may enter into collaborative arrangements that
provide for a collaborator to assume responsibility for future clinical
development and obtaining regulatory approvals. If third parties or potential
collaborators fail to perform under our agreements with them, our clinical
trials may be delayed or stopped prior to completion.
Our product candidates may fail to demonstrate safety and efficacy in
clinical trials. Any failure in the clinical trial process, or problems arising
with any product after obtaining regulatory approval, may impede our ability to
obtain additional financing and will materially and adversely affect our
business, financial condition, and results of operations.
We are subject to extensive government regulation and we may not obtain
regulatory approvals.
Our products and our manufacturing and research activities are subject to
varying degrees of regulation by a number of government authorities in the
United States and other countries. The development, manufacture, marketing, and
sale of each of our product candidates are subject to one of the following
regulatory review processes:
o pharmaceutical--new drug application
o infant formula additive--new infant formula submission
o foods and food ingredients--either self-affirmed to be generally
recognized as safe (GRAS) or food additive petition process
Generally, pharmaceuticals are regulated more rigorously than foods and
food ingredients. Infant formula additives are special types of food ingredients
that are regulated more rigorously than most other types of food ingredients. We
may not obtain the appropriate regulatory approval for any of our products.
Regulation of pharmaceutical product candidates
We are developing three compounds as potential pharmaceutical products, of
which two are in clinical trials. In addition, we are developing proprietary
processes for the manufacture of complex carbohydrates for two cancer vaccines
being developed by Bristol-Myers Squibb Company. Our pharmaceutical product
candidates, as well as the Bristol-Myers vaccines, must undergo an extensive
regulatory approval process before commercialization. This process, which is
regulated by the FDA and by comparable agencies in other countries, generally
requires:
o expensive and time-consuming preclinical studies and clinical trials of
each compound to establish its safety and effectiveness;
o compliance with FDA good laboratory, clinical, and manufacturing
practices during testing and manufacturing;
o many years, if ever, until regulatory approval is obtained; and
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o continued FDA oversight of product and promotion after marketing approval
is obtained.
If we fail to comply with all applicable regulatory requirements, we may be
subject to delays or regulatory action, including:
o warning letters;
o fines;
o product recalls or seizures;
o injunctions;
o refusal of the FDA to complete review of pending market approval
applications or supplements to approval applications;
o total or partial suspension of production;
o refusal to approve new drug or other approval applications or
supplements;
o withdrawal of previously approved product approvals;
o civil penalties; and
o criminal prosecution.
We have not submitted, and we may never submit, any of our pharmaceutical
product candidates for marketing approval to the FDA, or any other regulatory
authority. In addition, Bristol-Myers, which is responsible for all regulatory
activities relating to its vaccines, has not submited, and may not ever submit,
its vaccines for marketing approval to the FDA, or any other regulatory
authority.
If any products manufactured using our technology are submitted for
regulatory approval, they may not be able to gain either the approvals necessary
for commercialization or the desired labeling claims. Any delay in gaining, or
failure to gain, these approvals would adversely affect our ability to generate
product revenues or royalties. Even if all approvals are granted, these
approvals may entail commercially unacceptable limitations on the labeling
claims. Even if granted desired labeling claims, a marketed drug or compound and
the manufacturer are subject to continual review and inspection. Later discovery
of previously unknown problems with a product or manufacturer may result in
restrictions or regulatory action against the product or manufacturer, including
withdrawal of the product from the market. Additional governmental regulations
may delay or alter regulatory approval of our potential products. We cannot
predict the impact of adverse governmental action that might arise from future
legislative and administrative action.
Regulation of infant formula additives
Abbott Laboratories is using our technology to develop a complex
carbohydrate as a potential nutritional additive to infant formula. This
potential infant formula additive is identical to a naturally occurring
carbohydrate found in mothers' milk. As with any additive to infant formula,
this proposed additive must undergo rigorous safety testing, and is subject to
intensive regulation.
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The manufacture, composition, and labeling of infant formulas are subject
to the provisions of the United States Infant Formula Act. Prior to
commercializing any potential infant formula additive, an infant formula
manufacturer must demonstrate that its potential additive:
o is generally recognized as safe (GRAS) either by previous
regulation of the FDA, or is self-affirmed as GRAS by the infant
formula manufacturer; or
o is the subject of an approved food additive petition.
Under our agreements, Abbott is responsible for all regulatory activities
relating to the infant formula additive. Abbott has not yet made, nor may ever
make, any filings with the FDA to propose inclusion of an infant formula
additive manufactured using our technology. Abbott's efforts to commercialize
any infant formula additives manufactured using our technology may be materially
and adversely affected if Abbott does not self-affirm the GRAS status of its
potential infant formula additive.
In addition, at the request of the FDA, the Life Science Research
Organization is conducting a thorough review of potential nutrients in infant
formula, including oligosaccharides like the one being developed by Abbott using
our technology. The timing of, or the recommendations (if adopted by the FDA)
resulting from, that review may materially and adversely affect Abbott's efforts
to commercialize any infant formula additives manufactured using our technology.
Regulation of foods and food ingredients
The initial product to be manufactured in collaboration with Johnson &
Johnson will be regulated as a food ingredient. Foods and food ingredients are
subject to the provisions of the federal Food, Drug and Cosmetic Act. Food
ingredients are broadly defined as any substances that may become a component,
or otherwise affect the characteristics, of food. Food ingredients are regulated
either as substances generally recognized as safe (GRAS) or as food additives.
Johnson & Johnson is responsible for all regulatory activities relating to
any products manufactured using our joint technology. J&J has informed us that
it intends to self-affirm as GRAS the initial product to be manufactured using
the joint technology. If J&J is unable to make this affirmation, and is required
to file a food additive petition to obtain FDA approval for use of the compound
as a food ingredient, our business, financial condition, and results of
operations will be materially and adversely affected.
Food ingredients that are GRAS are excluded from the definition of food
additives. The FDA has affirmed by regulation a number of substances as GRAS,
although it is not required that a substance be affirmed as GRAS by regulation
of the FDA in order to be GRAS. A manufacturer may self-affirm a substance as
GRAS by making an independent determination that qualified experts would
generally agree that the substance is GRAS for a particular use. If the FDA
disagrees with a determination, the manufacturer must complete the food additive
petition process for the substance to be approved by the FDA.
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Food ingredients that are not GRAS are regulated as food additives. All new
food additives require FDA approval prior to commercialization. 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. Commercialization of the food additive, if permitted by
the FDA, often occurs several years after the petition is submitted to the FDA.
If a food additive petition is submitted, the FDA may choose to reject the
petition or deny any desired labeling claims. Furthermore, the FDA may require
the establishment of regulations that necessitate costly and time-consuming
compliance procedures.
We are exposed to competition from many sources.
Several companies are producing by enzymatic and other means a limited
number of oligosaccharides and oligosaccharide precursors. Our competitors may
successfully develop technologies and products that are more effective than our
technologies, or that would render our technology or products or both obsolete
or noncompetitive.
Our potential competitors include nutritional products companies,
pharmaceutical companies, chemical companies, biotechnology companies, food
companies, and consumer companies. Many of these companies have more:
o financial, scientific, and technical resources;
o manufacturing and marketing capabilities;
o experience conducting preclinical studies and clinical trials of new
products; and
o experience in obtaining regulatory approvals for products.
We have limited commercial manufacturing capability or experience.
We intend to manufacture complex carbohydrates. We have limited resources
and capability to manufacture some of our products on a commercial scale. To
commercialize our products, we must manufacture our products in commercial
quantities under current good manufacturing practices prescribed by the FDA, and
at acceptable costs. Our existing facility is not adequate for large-scale,
commercial manufacturing of all our products. Therefore, we will need to develop
commercial-scale manufacturing facilities meeting good manufacturing practices,
or depend on our collaborators, licensees, or contract manufacturers for the
commercial manufacture of our potential products.
Additional manufacturing facilities will require additional funds,
additional personnel, and compliance with applicable regulations. We may not be
able to design, build, or operate additional facilities to manufacture products
in commercial quantities for sale at competitive prices. In addition to the
normal scale-up risks associated with any manufacturing process, there may be
unanticipated problems unique to carbohydrate manufacture.
We have no marketing or sales capability or experience.
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We have no experience or capability in marketing, distributing, or selling
products. We will have to develop a sales force or rely on our collaborators,
licensees, or arrangements with others to provide for the marketing,
distribution, and sales of any products we commercialize. We may not be able to
establish marketing, distribution, and sales capabilities, or make arrangements
with third parties to perform such activities on acceptable terms. If we enter
into marketing and sales arrangements with other companies, our revenues, if
any, will depend on the efforts of others. Their efforts may not be successful,
and therefore our revenues, if any, may be limited.
If we fail to enter into arrangements with others, we will need to develop
a marketing and sales force, which may need to be substantial in size, to
achieve commercial success for any product candidate. We may not successfully
develop marketing and sales experience or have sufficient resources to do so. If
we do develop such capabilities, we will compete with other companies that have
experienced and well-funded marketing and sales operations. If we fail to
establish successful marketing and sales capabilities or fail to enter into
successful marketing arrangements with third parties, our business, financial
condition, and results of operations will be materially and adversely affected.
We have no product liability insurance.
The use of any of our product candidates in clinical trials, and the sale
of any approved products, may expose our collaborators or us to liability claims
resulting from such use or sale of our products. Consumers, healthcare
providers, pharmaceutical companies, or others selling such products might make
such claims. We may experience financial losses in the future due to product
liability claims. We have no product liability insurance coverage for our
clinical trials. We may not be able to obtain insurance coverage at a reasonable
cost or in sufficient amounts to protect us against losses.
We use hazardous materials in our operations.
Our research and development processes involve the controlled use of
hazardous materials, chemicals, and radioactive compounds. We are subject to
stringent governmental laws, rules, regulations, and policies governing the use,
generation, manufacture, storage, air emission, effluent discharge, handling,
and disposal of these materials and other wastes. We may be required to incur
significant costs to comply with environmental laws, rules, regulations, and
policies. Current or future environmental laws, rules, regulations, and policies
may materially and adversely effect our business, financial position, and
results of operations.
We store radioactive materials and various wastes in our facility. The risk
of accidental injury or contamination from these materials cannot be entirely
eliminated. We do not maintain a separate insurance policy for these types of
risks. In the event of an accident or environmental discharge, we may be held
liable for any resulting damages, which may exceed our financial resources and
may materially and adversely effect our business, financial position, and
results of operations. We may incur substantial additional costs to comply with
environmental regulations as we develop additional manufacturing capacity.
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Our Business
Neose is developing synthetic processes to manufacture oligosaccharides, or
complex carbohydrates. We are using these manufacturing processes to discover,
develop, and commercialize complex carbohydrates for pharmaceutical,
nutritional, and consumer uses. Due to their structural complexity,
oligosaccharides are difficult and expensive to produce. Accordingly, their
commercial development has been significantly limited. We believe our
proprietary technologies enable the rapid and cost-efficient enzymatic
production of naturally occurring oligosaccharides.
Recent Development
On March 26, 1999, we acquired the carbohydrate manufacturing patents,
licenses, and other intellectual property of Cytel Corporation's Glytec business
unit. Under the agreements, we acquired:
o six issued U.S. patents, eight pending U.S. patent applications, two
provisional U.S. patent applications, and related foreign counterparts,
owned by Cytel;
o Cytel's license and option agreements with The Scripps Research
Institute, the University of Michigan, the University of Alberta,
the University of California at Los Angeles, National Research
Council of Canada, the University of Arkansas, Japan Tobacco
Corporation, and Marukin Shoyu Ltd., which licenses and options
together cover an additional 29 issued U.S. patents, 25 pending U.S.
patent applications, and related foreign counterparts;
o Cytel's Suguar Nucleotide Cycling (SNC(R)) technology; and
o Cytel's glycoprotein remodeling program and related technologies.
We paid $3.5 million in cash to Cytel and an additional $1.5 million in
cash into escrow, the release of which is conditioned on Cytel's satisfaction of
certain matters relating to the acquired patents and licenses. We may be
required to pay Cytel up to an additional $1.6 million in cash, contingent on
potential payments and revenues realized by us from certain future corporate
collaborations.
Technology Background
Complex carbohydrates are an important class of biological polymers
There are only three classes of biological polymers: nucleic acid polymers
(DNA and RNA), amino acid polymers (proteins), and monosaccharide polymers
(oligosaccharides, or complex carbohydrates). Today, total worldwide sales of
complex carbohydrates approximate that of nucleic acids and proteins together,
and we believe that sales of complex carbohydrates will grow more rapidly in the
years to come. With the exception of heparin, a multi-billion dollar per year
product now derived largely from pig intestines, most commercial complex
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carbohydrates are isolated from plants cultivated on land or found at sea. The
most valuable of these products come from the least reliable sources. Weather,
political instability, and contamination can have large and detrimental effects
on supply. Our manufacturing methods offer an alternative to reliance on
unpredictable natural sources for complex carbohydrates. Enzymatically-produced
carbohydrates, although identical to natural compounds, are cleaner, more
homogeneous, and can be less expensive to produce, especially at large volumes.
Natural anti-infectives
Unlike the bulk of plant complex carbohydrates, which are often composed of
repeated and simple sequences of a single monosaccharide, oligosaccharides in
animals can be made up of many different monosaccharides in unique patterns. The
most complex carbohydrate patterns protrude from cell surfaces, where they are
essentially molecular addresses. Bacteria, viruses, and fungi have evolved
proteins that recognize these specific, human cell surface carbohydrate
patterns. The pathogens use their evolved proteins to attach to specific sites
in the body, and thus to initiate the disease process. To counter pathogen
attack, the human body bathes exposed surfaces with decoy oligosaccharides that
bind to the pathogens' proteins, thereby preventing pathogen attachment, and
causing pathogen detachment. Based on this well-accepted concept of infectious
disease, we have produced and are testing in clinical trials two anti-infective
oligosaccharides. If successful, these compounds could offer prophylactic and
therapeutic alternatives to conventional antibiotics, which are becoming less
and less useful as bacteria become more and more resistant to them.
Structural complexity
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.
Carbohydrate synthesis
The specific biological properties of an oligosaccharide are dictated by
both its component monosaccharides and the chemical linkages among 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 recombinant methods. Difficulties in producing
oligosaccharides efficiently and in sufficient quantities have significantly
limited their development and commercialization. See "Risk Factors--There has
been only very limited development and no commercialization of synthesized
complex carbohydrates."
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Our Proprietary Technologies
We believe our proprietary technology platform enables the rapid and
cost-effective enzymatic synthesis of commercial quantities of a wide range of
oligosaccharides. Our 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.
Glycosyltransferases synthesize linkages at a very rapid rate. Because some
glycosyltransferases can work for weeks before having to be replenished, we
believe that the optimal preparation can generate desired oligosaccharides in a
commercially scalable manner. Nevertheless, the cost of manufacturing a product
depends in significant part on the cost of obtaining the glycosyltransferases.
We have, accordingly, invested in recombinant methods of producing the
glycosyltransferases necessary to manufacture cost-effectively many naturally
occurring oligosaccharides. These processes have significantly reduced the
costs, and increased the efficiencies, of manufacturing certain
oligosaccharides.
Historically, the largest cost component in enzymatic synthesis of complex
carbohydrates was the cost of purifying glycosyltransferases from natural
sources. Later, as recombinant methods were developed to produce these enzymes
from mammalian sources, these costs began to decline, but the resulting enzymes
generally still had very low efficiencies. We have developed bacterial gene
sources for the recombinant production of enzymes with higher efficiencies and
specific activities.
The next largest cost component in enzymatic synthesis of complex
carbohydrates has been the cost of sugar donors, or sugar nucleotides. As
markets have developed for large-scale production of carbohydrates, the prices
of commercially available sugar nucleotides have decreased sharply. Moreover, we
have developed two other methods to synthesize complex carbohydrates
enzymatically without the need to use sugar nucleotides. We believe that the
cost of sugar nucleotides no longer represents a significant barrier to the
large-scale, low-cost production of some carbohydrates.
Products in Development
We are focusing our research and development efforts on:
o the development of novel technologies for the large-scale
production of commodity and consumer products, including our joint
development project with Johnson & Johnson;
o the development of a proprietary synthesis process for the active
complex carbohydrates in vaccines being developed by Bristol-Myers
Squibb Company; and
o carbohydrate-based therapeutic products for the potential
prevention and treatment of pediatric ear infections, chronic
gastritis and peptic ulcers, and the prevention of xenotransplant
rejection.
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Commodity and Consumer Products
Many prepared foods contain plant and microbial complex carbohydrate
compounds that act to maintain ingredients in mixtures, to emulsify ingredients
that are relatively water-insoluble, to serve as bulking agents for less
prevalent ingredients, and to thicken products that would otherwise be too
watery. Food processing companies blend these carbohydrates from a variety of
natural sources that contain, among others: the seaweed-derived gums (agars,
alginates, carrageenans); the seed-derived gums (tara, guar, and locust bean
seeds); the fructo-oligosaccharides; the microbial gums (xanthan and gellan);
the bush exudates (gum arabic, gum tragacanth, and karaya gum); the pectins; and
the celluloses, starches, and dextrins. All of these components are carbohydrate
polymers currently derived from living organisms, and all of these components
are potential targets for Neose's enzyme-based manufacturing technology. In
1998, Neose collaborated closely with McNeil Specialty Products Company, a
subsidiary of Johnson & Johnson, to develop novel technologies for the
efficient, large-scale manufacture of a particular class of complex
carbohydrates for human healthcare applications. In 1999, the joint development
agreement was extended and expanded. We jointly contemplate building and
operating a manufacturing facility capable of producing at least one
commercially promising complex carbohydrate by early 2000. In addition, we are
investigating the application of complex carbohydrates to oral health, skin
care, and cosmetics markets.
Pharmaceuticals
Neose has a three-part strategy toward the commercialization of
oligosaccharide pharmaceuticals. First, we provide pharmaceutical companies with
proprietary synthesis technologies that enable them to develop their own
carbohydrate-based drugs. For example, Neose is developing novel manufacturing
processes for the active component of two Bristol-Myers Squibb Company oncologic
vaccines, one of which is currently in late-stage clinical trials. Neose is also
producing anti-rejection compounds for companies that are working on
xenotransplantation, which is the use of modified animal organs for humans.
Second, we are investing directly in the clinical development of two, novel
anti-infective drug candidates--NE-1530 for ear infection and NE-0080 for
gastritis and ulcers. We believe that oligosaccharide anti-infectives may have
substantial benefits when compared with conventional antibiotics.
Oligosaccharides are naturally occurring, are cost-effective to produce
utilizing our technology, have relatively low toxicity, and are less likely than
antibiotics to cause adverse side-effects. Bacteria are becoming increasingly
resistant to antibiotics, which kill pathogens and select for, and consequently
facilitate the proliferation of, strains of the pathogens that are resistant to
the antibiotics. Because our anti-infective product candidates do not kill
pathogens, but rather prevent attachment of pathogens to cell surfaces, we
believe that use of our anti-infectives is less likely to result in the
development of resistant strains. For these reasons, we believe that, unlike
conventional antibiotics, complex carbohydrates may be useful for prophylactic,
as well as therapeutic, applications.
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Third, Neose actively supports research and development of, and when
appropriate licenses, other carbohydrate-based pharmaceutical product
candidates. Specifically, we are collaborating with scientists at Harvard
University, the University of Washington, the University of Pennsylvania, and
the University of British Columbia, in addition to the research support extended
to the four recipients of our GRANT awards. We established the GRANT
(Glycoscience Research Awards: Neose Technologies) awards in 1997 to identify
and support early-stage oligosaccharide research ideas conceived by university
researchers.
Our initial drug discovery and development efforts have generated the
following three compounds, of which the first two are in clinical trials. We are
developing:
o NE-1530 for treatment of pediatric ear infections;
o NE-0080 for treatment for gastritis and peptic ulcers caused by
Helicobacter pylori ("H.pylori") infections; and
o NE-0501 for treatment of hyperacute rejection following
xenotransplantation.
NE-1530 for pediatric ear infections
Pediatric Ear Infections. NE-1530, a naturally occurring oligosaccharide,
is our compound for the treatment of pediatric ear infections. NE-1530 contains
a sugar sequence believed to be identical to that of airway carbohydrates to
which respiratory disease-causing bacteria attach, and subsequently initiate
colonization. Middle ear infections are one of the most frequent reasons for
pediatrician visits. There are estimated to be in excess of 24 million office
visits and prescriptions each year attributable to middle ear infections. Health
care 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 occurrence of resistant strains of the bacteria that
cause these infections.
Clinical Status. In in vitro tests, NE-1530 blocked the attachment to human
airway cells of Streptococcus pneumoniae, Hemophilus influenzae, and Moraxella
catarrhalis. These bacteria are most frequently associated with a variety of
respiratory infections, including pediatric ear infections, acute infections
associated with chronic bronchitis, and pneumonia. We filed an Investigational
New Drug Application with the FDA for NE-1530 in 1997, and completed Phase I
adult and child safety studies in 1997 and 1998. In January 1999, we initiated a
Phase II clinical trial of NE-1530. The Finnish National Public Health Institute
in Helsinki, Finland will conduct the study in 500 children. The double-blind,
placebo-controlled trial is designed to evaluate the effectiveness and safety of
intranasal doses of NE-1530 in the prevention of pediatric ear infections during
a three month course of treatment. The study also will evaluate changes in
colonization of the bacteria that are primarily responsible for pediatric ear
infections. Data from the Phase II trial are expected to be available later in
1999. Although we have chosen initially to develop NE-1530 for pediatric ear
infections, we also may develop this compound in the future for other
indications, such as acute infections associated with chronic bronchitis and
pneumonia.
NE-0080 for gastritis and peptic ulcers
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Gastritis and peptic ulcers. NE-0080, a naturally occurring
oligosaccharide, is our compound for the treatment of gastritis and peptic
ulcers caused by H. pylori infections. NE-0080 is a carbohydrate molecule that
is believed to be identical to a human stomach cell carbohydrate utilized by H.
pylori to attach to its target cells. NE-0080 is being developed for use in the
treatment 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. We estimate 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. The
approach currently favored to treat gastritis and recurrent peptic ulcers
involves the administration of antibiotics in combination with other drugs. The
leading antibiotic approved for the treatment of H. pylori infections is
Biaxin(R) (clarithromycin). Even the most effective antibiotic treatments,
however, may be complicated by:
o the need to treat for prolonged periods with multiple drugs;
o side-effects and problems with patient compliance;
o relapses if treatment is interrupted; and
o the development of antibiotic-resistant strains of H. pylori.
Clinical status. We filed an Investigational New Drug Application with the
FDA in 1994 and completed Phase I clinical trials in 1995 and 1996. The results
of these studies indicated that NE-0080 was well-tolerated and did not cause any
adverse side effects. We completed a pilot dose-ranging Phase II study on
NE-0080 in January 1998, and initiated a Phase II trial with 60 symptomatic
subjects in Europe in early 1999. We also are 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.
NE-0501 for xenotransplant rejection
Xenotransplant Rejection. NE-0501 is our compound for the treatment of
hyperacute rejection following xenotransplantation. Xenotransplantation is the
transplantation of animal organs into humans. 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, hyperacute rejection, in which the transplanted organ is rejected
within minutes of transplantation, remains one of the most critical obstacles to
xenotransplantation. Hyperacute rejection results from an antibody-mediated
response against an oligosaccharide found on the cell surface of most mammals,
but absent in humans.
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Clinical Status. NE-0501 is a carbohydrate molecule that is believed to be
identical to the carbohydrate targeted by human antibodies following
xenotransplantation. In vitro studies and limited in vivo studies indicate that
it may be possible to prevent, to some extent, hyperacute rejection by
administering sufficient quantities of NE-0501 prior to and following surgery to
bind and neutralize the circulating antibodies. Animal studies have demonstrated
that the administration of NE-0501 may prevent hyperacute rejection to a
sufficient degree, and for a sufficient period of time, to allow the recipient
to accommodate the grafted organ. Once hyperacute rejection is overcome,
existing immunosuppressive pharmaceuticals may help physicians manage the
ongoing accommodation of the new organ in most patients. Although we do not plan
any further independent development of NE-0501, we are collaborating with other
companies that are pursuing xenotransplantation with several different
approaches, including transgenic modification of pig organs and chimeric
tolerization of donor organs. We believe 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.
Our drug candidates and future pharmaceutical development efforts are
subject to the substantial risks of failure inherent in the development of any
pharmaceutical product. See "Risk Factors--Clinical trials for our
pharmaceutical product candidates will be expensive and their outcome is
uncertain" and "Risk Factors--We are subject to extensive government regulation
and we may not obtain regulatory approvals."
Specialty Nutritional Products
Neose's technology platform allows us to pursue complex carbohydrate
applications for many nutritional products. We focused initially on human breast
milk carbohydrates for eventual use in infant formulas. The more than two dozen
breast milk oligosaccharides have only one known function--to prevent infection
of the newborn by bacteria, fungi, and viruses. No infant formula yet contains
any of these complex carbohydrates. In an attempt to commercialize our
technology, and to bring a part of breast milk's infection-fighting properties
to infant formulas, we licensed our relevant technology to Abbott Laboratories,
which, through its Ross Laboratories Division, manufactures the Similac and
Isomil lines of infant formulas. Under our agreements with Abbott, we have the
right to make the agreements non-exclusive and enter into agreements with other
infant formula and nutritional products companies. We have been in discussions
with various other infant formula and nutritional products companies regarding
the possible license of our technology on a non-exclusive basis. See "Risk
Factors--We are subject to extensive government regulation and we may not obtain
regulatory approvals."
Other Potential Products
In addition to the human pathogens targeted by our two anti-infective
oligosaccharides currently in clinical trials, there are dozens of other human
pathogens with previously identified oligosaccharide targets. Our flexible and
proprietary synthetic methods allow us to pursue many of these potential
therapeutic and prophylactic anti-infectives for clinical and commercial
development. In addition to anti-infective oligosaccharides, there are many
other possible therapeutic carbohydrates. Complex carbohydrates are already
being used as potential oncologic vaccines. Specific oligosaccharides also
modulate immune responses, and they can determine the ultimate cellular location
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of the thousands of proteins and lipids they are part of. Additionally, complex
carbohydrates of the heparin family, a product derived from pig and cow
intestines, remain the most useful and most prescribed anti-coagulant. Some of
these pharmaceutical concepts are in the earliest stages of research and
development by us and others, others are more advanced, and heparin is a major
therapeutic product today.
Collaborative Agreements
Agreement with J&J
In 1997, we entered into a joint development agreement with McNeil
Specialty Products Company, a subsidiary of Johnson & Johnson, for the joint
development of novel technologies for the efficient large-scale manufacture of a
particular class of complex carbohydrates for a number of human healthcare
applications. The joint development agreement was extended and expanded in
January 1999. At the same time, Johnson & Johnson Development Corporation made a
$4 million investment in our common stock. Under the joint development
agreement, we jointly contemplate building and operating a manufacturing
facility capable of producing at least one commercially promising complex
carbohydrate by early 2000. Either party may terminate the agreement upon sixty
days prior notice. See "Risk Factors--We depend upon our collaborative
relationships to become profitable."
Agreement with Bristol-Myers
In June 1998, we entered into an agreement with Bristol-Myers Squibb
Company to develop proprietary processes for the manufacture of complex
carbohydrates for two cancer vaccines being developed by Bristol-Myers. We
received $250,000 upon execution of the agreement and $125,000 in December 1998
upon satisfaction of the first part of the initial milestone. If we complete
milestones under the agreement, we will receive additional money. Bristol-Myers
may terminate the agreement upon ninety days prior notice. If Bristol-Myers
decides to purchase any complex carbohydrates from us after commercializing
either of its vaccines, we will need to negotiate the terms of a manufacturing
supply agreement. See "Risk Factors--We depend upon our collaborative
relationships to become profitable."
Agreements with Abbott
Under our agreements, Abbott Laboratories has the exclusive right to use
our technology to manufacture and commercialize, for nutritional purposes only,
any complex carbohydrate naturally found in breast milk. Abbott has exclusive
manufacturing rights, and development and regulatory responsibilities for these
nutritional additives.
If Abbott commercializes any products manufactured using our technology,
Abbott will owe us a commercialization fee and royalties. Under the agreements,
we have received to date approximately $11.2 million in contract payments,
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milestone payments, and equity investments from Abbott. If the agreements are
still exclusive when Abbott commercializes any products manufactured using our
technology, we are required to credit $3.75 million against royalties in equal
amounts over four years.
Abbott may terminate the agreements upon sixty days prior notice. Upon
termination, Abbott would have no further payment obligations to us. At any time
prior to the first commercial sale of any product manufactured using our
technology, Abbott has the option to make the agreements non-exclusive.
We also have the option to make the agreements non-exclusive. If either
party makes the agreements non-exclusive, Abbott will not be required to pay a
$5 million fee otherwise due upon commercialization, and royalties payable by
Abbott would be reduced by 50%.
Since obtaining the right to make the agreements non-exclusive, we have
been in discussions with various other infant formula and nutritional products
companies regarding the possible license of our technology on a non-exclusive
basis. We may not be able to interest these potential collaborators in a
non-exclusive license of our technology. We can enter into a new agreement only
if we have previously made our Abbott agreements non-exclusive. The terms of,
and payments from, a new agreement may not be adequate to offset the reduced
payments Abbott would then owe as a non-exclusive collaborator. Furthermore, if
we enter into a new agreement, Abbott may be less interested in pursuing
commercialization of any products manufactured using our technology. See "Risk
Factors--We depend upon our collaborative relationships to become profitable."
Research and Development
We conduct the majority of our research and development activities with our
own staff and facilities. We have assembled a scientific staff with
multidisciplinary skills in advanced research technologies, including
biochemistry, organic chemistry, analytic chemistry, molecular biology, cell
biology, microbiology, and enzymology. As of March 15, 1999, we have 42
employees engaged in research and development.
In addition to our in-house research programs, we collaborate with academic
and research institutions to support research in areas of interest to us.
Usually, such research assistance is performed with additional in-house
research. We may engage the faculty member supervising the outside research
effort as a consultant.
Patents and Proprietary Rights
We will be able to protect our proprietary rights from unauthorized use by
third parties only if our proprietary rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets. We rely on
patent rights, trade secrets, trademarks, and nondisclosure agreements to
establish and protect our proprietary rights in our technologies and products.
Despite these precautions, it may be possible for unauthorized third parties to
utilize our technology, or to obtain and use information that we regard as
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proprietary. See "Risk Factors--We depend upon our patents and other
intellectual property."
We own eight issued U.S. patents, and have licensed eleven issued U.S.
patents from five universities. There are a number of U.S. and foreign patent
applications related to our owned and licensed patents. See "Recent
Development." Through our license with the University of Pennsylvania, we have
obtained exclusive, worldwide rights to five issued U.S. patents and a number of
related U.S. patent applications and foreign patents and patent applications.
The patents, which have various expiration dates, begin expiring 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. Other U.S. patents are directed to an
apparatus containing a specific pair of enzymes for synthesizing a breast milk
oligosaccharide, to other apparatuses containing multiple glycosyltransferases,
and 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 sixty days
prior notice if we are not using our continuing best efforts to develop or sell
a product using the licensed technology. The Penn license is subject to Penn's
reserved right of use, and right to permit use by non-profit organizations,
solely for educational and research purposes. We also have licensed from four
other universities six issued U.S. patents and a number of related U.S. and
foreign patent applications. These are directed toward certain gene sequences,
and therapeutic uses of certain oligosaccharides.
Government Regulation
Our products and our manufacturing and research activities are subject to
varying degrees of regulation by a number of government authorities in the
United States and other countries. The development, manufacture, marketing, and
sale of each of our product candidates are subject to one of the following
regulatory review processes:
o pharmaceutical--new drug application
o infant formula additive--new infant formula submission
o foods and food ingredients--either self-affirmed to be generally
recognized as safe (GRAS) or food additive petition process
Generally, pharmaceuticals are regulated more rigorously than foods and
food ingredients. Infant formula additives are special types of food ingredients
that are regulated more rigorously than most other types of food ingredients. We
may not obtain the appropriate regulatory approval for any of our products. See
"Risk Factors--We are subject to extensive government regulation and we may not
obtain regulatory approvals."
Our operations are also subject to regulation under the Occupational Safety
and Health Act, the Environmental Protection Act, the Toxic Substances Control
Act, the Resource Conservation and Recovery Act, and other similar federal,
state, and local laws, rules, and regulations governing laboratory activities,
waste disposal, handling dangerous materials, and other matters. We voluntarily
comply with the National Institutes of Health Guidelines for Research Involving
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Recombinant DNA Technologies. See "Risk Factors--We use hazardous materials in
our operations."
Regulation of pharmaceutical product candidates
We are developing three compounds as potential pharmaceutical products, of
which two are in clinical trials. In addition, we are developing proprietary
processes for the manufacture of complex carbohydrates for two cancer vaccines
being developed by Bristol-Myers Squibb Company. Our research and development
activities regarding, and the future manufacturing and marketing of, our
pharmaceutical product candidates, as well as the Bristol-Myers vaccines, are
and will be subject to significant regulation by numerous governmental
authorities in the United States and other countries. Pharmaceutical products
intended for therapeutic use in humans are governed principally by the federal
Food, Drug and Cosmetic Act and by FDA regulations in the United States, and by
comparable laws and regulations in foreign countries. The federal Food, Drug and
Cosmetic Act and other federal statutes and regulations govern the testing,
manufacture, safety, effectiveness, labeling, storage, record keeping, approval,
advertising, and promotion of pharmaceutical 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
pharmaceutical product requires a number of years and the expenditure of
substantial resources.
Following drug discovery, the steps required before a new pharmaceutical
product may be marketed in the United States include:
o preclinical laboratory and animal tests;
o the submission to the FDA of an Investigational New Drug application;
o human clinical and other studies to assess safety and parameters of use;
o adequate and well-controlled clinical trials, typically conducted in
three phases, to establish the safety and effectiveness of the drug;
o the submission of a New Drug Application to the FDA; and
o FDA approval of the New Drug Application prior to any promotion,
commercial sale, or shipment of the drug.
Clinical trials are typically conducted in three sequential phases, which
may overlap. 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 may
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be required. Typical estimates of the total time required for completing such
clinical testing vary between four and ten years. For marketing outside the
United States, we will be subject to foreign regulatory requirements governing
human clinical trials and marketing approval for drugs. The requirements
relating to the conduct of clinical trials, product licensing, pricing, and
reimbursement vary widely from country to country. See "Risk Factors--Clinical
trials for our pharmaceutical product candidates will be expensive and their
outcome is uncertain" and "Risk Factors--We are subject to extensive government
regulation and we may not obtain regulatory approvals."
Regulation of infant formula additives
Abbott Laboratories is using our technology to develop a complex
carbohydrate as a potential nutritional additive to infant formula. The
manufacture, composition, and labeling of infant formulas are subject to the
provisions of the United States Infant Formula Act. Prior to commercializing any
potential infant formula additive, an infant formula manufacturer must
demonstrate that its potential additive:
o is generally recognized as safe (GRAS) either by previous
regulation of the FDA, or is self-affirmed as GRAS by the infant
formula manufacturer; or
o is the subject of an approved food additive petition.
Under the United States 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 ninety days prior to the
intended date of commercial distribution. This new infant formula 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 with the nutrient
and quality factor requirements and good manufacturing practices control
requirements. Upon notification, the FDA has a ninety-day period in which to
request additional information, or deny marketing rights for the new formula. If
no response is received from the FDA within the ninety-day period the
manufacturer may proceed with commercial sales of the newly formulated product.
Under our agreements, Abbott is responsible for all regulatory activities
relating to the infant formula additive. Abbott has not yet made, nor may ever
make, any filings with the FDA to propose inclusion of an infant formula
additive manufactured using our technology. Abbott's efforts to commercialize
any infant formula additives may be materially and adversely affected if Abbott
does not self-affirm GRAS status of its potential infant formula additive.
In addition, at the request of the FDA, the Life Science Research
Organization is conducting a thorough review of potential nutrients in infant
formula, including the possible inclusion of oligosaccharides such as any
developed by Abbott using our technology. The timing of, or the recommendations
(if adopted by the FDA) resulting from, that review may materially and adversely
effect Abbott's efforts to commercialize any oligosaccharides manufactured using
our technology as additives to infant formula.
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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 clearances, if required, in foreign countries may be longer
or shorter than that required in the United States. See "Risk Factors--We are
subject to extensive government regulation and we may not obtain regulatory
approvals."
Regulation of foods and food ingredients
The initial product to be manufactured in collaboration with Johnson &
Johnson will be regulated as a food ingredient. Foods and food ingredients are
subject to the provisions of the federal Food, Drug and Cosmetic Act. Food
ingredients are broadly defined as any substances that may become a component,
or otherwise affect the characteristics, of food. Food ingredients are regulated
either as substances generally recognized as safe (GRAS) or as food additives.
Food ingredients that are GRAS are excluded from the definition of food
additives. The FDA has affirmed by regulation a number of substances as GRAS,
although it is not required that a substance be affirmed as GRAS by regulation
of the FDA in order to be GRAS. A manufacturer may self-affirm a substance as
GRAS by making an independent determination that qualified experts would
generally agree that the substance is GRAS for a particular use. If the FDA
disagrees with a determination, the manufacturer must complete the food additive
petition process for the substance to be approved by the FDA. Affirmation of
GRAS status either by the manufacturer or regulation of the FDA would allow the
manufacturer to market and sell the additive or the food containing the
additive. Furthermore, a manufacturer's decision to rely on an independent
determination may limit the marketability of that manufacturer's products 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.
Food ingredients that are not GRAS are regulated as food additives. All new
food additives require FDA approval prior to commercialization. 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. Commercialization of the food additive, if permitted by
the FDA, often occurs several years after the petition is submitted to the FDA.
The petition must establish with reasonable certainty that the food additive is
safe for its intended use at the level specified in the petition. The petition
is required to contain reports of safety investigations of the food additive and
details regarding its physical, chemical, and biological properties. Product
safety studies submitted to the FDA are typically conducted in accordance with
FDA good laboratory practices requirements. If a food additive petition is
submitted, the FDA may choose to reject the petition or deny any desired
labeling claims. Furthermore, the FDA may require the establishment of
regulations that necessitate costly and time-consuming compliance procedures.
See "Risk Factors--We are subject to extensive government regulation and we may
not obtain regulatory approvals."
Competition
We have many potential competitors including nutritional products
companies, pharmaceutical companies, chemical companies, biotechnology
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companies, food companies, and consumer companies. These companies are marketing
and developing products that may compete successfully with ours. Many of these
companies have more:
o financial, scientific, and technical resources;
o manufacturing and marketing capabilities;
o experience conducting preclinical studies and clinical trials of new
products; and
o experience in obtaining regulatory approvals for products.
Several companies are producing by enzymatic means a limited number of
oligosaccharides and oligosaccharide precursors. Any of these companies may
develop technologies superior to our technologies. We do not believe any 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 commercial quantities of complex carbohydrates. These
and other efforts by potential competitors may be successful or other methods of
carbohydrate synthesis may be developed to compete with us. See "Risk
Factors--We are exposed to competition from many sources."
The market for treatment of respiratory infections and otitis media is
dominated by large pharmaceutical companies that market 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.
The anti-H. pylori market is currently dominated by large pharmaceutical
companies with products that generally kill bacteria non-specifically. 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 or
resistance. To date, no single product has 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.
We are relying solely on Abbott Laboratories to develop, manufacture, and
commercialize any nutritional additives manufactured using our technology.
Abbott's ability to successfully commercialize our technology will depend, in
part, on Abbott's ability to compete in the highly competitive infant formula
market. Abbott's principal competitors in this market are believed to include
Bristol-Myers Squibb Company, Nestle S.A., Novartis, and American Home Products.
Abbott's competitors or others may develop technologies and products that are
more commercially successful than any being developed by Abbott, or that would
24
<PAGE>
render technology licensed from us, or Abbott's products, obsolete or
noncompetitive. Although we are not aware of any other 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, oligosaccharides.
Manufacturing
In 1997, we purchased our previously leased building for approximately $3.8
million. In addition, we completed the construction of a pilot-scale
manufacturing facility within our building. The new manufacturing facility,
which cost $8.2 million, was constructed to expand manufacturing capabilities,
utilizing current good manufacturing practices, for our compounds in clinical
and preclinical development. We believe that we now have the capacity to
manufacture sufficient quantities of these compounds to complete clinical
trials. In addition, we believe that we now have the capacity to manufacture,
utilizing good manufacturing practices, certain amounts of these and other
carbohydrates for third parties.
We intend to manufacture complex carbohydrates. We have limited resources
and capability to manufacture some of our products on a commercial scale. To
commercialize our products, we must manufacture our products in commercial
quantities under current good manufacturing practices prescribed by the FDA, and
at acceptable costs. Our existing facility is not adequate for large-scale,
commercial manufacturing of all our products. Therefore, we will need to develop
commercial-scale manufacturing facilities meeting current good manufacturing
practices, or depend on our collaborators, licensees, or contract manufacturers
for the commercial manufacture of our potential products.
Additional manufacturing facilities will require additional funds,
additional personnel, and compliance with applicable regulations. See "Risk
Factors--We have limited commercial manufacturing capability or experience."
Marketing, Distribution, and Sales
We have no experience or capability in marketing, distributing, or selling
products. We will have to develop a sales force or rely on our collaborators,
licensees, or arrangements with others to provide for the marketing,
distribution, and sales of any products we commercialize. See "Risk Factors--We
have no marketing or sales capability or experience."
Employees
As of March 15, 1999, we employed 56 individuals (12 of whom held Ph.D.,
Pharm.D., or M.D. degrees), consisting of 42 employees engaged in research and
development activities and 14 employees devoted to business development,
finance, and administrative activities. Our staff includes carbohydrate
biochemists as well as scientists with expertise in organic chemistry, analytic
chemistry, molecular biology, microbiology, cell biology, scale-up manufacture,
25
<PAGE>
and regulatory affairs. A significant number of our employees have prior
experience with pharmaceutical or biotechnology companies, and many have
specialized training in carbohydrate technology. None of our employees is
covered by collective bargaining agreements. We believe we have good relations
with our employees.
ITEM 2. PROPERTIES.
We own approximately 45,000 square feet of laboratory and office space in
Horsham, Pennsylvania.
We must develop commercial-scale manufacturing facilities meeting current
good manufacturing practices, or depend on our collaborators, licensees, or
contract manufacturers for the commercial manufacture of some of our potential
products. See "Item 1--Business--Manufacturing."
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of security holders during the
fourth quarter of 1998.
26
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is quoted on the Nasdaq National Market under the symbol
"NTEC." The following table contains the high and low closing sale prices per
share of our common stock for the periods indicated below.
High Low
------ -----
1997
First Quarter..................................... $18.75 $13.75
Second Quarter.................................... 16.25 11.88
Third Quarter..................................... 18.00 12.75
Fourth Quarter.................................... 19.13 12.75
1998
First Quarter..................................... 15.88 12.13
Second Quarter.................................... 17.88 13.94
Third Quarter..................................... 16.25 8.75
Fourth Quarter.................................... 15.38 8.00
1999
First Quarter (through March 15, 1999)............ 16.75 11.38
As of March 15, 1999, there were approximately 250 holders of record
and 2,200 beneficial holders of our common stock. We intend to retain all
available funds for use in the operation of our business and for potential
acquisitions; therefore, we do not anticipate paying any cash dividends on our
common stock during the next several years.
27
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data in the table below as of and for the years
ended December 31, 1994, 1995, 1996, 1997, and 1998 and for the period from
inception (January 17, 1989) to December 31, 1998, have been derived from our
audited consolidated financial statements. The following consolidated financial
statements, which were audited by Arthur Andersen LLP, our independent public
accounting firm, are included elsewhere in this Form 10-K:
o our consolidated financial statements for each of the three years
in the period ended December 31, 1998, and for the period from
inception (January 17, 1989) to December 31, 1998; and
o our consolidated balance sheets at December 31, 1997 and 1998.
You should read the table below in combination with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our Consolidated Financial Statements, including the Notes to Consolidated
Financial Statements, appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
Period from
inception
Year ended December 31, (January 17, 1989)
--------------------------------------------------------- to December 31,
1994 1995 1996 1997 1998 1998
-------- -------- ------- -------- -------- -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenue from collaborative
agreements $ 48 $ 1,199 $ 1,383 $ 725 $ 390 $ 6,345
-------- -------- ------- -------- -------- --------
Operating expenses:
Research and development 5,004 4,733 6,502 8,013 9,912 40,904
General and administrative 1,319 1,665 2,505 3,884 3,635 16,713
-------- -------- ------- -------- -------- --------
Total expenses 6,323 6,398 9,007 11,897 13,547 57,617
-------- -------- ------- -------- -------- --------
Interest income (expense), net 63 132 1,483 2,108 1,250 4,778
-------- -------- ------- -------- -------- --------
Net loss $(6,212) $ (5,067) $(6,141) $ (9,064) $(11,907) $(46,494)
======== ======== ======= ======== ======== ========
Basic and diluted net loss per
share (1) $ (1.99) $ (0.82) $ (0.96) $ (1.25)
======== ======= ======== ========
Basic and diluted weighted-average
shares outstanding (1) 2,550 7,494 9,405 9,556
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------
1994 1995 1996 1997 1998
------- -------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and marketable securities $ 5,363 $ 11,189 $32,845 $ 43,303 $ 32,023
Total assets 8,196 14,639 37,118 58,886 46,265
Long-term debt 736 1,235 556 8,917 8,300
Deficit accumulated during
the development stage (14,315) (19,382) (25,523) (34,587) (46,494)
Total stockholders' equity 6,352 11,733 35,120 46,954 36,013
</TABLE>
(1) See Note 2 of Notes to Financial Statements
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The statements in this Form 10-K and the Exhibits that are not facts are
forward-looking statements. Forward-looking statements involve predictions. Our
actual results, performance, or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements. Potential
risks and uncertainties that could affect our actual results, performance, or
achievements include the "Risk Factors" set forth in Item 1, and general
financial, economic, regulatory, and political conditions affecting the
biotechnology industry in general. Given these uncertainties, you should not
base your decision to invest in our common stock on any forward-looking
statements. In addition, we do not have any obligation or intent to update any
of these risk factors or forward-looking statements to reflect future events or
developments.
Overview
Neose, a development-stage company, is developing synthetic processes to
manufacture oligosaccharides, or complex carbohydrates. We are using these
manufacturing processes to discover, develop, and commercialize complex
carbohydrates for pharmaceutical, nutritional, and consumer uses. Due to their
structural complexity, oligosaccharides are difficult and expensive to produce.
Accordingly their commercial development has been significantly limited. We
believe our proprietary technologies enable the rapid and cost-efficient
enzymatic production of naturally occurring oligosaccharides.
We have not generated any material revenues from operations, except for
interest income and revenues from collaborative agreements, including our
agreements with Abbott Laboratories. Under our agreements, Abbott has the
exclusive right to use our technology to manufacture and commercialize, for
nutritional purposes only, any complex carbohydrate naturally found in breast
milk. We have received approximately $11.2 million in contract payments, license
fees, milestone payments, and equity investments from Abbott. Under our
agreements, we will receive further payments from Abbott only if Abbott
commercializes a product manufactured using our technology.
We have incurred increasingly large losses each year. As of December 31,
1998, we had an accumulated deficit of approximately $46.5 million. We expect
increased losses over at least the next several years as we expand research and
development efforts, conduct additional clinical trials, expand manufacturing
scale-up activities, and begin sales and marketing activities.
We have not yet commercialized any products or technologies. We do not know
if or when we will generate significant revenues from the commercialization of
our products or technologies. Before we can commercialize any of our products or
technologies, we must overcome many hurdles. Even if we commercialize one or
more of our products or technologies, we may not become profitable.
29
<PAGE>
Results of Operations
Years Ended December 31, 1998 and 1997
Revenues from collaborative agreements decreased to $0.4 million in 1998
from $0.7 million in 1997. Typically, these revenues represent payments received
by us under our collaborative agreements. Therefore, we expect our revenues to
fluctuate from year to year. Substantially all of our revenues during 1998 were
payments received by us under our collaborative agreement with Bristol-Myers
Squibb Company. Substantially, all of our revenues during 1997 were payments
received by us under our collaborative agreements with Abbott.
Research and development expenses increased to $9.9 million in 1998 from
$8.0 million in 1997. The increase was primarily attributable to the hiring of
additional scientific personnel and increased purchases of laboratory supplies
and services related to our collaborative agreement with Johnson & Johnson, and
increased funding of external research.
General and administrative expenses decreased to $3.6 million in 1998 from
$3.9 million in 1997. The decrease was primarily attributable to decreased
patent and business development expenses.
Interest income decreased to $1.8 million in 1998 from $2.7 million in 1997
due to lower average cash balances during 1998. Interest expense decreased to
$0.5 million in 1998 from $0.6 in 1997 due to lower average loan balances
outstanding during 1998.
Years Ended December 31, 1997 and 1996
Revenues from collaborative agreements decreased to $0.7 million in 1997
from $1.4 million in 1996. Substantially all of our revenues during 1997 and
1996 were payments received by us under our collaborative agreements with
Abbott.
Research and development expenses increased to $8.0 million in 1997 from
$6.5 million in 1996. The increase was primarily attributable to the increased
preclinical and clinical trial expenditures for our pediatric ear infection
compound, increased depreciation expense related to property and improvements
expenditures, and financing expenses associated with the bond issuance that
financed our property acquisition and facility expansion.
General and administrative expenses increased to $3.9 million in 1997 from
$2.5 million in 1996. The increase was primarily attributable to increased
patent and business development expenses, and expenses associated with being a
public company.
Interest income increased to $2.7 million in 1997 from $1.7 million in 1996
due to higher average cash and marketable securities balances resulting from our
public offering in January 1997. Interest expense increased to $0.6 million in
1997 from $0.2 million in 1996 due to higher average loan balances outstanding
during 1997.
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<PAGE>
Liquidity and Capital Resources
We have incurred increasingly large losses each year since our inception.
As of December 31, 1998, we had a deficit accumulated during the development
stage of approximately $46.5 million. We have financed our operations through
private and public offerings of our securities and revenues from our
collaborative agreements. We had $32.0 million in cash and marketable securities
as of December 31, 1998, compared to $43.3 million as of December 31, 1997. This
decrease was primarily attributable to the use of funds for continuing operating
activities. In January 1999, we issued 286,097 shares of common stock to Johnson
& Johnson Development Corporation for gross proceeds of $4 million.
On March 26, 1999, we acquired the carbohydrate manufacturing patents,
licenses, and other intellectual property of Cytel Corporation's Glytec
business unit. We paid $3.5 million in cash to Cytel and an additional $1.5
million in cash into escrow, the release of which is conditioned on Cytel's
satisfaction of certain matters relating to the acquired patents and
licenses. We may be required to pay Cytel up to an additional $1.6 million
in cash, contingent on potential payments and revenues realized by us from
certain future corporate collaborations. See "Item 1--Business--Recent
Development."We have not yet determined the accounting treatament for this
transaction.The accounting treatment for this type of transaction varies,
depending upon the facts specfic to each transaction, from capitalizing all
of the purchase price and expensing a portion of the asset over a number of
years to expensing the entire purchase price on the date of acquisition as
acquired in-process research and development.
In 1997, we issued, through the Montgomery County (Pennsylvania) Industrial
Development Authority, $9.4 million of taxable and tax-exempt bonds. The bonds
were issued to finance the purchase of our previously leased building and the
construction of a pilot-scale manufacturing facility within our building. The
bonds are supported by a AA-rated letter of credit, and a reimbursement
agreement between our bank and the letter of credit issuer. The interest rate on
the bonds will vary weekly, depending on market rates for AA-rated taxable and
tax-exempt obligations, respectively. As of December 31, 1998, the effective,
blended interest rate was 7.2% per annum, including letter-of-credit and other
fees. To provide credit support for this arrangement, we have given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to our bank. In addition, we have agreed to maintain at least $20
million of cash and short-term investments. If we fail to comply with this
covenant, we are required to deposit with the lender cash collateral up to, but
not more than, the unpaid balance of the loan, which as of December 31, 1998 was
$8.9 million.
If the technology development program with Johnson & Johnson is successful,
the parties will have to reach agreement upon the structure and financing of a
large-scale manufacturing facility. See "Item 1--Business--Collaborative
Agreements--Agreement with J&J."
During 1996, 1997, and 1998, we purchased approximately $1.9 million, $11.5
million, and $0.8 million of property, equipment, and building improvements.
We expect that our existing cash and short-term investments will be
adequate to fund our operations through late 2000; however, changes in our
collaborative relationships or our business, whether or not initiated by us, may
cause us to deplete our cash and short-term investments sooner than the above
estimate. The timing and amount of our future capital requirements and the
adequacy of available funds will depend on many factors, including:
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<PAGE>
o if or when any products covered by our existing collaborative agreements
are commercialized;
o the progress of our research and development activities, including our
pharmaceutical discovery and development programs;
o the safety and efficacy of our products in preclinical studies and
clinical trials;
o the costs involved in preparing, filing, prosecuting, maintaining, and
enforcing patent claims and other intellectual property rights;
o competing technological and market developments;
o changes in our existing collaborative relationships;
o our ability to establish additional collaborative agreements;
o the cost of manufacturing scale-up; and
o developing effective marketing activities and arrangements.
We may need to sell additional stock, borrow additional money, or enter
into new collaborative agreements both to fund operations until we become
profitable and to make capital investments. The timing and amount of our future
capital requirements will depend on many factors including those discussed in
the "Risk Factors" set forth in Item 1.
If we raise money by selling additional stock or borrowing additional
money, the terms may not be favorable and may be dilutive to our stockholders. A
debt financing may contain restrictive covenants, and, if we default, may
provide the lender with rights to some or all of our assets.
We may not be able to raise money when we need it. If we are unable to
obtain adequate funds when needed:
o we may delay or eliminate our research and development activities, or
other aspects of our business;
o we may have to license or sell our technologies on unfavorable terms; or
o we may have to reduce or cease operations.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. In other
words, date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in system failures or
miscalculations causing disruptions of operations, including an inability to
process transactions and information, operate certain laboratory and
manufacturing equipment, order raw materials, or engage in similar normal
business activities.
We do not believe we have a material exposure to the Year 2000 issue for
our information and non-information technology systems. We have reviewed these
existing systems and they either correctly define the Year 2000 or are expected
to be replaced before Year 2000 issues will arise. Each of our major vendors has
informed us that they are taking appropriate steps to remediate their own Year
32
<PAGE>
2000 issues. Our business, financial condition, and results of operations may be
materially and adversely affected if our major vendors fail to remediate their
own Year 2000 issues. We have not yet developed any contingency plans to address
situations that may result if we, or our vendors, are unable to remediate fully
all Year 2000 issues affecting our operations.
Our historical costs directly related to Year 2000 issue evaluation,
remediation, and validation have been immaterial as our systems have been on a
normal replacement schedule with only immaterial opportunity costs of personnel
to ensure new systems and third parties are Year 2000 compliant. We estimate
that the future expenses and capital expenditures necessary to complete our Year
2000 evaluation, remediation, and validation of all systems will not exceed
$200,000.
We are currently assessing the extent to which we would be vulnerable to
our vendors' failure to remediate any Year 2000 issues on a timely basis. We
plan to develop contingency plans if necessary during 1999. We have not deferred
any systems projects as a result of our efforts to evaluate, remediate, and
validate our systems for the Year 2000 issue.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We do not hold any investments in market risk sensitive instruments.
Accordingly, we believe that we are not subject to any material risks arising
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements required by this item are attached to this Form
10-K beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information required by this item is incorporated herein by reference
to our Proxy Statement for our 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to our Proxy Statement for our 1999 Annual Meeting of Stockholders.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated herein by reference
to our Proxy Statement for our 1999 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated herein by reference
to our Proxy Statement for our 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements.
Our Consolidated Financial Statements listed in the accompanying Index to
Consolidated Financial Statements at page F-1 are filed as part of this Form
10-K.
2. Financial Statement Schedules.
All financial statement schedules have been omitted because they are not
applicable, not required, or the information is shown in the Consolidated
Financial Statements or Notes thereto.
3. Exhibits. (See (c) below)
(b) Reports on Form 8-K.
On January 8, 1999, we filed a Current Report on Form 8-K, dated December
3, 1998, with the SEC. We reported the adoption of an amendment to our
Shareholder Rights Plan (see Note 8 of Notes to Consolidated Financial
Statements filed as part of this Form 10-K) under "Item 5" of the Form 8-K.
(c) Exhibits.
The following is a list of exhibits filed as part of this Form 10-K. We are
incorporating by reference to our previous SEC filings each exhibit that
contains a footnote. For exhibits incorporated by reference, the location of the
exhibit in the previous filing is indicated in parentheses.
34
<PAGE>
Exhibit
Number Description
- ------ -----------
3.1 Second Amended and Restated Certificate of Incorporation. (Exhibit
3.1)(1)
3.2 Amended and Restated By-Laws. (Exhibit 3.3)(5)
3.3 Certificate of Designation establishing and designating the Series A
Junior Participating Preferred Stock. (Exhibit 3.2)(5)
4.1 See Exhibits 3.1, 3.2, and 3.3 for instruments defining rights of
holders of common stock.
4.2 Representation pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K.
(Exhibit 4.1)(3)
4.3 Trust Indenture, dated as of March 1, 1997, between Montgomery County
Industrial Development Authority and Dauphin Deposit Bank and Trust
Company. (Exhibit 4.2)(3)
4.4 Form of Montgomery County Industrial Development Authority Federally
Taxable Variable Rate Demand Revenue Bond (Neose Technologies, Inc.
Project) Series B of 1997. (Exhibit 4.3)(3)
4.5 Amended and Restated Rights Agreement, dated as of December 3, 1998,
between American Stock Transfer & Trust Company, as Rights Agent, and
Neose. (Exhibit 4.1)(6)
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between
University of Pennsylvania and Neose. (Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between University of
Pennsylvania and Neose, as amended to date. (Exhibit 10.2)(1)
10.3(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30,
1992, between Abbott Laboratories and Neose. (Exhibit 10.8(a))(1)
10.3(b)+ Supply Agreement, dated as of December 30, 1992, between Abbott
Laboratories and Neose. (Exhibit 10.8(b))(1)
10.3(c)+ Research and License Agreement, dated as of December 30, 1992, between
Abbott Laboratories and Neose. (Exhibit 10.8(c))(1)
10.3(d)+ Amendment to the Research and License Agreement, dated as of January
18, 1995, between Abbott Laboratories and Neose. (Exhibit 10.8(d))(2)
10.4 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit
10.9)(1)
10.5 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit
10.10)(1)
10.6 Form of Warrant to Purchase Common Stock, dated as of February 23,
1991. (Exhibit 10.11)(1)
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<PAGE>
10.7 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993.
(Exhibit 10.12)(1)
10.8 Form of Warrant to Purchase Common Stock, dated as of February 16,
1994. (Exhibit 10.13)(1)
10.9 Form of Warrant to Purchase Series E Preferred Stock, dated as of July
29, 1994. (Exhibit 10.14)(1)
10.10 Warrant for the Purchase of Common Stock, dated as of June 30, 1995,
between Financing for Science International, Inc. and Neose. (Exhibit
10.15)(1)
10.11++ 1995 Stock Option/Stock Issuance Plan, as amended. (Exhibit 99.1)(4)
10.12++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.13++ Employment Agreement dated April 1, 1992, between David A. Zopf and
Neose, as amended to date. (Exhibit 10.18)(1)
10.14 Design-Build Agreement dated August 30, 1996, between Irwin & Leighton,
Inc. and Neose. (Exhibit 10.19)(2)
10.15 Agreement for Purchase and Sale of Real Property, dated March 14, 1997,
by and between Pennsylvania Business Campus Delaware, Inc. and Neose.
(Exhibit 2.1)(3)
10.16 Loan Agreement, dated as of March 1, 1997, between Montgomery County
Industrial Development Authority and Neose. (Exhibit 10.1)(3)
10.17 Participation and Reimbursement Agreement, dated as of March 1, 1997,
between Jefferson Bank and CoreStates Bank, N.A. (Exhibit 10.2)(3)
10.18 Form of CoreStates Bank, N.A. Irrevocable Letter of Credit. (Exhibit
10.3)(3)
10.19 Pledge, Security and Indemnification Agreement, dated as of March 1,
1997, by and among CoreStates Bank, N.A., Jefferson Bank, and Neose.
(Exhibit 10.4)(3)
10.20 Reimbursement Agreement, dated as of March 1, 1997, between Jefferson
Bank and Neose. (Exhibit 10.5)(3)
10.21 Specimen of Note from Company to Jefferson Bank. (Exhibit 10.6)(3)
10.22 Mortgage, Assignment and Security Agreement, dated March 20, 1997,
between Jefferson Bank and Neose. (Exhibit 10.7)(3)
10.23 Security Agreement, dated as of March 1, 1997, by and between Jefferson
Bank and Neose. (Exhibit 10.8)(3)
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<PAGE>
10.24 Assignment of Contract, dated as of March 20, 1997, between Jefferson
Bank and Neose. (Exhibit 10.9)(3)
10.25 Custodial and Collateral Security Agreement, dated as of March 20,
1997, by and among Offitbank, Jefferson Bank, and Neose. (Exhibit
10.10)(3)
10.26 Placement Agreement, dated March 20, 1997, among Montgomery County
Industrial Development Authority, CoreStates Capital Markets, and
Neose. (Exhibit 10.11)(3)
10.27 Remarketing Agreement, dated as of March 1, 1997, between CoreStates
Capital Markets and Neose. (Exhibit 10.12)(3)
11* Statement re: Computation of Net Loss Per Common Share.
23.1* Consent of Arthur Andersen LLP.
24* Powers of Attorney (included as part of signature page hereof).
27.1* Financial Data Schedule.
- ---------
* Filed herewith
+ Portions of this Exhibit were omitted and filed separately with the
Secretary of the SEC pursuant to an order of the SEC granting our
application for confidential treatment filed pursuant to Rule 406 under
the Securities Act.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to our Registration Statement on Form S-1
(Registration No. 33-80693) filed with the SEC on December 21, 1995, as
amended.
(2) Filed as an Exhibit to our Registration Statement on Form S-1
(Registration No. 333-19629) filed with the SEC on January 13, 1997.
(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997.
(4) Filed as an Exhibit to our Registration Statement on Form S-8
(Registration No. 333-35283) filed with the SEC on September 10, 1997.
(5) Filed as an Exhibit to our Current Report on Form 8-K filed with the
SEC on October 1, 1997.
(6) Filed as an Exhibit to our Current Report on Form 8-K filed with the
SEC on January 8, 1999.
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<PAGE>
Index to Consolidated Financial Statements
Report of Independent Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity and Comprehensive Loss F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
Report of Independent Public Accountants
To Neose Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Neose
Technologies, Inc. (a Delaware corporation in the development-stage) and
subsidiary, as of December 31, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and comprehensive loss, and cash
flows for each of the three years in the period ended December 31, 1998, and for
the period from inception (January 17, 1989) to December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Neose Technologies, Inc. and
subsidiary as of December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, and for the period from inception (January 17, 1989) to December 31,
1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
January 22, 1999
F-2
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Consolidated Balance Sheets
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------------
Assets 1997 1998
--------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,098 $ 9,484
Marketable securities (Note 4) 26,205 22,539
Restricted funds (Note 6) 450 468
Prepaid expenses and other 517 235
--------- --------
Total current assets 44,270 32,726
Property and equipment, net (Note 5) 14,616 13,539
--------- --------
Total assets $ 58,886 $ 46,265
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt (Note 6) $ 1,040 $ 617
Accounts payable 347 45
Accrued expenses (Note 7) 1,628 1,290
--------- --------
Total current liabilities 3,015 1,952
Long-term debt (Note 6) 8,917 8,300
--------- --------
Total liabilities 11,932 10,252
--------- --------
Commitments (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 30,000 shares
authorized; 9,525 and 9,589 shares issued and 95 96
outstanding
Additional paid-in capital 81,807 82,400
Deferred compensation (361) (211)
Deficit accumulated during the development stage (34,587) (46,494)
Unrealized gains on marketable securities -- 222
--------- --------
Total stockholders' equity 46,954 36,013
--------- --------
Total liabilities and stockholders' equity $ 58,886 $ 46,265
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Consolidated Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Period from
inception
(January 31,
Year ended December 31, 1989) to
---------------------------------------- December 31,
1996 1997 1998 1998
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue from collaborative agreements $ 1,383 $ 725 $ 390 $ 6,345
-------- -------- ---------- -----------
Operating expenses:
Research and development 6,502 8,013 9,912 40,904
General and administrative 2,505 3,884 3,635 16,713
-------- -------- ---------- -----------
Total operating expenses 9,007 11,897 13,547 57,617
-------- -------- ---------- -----------
Operating loss (7,624) (11,172) (13,157) (51,272)
Interest income 1,730 2,663 1,784 6,993
Interest expense (247) (555) (534) (2,215)
-------- -------- ---------- -----------
Net loss $ (6,141) $ (9,064) $ (11,907) $(46,494)
======== ======== ========== ===========
Basic and diluted net loss per share $ (0.82) $ (0.96) $ (1.25)
======== ======== ==========
Basic and diluted weighted-average
shares outstanding 7,494 9,405 9,556
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(in thousands)
<TABLE>
<CAPTION>
Comprehensive
Deficit loss
Convertible accumulated Unrealized accumulated
Preferred Stock Common Stock Additional during the gains on during the
----------------- ---------------- paid-in Deferred development marketable development
Shares Amount Shares Amount capital compensation stage securities stage
------ ------ ------ ------ ------- ------------ ----- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 17, 1989
(inception) -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Initial issuance of common -- -- 1,302 13 (3) -- -- -- --
stock
Shares issued pursuant to
consulting, licensing, and
antidilutive agreements -- -- 329 3 (1) -- -- -- --
Sale of common stock -- -- 133 1 1 -- -- -- --
Net loss -- -- -- -- -- -- (460) -- (460)
----- ---- ----- ---- ----- ---- ------ ---- ----
Balance, December 31, 1990 -- -- 1,764 17 (3) -- (460) -- (460)
Sale of stock 1,517 15 420 4 4,499 (7) -- -- --
Shares issued pursuant to
consulting and
antidilutive -- -- 145 1 -- -- -- -- --
agreements
Capital contributions -- -- -- -- 10 -- -- -- --
Dividends on preferred stock -- -- -- -- (18) -- -- -- --
Net loss -- -- -- -- -- -- (1,865) -- (1,865)
----- ---- ----- ---- ----- ---- ------ ---- ----
Balance, December 31, 1991 1,517 15 2,329 22 4,488 (7) (2,325) -- (2,325)
Sale of stock 260 2 17 -- 2,344 -- -- -- --
Shares issued pursuant to
redemption of notes -- -- 107 1 682 -- -- -- --
payable
Exercise of stock options
and warrants -- -- 21 -- 51 -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 5 -- -- --
Dividends on preferred stock -- -- -- -- (36) -- -- -- --
Net loss -- -- -- -- -- -- (3,355) -- (3,355)
----- ---- ----- ---- ----- ---- ------ ---- ----
Balance, December 31, 1992 1,777 17 2,474 23 7,529 (2) (5,680) -- (5,680)
Sale of preferred stock 250 3 -- -- 1,997 -- -- -- --
Shares issued to licensor -- -- 3 -- -- -- -- -- --
Shares issued to preferred
stockholder in lieu of
cash dividends -- -- 1 -- 18 -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 2 -- -- --
Dividends on preferred stock -- -- -- -- (36) -- -- -- --
Net loss -- -- -- -- -- -- (2,423) -- (2,423)
----- ---- ----- ---- ----- ---- ------ ---- ----
Balance, December 31, 1993 2,027 20 2,478 23 9,508 -- (8,103) -- (8,103)
Sale of preferred stock 2,449 25 -- -- 11,040 -- -- -- --
Exercise of stock options -- -- 35 1 14 -- -- -- --
Shares issued to preferred
stockholder in lieu of
cash -- -- 10 1 53 -- -- -- --
dividends
Dividends on preferred stock -- -- -- -- (18) -- -- -- --
Net loss -- -- -- -- -- -- (6,212) -- (6,212)
----- ---- ----- ---- ----- ---- ------ ---- ----
Balance, December 31, 1994 4,476 45 2,523 25 20,597 -- (14,315) -- (14,315)
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Consolidated Statements of Stockholders' Equity and Comprehensive Loss
(in thousands)
(continued)
<TABLE>
<CAPTION>
Comprehensive
Deficit loss
Convertible accumulated Unrealized accumulated
Preferred Stock Common Stock Additional during the gains on during the
----------------- ---------------- paid-in Deferred development marketable development
Shares Amount Shares Amount capital compensation stage securities stage
------ ------ ------ ------ ------- ------------ ----- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sale of preferred stock 2,721 27 -- -- 10,065 -- -- -- --
Exercise of stock options
and warrants -- -- 116 1 329 -- -- -- --
Shares issued to employees
in lieu of cash compensation -- -- 8 -- 44 -- -- -- --
Deferred compensation related
to grant of stock options -- -- -- -- 360 (360) -- -- --
Shares issued to stockholder
related to the initial -- -- 23 -- -- -- -- -- --
public offering
Shares issued to preferred
stockholder in lieu of cash -- -- 3 -- 18 -- -- -- --
dividends
Dividends on preferred stock -- -- -- -- (36) -- -- -- --
Conversion of preferred
stock into common stock (1,417) (14) 472 5 9 -- -- -- --
Net loss -- -- -- -- -- -- (5,067) -- (5,067)
----- ---- ----- ---- ------- ------ --------- ----- --------
Balance, December 31, 1995 5,780 58 3,145 31 31,386 (360) (19,382) -- (19,382)
Dividends on preferred stock -- -- -- -- (18) -- -- -- --
Sale of common stock in
initial public offering -- -- 2,588 26 29,101 -- -- -- --
Conversion of preferred
stock into common stock (5,780) (58) 2,411 24 34 -- -- -- --
Exercise of stock options
and warrants -- -- 65 1 162 -- -- -- --
Shares issued pursuant to
employee stock purchase -- -- 6 -- 60 -- -- -- --
plan
Deferred compensation
related to acceleration -- -- -- -- 106 -- -- -- --
of option vesting
Amortization of deferred
compensation -- -- -- -- -- 90 -- -- --
Net loss -- -- -- -- -- -- (6,141) -- (6,141)
----- ---- ----- ---- ------- ------ --------- ----- --------
Balance, December 31, 1996 -- -- 8,215 82 60,831 (270) (25,523) -- (25,523)
Sale of common stock in
public offering -- -- 1,250 13 20,326 -- -- -- --
Exercise of stock options and
warrants -- -- 42 -- 139 -- -- -- --
Shares issued pursuant to
employee stock purchase -- -- 18 -- 189 -- -- -- --
plan
Deferred compensation
related to grants of -- -- -- -- 322 (322) -- -- --
stock options
Amortization of deferred
compensation -- -- -- -- -- 231 -- -- --
Net loss -- -- -- -- -- -- (9,064) -- (9,064)
----- ---- ----- ---- ------- ------ --------- ----- --------
Balance, December 31, 1997 -- -- 9,525 95 81,807 (361) (34,587) -- (34,587)
Exercise of stock options -- -- 49 1 261 -- -- -- --
Shares issued pursuant to
employee stock purchase -- -- 15 -- 171 -- -- -- --
plan
Deferred compensation
related to -- -- -- -- 161 (161) -- -- --
grants of stock options
Amortization of deferred
compensation -- -- -- -- -- 311 -- -- --
Unrealized gains on
marketable securities -- -- -- -- -- -- -- 222 222
Net loss -- -- -- -- -- -- (11,907) -- (11,907)
----- ---- ----- ---- ------- ------ --------- ----- --------
Balance, December 31, 1998 -- $ -- 9,589 $ 96 $82,400 $ (211) $ (46,494) $ 222 $(46,272)
===== ==== ===== ==== ======= ====== ========= ===== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Period from
inception
(January 17,
Year ended December 31, 1989)
----------------------------------------- to December 31,
1996 1997 1998 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,141) $ (9,064) $ (11,907) $ (46,494)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 763 1,117 2,149 5,205
Common stock issued for noncash charges and other -- -- -- 35
Changes in operating assets and liabilities:
Restricted funds 148 (305) (18) (397)
Prepaid expenses and other (91) (292) 282 (235)
Accounts payable (84) 130 (302) 45
Accrued expenses (63) 477 (338) 608
Deferred revenue and other liabilities 4 (121) -- --
--------- --------- --------- ---------
Net cash used in operating activities (5,464) (8,058) (10,134) (41,233)
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment (1,857) (10,803) (761) (16,524)
Proceeds from sale-leaseback of equipment -- -- -- 1,382
Purchases of marketable securities -- (26,808) (24,315) (51,123)
Proceeds from sales of marketable securities -- 603 1,982 2,585
Proceeds from maturities of and other changes in
marketable securities -- -- 26,221 26,221
--------- --------- --------- ---------
Net cash provided by (used in) investing
activities (1,857) (37,008) 3,127 (37,459)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt -- 9,329 -- 11,955
Repayment of debt (765) (677) (1,040) (4,335)
Proceeds from issuance of preferred stock, net -- -- -- 29,497
Proceeds from issuance of common stock, net 60 189 171 705
Proceeds from public offerings, net 29,536 20,339 -- 49,466
Proceeds from exercise of stock options and warrants 164 139 262 960
Dividends paid (18) -- -- (72)
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities 28,977 29,319 (607) 88,176
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 21,656 (15,747) (7,614) 9,484
Cash and cash equivalents, beginning of period 11,189 32,845 17,098 --
--------- --------- --------- ---------
Cash and cash equivalents, end of period $ 32,845 $ 17,098 $ 9,484 $ 9,484
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 257 $ 511 $ 548 $ 2,109
========= ========= ========= =========
Noncash financing activities:
Issuance of common stock for dividends $ -- $ -- $ -- $ 90
========= ========= ========= =========
Issuance of common stock to employees in lieu of
cash compensation $ -- $ -- $ -- $ 44
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
Note 1. Background
Neose, a development stage company, is developing synthetic processes to
manufacture oligosaccharides, or complex carbohydrates. We are using these
manufacturing processes to discover, develop, and commercialize complex
carbohydrates for pharmaceutical, nutritional, and consumer uses. Due to their
structural complexity, oligosaccharides are difficult and expensive to produce;
accordingly their commercial development has been significantly limited. We
believe our proprietary technologies enable the rapid and cost-efficient
enzymatic production of naturally occurring oligosaccharides.
We commenced operations in August 1990. We have not generated any material
revenues from operations, except for interest income and revenues from
collaborative agreements, including our agreements with Abbott Laboratories (see
Note 3). We have incurred increasingly large losses each year. As of December
31, 1998, we had an accumulated deficit of approximately $46.5 million. We
expect increased losses over at least the next several years as we expand
research and development efforts, conduct additional clinical trials, expand
manufacturing scale-up activities, and begin sales and marketing activities.
We have not yet commercialized any products or technologies. We do not know
if or when we will generate significant revenues from the commercialization of
our products or technologies. Before we can commercialize any of our products or
technologies, we must overcome many hurdles. Even if we commercialize one or
more of our products or technologies, we may not become profitable.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Neose
Technologies, Inc. and its wholly-owned subsidiary. The financial statements
reflect the elimination of all significant intercompany accounts and
transactions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements. Actual results
could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months
or less on the date of purchase to be cash equivalents.
Marketable Securities
Marketable securities consist of investments that have a maturity of more
than three months on the date of purchase. To maintain the safety and liquidity
of our marketable securities, we have established guidelines for the
concentration, maturities, and credit ratings of our investments.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," we determine
the appropriate classification of debt and equity securities at the time of
purchase and re-evaluate such designation as of each balance sheet date. As of
December 31, 1998, all marketable securities were classified as
"available-for-sale" securities. Available-for-sale securities are carried at
Neose Technologies, Inc. and Subsidiary (a development-stage company)
F-8
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
fair value, based on quoted market prices, with unrealized gains and losses
reported as a separate component of stockholders' equity. All realized gains and
losses, computed using specific identification, and any declines in value
determined to be permanent are recognized in the Consolidated Statements of
Operations.
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. We use depreciable
lives of three to seven years for office, research, and manufacturing equipment,
and eighteen to twenty years for building and improvements.
Research and Development
Research and development costs are charged to expense as incurred.
Income Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The objective of
this pronouncement is to recognize and measure, using enacted tax laws, 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.
Revenue Recognition
We record revenue from collaborative agreements either when we perform
specified services or ratably over the term of the applicable agreement.
Net Loss Per Share
Basic and diluted net loss per share are presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic
loss per share is computed by dividing net loss by the weighted-average number
of common shares outstanding for the period. Diluted loss per share reflects the
potential dilution from the exercise or conversion of securities into common
stock. For the years ended December 31, 1996, 1997, and 1998, the effects of the
following were antidilutive; accordingly, they were excluded from the
calculation of diluted earnings per share:
o the exercise of outstanding stock options and warrants; and
o the conversion of outstanding shares of convertible preferred stock into
common stock (as if converted into common stock on their dates of issuance).
Reclassifications
Certain prior year amounts have been reclassified in order to conform to
current year presentation.
Note 3. Collaborative Agreements
Agreement with J&J
In 1997, we entered into a joint development agreement with McNeil
Specialty Products Company, a subsidiary of Johnson & Johnson, for the joint
development of novel technologies for the efficient large-scale manufacture of a
particular class of complex carbohydrates for a number of human healthcare
applications. The joint development agreement was extended and expanded in
January 1999. At the same time, we entered into a stock purchase agreement with
Johnson & Johnson Development Corporation. Under the stock purchase agreement,
we issued 286,097 shares of common stock for gross proceeds of $4 million. Under
the joint development agreement,
F-9
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
we jointly contemplate building and operating a manufacturing facility capable
of producing at least one commercially promising complex carbohydrate by early
2000. Either party may terminate the agreement upon sixty days prior notice.
The collaboration with J&J will require:
o intellectual property protection for the novel technology;
o manufacturing scale-up;
o compliance with regulatory requirements;
o successful sales and marketing of products manufactured using the novel
technology; and
o further agreement on the structure and financing of a large-scale
manufacturing facility and start up operating expenses.
Our business, financial condition, and results of operations will be
materially and adversely affected if the agreement is terminated, or if we
jointly fail to commercialize any products.
Agreement with Bristol-Myers
In June 1998, we entered into an agreement with Bristol-Myers Squibb
Company to develop proprietary processes for the manufacture of complex
carbohydrates for two cancer vaccines being developed by Bristol-Myers. We
received $250,000 upon execution of the agreement and $125,000 in December 1998
upon satisfaction of the first part of the initial milestone. If we complete
milestones under the agreement, we will receive additional money. We may not
successfully complete the milestones according to the time frame anticipated, if
at all. Bristol-Myers may terminate the agreement upon ninety days prior notice.
Even if we successfully complete development of these processes, and
fulfill all of our obligations to Bristol-Myers, either or both of these cancer
vaccines may not be clinically safe and effective, and Bristol-Myers may not
obtain regulatory approval to market either or both of these vaccines. If
Bristol-Myers decides to purchase any complex carbohydrates from us after
commercializing either or both of its vaccines, we will need to negotiate the
terms of a manufacturing supply agreement. Our business, financial condition,
and results of operations may be materially and adversely affected if:
o we fail to complete successful development of these processes;
o Bristol-Myers fails to obtain regulatory approval to market either or
both of its cancer vaccines; or
o we fail to enter into a manufacturing supply agreement with
Bristol-Myers.
Agreements with Abbott
Under our agreements, Abbott Laboratories has the exclusive right to use
our technology to manufacture and commercialize, for nutritional purposes only,
any complex carbohydrate naturally found in breast milk. Abbott is completely
responsible for developing, manufacturing, and commercializing nutritional
products under our agreements. The amount and timing of resources Abbott commits
to these activities are entirely within its control. We do not know or control
if or when Abbott will commercialize any products under these agreements. Our
business, financial condition, and results of operations may be materially and
adversely affected if Abbott fails to commercialize any products manufactured
using our technology.
If Abbott commercializes any products manufactured using our technology,
Abbott will owe us a commercialization fee and royalties. Under the agreements,
we have received to date approximately $11.2 million in contract payments,
milestone payments, and equity investments from Abbott. If the agreements are
still exclusive when Abbott commercializes any products manufactured using our
technology, we are required to credit $3.75
F-10
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
million against royalties in equal amounts over four years.
Abbott may terminate the agreements upon sixty days prior notice. Upon
termination, Abbott would have no further payment obligations to us. At any time
prior to the first commercial sale of any product manufactured using our
technology, Abbott has the option to make the agreements non-exclusive.
We also have the option to make the agreements non-exclusive. If either
party makes the agreements non-exclusive, Abbott will not be required to pay a
$5 million fee otherwise due upon commercialization, and royalties payable by
Abbott would be reduced by 50%.
Since obtaining the right to make the agreements non-exclusive, we have
been in discussions with various other infant formula and nutritional products
companies regarding the possible license of our technology on a non-exclusive
basis. We may not be able to interest these potential collaborators in a
non-exclusive license of our technology. We can enter into a new agreement only
if we have previously made our Abbott agreements non-exclusive. The terms of,
and payments from, a new agreement may not be adequate to offset the reduced
payments Abbott would then owe as a non-exclusive collaborator. Furthermore, if
we enter into a new agreement, Abbott may be less interested in pursuing
commercialization of any products manufactured using our technology.
Agreement with Bracco
We recognized approximately $250,000 and $209,000 of revenue under our
collaborative research agreement with Bracco Research USA Inc. for the years
ended December 31, 1996 and 1997, respectively. We mutually agreed to terminate
our research collaboration in September 1997.
Note 4. Marketable Securities
All of our marketable securities have been classified as
available-for-sale. As of December 31, 1997 and 1998, available-for-sale
securities consisted of securities and obligations of either the U.S. Treasury
or U.S. government agencies. The following summary contains additional
information about our available-for-sale securities (in thousands):
December 31, 1997 1998
- ------------ ---------- ----------
Cost $ 40,901 $ 30,303
Gross unrealized gains -- 222
Gross unrealized losses -- --
---------- ----------
Fair value 40,901 30,525
Less amounts classified as cash equivalents (14,696) (7,986)
========== ==========
$ 26,205 $ 22,539
========== ==========
The weighted-average maturities of our marketable securities as of December
31, 1997 and 1998 were approximately 15 months and 5 months, respectively.
During the years ended December 31, 1997 and 1998, we received proceeds from the
sales of marketable securities of approximately $603,000 and $1,982,000,
respectively. Realized gains on these sales for the years ended December 31,
1997 and 1998 were approximately $3,000 and $74,000, respectively. During the
year ended December 31, 1996, we did not sell any marketable securities.
F-11
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
Note 5. Property and Equipment
Property and equipment consisted of the following (in thousands):
December 31, 1997 1998
- ------------ ---------- -------
Building and improvements $ 12,967 $13,212
Research equipment 2,206 2,652
Manufacturing equipment 776 842
Computer and office equipment 400 411
---------- -------
16,349 17,117
Less accumulated depreciation and amortization (2,440) (4,278)
---------- -------
13,909 12,839
Land 700 700
Construction in progress 7 --
---------- -------
$ 14,616 $13,539
========== =======
Depreciation and amortization expense was approximately $569,000, $886,000,
and $1,838,000 for the years ended December 31, 1996, 1997, and 1998,
respectively. Upon purchasing our previously leased facility in March 1997, the
operating lease for our office and laboratory facilities was terminated. We did
not incur any rent expense during the year ended December 31, 1998. Rent expense
was approximately $309,000 and $92,000 for the years ended December 31, 1996 and
1997, respectively.
Note 6. Long-Term Debt
Long-term debt consisted of the following (in thousands):
December 31, 1997 1998
- ------------ -------- --------
MCIDA bond issuance $ 9,400 $ 8,900
Capital lease obligation 517 --
Equipment loans 40 17
-------- --------
9,957 8,917
Less current portion (1,040) (617)
-------- --------
$ 8,917 $ 8,300
======== ========
Minimum principal repayments of long-term debt as of December 31, 1998 were
as follows (in thousands): 1999--$617; 2000--$1,000; 2001--$1,100; 2002--$1,100;
2003--$1,200; and thereafter--$3,900.
MCIDA Bond Issuance
In 1997, we issued, through the Montgomery County (Pennsylvania) Industrial
Development Authority, $9.4 million of taxable and tax-exempt bonds. The bonds
were issued to finance the purchase of our previously leased building and the
construction of a pilot-scale manufacturing facility within our building. The
bonds are supported by a AA-rated letter of credit, and a reimbursement
agreement between our bank and the letter of credit issuer. The interest rate on
the bonds will vary weekly, depending on market rates for AA-rated taxable and
tax-exempt obligations, respectively. As of December 31, 1998, the effective
blended interest rate was 7.2% per annum, including letter-of-credit and other
fees.
F-12
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
The terms of the bond issuance provide for monthly, interest-only payments
and a single repayment of principal at the end of the twenty-year life of the
bonds. However, under our agreement with our bank, we are making monthly
payments to an escrow account to provide for an annual prepayment of principal.
As of December 31, 1998, we had restricted funds of $468,000, which
consisted of our monthly payments to an escrow account plus interest revenue on
the balance in the escrow account.
The principal amount of bonds to be redeemed each year are as follows (in
thousands): 1999--$600; 2000--$1,000; 2001 and 2002--$1,100; 2003 and
2004--$1,200; 2005--$100; 2006--$200; 2007--$100; 2008 through 2011--$200;
2012--$300; 2013--$200; 2014--$300; 2015--$200; 2016--$300; and 2017--$200.
To provide credit support for the bond issuance, we have given a first
mortgage on the land, building, improvements, and certain machinery and
equipment to our bank. In addition, we have agreed to maintain at least $20
million of cash and short-term investments. If we fail to comply with this
covenant, we are required to deposit with the lender cash collateral up to, but
not more than, the unpaid balance of the loan.
Capital Lease Obligation
In June 1995, we entered into a master equipment lease agreement with a
finance company. We borrowed $1.4 million under the agreement. In connection
with the lease, we granted the lessor warrants to purchase 10,527 shares of
common stock at $14.25 per share (see Note 8). As of December 31, 1998, we had
satisfied our obligations under the agreement.
Equipment Loans
In June 1993, we entered into a master equipment loan with a finance
company. During 1993 and 1994, we financed equipment and improvements of
approximately $1,011,000 under this agreement. In connection with the master
equipment loan, we granted the finance company a warrant to purchase 7,072
shares of common stock at $14.85 per share (see Note 8). As of December 31,
1998, we had satisfied our obligations under the master equipment loan.
In August 1994, we borrowed $100,000 from a municipal development agency to
finance some equipment. We are obligated to make monthly principal and interest
payments of approximately $2,000 through September 1999. Outstanding balances
under this loan bear interest at the annual rate of 5%.
Note 7. Accrued Expenses
Accrued expenses consisted of the following (in thousands):
December 31, 1997 1998
- ------------ -------- -------
Accrued outside research expenses $ 85 $ 183
Accrued compensation 341 330
Accrued clinical expenses 38 250
Accrued royalty expense -- 142
Accrued building improvements 725 37
Other accrued expenses 439 348
-------- -------
$ 1,628 $ 1,290
======== =======
F-13
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
Note 8. Stockholders' Equity
Common Stock
On January 29, 1997, we sold 1,250,000 shares of common stock in a public
offering at a price of $17.50 per share. Our net proceeds from this offering
after the payment of placement fees and offering expenses were approximately
$20,339,000.
Our initial public offering closed on February 22, 1996. We sold 2,587,500
shares, which included the exercise of the underwriters' over-allotment option
on March 4, 1996, of common stock at a price of $12.50 per share. Our net
proceeds from this offering after the underwriting discount and payment of
offering expenses were approximately $29,127,000. In connection with this
offering, all outstanding shares of Series A, C, D, E, and F Convertible
Preferred Stock converted into 2,410,702 shares of common stock. Some of these
common shares have registration rights.
From 1991 through 1995, we sold 7,196,884 shares of Series A, B, C, D, E,
and F Convertible Preferred Stock. On December 7, 1995, all outstanding shares
of Series B Convertible Preferred Stock converted into 472,249 shares of common
stock. As discussed above, in connection with the initial public offering, all
outstanding shares of Series A, C, D, E, and F converted into 2,410,702 shares
of common stock.
In 1991, we issued $1,225,000 in subordinated notes; in addition, the
holders of the subordinated notes received warrants to purchase 204,180 shares
of common stock at $3 per share. In 1992 and 1993, we redeemed the subordinated
notes, plus accrued interest of $183,750, with common stock or cash or a mixture
of the two, 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 1995, some holders of the subordinated notes exercised their
warrants to purchase a total of 99,751 shares of common stock for $3 per share;
other holders of the subordinated notes allowed their warrants to purchase 8,589
of common stock for $3 per share to expire. Also during 1995, we issued 7,810
shares of common stock at a fair market value of $5.70 per share as payment for
bonuses and other compensation. Finally during 1995, we issued 23,400 shares of
common stock to a stockholder in connection with the initial public offering;
the deemed value of these shares for accounting purposes was recorded as
offering costs.
In connection with the issuance of the Series E Convertible Preferred
Stock, we issued warrants to the placement agent to purchase shares of Series E
Convertible Preferred Stock. Upon the closing of our initial public offering,
these warrants converted into warrants to purchase 119,961 shares of common
stock for $9.45 per share. During 1996 and 1997, warrants to purchase 6,538 and
2,490 shares of common stock, respectively, were exercised to purchase 2,526 and
880 shares of common stock, respectively, via a cashless exercise provision
contained in the warrant (see below).
F-14
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
Stock Warrants
The following table summarizes outstanding warrants as of December 31,
1998. All warrants are currently exercisable and the exercise price is subject
to adjustment as set forth in the warrant agreement.
Outstanding Exercise Issuance Expiration
Warrants Price Date Date
- ----------- -------- ----------------- -----------------
7,072 $ 14.85 February 16, 1994 February 16, 1999
110,933 9.45 July 31, 1994 July 31, 1999
10,527 14.25 June 30, 1995 June 30, 2002
-------
128,532
=======
Shareholder Rights Plan
In September 1997, we adopted a Shareholder Rights Plan. Under this plan,
which was amended in December 1998, holders of common stock are entitled to
receive one right for each share of common stock held. Separate rights
certificates would be issued and become exercisable if any acquiring party
either accumulates or announces an offer to acquire at least 15% of our common
stock. Each right will entitle any holder who owns less than 15% of our common
stock to buy one one-hundredth share of the Series A Junior Participating
Preferred Stock at an exercise price of $150 per unit. Each one one-hundredth
share of the Series A Junior Participating Preferred Stock is essentially
equivalent to one share of our common stock. If an acquiring party accumulates
at least 15% of our common stock, each right entitles any holder who owns less
than 15% of our common stock to purchase for $150 either $300 worth of our
common stock or $300 worth of the 15% acquiror's common stock. The rights expire
in September 2007 and may be redeemed by us at a price of $.01 per right at any
time up to ten days after they become exercisable.
Note 9. Employee Benefit Plans
Stock Option Plans
We have three stock option plans, the 1991, 1992, and 1995 Stock Option
Plans, under which a total of 2,016,666 shares of common stock have been
reserved. The 1995 Stock Option Plan, which incorporates the two predecessor
plans, provides for the granting of both incentive stock options and
nonqualified stock options to our employees, officers, directors, and
consultants. In addition, the plan allows us to issue shares of common stock
directly either through the immediate purchase of shares or as a bonus tied to
either an individual's performance or our attainment of prescribed milestones.
Incentive stock options may not be granted at an exercise price less than the
fair market value on the date of grant. In addition, the plan includes stock
appreciation rights to be granted at our discretion. The stock options are
exercisable over a period, which may not exceed ten years from the date of
grant, determined by our board of directors.
We have elected to adopt the disclosure provisions only of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," or SFAS 123. Accordingly, we apply APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for our stock-based compensation plans. We record deferred
compensation for option grants to employees for the amount, if any, the market
price per share exceeds the exercise price per share. In addition, we record
deferred compensation for option grants to non-employees in the amount of the
fair value per share, as computed using the Black-Scholes option-pricing model.
We amortize deferred compensation amounts over the vesting periods of each
option. We recognized compensation expense of approximately $90,000, $231,000,
and $311,000 for the years ended December 31, 1996, 1997, and 1998,
respectively. Neose Technologies, Inc. and Subsidiary (a development-stage
company)
F-15
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model. We used the following
weighted-average assumptions for 1996, 1997, and 1998 grants, respectively:
risk-free interest rate of 6.0%, 5.8%, and 4.6%; an expected life of 5.0, 5.3,
and 5.1 years; volatility of 70%, 60%, and 60%; and a dividend yield of zero. If
we had elected to record compensation cost for our stock-based compensation
plans consistent with SFAS 123, our net loss and basic and diluted net loss per
share would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Net loss - as reported $ (6,141) $ (9,064) $ (11,907)
Net loss - pro forma $ (7,563) $ (11,524) $ (14,756)
Basic and diluted net loss per share - as reported $ (0.82) $ (0.96) $ (1.25)
Basic and diluted net loss per share - pro forma $ (1.01) $ (1.23) $ (1.54)
</TABLE>
The increase in our pro forma net loss and net loss per share disclosed for
1996 and 1997 is not representative of the increase in our pro forma net loss
and net loss per share in 1998 and future years. We normally grant options that
have a four-year vesting period. The 1996 and 1997 pro forma results include the
impact of only two and three years, respectively, of option vesting and related
amortization of deferred compensation. 1998 and subsequent years will include a
full four years of option vesting and related amortization of deferred
compensation.
A summary of the status of our stock option plans as of December 31, 1996,
1997, 1998 and changes during each of the years then ended, is presented below:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Price Number Exercise Price Number Exercise Price
Outstanding Per Share Outstanding Per Share Outstanding Per Share
----------- -------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1 910,661 $ 7.29 1,201,087 $ 10.03 1,564,176 $ 11.73
Granted 369,182 15.46 419,704 15.76 312,212 13.38
Exercised (63,009) 2.60 (41,618) 3.40 (50,320) 5.40
Canceled (15,747) 8.11 (14,997) 11.48 (40,579) 13.69
--------- -------- --------- -------- --------- --------
Balance at
December 31 1,201,087 $ 10.03 1,564,176 $ 11.73 1,785,489 $ 12.15
========= ======== ========= ======== ========= ========
Options exercisable
at December 31 419,297 $ 5.54 636,164 $ 7.84 930,954 $ 9.82
========= ======== ========= ======== ========= ========
</TABLE>
F-16
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
A summary of options granted at exercise prices equal to, greater than, and
less than the market price on the date of grant is presented below:
<TABLE>
<CAPTION>
Year Ended December 31, 1996 1997 1998
- ----------------------- ------- -------- --------
<S> <C> <C> <C>
Price = Market Value
Options granted 369,182 402,665 306,165
Weighted-average
exercise price $ 15.46 $ 15.75 $ 13.55
Weighted-average
fair value $ 9.53 $ 8.97 $ 7.48
Price > Market Value
Options granted -- 10,000 --
Weighted-average
exercise price $ -- $ 20.50 $ --
Weighted-average
fair value $ -- $ 8.86 $ --
Price < Market Value
Options granted -- 7,039 6,047
Weighted-average
exercise price $ -- $ 9.68 $ 4.92
Weighted-average
fair value $ -- $ 13.70 $ 11.40
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------- ---------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
- ----------------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.90 - $ 12.54 684,729 5.7 $ 7.08 598,865 $ 6.57
$ 12.68 - $ 15.13 810,930 8.8 14.14 238,091 14.54
$ 15.25 - $ 24.84 289,830 8.4 18.54 93,998 18.52
--------- -------
$ 0.90 - $ 24.84 1,785,489 7.6 $ 12.15 930,954 $ 9.82
========= =======
</TABLE>
The weighted-average fair value of employee purchase rights granted under
our employee stock purchase plan (see below) in 1996, 1997, and 1998 was $5.67,
$5.97, and $6.05, respectively. The fair value of the purchase rights was
estimated using the Black-Scholes model with the following weighted-average
assumptions for 1996, 1997, and 1998, respectively: risk-free interest rate of
5.7%, 5.7%, and 4.6%; an expected life of sixteen, seventeen, and seventeen
months; volatility of 70%, 60%, and 60%; and a dividend yield of zero.
Employee Stock Purchase Plan
We maintain an employee stock purchase plan, or ESPP, that allows any
eligible employee the opportunity to purchase shares of our common stock through
payroll deductions at the end of semiannual purchase periods. Any employee who
is expected to work at least 20 hours per week for at least five months per
calendar year is eligible to
F-17
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
participate. The ESPP, which became effective in February 1996, provides for
successive, two-year offering periods, each of which is contemplated to have
four semiannual purchase periods. Pursuant to the ESPP, 100,000 shares of common
stock were reserved for issuance. The purchase price is 85% of the lower of the
market price per share on the employee's entry date into the offering period or
the market price per share on the purchase date. Any employee who owns less than
5% of our common stock may purchase up to the lesser of:
o 10% of his or her eligible compensation;
o 1,000 shares per purchase; or
o the number of shares per year that does not exceed the quotient of
$25,000 divided by the market price per share on the employee's entry date into
the offering period.
A total of 94,369, 76,712, and 61,632 shares of common stock remained
available for issuance under the ESPP at December 31, 1996, 1997, and 1998,
respectively. The total purchases of common stock under the ESPP during the
years ended December 31, 1996, 1997, and 1998, were 5,631 shares at a total
purchase price of approximately $60,000, 17,657 shares at a total purchase price
of approximately $189,000, and 15,080 shares at a total purchase price of
approximately $171,000, respectively. We have not recorded any compensation
expense for the ESPP.
401(k) Plan
We have a 401(k) Savings Plan for employees. Employee contributions are
voluntary. Each employee may contribute up to the lesser of the maximum amount
allowable under federal income tax regulations or 15% of his or her
compensation. We match employee contributions up to specified limits. We
contributed approximately $61,000, $67,000, and $75,000 to the 401(k) Plan for
the years ended December 31, 1996, 1997, and 1998, respectively.
Note 10. Commitments
Agreements with the University of Pennsylvania
In 1990, we entered into an agreement under which the University of
Pennsylvania, or Penn, granted to us an exclusive license to use some of their
patent rights and technology. In consideration, we issued 147,063 shares of
common stock to Penn. The agreement will terminate upon the expiration of the
patent rights. Under the agreement, which was amended in 1995, we are required
to pay Penn royalties based on both sales of applicable products by us and
specified license fees, milestone fees, and royalties received by us from
sublicensees of the Penn agreement. During the year ended December 31, 1998, we
recorded Penn-related royalty expense of approximately $142,000 for our receipt
in prior years of an equity investment and certain license fees from Abbott. We
did not record any Penn-related royalty expense for the years ended December 31,
1996 or 1997. We are also required to reimburse Penn for all reasonable fees
related to the acquisition and maintenance of the patents licensed to us. We
recognized approximately $41,000, $181,000, and $94,000 of fees related to the
patents licensed to us for the years ended December 31, 1996, 1997, and 1998,
respectively.
Note 11. Income Taxes
As of December 31, 1998, we had net operating loss carryforwards for
federal and state income tax purposes of approximately $6,800,000 and
$2,100,000, respectively. In addition, we had federal research and development
credit carryforwards of approximately $1,200,000. These carryforwards begin to
expire in 2004. Due to the uncertainty surrounding the realization of the tax
benefit associated with these carryforwards, we have provided a full valuation
allowance against this tax benefit. In addition, pursuant to the Tax Reform Act
of 1986, the annual utilization of our net operating loss carryforwards will be
limited. We do not believe that these limitations will have a material adverse
impact on the utilization of our net operating loss carryforwards.
F-18
<PAGE>
Neose Technologies, Inc. and Subsidiary
(a development-stage company)
Notes to Consolidated Financial Statements
(continued)
The approximate income tax effect of each type of temporary difference and
carryforward is as follows (in thousands):
December 31, 1997 1998
- ------------ -------- --------
Benefit of net operating loss carryforwards $ 1,718 $ 2,535
Research & development credit carryforwards 915 1,169
Start-up costs 4,409 5,594
Capitalized research and development 6,410 8,360
Deferred compensation 173 299
Nondeductible depreciation and amortization 991 1,737
Accrued expenses not currently deductible -- 199
Other -- (223)
-------- --------
14,616 19,670
Valuation allowance (14,616) (19,670)
-------- --------
$ -- $ --
======== ========
Note 12. Related-Party Transaction
In 1997, we entered into an agreement with an employee of Paramount
Capital, Inc. for consulting services. The sole shareholder of Paramount Capital
is a member of our board of directors. Under the agreement, which may be
terminated by either party upon sixty days prior notice, we granted the
consultant options to purchase 15,000 shares of common stock at prices equal to
and in excess of the then market price. The weighted-average exercise price of
the options is $18 per share. The options vest in equal, annual amounts over
four years. In addition, we are obligated to pay the consultant an annual amount
of $50,000.
F-19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, we have duly caused this report to be signed on our behalf
by the undersigned, thereunto duly authorized.
NEOSE TECHNOLOGIES, INC.
Date: March 30, 1999 By: /s/ Stephen A. Roth
--------------------------
Stephen A. Roth
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Neose
and in the capacities and on the dates indicated.
Each person, in so signing also makes, constitutes, and appoints
Stephen A. Roth, Chief Executive Officer of Neose, and P. Sherrill Neff,
President and Chief Financial Officer of Neose, and each of them acting alone,
as his true and lawful attorneys-in-fact, with full power of substitution, in
his name, place, and stead, to execute and cause to be filed with the Securities
and Exchange Commission any or all amendments to this report.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/s/ Stephen A. Roth Chief Executive Officer and Chairman of March 30, 1999
- --------------------------------- the Board (Principal Executive Officer)
Stephen A. Roth
/s/ P. Sherrill Neff President and Chief Financial Officer and March 30, 1999
- --------------------------------- Director (Principal Financial and
P. Sherrill Neff Accounting Officer)
/s/ William F. Hamilton Director March 30, 1999
- ---------------------------------
William F. Hamilton
/s/ Douglas J. MacMaster, Jr. Director March 30, 1999
- ---------------------------------
Douglas J. MacMaster, Jr.
/s/ Lindsay A. Rosenwald Director March 30, 1999
- ---------------------------------
Lindsay A. Rosenwald
/s/ Lowell E. Sears Director March 30, 1999
- ---------------------------------
Lowell E. Sears
/s/ Jerry A. Weisbach Director March 30, 1999
- ---------------------------------
Jerry A. Weisbach
</TABLE>
38
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1 Second Amended and Restated Certificate of Incorporation. (Exhibit
3.1)(1)
3.2 Amended and Restated By-Laws. (Exhibit 3.3)(5)
3.4 Certificate of Designation establishing and designating the Series A
Junior Participating Preferred Stock. (Exhibit 3.2)(5)
4.2 See Exhibits 3.1, 3.2, and 3.3 for instruments defining rights of
holders of common stock.
4.2 Representation pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K.
(Exhibit 4.1)(3)
4.3 Trust Indenture, dated as of March 1, 1997, between Montgomery County
Industrial Development Authority and Dauphin Deposit Bank and Trust
Company. (Exhibit 4.2)(3)
4.4 Form of Montgomery County Industrial Development Authority Federally
Taxable Variable Rate Demand Revenue Bond (Neose Technologies, Inc.
Project) Series B of 1997. (Exhibit 4.3)(3)
4.6 Amended and Restated Rights Agreement, dated as of December 3, 1998,
between American Stock Transfer & Trust Company, as Rights Agent, and
Neose. (Exhibit 4.1)(6)
10.1 Stock Purchase Agreement, dated as of August 28, 1990, between
University of Pennsylvania and Neose. (Exhibit 10.1)(1)
10.2 License Agreement, dated as of August 28, 1990, between University of
Pennsylvania and Neose, as amended to date. (Exhibit 10.2)(1)
10.3(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30,
1992, between Abbott Laboratories and Neose. (Exhibit 10.8(a))(1)
10.3(b)+ Supply Agreement, dated as of December 30, 1992, between Abbott
Laboratories and Neose. (Exhibit 10.8(b))(1)
10.3(c)+ Research and License Agreement, dated as of December 30, 1992, between
Abbott Laboratories and Neose. (Exhibit 10.8(c))(1)
10.3(d)+ Amendment to the Research and License Agreement, dated as of January
18, 1995, between Abbott Laboratories and Neose. (Exhibit 10.8(d))(2)
10.4 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit
10.9)(1)
39
<PAGE>
10.5 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit
10.10)(1)
10.6 Form of Warrant to Purchase Common Stock, dated as of February 23,
1991. (Exhibit 10.11)(1)
10.7 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993.
(Exhibit 10.12)(1)
10.8 Form of Warrant to Purchase Common Stock, dated as of February 16,
1994. (Exhibit 10.13)(1)
10.9 Form of Warrant to Purchase Series E Preferred Stock, dated as of July
29, 1994. (Exhibit 10.14)(1)
10.10 Warrant for the Purchase of Common Stock, dated as of June 30, 1995,
between Financing for Science International, Inc. and Neose. (Exhibit
10.15)(1)
10.11++ 1995 Stock Option/Stock Issuance Plan, as amended. (Exhibit 99.1)(4)
10.12++ Employee Stock Purchase Plan. (Exhibit 10.17)(1)
10.13++ Employment Agreement dated April 1, 1992, between David A. Zopf and
Neose, as amended to date. (Exhibit 10.18)(1)
10.14 Design-Build Agreement dated August 30, 1996, between Irwin & Leighton,
Inc. and Neose. (Exhibit 10.19)(2)
10.15 Agreement for Purchase and Sale of Real Property, dated March 14, 1997,
by and between Pennsylvania Business Campus Delaware, Inc. and Neose.
(Exhibit 2.1)(3)
10.16 Loan Agreement, dated as of March 1, 1997, between Montgomery County
Industrial Development Authority and Neose. (Exhibit 10.1)(3)
10.17 Participation and Reimbursement Agreement, dated as of March 1, 1997,
between Jefferson Bank and CoreStates Bank, N.A. (Exhibit 10.2)(3)
10.18 Form of CoreStates Bank, N.A. Irrevocable Letter of Credit. (Exhibit
10.3)(3)
10.19 Pledge, Security and Indemnification Agreement, dated as of March 1,
1997, by and among CoreStates Bank, N.A., Jefferson Bank, and Neose.
(Exhibit 10.4)(3)
10.20 Reimbursement Agreement, dated as of March 1, 1997, between Jefferson
Bank and Neose. (Exhibit 10.5)(3)
10.21 Specimen of Note from Company to Jefferson Bank. (Exhibit 10.6)(3)
40
<PAGE>
10.22 Mortgage, Assignment and Security Agreement, dated March 20, 1997,
between Jefferson Bank and Neose. (Exhibit 10.7)(3)
10.23 Security Agreement, dated as of March 1, 1997, by and between Jefferson
Bank and Neose. (Exhibit 10.8)(3)
10.24 Assignment of Contract, dated as of March 20, 1997, between Jefferson
Bank and Neose. (Exhibit 10.9)(3)
10.25 Custodial and Collateral Security Agreement, dated as of March 20,
1997, by and among Offitbank, Jefferson Bank, and Neose. (Exhibit
10.10)(3)
10.26 Placement Agreement, dated March 20, 1997, among Montgomery County
Industrial Development Authority, CoreStates Capital Markets, and
Neose. (Exhibit 10.11)(3)
10.28 Remarketing Agreement, dated as of March 1, 1997, between CoreStates
Capital Markets and Neose. (Exhibit 10.12)(3)
11* Statement re: Computation of Net Loss Per Common Share.
23.1* Consent of Arthur Andersen LLP.
24* Powers of Attorney (included as part of signature page hereof).
27.1* Financial Data Schedule.
- ------------------
* Filed herewith
+ Portions of this Exhibit were omitted and filed separately with the
Secretary of the SEC pursuant to an order of the SEC granting our
application for confidential treatment filed pursuant to Rule 406 under
the Securities Act.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to our Registration Statement on Form S-1
(Registration No. 33-80693) filed with the SEC on December 21, 1995, as
amended.
(2) Filed as an Exhibit to our Registration Statement on Form S-1
(Registration No. 333- 19629) filed with the SEC on January 13, 1997.
(3) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997.
(4) Filed as an Exhibit to our Registration Statement on Form S-8
(Registration No. 333-35283) filed with the SEC on September 10, 1997.
41
<PAGE>
(5) Filed as an Exhibit to our Current Report on Form 8-K filed with the
SEC on October 1, 1997.
(6) Filed as an Exhibit to our Current Report on Form 8-K filed with the
SEC on January 8, 1999.
42
EXHIBIT 11
Computation of Pro Forma Net Loss Per Common Share
(In thousands, except per share data)
Year Ended December 31,
-----------------------------------------
1996 1997 1998
-----------------------------------------
Net loss ...................... $(6,141) $(9,064) $(11,907)
=========================================
Basic and diluted
weighted-average
shares outstanding ............ 7,494 9,405 9,556
=========================================
Basic and diluted net loss per
share ......................... $ (0.82) $ (0.96) $ (1.25)
=========================================
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Neose Technologies, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statement File Nos. 333-01410 and 333-35283.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,484
<SECURITIES> 22,539
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 32,726
<PP&E> 17,817
<DEPRECIATION> 4,278
<TOTAL-ASSETS> 46,265
<CURRENT-LIABILITIES> 1,952
<BONDS> 8,300
0
0
<COMMON> 96
<OTHER-SE> 35,917
<TOTAL-LIABILITY-AND-EQUITY> 46,265
<SALES> 0
<TOTAL-REVENUES> 390
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 13,547
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 534
<INCOME-PRETAX> (11,907)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,907)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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</TABLE>
