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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A2
(Second Amendment)
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-24320
NaPRO BIOTHERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1187753
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6304 SPINE ROAD, UNIT A 80301
BOULDER, COLORADO (Zip Code)
(Address of principal executive offices)
(303) 530-3891
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0075 par value
Warrants to Purchase Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of the Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __________
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405): $51,772,736 as of March 25, 1996.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of March 31,
1996.
TITLE OF CLASS NUMBER OF SHARES
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Common Stock 8,385,144
Nonvoting Common Stock 400,000
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PART I
ITEM 1. BUSINESS
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GENERAL
NaPro BioTherapeutics, Inc. (the "Company") is engaged in the development
and manufacture of paclitaxel (referred to in some scientific and medical
literature as "taxol")/1/, (the Company's formulation of paclitaxel is referred
to herein as "NBT Paclitaxel"), a naturally-occurring cytotoxic agent found in
certain species of yew (Taxus) trees. Bristol-Myers Squibb Company ("BMS") has
publicly announced sales of their paclitaxel, of approximately $580 Million in
1995 and $200 million in the first quarter of 1996. The Company's objective is
to develop its proprietary extraction, isolation and purification ("EIP/TM/")
technology in conjunction with securing proprietary sources of renewable Taxus
biomass to become an established manufacturer of NBT Paclitaxel on a worldwide
basis while assigning responsibility for the performance of clinical trials and
regulatory procedures and sales, marketing and distribution of NBT Paclitaxel to
large international pharmaceutical companies. To implement this strategy, the
Company has formed strategic alliances through long-term exclusive agreements
with each of F.H. Faulding & Co., Ltd., Australia's largest domestic
pharmaceutical company with 1995 sales of approximately $1.3 billion
("Faulding"), and Baker Norton Pharmaceuticals, a subsidiary of IVAX
Corporation, a diversified international healthcare company with 1995 sales of
approximately $1.4 billion ("IVAX" and together with Faulding, the "Strategic
Partners").
The Strategic Partners have agreed to fund and, with the Company's input,
oversee the clinical trials required to obtain regulatory approvals for the
commercialization of NBT Paclitaxel in their respective territories. The
Company is responsible for supplying the Strategic Partners with NBT Paclitaxel
for all of their clinical and commercialization purposes. Under the terms of
each respective agreement, IVAX and Faulding pay a fixed price for NBT
Paclitaxel for non-commercial sales and approximately 30%-40% of revenues for
NBT Paclitaxel sold commercially.
Faulding obtained regulatory approval and began marketing NBT Paclitaxel as a
generic pharmaceutical in Australia in January 1995 for the treatment of
refractory (non-responsive) breast and ovarian cancers. Faulding estimates that
during 1995 it captured in excess of one half of the Australian paclitaxel
market. IVAX filed an investigational new drug exemption ("IND") application
for NBT Paclitaxel with the United States Food and Drug Administration ("FDA")
in June 1994. IVAX is currently engaged in Phase II/III clinical trials with
NBT Paclitaxel for treating refractory breast and ovarian cancers and believes
it may be able to submit a new drug application ("NDA") to the FDA for at least
one indication in 1997.
The Company's EIP/TM/ technology was designed to allow the extraction,
isolation and purification of paclitaxel and other taxanes (compounds
structurally similar to paclitaxel that can be synthesized into paclitaxel) from
renewable sources of biomass such as needles and limbstock harvested from
ornamental yew trees and bushes. In order to ensure a stable and reliable
source of Taxus biomass for use in the production of NBT Paclitaxel, the Company
has entered into an agreement (the "PBI Agreement") with Pacific
Biotechnologies, Inc. ("PBI"), a subsidiary of Pacific Regeneration
Technologies, Inc., one of Canada's largest reforestation companies to grow
cloned ornamental yew trees and bushes on a large scale. The Company intends to
supplement its supply of biomass obtained from PBI by entering into an
additional agreement with a commercial grower of ornamental yew trees in the
second quarter of 1996. The Company is currently constructing a large-scale
commercial EIP/TM/ manufacturing facility with planned capacity to meet the
commercial needs of the Strategic Partners through 1999. The Company expects to
complete and validate this facility in 1997. In addition, in order to increase
production yields of NBT Paclitaxel, the Company is developing, and has applied
for patent protection for, a semi-synthesis process for manufacturing NBT
Paclitaxel from certain other taxanes contained in renewable biomass sources.
The use of this semi-synthesis process, which the Company expects to scale-up by
1999, will require a supplemental NDA ("SNDA").
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/1/ TAXOL(R) is a registered trademark of Bristol-Myers Squibb Company for an
anti-cancer pharmaceutical preparation containing paclitaxel.
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PACLITAXEL OVERVIEW
Cancer is the second leading cause of death in the United States with over one
million new cases diagnosed each year. Cancer is generally treated by surgery,
radiation and chemotherapy or a combination of these therapies. Paclitaxel,
approved less than four years ago, has become the largest selling of a class of
cancer chemotherapy drugs known as cytotoxic agents.
Paclitaxel is a natural product that was recognized by the National Cancer
Institute (the "NCI") in 1963 as showing cytotoxic activity against leukemia
cells and inhibitory activity against a variety of tumors. Over the next two
decades, researchers working under grants from the NCI conducted studies to
determine paclitaxel's structure and its mechanism of action. The NCI studies
indicated that paclitaxel inhibits the normal action of microtubules in cancer
cell division. Microtubules, located in the cytoplasm of cells, play a vital
role in cellular division. Paclitaxel promotes microtubule assembly and blocks
normal microtubule disassembly in cells, thereby inhibiting cell division and
inducing death of cancer cells. This cytoplasmic mechanism of action contrasts
with the nuclear mechanism of action of the majority of cytotoxic drugs which
kill the cell by attacking nuclear components such as DNA or RNA.
In June 1991, the NCI formalized a Collaborative Research and Development
Agreement for development of paclitaxel with BMS, the world's largest oncology
company. BMS assumed development of paclitaxel which included completion of the
necessary clinical trials and manufacturing scale-up. In June 1992, BMS
submitted an NDA to the FDA. BMS received approval for the sale of paclitaxel
as a treatment for refractory (non-responsive) ovarian cancer in December 1992
and approval for the sale of paclitaxel as a treatment for refractory breast
cancer in April 1994. BMS has publicly announced commercial sales of paclitaxel
of approximately $580 million in 1995 and $200 million in the first quarter of
1996.
Paclitaxel is one of a family of compounds, commonly referred to as taxanes,
which share a hydrocarbon ring (diterpene) structure. Taxanes are found
naturally in many parts of various species of yew trees and bushes. The
concentration of taxanes in yew trees and bushes is very small -- generally less
than 500 parts per million each -- and accordingly, the process of extracting
taxanes from yew biomass is very complicated and challenging. To arrive at a
final stage paclitaxel product for use in clinical trials and for
commercialization, several production approaches can be utilized. The Company
believes the two most prevalent processes used today are extraction and semi-
synthesis.
In extraction, the manufacturing process must be designed to extract, isolate
and purify paclitaxel from yew biomass leaving behind the other components
including taxanes. The extraction, isolation and purification processes,
however, are very complicated since there are over 100 different taxanes present
in yew biomass. In a semi-synthesis process, the initial extraction, isolation
and purification is similar except that the processes not only isolate
paclitaxel, but also isolate and subsequently convert through a chemical
synthesis certain other taxanes (which are considered waste byproducts in
extraction) into paclitaxel, thereby increasing the supply and yield of
paclitaxel. The final product of either method must have levels of impurity at
or below regulatory standards.
Historically, the wild Pacific yew tree has been the primary source of yew
biomass. Most species of Taxus, including the wild Pacific yew, grow slowly,
requiring a number of years to reach harvestable size. The slow growing pattern
generally contributes to a prevalence of Taxus in the wild which are located in
old growth forests, frequently the habitat of endangered species including the
spotted owl. Biomass from the wild Pacific yew tree has historically been
obtained from its bark, which generally requires destroying the tree. As a
result, there has been a considerable amount of public debate in the United
States and other countries by environmental groups and others regarding the
harvesting of bark from the wild Pacific yew tree. The Company halted
harvesting bark from wild Pacific yew trees in 1994. See "--Corporate Strategy"
and "--Biomass; Manufacturing."
Others have developed taxane analogues which are similar, but not identical
chemically, to paclitaxel. For example, Rhone-Poulenc Rorer ("RPR"), a large
international pharmaceutical company, has developed docetaxel, one such taxane
analogue, which is being marketed in various parts of the world outside the
United States under the trademark Taxotere(R). Taxotere(R) has a different
toxicity profile from paclitaxel and has side effects not seen in paclitaxel. In
May 1996, the FDA approved Taxotere(R) for treatment of anthracycline-resistant
breast cancer in patients without impaired liver function.
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CORPORATE STRATEGY
The Company's objective is to be the world's most efficient manufacturer of
high quality paclitaxel. The Company's strategy for achieving its objective
includes the following:
Develop and Commercialize Paclitaxel Through Strategic Alliances. In order to
promote the more rapid development and commercialization of NBT Paclitaxel, the
Company has entered into long-term exclusive agreements with Faulding and IVAX.
Pursuant to these agreements, Faulding and IVAX are responsible for obtaining
regulatory approval, including designing and conducting clinical trials, as well
as marketing NBT Paclitaxel in their respective territories. The Company is
responsible for the manufacture of NBT Paclitaxel using its EIP/TM/ technology.
Faulding, Australia's largest domestic pharmaceutical company with 1995 sales of
approximately $1.3 billion, actively markets anti-cancer pharmaceuticals and
other health care products in Australia, Southeast Asia and other countries
throughout the world. In 1995, Faulding estimates that it captured more than
half of the Australian paclitaxel market with ANZATAX/TM/ (Faulding's brand name
for NBT Paclitaxel). IVAX, a diversified international health care company with
1995 sales of approximately $1.4 billion, is engaged in the research,
development, manufacture and sale of branded and generic pharmaceuticals and
other related health care and personal products and specialty chemicals. See"--
Strategic Alliances."
Expand and Secure Renewable Biomass Supply Sources. In order to avoid the
environmental issues surrounding the harvesting of wild Pacific yew biomass and
to expand and secure a renewable biomass supply source, the Company implemented
a plantation strategy by entering into the PBI Agreement to grow cloned
ornamental yew trees and bushes. The Company expects to supplement its biomass
obtained from PBI by entering into an additional agreement with a commercial
grower of ornamental yew trees in the second quarter of 1996. Using its EIP/TM/
technology, the Company plans to extract paclitaxel and other taxanes from
renewable biomass components such as needles and limbstock of trees and bushes
grown on the plantations utilizing its proprietary technologies. See "--Biomass;
Manufacturing."
Scale-Up Manufacturing Process. In order to meet the supply needs of the
Strategic Partners through 1999, the Company has commenced construction of a
large-scale commercial EIP/TM/ manufacturing facility in the United States which
the Company expects to complete and validate by 1997. The Company expects to
augment its current manufacturing process with semi-synthesis production by 1999
either through the addition of semi-synthesis manufacturing capacity to its
current EIP/TM/ facility under construction or the construction of a new semi-
synthesis facility. See "--Biomass; Manufacturing."
CLINICAL STATUS OF NBT PACLITAXEL
Pursuant to the agreements with the Strategic Partners, the Strategic Partners
have primary responsibility for conducting clinical trials for regulatory
approval of NBT Paclitaxel throughout the world, and the Company has primary
responsibility for carrying out the procedures for regulatory approval relating
to the Company's manufacturing processes. The Company has filed confidential
Drug Master Files ("DMF") containing certain of the Company's proprietary
manufacturing processes relating to the Company's manufacture of NBT Paclitaxel
with regulatory agencies in the United States, Australia, Canada, Europe and
Singapore. In addition, the Company performed the toxicological and preclinical
characterization necessary for an IND for extracted paclitaxel.
Existing regulatory approvals and statutes have a direct impact on the
clinical and marketing strategy being pursued by the Company and its Strategic
Partners. In December 1992, BMS obtained NDA approval in the United States for
paclitaxel. Under the 1984 Waxman-Hatch Amendment (the "Waxman-Hatch Act") to
the Food and Drug Cosmetic Act (the "FDA Act"), a non-patented drug such as
paclitaxel which first gains approval through an NDA process is granted a five
year period of marketing exclusivity which prevents submission by another party
of an Abbreviated New Drug Application ("ANDA") for generic substitutes. The
FDA will accept and review, however, an NDA submitted by a party during this
period of exclusivity if incremental data is generated from the clinical trials
supporting such NDA. A comparable statute to the Waxman-Hatch Act exists in
Europe, although the related period of exclusivity is ten years. For these
reasons, IVAX plans to file NDA(s) for NBT Paclitaxel. See "--Government
Regulation and Product Approvals."
IVAX. IVAX is currently pursuing a strategy to obtain United States NDA
approval of NBT Paclitaxel for the treatment of refractory breast and ovarian
cancers. IVAX filed an IND with the FDA in June 1994. In October 1994, IVAX
initiated its Phase I clinical trials of NBT Paclitaxel in the United States and
in May 1995 initiated Phase II/III clinical trials. IVAX is currently
conducting Phase II/III studies using NBT Paclitaxel in three indications,
including
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refractory breast and ovarian cancers. The breast cancer trial is evaluating
both a short-term and a long-term dosing schedule. IVAX expects to finish
patient accrual for the breast cancer trial by year-end 1996. Patient accrual
for the ovarian cancer trial has been completed. The clinical trial for the
third undisclosed indication is ongoing. IVAX has publicly disclosed that it
may be able to submit an NDA for NBT Paclitaxel for at least one indication
during 1997. There can be no assurance, however, as to the completion of any
clinical trials or as to whether IVAX will meet anticipated timetables or be
successful in obtaining any necessary regulatory approvals or successfully
market NBT Paclitaxel even if approval has been obtained.
Faulding. In January 1995, Faulding received regulatory approval from
Australian Therapeutic Goods Administration (the "TGA") to market ANZATAX/TM/ in
Australia for the treatment of refractory breast and ovarian cancers. Under
Australian law there is no exclusivity period, as is available in the United
States or Europe, and therefore approval of a generic substitute was possible.
Faulding has also conducted clinical investigations with ANZATAX/TM/ in order to
support marketing in Australia and to support applications for regulatory
approval in other countries. The Company and Faulding have obtained regulatory
approval from the TGA for the Company to supply NBT Paclitaxel to Faulding from
either Canadian or United States manufacturing facility. Faulding is also
engaged in ongoing clinical research with NBT Paclitaxel with the goal of
improving the effectiveness of combination therapies utilizing NBT Paclitaxel
and expanding the number of disease indications treatable with NBT Paclitaxel.
Faulting has filed certificates of free sale and requested marketing approval in
various territories including Hong Kong, Cyprus, Egypt, Oman, Turkey, Kuwait,
Saudi Arabia, Malaysia, Thailand, Indonesia and the Philippines.
The Company plans to submit an SNDA for NBT Paclitaxel manufactured through a
semi-synthesis process. Based on the SNDA approval process for BMS, the Company
believes additional toxicological and stability data may be required prior to
submission of an SNDA for manufacturing NBT Paclitaxel through a semi-synthesis
process. Toxicology data may also be required to support production using
different species of Taxus plants other than those in the original NDA filing.
It is not anticipated that an SNDA could be filed before 1998, since an approved
NDA will need to exist before an SNDA can be submitted. The requirements for an
SNDA have not been discussed with the FDA. See "--Government Regulation and
Product Approvals."
BIOMASS; MANUFACTURING
Biomass. Paclitaxel and other taxanes necessary for the production of NBT
Paclitaxel are present in many parts of various species of yew trees and bushes.
Historically, the Company used the bark of the wild Pacific yew tree as a source
of biomass from which to manufacture NBT Paclitaxel. The Company's EIP/TM/
technology was designed to allow extraction and purification of paclitaxel and
other taxanes which can be synthesized into paclitaxel from renewable sources of
biomass such as needles and limbstock harvested from ornamental yew trees and
bushes. The Company ceased harvesting bark from the wild Pacific yew tree in
1994.
In order to ensure a stable supply of biomass used in the production of NBT
Paclitaxel, the Company entered into the PBI Agreement in 1993 and intends
to supplement its supply of biomass obtained from PBI by entering into an
additional agreement with a commercial grower of ornamental yew trees in the
second quarter of 1996. The Company believes that these plantations will
produce adequate biomass to support the commercial requirements of the Strategic
Partners. By planting and propagating a reliable and renewable homogeneous
biomass source, the Company believes that it may reduce its raw material costs,
currently the Company's largest cost component in producing NBT Paclitaxel,
while at the same time allowing it to increase the yield of NBT Paclitaxel. The
Company made its first small-scale harvest pursuant to the PBI Agreement in the
first quarter of 1996. The Company is also examining, however, other potential
sources of biomass to ensure adequate, continuous and uninterrupted supply of
biomass and to augment the biomass supplied from the plantations in the event
demand exceeds current expectations.
Manufacturing. The Company's current method of manufacturing NBT Paclitaxel
utilizes its EIP/TM/ technology to isolate and purify paclitaxel from partially
purified paclitaxel in the Company's small-scale manufacturing facilities in
Boulder, Colorado and British Colombia Canada. Biomass is harvested from yew
trees and bushes and delivered to a Canadian company which, pursuant to a
contract with the Company, utilizes the Company's proprietary technology to
extract paclitaxel. The Canadian company delivers partially purified paclitaxel
to the Company's small-scale manufacturing facilities in Boulder, Colorado and
British Columbia, Canada. At these two facilities, the impure paclitaxel goes
through an isolation and purification process and the resulting active drug
substance is delivered to Faulding's final fill and finish facility in Australia
where NBT Paclitaxel is formulated by Faulding for final packaging for both
itself and IVAX. Each small-scale manufacturing facility has been inspected by
the TGA and approved for the commercial production of NBT Paclitaxel for sale in
Australia. TGA approval applies to the extraction, isolation and
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purification of naturally-occurring paclitaxel from both the bark of the wild
Pacific yew tree as well as from other raw material sources. On a combined
basis, these facilities have adequate capacity to meet clinical and commercial
demand through the launch of commercial sales of NBT Paclitaxel in the United
States. The Company plans to seek initial FDA approval of its manufacturing
processes which utilize both bark sources of biomass as well as non-bark sources
of biomass obtained from the needles and limbstock of ornamental yew trees and
bushes in the production of NBT Paclitaxel. There can be no assurance that such
regulatory approval will be obtained.
The Company is currently refining and scaling-up its EIP/TM/ technology for
use in a large-scale commercial manufacturing facility which is being built in
Boulder. The Company plans to complete construction and validation of this
facility in 1997. The Company believes that this facility will have adequate
capacity to meet the demands of the Strategic Partners through the startup of a
semi-synthesis manufacturing facility currently scheduled for completion in
1999. Upon completion of validation, but prior to approval of the NDA for NBT
Paclitaxel, the Company anticipates the facility and process intended to be used
for commercial launch of the production will be inspected by the FDA. Approval
of the facility will be a component of the FDA's approval of the NDA. There can
be no assurance that FDA approval will be received or that a commercially viable
operating facility will be completed or that scale-up of the facility, once
completed, will receive governmental approval.
The Company is also developing, and has applied for patent protection for, a
semi-synthesis process for manufacturing NBT Paclitaxel from certain other
taxanes contained in renewable biomass sources. Semi-synthesis manufacturing,
initially involves extraction of paclitaxel and other taxanes from yew sources
such as renewable needles and limbstock. Unlike extraction, however, which
attempts to isolate and purify only paclitaxel, semi-synthesis isolates and
purifies additional taxanes. Through a chemical synthesis process, these other
taxanes are converted into paclitaxel. Accordingly, since both paclitaxel and
other taxanes are used in semi-synthesis, the Company expects to be able to
increase the paclitaxel yield from its biomass source.
Faulding's final fill and finish facility has been inspected by the FDA for
other products and operates in compliance with United States cGMP standards.
The Company believes that Faulding's facility will have the capacity to meet the
anticipated needs of the Strategic Partners for the foreseeable future. There
is no assurance, however, that a commercially viable operating facility will be
completed or that scale-up of the facility, once completed, will receive
governmental approval.
In addition, the Company's has a contract with the Canadian company for small-
scale extraction. In order for the Company to meet the expected increase in
demand for NBT Paclitaxel once commercialized, the Company must either contract
out its extraction requirements or build large scale extraction facility. There
can be no assurance that a third party contract for such extraction can be
obtained on commercially reasonable terms or that an extraction facility can be
constructed in a timely fashion and receive the necessary regulatory approvals.
The failure of the Company to secure a large scale extraction contract or to
construct a regulatory-approved extraction facility on a timely basis would
have a material adverse effect on the Company.
STRATEGIC ALLIANCES
The Company's primary strategy is to develop its proprietary EIP/TM/
technology and control the manufacturing process of NBT Paclitaxel and
regulatory procedures associated therewith while assigning responsibility for
the performance of clinical trials and regulatory procedures and the sale,
marketing and distribution of NBT Paclitaxel to large international
pharmaceutical companies. To implement this strategy, the Company has formed
strategic alliances through long-term exclusive agreements with each of Faulding
and IVAX. Pursuant to such arrangements, each Strategic Partner has agreed to
fund and, with the Company's input, oversee the clinical trials required to
obtain regulatory approvals for commercializing NBT Paclitaxel in their
respective territories. The Company is responsible for supplying the Strategic
Partners with NBT Paclitaxel for clinical trials and each Strategic Partner is
required to purchase all of its paclitaxel requirements from the Company. Under
the terms of each respective agreement, IVAX and Faulding each pay a fixed price
for NBT Paclitaxel for non-commercial sales and approximately 30-40% of revenues
for NBT Paclitaxel sold commercially. The Company believes that through its
agreements with Faulding and IVAX, it will be able to take advantage of their
expertise in clinical testing and sales, marketing and distribution. As a
result, the Company believes it may be able to compete more effectively with
BMS, RPR, generic drug manufacturers and other companies, research organizations
and academic institutions that are developing paclitaxel and are attempting to
develop new and advanced forms of anti-cancer drugs.
Faulding. Faulding, Australia's largest domestic pharmaceutical company with
1995 sales of approximately $1.3
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billion, actively markets anti-cancer pharmaceuticals and other health care
products in Southeast Asia and other countries throughout the world. In 1995,
Faulding estimates that it captured more than half of the Australian paclitaxel
market with ANZATAX/TM/. In 1992 the Company originally entered into a
development and marketing agreement (the "Faulding Agreement") with Faulding.
The Faulding Agreement, as restated and amended, has an initial term of 20 years
and will continue thereafter from year to year unless terminated in writing by
either party.
The Faulding Agreement grants Faulding the exclusive right to develop and
market NBT Paclitaxel in ten countries, including Australia, New Zealand and
much of Southeast Asia. The Faulding Agreement also grants Faulding the non-
exclusive right to sell NBT Paclitaxel in certain countries in the Middle East.
Pursuant to the Faulding Agreement, Faulding is required to purchase all of its
requirements of paclitaxel from the Company, except in certain circumstances
where the Company is unable to supply Faulding's requirements.
In the March 1995 amendment to the Faulding Agreement, Faulding agreed to
convert certain prepaid product sales and deferred revenue in an amount of $1.1
million which would have become due in 1995 and 1996 into a note in aggregate
principal amount of $1.2 million, maturing in 1997. The terms of the note
provide that the Company will pay interest quarterly on amounts which would have
been payable to Faulding had the conversion not occurred, at an annual rate of
9%.
Faulding may terminate the Faulding Agreement: (i) upon the reorganization or
insolvency of the Company; (ii) if Faulding becomes controlled by a
pharmaceutical company that sells paclitaxel in the Faulding territory; (iii) if
the Company becomes controlled by IVAX or BMS; (iv) if the Company is purchased
by a pharmaceutical company which sells paclitaxel in the Faulding territory and
that company refuses to be bound by the terms of the Faulding Agreement; or (v)
the Company is unable to meet the paclitaxel supply requirements of Faulding.
The Company may terminate the Faulding Agreement: (i) upon the reorganization
or insolvency of Faulding; or (ii) in certain circumstances, upon a change in
control of Faulding.
The Company is required to indemnify Faulding pursuant to the Faulding
Agreement for any defect in the NBT Paclitaxel that is shipped to Faulding and
for uncured breaches of the Company's representations and warranties under the
Faulding Agreement. Faulding is required to indemnify the Company against all
losses resulting from a defect in a product manufactured by Faulding which
contains NBT Paclitaxel and in a product formulated, stored, handled, promoted,
distributed, registered or sold by Faulding which contains NBT Paclitaxel.
In connection with the Company's IPO in August 1994, Faulding purchased
400,000 shares of the Company's nonvoting common stock (the "Nonvoting Common
Stock") and 400,000 warrants to purchase Nonvoting Common Stock. See
"Description of Capital Stock--Nonvoting Common Stock."
IVAX. IVAX, a diversified international health care company with 1995 sales
of approximately $1.4 billion, is engaged in the research, development,
manufacture and sale of branded and generic pharmaceuticals and other related
health care and personal products and specialty chemicals. In 1993 the Company
entered into a development and marketing agreement (the "IVAX Agreement") with
IVAX (through IVAX's subsidiary, Baker Norton Pharmaceuticals, "BNP"). The IVAX
Agreement has an initial term of 20 years and will continue thereafter from year
to year unless terminated in writing by either party. Pursuant to the IVAX
Agreement, IVAX is required to purchase all of its requirements of paclitaxel
from the Company except in certain circumstances where the Company is unable to
supply IVAX's requirements.
Either IVAX or the Company may terminate the IVAX Agreement if the other party
materially breaches the agreement under certain circumstances. In addition,
IVAX may terminate the IVAX Agreement if the Company fails to meet the
paclitaxel supply requirements of IVAX for a continuing three year period.
The Company is required to indemnify IVAX pursuant to the IVAX Agreement for
any defect in the NBT Paclitaxel that is shipped to IVAX and for uncured
breaches of the Company's representations and warranties under the IVAX
Agreement. IVAX is required to indemnify the Company against all losses
resulting from a defect in a product manufactured by IVAX which contains NBT
Paclitaxel and is a product formulated, stored, handled, promoted, distributed,
registered or sold by IVAX which contains NBT Paclitaxel.
IVAX, through its subsidiary D&N Holding Company ("D&N"), currently owns
1,126,398 shares of the Common Stock. See "Principal Stockholders."
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MARKETING AND SALES
All marketing and sales of NBT Paclitaxel will be conducted by the Strategic
Partners. Each of the Strategic Partners have established sales forces with
demonstrated sales capability to effectively market pharmaceutical products. The
Company has no sales force and has only limited marketing capabilities and has
no present intention to establish a sales or marketing force. The Company
expects that sales to the Strategic Partners will account for substantially all
of the Company's revenues for the foreseeable future. As a result, the loss of
either Strategic Partner as a customer, in the absence of a comparable
alternative strategic alliance arrangement, would have a material adverse effect
on the Company. See "--Strategic Alliances."
COMPETITION
The biopharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition for financing, executive talent,
intellectual property and product sales. The Company competes with all entities
developing and producing therapeutic agents for cancer treatment. The success
of competitors in entering the market for paclitaxel may reduce the Company's
potential market share and reduce the price of NBT Paclitaxel, each of which
could have a material adverse effect on the Company. In addition, regulatory
approval and marketing are being handled exclusively by the Strategic Partners.
Although the Company believes the Strategic Partners have capable clinical and
marketing abilities, there can be no assurance that the Strategic Partners will
be capable or effective in gaining regulatory approval on a timely basis, if at
all, and competing on a global basis with existing or new competitors.
BMS, the worlds largest oncology company with 1995 sales of paclitaxel of
approximately $560 million, is already marketing paclitaxel commercially in the
United States, Australia, Canada, Europe and certain other territories. In
addition RPR has developed a proprietary analog of paclitaxel, docetaxel,
which is marketed under the trademark Taxotere(R). Taxotere(R) has a microtubule
binding mechanism of action similar to that of paclitaxel. Taxotere(R) is
approved in the European Community, Australia, Canada and a number of other
countries. In May 1996, the FDA approved Taxotere(R) for treatment of
anthracycline-resistant breast cancer in patients without impaired liver
function. Treatment with Taxotere(R), however, leads to certain side effects not
found with paclitaxel. It is anticipated, however, that Taxotere(R) will compete
with NBT Paclitaxel, potentially eroding NBT Paclitaxel sales.
Furthermore, upon expiration in December 1997 of the five-year marketing
protection from generic competition currently provided to BMS paclitaxel by the
Waxman-Hatch Act, the Company will be subject to competition from generic
pharmaceuticals producers. In Europe, a similar exclusivity period will end 10
years after BMS's initial approval. Finally, academic and research organizations
and pharmaceutical and biotechnology companies are pursuing production of, among
other things, genetically engineered drugs, chemical synthesis and cell-tissue
culture. In addition, certain companies are pursuing the production of
paclitaxel and other taxanes from natural product extraction techniques.
Many of the Company's competitors, most notably BMS and RPR, have
substantially greater capital resources, research and development capabilities,
manufacturing and marketing resources, and experience than the Company. The
Company's competitors may succeed in developing products that are more effective
or less costly than any that may be developed by the Company, or that gain
regulatory approval prior to the Company's products. Many companies and
research institutions are also seeking means to obtain paclitaxel and taxanes
from non-bark renewable biomass components of yew trees and other sources in
order to increase paclitaxel yields, avoid environmental concerns and reduce the
cost of biomass. In addition, the Company is aware of several potential
competitors that have developed and patented or are developing various processes
for producing paclitaxel and paclitaxel-related substances semi-synthetically,
which resulted or may result in products that are equally as effective as the
paclitaxel extracted from bark. Although the Company believes that production
of fully synthetic paclitaxel is not currently commercially viable, the
discovery by a third party of a cost-effective means to fully synthesize
paclitaxel in commercial quantity or the manufacture of taxane derivatives or
analogs that are more efficacious than Paclitaxel in treating cancer could have
a material adverse effect on the Company. See "Risk Factors--Rapid
Technological Change; Intense Competition."
PATENTS AND PROPRIETARY TECHNOLOGY
Where appropriate, the Company seeks protection of its proprietary technology
by applying for patents in the United States and abroad. The Company owns three
issued United States patents and has several United States patent applications
pending. The Company has filed patent applications in certain other areas of
the world and expects to make
8
<PAGE>
additional filings as it believes appropriate. In addition, the Company has
obtained licenses from third parties to use their proprietary technology, for
which patent applications have been filed in the United States and in certain
other areas of the world. There can be no assurance that either the Company's
or its licensors' existing patent applications will become issued patents, that
the Company will be able to obtain any necessary or desired additional licenses
to patents or technologies of others or that the Company will be able to develop
its own additional patentable technologies. In addition, there can be no
assurance that any future patent applications or patents issued to the Company
will provide it with competitive advantages or will not be challenged as
infringing upon the patents or proprietary rights of others or will not be
invalidated, or that the patents or proprietary rights of others will not have a
material adverse effect on the ability of the Company to do business. Patent
applications in the United States are maintained in secrecy until patents are
issued and patent applications in certain other countries generally are not
published until more than 18 months after they are filed. In addition,
publication of scientific or patent literature often lags behind actual
discoveries. As a result, the Company cannot be certain it or any of its
licensors was the first creator of inventions covered by the Company's or its
licensors' pending patent applications or that the Company or its licensors were
the first to file such applications. Furthermore, there can be no assurance that
others will not independently develop similar technology or, if patents are
issued to the Company, that others will not design technology to circumvent the
Company's patents or proprietary rights.
A substantial majority of the Company's proprietary technology is not
protected by patents, and is held by the Company as trade secrets. The
Company's success will depend in part on its ability to protect these trade
secrets for extracting, isolating and purifying paclitaxel and other technology.
The Company relies on proprietary know-how and confidential information and
employs various methods, such as entering into confidentiality and non-compete
agreements with its current employees and with third parties to whom it divulges
proprietary information, to protect the processes, concepts, ideas and
documentation associated with its technologies, including its paclitaxel
production process. Such methods may afford incomplete protection and there can
be no assurance that the Company will be able to adequately protect its trade
secrets or that other companies will not acquire information which the Company
considers to be proprietary. In addition, if the Company is unable to fulfill
its contractual obligations to IVAX relating to its supply of NBT Paclitaxel,
the Company may, under certain circumstances, be contractually obligated to
disclose proprietary manufacturing information to IVAX. The inability to
maintain its proprietary technologies for its exclusive use could have a
material adverse effect on the Company.
The patent position of pharmaceutical companies generally is highly uncertain
and involves complex legal and factual questions. Paclitaxel is an
unpatentable, naturally occurring compound. Various compositions containing
paclitaxel, and also various processes and other technologies, however,
including those relating to extracting paclitaxel and preparing the drug for
finished formulation, are or may be patented. Certain of these patents are
owned by BMS and RPR, two of the Company's primary competitors. In the event
that the Company's technology, products or activities are deemed to infringe
upon the rights of others, the Company could be subject to damages or enjoined
from using such technology, or the Company could be required to obtain licenses
to utilize such technology. No assurance can be given that any such licenses
would be made available on terms acceptable to the Company, or at all. If the
Company were unable to obtain such licenses, it could encounter significant
delays in product market introductions while it attempted to design around the
patents or rights infringed upon, or could find the development, manufacture or
sale of products requiring such licenses to be foreclosed. In addition, the
Company could experience a loss of revenues and may incur substantial costs in
defending itself and indemnifying the Strategic Partners in patent infringement
or proprietary rights violation actions brought against it or either of the
Strategic Partners. The Company could also incur substantial costs in the event
it finds it necessary to assert claims against third parties to prevent the
infringement of its patents and proprietary rights by others. Participation in
such infringement proceedings could have a material adverse effect on the
Company, even if the eventual outcome were favorable.
In August 1994, BMS received two Australian petty patents claiming certain
methods of administering paclitaxel. Australian petty patents have a maximum
term of six years, are allowed to contain only three claims (one independent and
two dependent) and are granted on the basis of a prior act search which is
significantly more limited in scope than the searches done prior to issuance of
regular patents. Following publication of these patents, Faulding instituted
legal action to revoke these patents on the grounds that the patent claims are
invalid and that the subject matter claimed in the patents was already known
prior to the claimed date of invention. In February 1995, BMS brought legal
action against Faulding, based upon these patent claims, seeking an injunction
against Faulding to prevent Faulding from marketing NBT Paclitaxel pursuant to
Faulding's generic approval. In March 1995, the Australian court denied BMS's
request to enjoin Faulding from marketing NBT Paclitaxel. The Company
understands, based on communications with Faulding, that BMS's claims will
likely be resolved in conjunction with Faulding's revocation action later in
1996 or early in 1997 and based upon its review of the information disclosed
publicly prior to the BMS patent application and its discussions with Faulding,
the Company believes that BMS's claims will be successfully resisted. No
assurance can be given,
9
<PAGE>
however, that BMS will not obtain an injunction against Faulding which could
prevent Faulding from marketing NBT Paclitaxel in Australia. If Faulding were
prevented from marketing NBT Paclitaxel in Australia pursuant to its generic
approval, Faulding would be unable to market NBT Paclitaxel for commercial sale
in Australia until such time as Faulding obtains its own non-generic approval
which will require substantial clinical trials and regulatory approval. There
can be no assurances, however, that Faulding will be able to obtain its own non-
generic approval in such circumstances. If BMS is successful in enforcing its
patent claims against Faulding such that Faulding is unable to sell NBT
Paclitaxel in Australia, such a result would have a material adverse effect on
the Company.
GOVERNMENT REGULATION AND PRODUCT APPROVALS
The production and marketing of NBT Paclitaxel and the Company's research and
development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. In the
United States, drugs are subject to FDA regulation. The FDC Act, and the
regulations promulgated thereunder, and other federal and state statutes and
regulations govern, among other things, the testing, manufacture, quality,
safety, efficacy, labeling, storage, advertising and promotion of paclitaxel.
Product development within this regulatory framework takes a number of years and
involves the expenditure of substantial resources. The marketing of drugs may
not begin without FDA approval.
The steps required before a pharmaceutical may be marketed in the United
States include: (i) preclinical laboratory tests, animal pharmacology,
toxicology studies and formulation studies; (ii) the submission to the FDA of an
IND for human clinical testing, which must become effective before human
clinical trials commence; (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug; (iv) the submission of
an NDA to the FDA; and (v) FDA approval of the NDA prior to any commercial sale
or shipment of the drug. The FDA may refuse to approve an NDA if the applicant
does not demonstrate to the FDA's satisfaction that it can manufacture the drug
in compliance with the FDA's cGMP regulations. In addition to obtaining FDA
approval for each product, each domestic drug manufacturing establishment must
be registered with the FDA. Domestic drug manufacturing establishments are
subject to regular inspections by the FDA and must comply with cGMP regulations.
To supply products for use in the United States, foreign manufacturing
establishments must comply with cGMP regulations and are subject to periodic
inspection by the FDA or by corresponding regulatory agencies in their home
countries under reciprocal agreements with the FDA.
Preclinical studies include the laboratory evaluation of in vitro
cytotoxicity, pharmacology, product chemistry and formulation, as well as animal
studies to assess the potential safety and efficacy of the product. Compounds
must be formulated according to cGMP, and preclinical safety tests must be
conducted by laboratories that comply with FDA regulations regarding good
laboratory practices. The results of the preclinical tests are submitted to the
FDA as part of an IND and are reviewed by the FDA prior to the commencement of
human clinical trials. The data in an IND consists of animal data on safety and
efficacy, possibly human data from a related use, chemistry, formulation and
manufacturing data. If the FDA objects, the study may not commence. There can be
no assurance that submission of an IND will result in FDA authorization to
commence clinical trials.
Clinical trials involve the administration of the investigational new drug to
patients under the supervision of a qualified principal investigator. Clinical
trials must be conducted in accordance with good clinical practices under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Each clinical study must be conducted
under the auspices of an Institutional Review Board ("IRB") at the institution
at which the study will be conducted. The IRB will consider, among other
things, the safety of human subjects and the possible liability of the
institution. The company sponsoring the trials is required to select qualified
investigators to supervise the administration of the drug and to ensure that the
trials are adequately monitored in accordance with FDA regulations.
Clinical trials typically are conducted in three sequential phases, which may
overlap. In Phase I, the initial introduction of the drug into healthy
subjects, the drug is tested for safety (adverse effects), dosage tolerance,
metabolism, distribution, excretion and pharmacodynamics (clinical
pharmacology). Phase II involves studies in a limited patient population to:
(i) determine the efficacy of the drug for specific, targeted indications; (ii)
determine dosage tolerance and optimal dosage; and (iii) identify possible
adverse effects and safety risks. When a compound is found to be effective and
to have an acceptable safety profile in Phase II evaluations, Phase III trials
are undertaken to evaluate further clinical efficacy and to test further for
safety within an expanded patient population at geographically dispersed
clinical study sites. Clinical trials require substantial time and effort.
There can be no assurance that Phase I, Phase II or Phase III testing will be
completed successfully within any specific time period, if at all. Furthermore,
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<PAGE>
although clinical trials have been completed to date, the Company, the Strategic
Partners or the FDA may modify, suspend or terminate clinical trials at any time
if they feel that the subjects or patients are being exposed to an unacceptable
health risk.
The results of the pharmaceutical development, preclinical studies and
clinical studies are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the drug. An NDA is a systematic
compilation of data, analysis and conclusions on a new drug product based on
studies conducted under an IND. The NDA testing and approval process requires
substantial time and effort, and there can be no assurance that approval will be
granted on a timely basis, if at all. The FDA may refuse to approve an NDA if
the FDA does not view the NDA as containing adequate evidence of the safety and
efficacy of the drug, or if other applicable regulatory criteria are not
satisfied. In addition, the FDA may require additional testing or information,
or require post-marketing testing and surveillance. Notwithstanding the
submission of complete data, the FDA may ultimately decide that the application
does not satisfy its criteria for approval. Moreover, if regulatory approval of
a drug is granted, such approval may entail limitations on the indicated uses
for which the drug may be marketed. Finally, product approvals may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing or if previously unknown information demonstrates a
lack of safety or effectiveness. Following an approved NDA, an SNDA may be
submitted to the FDA which requests a change in the existing approval. An SNDA
can be for changes in manufacturing, quality control or clinical data or for
changes in product labeling such as indications or warnings.
Manufacturers of drugs sold in the United States are required to satisfy the
FDA that their manufacturing facilities and processes adhere to applicable
standards for cGMP and to engage in extensive record keeping and reporting.
Thus, even if regulatory approval for NBT Paclitaxel is granted, the Company's
current and any future facilities will be subject to periodic review and
inspections by the FDA or the analogous regulatory authorities of other
countries for compliance with cGMP or similar foreign regulatory standards.
Compliance with cGMP regulations requires substantial time, attention and
financial resources. Following inspections of the Company's United States and
Canadian manufacturing facilities by a cGMP Auditor of the Australian TGA, the
TGA issued approvals to the Company as an Australian cGMP compliant paclitaxel
manufacturer. The Company's facilities, however, have not been inspected by the
FDA for regulatory compliance purposes. There can be no assurance that the FDA
or foreign regulatory authorities other than the TGA will find the Company's
current facilities to be in compliance with United States cGMP regulations or
analogous foreign standards. Subsequent discovery of previously unknown
problems with NBT Paclitaxel or the Company's manufacturing facilities may
result in restrictions, including withdrawal of NBT Paclitaxel from the market.
Failure to comply with the applicable regulatory requirements by either the
Company or its Strategic Partners could, among other things, result in criminal
prosecution and fines, product recalls, product seizures and operating
restrictions.
The Company is also subject to United States laws and regulations applicable
to exporting drugs. On April 26, 1996, the export provisions in the FDC Act
were amended in Chapter 1A of Title II, Supplemental Appropriations For The
Fiscal Year Ending September 30, 1996, in the "FDA Export Reform and Enhancement
Act of 1996" to authorize the export of a drug before marketing approval is
obtained in the United States, to any country, if the drug (a) complies with the
laws of the importing country, and (b) has valid marketing authorization by the
appropriate authority in a country listed by the statute, one of which is
Australia. The Company has received valid marketing authorization from
Australia. Thus, if the other statutory conditions are met, the Company
believes that future exports from the United States of NBT Paclitaxel labeled in
accordance with the laws of Australia and, for countries other than Australia,
of the importing country, should be permissible without an FDA permit or other
FDA approval.
The Company is also subject to, among others, the regulations of Canada, the
Province of British Columbia, the United States Environmental Protection Agency,
the Department of Interior (United States Fish and Wildlife Services and the
Bureau of Land Management), the Department of Agriculture (United States Forest
Service) and other countries and regulatory agencies. Pursuant to the National
Environmental Policy Act, certain United States agencies have prepared an
Environmental Impact Statement that addresses the impact of harvesting wild
Pacific yew trees, including cutting down wild Pacific yew trees on federally-
managed land. The Company ceased harvesting bark in August 1994, although the
Company has in its inventory bark obtained from the wild Pacific yew. The
Company is also subject to federal, state and local laws and regulations
governing the use and disposal of hazardous materials as well as regulations
imposed by the Occupational Safety and Health Administration governing worker
safety. There can be no assurance that the Company is at all times in complete
compliance with all such requirements. The Company has made and will continue to
make expenditures to comply with enviromental requirements. Compliance with
these regulations is time-consuming and expensive. The failure to comply with
these regulations, however, could have a material adverse effect on the Company.
The adoption by federal, state or local governments of significant new laws or
regulations or a change in the interpretation or implementation of existing laws
or regulations relating to environmental or other regulatory matters
11
<PAGE>
could increase the cost of producing NBT Paclitaxel, delay regulatory approval
or otherwise adversely affect the Company's ability to produce or sell NBT
Paclitaxel. Adverse governmental regulations which might arise from future
legislative or administrative regulations or other actions cannot be predicted.
In addition, the Company's activities have been opposed by the Oregon Natural
Resources Council ("ONRC") because of their concern over wild Pacific yew in old
growth forests. Even though the Company no longer harvests biomass from the
bark of the wild Pacific yew, there can be no assurance that the ONRC and other
environmental activist groups will not oppose other activities of the Company,
which may have the effect of delaying or halting production of NBT Paclitaxel,
each of which could have a material adverse effect on the Company.
Outside the United States, the Company's ability to market a product is
contingent upon receiving a marketing authorization from the appropriate
regulatory authority. This foreign regulatory approval process includes all of
the risks associated with FDA approval set forth above.
The Company has filed confidential Drug Master Files ("DMF"s) containing
certain of the Company's proprietary manufacturing processes with regulatory
agencies in the United States, Australia, Canada, Europe and Singapore, relating
to the Company's manufacture of NBT Paclitaxel. Faulding, using the Company's
Australian DMF, has received a marketing approval in Australia for NBT
Paclitaxel for treating refractory ovarian and breast cancers. Additionally,
Faulding has completed clinical trials with NBT Paclitaxel in Australia, which
may form the basis for applications for further marketing approvals in
Australia and other countries where Faulding has the right to market NBT
Paclitaxel. Faulding is also engaged in ongoing clinical research with NBT
Paclitaxel with the goal of improving the effectiveness of paclitaxel treatment
in combination therapies and expanding the number of disease indications
treatable with paclitaxel. There is no assurance that Faulding's efforts to
expand the use of NBT Paclitaxel outside the United States will be successful.
IVAX, using the Company's United States DMF, filed an IND with the FDA in June
1994 relating to NBT Paclitaxel and began its Phase I clinical trials relating
to NBT Paclitaxel in the United States in October 1994. IVAX began Phase II/III
clinical trials in May 1995. Based upon communications from IVAX, it is
estimated that the earliest IVAX could file a NDA seeking commercial approval to
sell NBT Paclitaxel in the United States is 1997. No assurance can be given,
however, regarding the timely completion of any clinical trials or whether any
regulatory approvals will be obtained by IVAX to market NBT Paclitaxel in the
United States or other countries.
RESEARCH AND DEVELOPMENT
During the years ended December 31, 1993, 1994 and 1995 the Company spent
approximately $3.5 million, $3.9 million and $4.6 million, respectively, on
Company sponsored research and development activities and to produce NBT
Paclitaxel sold to its Strategic Partners (including $1.2 million and $0.3
million in plantation development fees in 1994 and 1995, respectively). Research
and development is expected to remain a significant cost component of the
Company's business. In the short term, research and development is expected to
concentrate primarily on: (i) improving paclitaxel yield and reducing
production costs; (ii) developing the Company's semi-synthesis process for
paclitaxel production; and (iii) improving the yields of the Company's
production methodology for processing needles and limbstock. The Company will
focus its internal efforts on process development and plans to contract out
research considered essential, but for which it lacks facilities or staff.
FOREIGN AND DOMESTIC OPERATIONS; EXPORT SALES
The following table sets forth, for the past three fiscal years, and the three
months ended March 31, 1995 and 1996 revenue, profitability (operating loss),
and identifiable assets attributable to the Company's U.S. and foreign
operations (amounts in thousand dollars):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
-------------------------- ----------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Sales to Unaffiliated Customers
United States (1) $ 1,248 $ 854 $ 2,054 $ 979 $ 214
Foreign -- 148 569 169 477
Operating Loss
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
United States (4,954) (5,914) (3,851) (620) (1,473)
Foreign -- (68) (433) (26) (325)
Identifiable Assets
United States 2,120 4,304 5,133 3,633 4,660
Foreign -- 672 6,820 818 5,546
- ------------------------------
(1) Includes export sales of $998 in 1993 and $1,392 in 1995.
</TABLE>
Foreign sales include sales of product manufactured and shipped from NaPro
Canada, the Company's Canadian subsidiary. Such products sold by NaPro Canada
to the Company are then re-sold to Faulding for use outside the United States.
Such "exported" products never physically enter the United States.
Sales of NBT Paclitaxel into foreign markets accounted for approximately 75%
of the Company's revenues for the year ended December 31, 1995 and 69% of the
Company's revenues for the three months ended March 31, 1996. The Company
anticipates that a significant portion of its revenues will continue to be
derived from sales of its products in foreign markets until such time, if ever,
as IVAX receives approval for commercial sale of NBT Paclitaxel in the United
States.
A substantial portion of the Company's revenues and operations will thus
continue to be subject to the risks associated with foreign business, including
economic or political instability, shipping delays, fluctuations in foreign
currency exchange rates and various trade restrictions, all of which could have
a significant impact on the Company's ability to deliver products on a
competitive and timely basis. Future imposition of, or significant increases
in, the level of customs duties, export quotas, drug regulatory restrictions or
other regulatory or trade restrictions could have an adverse effect on the
Company.
EMPLOYEES
As of March 31, 1996 the Company had 67 full time and four part time
employees, of whom six hold Ph.D. or M.D. degrees. Four employees were engaged
in biological and clinical research, eight in chemistry, 16 in quality
control/quality assurance, 26 in manufacturing and 13 in general administration
and finance. The Company believes that its relations with its employees are
good.
ITEM 2. PROPERTIES
- ------ ----------
The Company leases approximately 54,000 square feet of space in Boulder,
Colorado, which will be used for research and development and commercial-scale
manufacturing upon completion of improvements and installation and validation of
equipment. This facility currently is used for the Company's executive offices
and warehousing of raw materials and equipment. The Company leases an
additional 5,900 square feet of space in Boulder, of which 1,300 square feet is
used for research and development and 4,600 square feet is used for
manufacturing. The Company leases a facility of approximately 3,400 square feet
in British Columbia, Canada which is used for manufacturing. The Company leases
an additional 10,090 square foot facility in British Columbia, Canada which the
Company subleases. The Company has an option to purchase 7.3 acres of land in
Longmont, Colorado as a potential site on which to build a manufacturing
facility.
ITEM 3. LEGAL PROCEEDINGS
- ------ -----------------
The Company is not currently engaged in any material legal proceedings. See
"--Patents and Proprietary Technology."
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion and analysis provides information which the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the Financial Statements and Notes included
elsewhere in this Prospectus. Special Note: Certain statements set forth below
constitute "forward-looking statements" within the meaning of the Reform Act.
See "Special Note Regarding Forward-Looking Statements" for additional factors
relating to such statements.
GENERAL
The Company has devoted its efforts primarily to the development and
implementation of its EIP/TM/ technology for producing NBT Paclitaxel. The
Company is currently dependent exclusively on sales of NBT Paclitaxel for
revenues. Through March 31, 1996, the Company's production of NBT Paclitaxel was
limited primarily to research and pilot-scale production, and most of the
Company's product sales were for use in clinical trials and for research and
development purposes. Accordingly, the Company has generated only limited
revenues from such activities and has incurred significant operating losses,
including operating losses of approximately $5.0 million, $6.0 million and $4.3
million for the years ended December 31, 1993, 1994 and 1995, respectively, and
$1.8 million for the three months ended March 31, 1996 resulting in an
accumulated deficit of $20.5 million as of March 31, 1996. The Company expects
that it will continue to have a high level of operating expenses and will be
required to make significant up-front expenditures in connection with its
biomass procurement, product development and research and development
activities. The Company anticipates that operating losses will continue until
such time, if ever, as the Company is able to generate sufficient revenues to
support its operations. The Company believes that its ability to generate such
revenues depends primarily on the ability of its Strategic Partners to obtain
regulatory approval for the commercial sale of NBT Paclitaxel, on the Company's
ability to obtain regulatory approval for its manufacturing facilities and on
the Company's ability to construct manufacturing facilities that produce
quantities of paclitaxel sufficient to supply the Strategic Partners'
requirements for commercial sales. Moreover, the Company's future growth and
profitability will depend on the success of the Strategic Partners in fostering
acceptance in the oncological market for NBT Paclitaxel as a preferred form of
chemotherapy to be used alone or in combination with other chemotherapeutic
agents.
In January 1995, Faulding received approval to market NBT Paclitaxel
commercially in Australia under their trade name ANZATAX/TM/. Although the
Company's revenues have increased as a result of this approval, the Company does
not currently expect to reach profitability at December 31, 1996. The ability of
Faulding to continue to market NBT Paclitaxel in Australia pursuant to
Faulding's marketing approval and the success of these marketing efforts will
continue to have a material effect on the Company's revenues, profitability and
capital requirements.
In July and August of 1995, the Company completed private placements of two
series of preferred stock. The proceeds of these offerings were used to
establish and upgrade Canadian and United States manufacturing facilities and to
fund the Company's operating expenditures and planned capital expenditures and
additional plantation development.
RESULTS OF OPERATIONS
The Company was in the development stage through December 31, 1994.
Comparison of operations between years and historical trends do not necessarily
indicate future trends and operating results of the Company.
14
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Revenue. Operating revenues decreased $0.4 million to $0.7 million for the
three months ended March 31, 1996 from $1.1 million for the three months ended
March 31, 1995. This decrease was attributable primarily to the timing of
product deliveries to the Strategic Partners, which may vary significantly from
quarter to quarter.
Research, Development and Costs of Products Sold. Research, development and
cost of products sold expenses increased $0.7 million to $1.8 million for the
three months ended March 31, 1996 from $1.1 million for the three months ended
March 31, 1995. The increase was due primarily to an increase in process
development and research expenses, as well as higher production costs.
General and Administrative Expenses. General and administrative expenses
("G&A") increased $0.2 million to $0.7 million for the three months ended March
31, 1996 from $0.5 million for the three months ended March 31, 1995. This
increase was due primarily to an increase in facility costs and an increase in
administrative and support staff.
Plantation Costs. Plantation costs decreased $0.3 million to $0.0 for the
three months ended March 31, 1996 from $0.3 million for the three months ended
March 31, 1995, reflecting the completion of research related to plantation
development as of December 31, 1995. The Company performed a pilot harvest of
the PBI plantation in 1996 and believes the technology has been adequately
developed to assure the plantation can function as a long-term renewable source
of biomass and, consequently, future plantation development payments will be
capitalized and amortized over the expected life of the plantation as biomass is
harvested.
Interest Income. Interest income increased $0.1 million to $0.1 million for
the three months ended March 31, 1996 from $0.0 million for the three months
ended March 31, 1995. This increase was the result of larger free cash
balances. Interest income may become a more significant portion of operations as
a result of additional cash which may be raised by either through a follow-on
offering of Common Stock of which the Company's intent to file was disclosed on
April 22, 1996 or through any exercise of currently outstanding redeemable
warrants.
Interest and Other Expenses. Interest and other expenses increased slightly
for the three months ended March 31, 1996 from the three months ended March 31,
1995. The increase was the result of borrowings under equipment financing
leases which were put in place in the fourth quarter of 1995. Interest expense
is expected to increase as borrowings on the equipment lease line of credit are
expected to increase from approximately $0.3 million at December 31, 1995 to an
expected value of approximately $1.5 million at June 30, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Operating revenues increased $1.6 million to $2.6 million for the
year ended December 31, 1995 from $1.0 million for the year ended December 31,
1994. The increase was attributable primarily to the timing of product
deliveries to the Strategic Partners, as well as changes in pricing associated
with commercial sales of NBT Paclitaxel in Australia. Through December 31,
1995, the majority of product sales had been for use in clinical trials and for
research and development purposes. Such sales are unpredictable in nature.
Although initial commercial sales commenced in January 1995, the Company expects
these sales to be unpredictable until such time as the markets of the Strategic
Partners have been established and proven.
Research, Development and Costs of Products Sold. Research, development and
cost of products sold expenses increased $1.6 million to $4.3 million for the
year ended December 31, 1995 from $2.7 million for the year ended December
31,1994. The increase was due primarily to an increase in the level of process
development and research, including higher production costs due to higher
production volumes.
General and Administrative Expenses. G&A increased $0.3 million to $2.3
million for the year ended December 31, 1995 from $2.0 million for the year
ended December 31, 1994. The increase was due primarily to a general increase
in administrative and related support staff.
Faulding Royalty Expense and Plantation Development Expense. Plantation costs
decreased $0.9 million to $0.3 million for the year ended December 31, 1995 from
$1.2 million for the year ended December 31, 1994. Higher costs during 1994
reflect the additional cost of establishing the plantation as opposed to ongoing
maintenance in 1995 (see Note 8 to the Financial Statements).
Interest Income. Interest income increased $0.2 million to $0.4 million for
the year ended December 31, 1995 from
15
<PAGE>
$0.1 for the year ended December 31, 1994. This increase was the result of
larger average free cash balances.
Interest and Other Expenses. Interest and other expenses decreased $0.2
million to $0.1 million for the year ended December 31, 1995 from $0.3 million
for the year ended December 31, 1994. The decrease was the result of the
absence of interest on bridge loans which were paid off in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. Operating revenues decreased $0.2 million to $1.0 million for the
year ended December 31, 1994 from $1.2 million for the year ended December 31,
1993. The decrease was attributable primarily to the timing of product
deliveries to the Strategic Partners.
Research, Development and Costs of Products Sold. Research and development
expenses decreased $0.8 million to $2.7 million for the year ended December 31,
1994 from $3.5 million for the year ended December 31, 1993. The decrease was
due primarily to decreases in production of NBT Paclitaxel for research
purposes, as well as substantial completion of NBT Paclitaxel product
development efforts.
General and Administrative Expenses. G&A decreased $0.7 million to $2.0
million for the year ended December 31, 1994 from $2.7 million for the year
ended December 31, 1993. The decrease was attributable primarily to decreased
legal costs relating to the negotiation of the agreements with the Strategic
Partners and certain intellectual property dispute proceedings that were
resolved in 1994.
Faulding Royalty Expense and Plantation Development Expense. During 1994, the
Company recorded a $1.0 million nonrecurring expense for the elimination of the
Faulding royalty (see Note 6 to the Financial Statements) and $1.2 million for
plantation development expenses resulting from the amortization of prepaid
plantation costs (see Note 8 to the Financial Statements).
Extraordinary Expense. During 1994, the Company incurred an extraordinary
loss on early extinguishment of debt totaling $0.5 million (See Note 6 to the
Financial Statements), resulting from one-year bridge notes issued in March and
April of 1994, which were prepaid at a premium in connection with the IPO in
August 1994.
Interest Income. Interest income increased $0.1 million to $0.2 million for
the year ended December 31, 1994 from $0.1 million for the year ended December
31, 1993. The increase was a result of increased average free cash balances.
Interest and Other Expense. Interest and other expenses increased $0.3
million to $0.3 million for the year ended December 31, 1994 from $0.0 million
for the year ended December 31, 1993. The increase was primarily the result of
interest expense recorded on the bridge notes outstanding from March through
August 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements have been and will continue to be
significant. As of March 31, 1996, the Company had a working capital balance of
$6.7 million. This compared to a working capital balance of $2.4 million as of
March 31, 1995. To date, the Company has been dependent primarily on net
proceeds of the IPO of approximately $7.4 million, on private placements of its
equity securities aggregating approximately $18.9 million (including proceeds of
approximately $10.2 million during 1995), and on loans and advances from its
stockholders and the Strategic Partners to fund its capital requirements.
Working Capital and Cash Flow. Cash and cash equivalents decreased $2.2
million to $4.9 million for the three months ended March 31, 1996 from $7.1
million at December 31, 1995. Net cash provided by financing activities was
offset by $2.1 million used in operating activities and $0.2 million used in
investing activities. Cash and cash equivalents increased $6.2 million to $7.1
million at December 31, 1995 from $0.9 million at December 31, 1994. Net cash
provided by financing activities was partially offset by cash used in operations
of $3.0 million, in capital expenditures totaling $1.2 million and net purchases
of investments of $0.1 million.
Inventories decreased $0.2 million to $1.2 million in the year ended December
31, 1995 from $1.4 million at December 31, 1994. The amount of product held as
finished goods equivalents in work-in-progress inventories as well as finished
goods inventories is dependent on a number of factors, including the shipping
requirements of the Strategic Partners and the Company's production planning for
meeting those needs. Inventory balances may vary significantly during product
development and launch periods. The Company plans to make significant biomass
investments during 1996.
16
<PAGE>
Capital Expenditures. The Company expended $0.1 million for capital projects
during the first quarter of 1996. The Company expended $1.2 million and $0.6
million, respectively, during 1995 and 1994, for capital projects. These
expenditures were primarily made to build the Canadian small-scale manufacturing
facility and for expansion and improvements to the Boulder laboratories and
facilities. In 1996, the Company expects to invest capital in property, plant
and equipment, primarily to expand its plantation and upgrade its current
domestic and foreign manufacturing capabilities, as well as to begin
construction of a new large-scale commercial EIP/TM/ manufacturing facility
which is expected to be completed in 1997.
The Company anticipates that its existing capital resources, together with
revenues from ongoing sales of NBT Paclitarel, and the proceeds from a proposed
offering (which the Company announced in a press release on April 22,1996)
including the interest earned thereon, will be adequate to fund operations and
capital expenditures until operating revenues are sufficient to finance
operations. If the proposed offering does not occur, however, the Company's
existing capital resources, together with ongoing sales of NBT Paclitaxel, will
not be adquate to fund such operations and capital expenditures. In such event,
the Company will need to seek additional financing, of which there can be no
assurance the Company will be able to obtain on acceptable terms, if at all.
The amount and timing of future capital expenditures will depend upon numerous
factors, including the progress of the Company's research and development
programs, the magnitude and scope of these activities, the cost of preparing,
filing, prosecuting, maintaining and enforcing patent claims and other
intellectual property rights, competing technological and marketing
developments, changes in or terminations of existing strategic partnerships, the
establishment of additional strategic relationships and the cost of
manufacturing scale-up. In the event of unanticipated future capital
requirements, the Company may seek to raise additional capital. The Company may
seek additional long-term financing to fund capital expenditures should such
financing become available on terms acceptable to the Company.
NET OPERATING LOSS CARRYFORWARDS
As of March 31, 1996, the Company had net operating loss carryforwards for
income tax purposes of approximately $17.0 million to offset future taxable
income. Under Section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards is limited after an ownership
change, as defined in such Section 382, to an annual amount equal to the value
of the loss corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal long-term tax-exempt rate in effect
during the month the ownership change occurred. Such an ownership change
occurred in September 1993. As a result, the Company will be subject to an
annual limitation on the use of its net operating losses. This limitation only
affects net operating losses incurred up to the ownership change and does not
reduce the total amount of net operating loss which may be taken, but rather
limits the amount which may be used during a particular year. Therefore, in the
event the Company achieves profitability, such limitation would have the effect
of increasing the Company's tax liability and reducing the net income and
available cash resources of the Company if the taxable income during a year
exceeded the allowable loss carried forward to that year.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The information required by this item begins at Page F-1.
PART III
ITEM 10. DIRECTORS AND OFFICERS
- ------- ----------------------
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Leonard P. Shaykin 52 Chairman of the Board of Directors
Sterling K. Ainsworth, Ph.D. 56 President and Chief Executive Officer; Director
Patricia A. Pilia, Ph.D. 47 Vice President, BioResearch and Toxicology;
Secretary; Treasurer; Director
Lawrence Helson, M.D. 65 Vice President, Clinical Research
Gordon H. Link, Jr. 42 Vice President, Finance and Chief Financial Officer
David L. Denny 44 Vice President, Operations
James D. McChesney, Ph.D. 56 Vice President, Natural Products Chemistry
E. Garrett Bewkes, Jr. 68 Director
Richard C. Pfenniger, Jr. 39 Director
Phillip Frost, M.D. 59 Director
Arthur H. Hayes, Jr., M.D. 63 Director
Mark B. Hacken 60 Director
Vaughn D. Bryson 56 Director
</TABLE>
MR. SHAYKIN has served as Chairman of the Board since June 1993. Pursuant to
his Executive Agreement, Mr. Shaykin is not required to devote more than 20
hours in any week nor more than 80 hours in any month to the Company's affairs.
In 1995, Mr. Shaykin founded Shaykin & Company, a private investment holding
firm. Prior to founding Shaykin & Company, Mr. Shaykin was a founding and
managing partner of Adler & Shaykin, an equity investment partnership organized
to sponsor leveraged buyouts. Prior to forming Adler & Shaykin in 1983, Mr.
Shaykin was Vice President, director and a member of the Investment Committee of
Citicorp Venture Capital, Ltd. and Citicorp Capital Investors, Inc., the venture
capital and equity investment subsidiaries of Citicorp and Citibank. Mr.
Shaykin is Chairman of the Board of Directors of Kimeragen, Inc., a privately-
held gene repair company, a director of Avigen, a privately-held gene therapy
company currently in registration, Chairman of the Neuroblastoma Foundation and
a Director of the Jerusalem Post, an English-language offshore newspaper. Mr.
Shaykin is also a governing trustee of The Jackson Laboratories, a privately-
held genetic research institute, and a trustee of the University of Chicago
Graduate School of Business. Mr. Shaykin is a graduate of the University of
Chicago (B.A., M.A., M.B.A.).
18
<PAGE>
DR. AINSWORTH, a co-founder of the Company, has served as an executive
officer and director of the Company since its inception, as Chief Executive
Officer since November 1991 and as President since October 1992. In 1990, he
co-founded, with Dr. Pilia, Pacific Biotechnology, Inc. (a predecessor of the
Company with no connection to PBI) and served as Chairman and President of such
company until the Company's inception. From 1972 until 1990, Dr. Ainsworth held
various levels of professorships of Pathology with tenure in the College of
Medicine and Dental Medicine and Graduate Studies at the Medical University of
South Carolina ("MUSC"), where he established, developed and directed MUSC's
Immunopathology Diagnostic Laboratory. He has authored over 150 publications on
a variety of research topics, including acute inflammation, viral pathogenesis,
immunopathology, immunodermatology, autoimmune disease, aging, immunology of
allergic and chronic occupational pulmonary disease and biological response
modifiers in cancer therapeutics. Dr. Ainsworth received a Bachelor's degree
from the University of Mississippi in 1963. He received a Master's degree in
Medical Microbiology in 1965 and a Doctoral degree in Medical Science in 1969
from the University of Mississippi Medical School. He completed his post-
doctoral fellowship in the Department of Pathology at Harvard Medical School
from 1970 to 1972. Dr. Ainsworth is engaged to marry Dr. Pilia, a director and
officer of the Company.
DR. PILIA, a co-founder of the Company, has served as a director of the
Company since its inception. She was appointed Secretary of the Company in
November 1991, Treasurer of the Company in October 1992 and Vice President of
BioResearch and Toxicology in March 1993. In 1990, she co-founded, with Dr.
Ainsworth, Pacific Biotechnology, Inc. and served as its Vice President and
Director of Biotechnology. From 1973 to 1990, she was engaged in independent
research in the fields of renal, pulmonary disease, immunotechnological
therapeutics and biological response modifiers and in the development of
diagnostic and laboratory medicine procedures. From 1983 to 1991, Dr. Pilia was
an Assistant Professor of Pathology in the College of Medicine and Dental
Medicine and the College of Graduate Studies at MUSC. She served as the
Assistant Director of the MUSC Immunopathology Diagnostic and Research
Laboratories from 1985 to 1991. Since 1984 she has been a consultant to
industry on the design and development of biomedical devices and treatment
modalities and the design and performance of clinical trials. Dr. Pilia
received a Bachelor's degree in 1970 from Boston University, a Master's degree
in Immunology/Microbiology in 1978 and a Doctoral degree in Pathology in 1980
from MUSC. Dr. Pilia is engaged to marry Dr. Ainsworth, a director and chief
executive officer of the Company.
DR. HELSON joined the Company as a director and in the part-time position of
Vice President, Clinical Research in July 1993. Dr. Helson served as a director
of the Company until March 1996. Dr. Helson has served as head of the Neuro-
Oncology Laboratory in the Division of Neoplastic Diseases, Department of
Medicine at New York Medical College since July 1988. From July 1968 until June
1986, Dr. Helson was attending physician with Memorial Sloan-Kettering, a cancer
research center. From July 1986 until June 1988, Dr. Helson was an Associate
Director with ICI Pharmaceuticals (a pharmaceutical company). Dr. Helson has
been involved in oncology research for over 30 years. Pursuant to his Executive
Agreement, Dr. Helson is not required to devote more than 15 hours in any week
nor more than 60 hours in any month to the Company's affairs.
MR. LINK, a certified public accountant and a certified management
accountant, joined the Company as Vice President, Finance and Chief Financial
Officer in September 1993. From June 1990 until April 1993, Mr. Link served
concurrently as Corporate Controller of Synergen, Inc. and of the Syntex-
Synergen Neuroscience Joint Venture, and from February 1991 until April 1993, as
Treasurer of Synergen Development Corporation, all of which entities are engaged
in biotechnology research and development. From October 1983 through May 1990,
Mr. Link practiced as a certified public accountant, most recently in the
position of Audit Manager with Deloitte & Touche. He received undergraduate
degrees in chemistry from Rensselaer Polytechnic Institute in 1976 and in
accounting from Metropolitan State College in 1983.
MR. DENNY has served as Vice President, Operations of the Company since
September 1995. From 1974 to 1991, Mr. Denny enjoyed a diverse career within
the pharmaceutical industry serving in manufacturing and quality assurance
capacities with Miles Pharmaceutical, Abbott Laboratories and Kabi-Pharmacia.
From 1991 to 1994, Mr. Denny served as Vice-President of Operations for
Somatogen, Inc. He received a B.S. in Biological Sciences from Tennessee
Technological University in 1972 and pursued graduate studies at the same
institution from 1972 to 1974.
19
<PAGE>
DR. MCCHESNEY joined the Company as Vice-President of Natural Products
Chemistry in January 1996. In July of 1993, Dr. McChesney was named Frederick
A.P. Barnard Distinguished Professor of Pharmacognosy at the University of
Mississippi. From 1987 until June of 1995, he served as Director of the Research
Institute of Pharmaceutical Sciences at the University of Mississippi,
specializing in natural product pharmaceutical research and development. Dr.
McChesney joined the School of Pharmacy at the University of Mississippi in 1978
as Professor and Chair of the Department of Pharmacognosy. Before joining the
faculty of the University of Mississippi, he served as Professor of Botany as
well as Professor of Medicinal Chemistry at the University of Kansas from 1965.
Dr. McChesney has authored more than 160 publications on all aspects of natural
products research and development, including isolation, structure elucidation,
biological activity, analytical methods, metabolism and sourcing. He is the
author of numerous patents on the production and utility of natural products as
pharmaceuticals and agrochemicals. After graduating with honors from Iowa State
University in 1961 with a B.S. in Chemical Technology, he pursued degrees in
Botany (M.A. 1964) and Natural Products Chemistry (Ph.D. 1965) at Indiana
University. He has been a Fulbright Lecturer in Brazil and a Visiting Professor
at several South American universities.
MR. BEWKES has served as a director of the Company since September 1993.
Since April 1987, Mr. Bewkes has been a director of PaineWebber Group, Inc. and
a consultant and Chairman of a number of PaineWebber mutual funds. From 1982
until 1987 he was Chairman of American Bakeries Corp. (a commercial bakery). He
is a director of Interstate Bakeries Corp. (a commercial bakery).
MR. PFENNIGER has served as a director of the Company since June 1993. Mr.
Pfenniger has served as Chief Operating Officer of IVAX since April 1994, and
since January 1995, President, Health Care Group, of IVAX. He served as Senior
Vice President-Legal Affairs, Secretary and General Counsel of IVAX from 1989
until April 1994, and as Secretary of IVAX from 1990 until April 1994. For
seven years prior to joining IVAX, Mr. Pfenniger was engaged in private law
practice, most recently as a member of the law firm of Greer, Homer & Bonner,
P.A. in Miami, Florida. Mr. Pfenniger is a director of Whitman Education Group,
Inc. and North American Vaccine, Inc.
DR. FROST has served as a director of the Company since June 1993. Dr. Frost
has served as Chairman and Chief Executive Officer of IVAX since 1987, and as
President of IVAX from July 1991 to January 1995. He is the Vice Chairman of
the Board of Directors of North American Vaccine, Inc. (a vaccine research and
development company). Dr. Frost was the Chairman of the Department of
Dermatology at Mt. Sinai Medical Center of Greater Miami, Miami Beach, Florida
from 1972 to 1990. He was Chairman of the Board of Directors of Key
Pharmaceuticals, Inc. (a pharmaceutical company) from 1972 to 1986. He is a
director of American Exploration Company (an oil and gas exploration and
production company), Northrup Grumman Corp. and Whitman Education Group, Inc.
He is a trustee of the University of Miami and a member of the Board of
Governors of the American Stock Exchange.
DR. HAYES was appointed a director of the Company in March 1996. He is
currently President and Chief Operating Officer of MediScience Associates, Inc.,
a pharmaceutical consulting company and is a Professor of Medicine at New York
Medical College and Pennsylvania State University College of Medicine. From
1981 to 1983 during the first Reagan administration, Dr. Hayes served as
Commissioner of Food and Drugs (FDA), U.S. Department of Health and Human
Services. He was President and Chief Executive Officer of EM Pharmaceuticals as
well as a member of their Board of Directors from 1986 to 1991 . Prior to this,
Dr. Hayes served as Provost & Dean at New York Medical College from 1983 to
1986, and served as the Director of the Institute of Human Values in Medical
Ethics, International Health and Biomedical Sciences, the latter of which he
also served as Chairman. Dr. Hayes has held several posts with Pennsylvania
State University which included Professor of Medicine and Pharmacology from 1977
to 1981, and Dean of Admissions from 1976 to 1979, in addition to the PSU
College of Medicine as Associate Professor of Medicine and Pharmacology and
Director of the Division of Clinical Pharmacology from 1972 to 1977. From 1968
through 1972, Dr. Hayes' employment, appointments and teachings were with
Cornell University Medical College as Assistant Professor of Medicine and
Pharmacology as well as Associate Dean (Academic Programs) in 1972, and
Assistant Dean (Academic Programs) from 1970 to 1972. His current and past
activities include service on numerous boards of directors and scientific
advisory boards for entities ranging from educational and non-profit
institutions to publicly traded corporations. Dr. Hayes currently serves on the
board of directors of Myriad Genetics, Inc. (a genomic research
20
<PAGE>
and pharmaceutical company) and of Celgene Corporation (a pharmaceutical
company). Dr. Hayes' received his M.D. from Cornell University Medical College,
and also attended Cornell's Graduate School of Medical Sciences, Department of
Pharmacology. He undertook premedical studies, and attended medical school at
Georgetown University. Dr. Hayes received his M.S. (Philosophy, politics and
economics) from Oxford University, where he was a Rhodes Scholar, and his A.B.
(Philosophy) from Santa Clara University in 1955.
MR. HACKEN was appointed a director of the Company in March 1996. He is
currently President of MBH International, a retail and health care consulting
company. He is the former Chief Executive Officer of FHP International
Corporation, a $4 billion HMO with members in 11 states, and its operating
subsidiary, FHP, Incorporated, a diversified health care services company.
Prior to his appointment to the Office of the Chief Executive in October 1993,
he served on the FHP International and FHP Incorporated Boards for two years and
seven years, respectively. He was co-founder and President of Elliott Drugs,
and President of Drug King after the firm was acquired from DART Industries.
After Drug King was sold to Thrifty Corporation, he was instrumental in
converting them to the Thrifty Jr. drug store concept and was President of that
division. Mr. Hacken received a B.S. in Pharmacy from the University of Florida.
MR. BRYSON was appointed a director of the Company in March 1996. Vaughn
Bryson has been Vice Chairman of Vector Securities International, Inc.
("Vector"), a specialty health care investment banking firm, since April 1994.
Prior to joining Vector Securities, Mr. Bryson worked in various positions for
Eli Lilly and Company for 32 years, including in sales/market research, human
resources, distribution, sales management and new product planning. Mr. Bryson
served as Eli Lilly's President and Chief Executive Officer from 1991 until June
1993. Mr. Bryson was a director of Eli Lilly from 1984 until his retirement in
1993. Mr. Bryson became area director for Japan and southeast Asia for Eli
Lilly International Corporation and in 1976 was named a Vice President. In
1977, Mr. Bryson also became area director for Canada, Australia, New Zealand
and South Africa. In 1979, Mr. Bryson transferred to London as Vice President
for Europe, the Middle East and Africa and in 1982 became President of Elanco
Products, Eli Lilly's agricultural division. In 1986 Mr. Bryson was made
Executive Vice President of Eli Lilly, overseeing Elanco, Elizabeth Arden and
the Medical Devices and Diagnostics Division. Mr. Bryson is a Director of three
public companies, ARIAD Pharmaceuticals, Inc., EndoVascular Technologies,
Inc. and Perclose, Inc. Mr. Bryson has a B.S. in Pharmacy from the University
of North Carolina and completed the Stanford Sloan Program at Stanford
University Graduate School of Business.
COMMITTEES
The Board of Directors has established an Audit Committee, a Compensation
Committee and a Strategic Planning Committee. The Audit Committee, which
currently consists of Mr. Hacken, Chairman, and Mr. Bewkes, meets periodically
with representatives of the Company's independent auditors and the Company's
management to obtain an assessment of the Company's financial condition and
results of operations, the results and scope of the annual audit and other
services provided by the Company's independent auditors, and reports to the full
Board of Directors with respect thereto. The Compensation Committee, which
currently consists of Mr. Bewkes, Chairman, Mr. Bryson and Mr. Pfenniger, meets
periodically to review and to recommend to the full Board of Directors
compensation arrangements for senior management and directors. In addition, the
Compensation Committee is responsible for administering the Company's existing
stock option plans. The Strategic Planning Committee, which currently consists
of Mr. Bryson, Chairman, Mr. Shaykin, Dr. Ainsworth, Mr. Pfenniger and Dr.
Hayes, meets periodically to review the Company's strategic plans in connection
with product development and marketing, regulatory approvals, clinical testing
and other matters.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Under Section 16 of the Securities Exchange Act of 1934, the Company's
directors and certain of its officers, and persons holding more than ten percent
of the Company's Common Stock are required to file forms reporting their
beneficial ownership of the Company's Common Stock and subsequent changes in
that ownership with the Securities and Exchange Commission. Such persons are
also required to furnish the Company copies of forms so filed. Based solely
upon a review of copies of such forms filed with the Company, each of Drs.
Ainsworth,
21
<PAGE>
Pilia and Helson were late in filing one Form 4 and no other directors or
officers were late in filing any reports on Forms 3, 4 and 5.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------- --------------------------------------------------------------
The following table sets forth certain information as of March 31, 1996
regarding ownership of the Common Stock and the Preferred Stock by (1) persons
believed by the Company to be the beneficial owners of more than five percent of
its outstanding Common Stock and Preferred Stock; (2) by each Director and by
the officers of the Company named in the Summary Compensation Table; and (3) by
all current executive officers and directors of the Company as a group. Unless
otherwise noted, all addresses are care of: NaPro BioTherapeutics, Inc., 6304
Spine Road, Unit A, Boulder, CO 80301.
<TABLE>
<CAPTION>
Number of Number of
Name of Director, Officer or Shares of Percent of Shares of Percent of
Beneficial Owner(1) Common Stock Class Preferred Stock Class
- ----------------------------------- ---------------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Leonard P. Shaykin 1,182,742(2)(3) 13.3% 0 0%
Sterling K. Ainsworth 1,108,019(3)(4) 13.0% 0 0%
Patricia A. Pilia 290,079(3)(5) 3.4% 0 0%
Gordon H. Link, Jr. 19,167(6) * 0 0%
All Directors and Executive 2,923,140(7) 32.1% 0 0%
Officers as a Group (13 persons)
D&N Holding Company 1,126,398(3)(8) 13.4% -- --
c/o IVAX Corporation
8800 Northwest 36th Street
Miami, Florida 33178
Knowlton Brothers, Inc. 557,100(9) 6.5% -- --
530 Fifth Avenue
New York, NY 10036
Mervyn Adelson Trust -- -- 125,000(10) 100%
c/o Nigro, Karlin & Segal
10100 Santa Monica Boulevard
Suite 1300
Los Angeles, CA 90067
</TABLE>
* Less than 1%.
(1) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
Common Stock or Preferred Stock beneficially owned by them.
(2) Includes warrants to purchase 509,778 shares of Common Stock. Such
warrants were purchased by Mr. Shaykin from various third parties
unaffiliated with the Company and from D&N Holding Company ("D&N"), a
wholly owned subsidiary of IVAX Corporation ("IVAX").
(3) IVAX, through D&N, Mr. Shaykin, Dr. Ainsworth, Dr. Pilia and the Company
are parties to an amended Stockholders Agreement dated as of June 7, 1993
(the "Stockholders Agreement") pursuant to which, among other things, each
of such directors and IVAX is obligated to vote for the election of Dr.
Ainsworth
22
<PAGE>
(as long as he owns beneficially (before taking into consideration any
shares issuable upon exercise or conversion of outstanding options and
warrants or convertible securities, respectively) 10% or more of the
outstanding Common Stock) and two individuals designated by IVAX to the
Company's Board of Directors. These designees currently are Dr. Frost and
Mr. Pfenniger. By virtue of this provision of the Stockholders Agreement,
each of such directors and IVAX may be deemed to share the power to vote or
direct the vote of the shares deemed beneficially owned by the parties to
the Stockholders Agreement with each of the other parties to the
Stockholders Agreement. Each of Mr. Shaykin, Dr. Ainsworth, Dr. Pilia and
IVAX disclaims that it, he, or she and any one or more other parties to the
Stockholders Agreement constitute a group under Rule 13d-5(b)(1) of the
Act, pursuant to which such group may be deemed to beneficially own the
shares directly beneficially owned by each of such directors and IVAX.
(4) Includes 122,667 shares of Common Stock issuable upon exercise of non-plan
options granted to Dr. Ainsworth in connection with the formation of the
Company in 1991 and 42,550 shares of Common Stock gifted by Dr. Ainsworth
to relatives and certain other persons, which Dr. Ainsworth may be deemed
to beneficially own by virtue of holding powers of attorney to vote and
take certain other actions with respect to such shares. Dr. Ainsworth, who
is engaged to be married to Dr. Pilia, disclaims beneficial ownership of
the shares of Common Stock beneficially owned by Dr. Pilia and the gifted
shares over which Dr. Ainsworth holds powers of attorney.
(5) Includes 36,800 shares of Common Stock issuable upon exercise of non-plan
options granted to Dr. Pilia in connection with formation of the Company in
1991, 1,000 shares of Common Stock issuable upon exercise of warrants
purchased by Dr. Pilia in the Company's initial public offering, and
10,800 shares of Common Stock gifted by Dr. Pilia to relatives and certain
other persons which Dr. Pilia may be deemed to beneficially own by virtue
of holding powers of attorney to vote and take certain other actions with
respect to such shares. Dr. Pilia disclaims beneficial ownership of shares
of Common Stock beneficially owned by Dr. Ainsworth and the gifted shares
over which Dr. Pilia holds powers of attorney. See note (4) above.
(6) Includes 16,667 shares of Common Stock issuable upon the exercise of
options granted to Mr. Link under the Company's 1993 Stock Option Plan and
2,500 shares of Common Stock issuable upon the exercise of options granted
to Mr. Link under the 1994 Long-Term Incentive Performance Plan.
(7) Includes an aggregate of 723,912 shares of Common Stock issuable upon
exercise of warrants, non-plan options, and options granted under the 1993
Stock Option Plan and the 1994 Plan.
(8) Information in the table as to beneficial ownership of Common Stock by IVAX
and D&N is based upon filings with the Company made on Schedule 13G by
IVAX. Such shares are held directly by D&N. Mr. Pfenniger is an officer
and director of D&N and Mr. Pfenniger and Dr. Frost are executive officers
of IVAX, and the Company has been advised that Dr. Frost beneficially owns
approximately 12.2% of IVAX's voting securities. Dr. Frost and Mr.
Pfenniger disclaim beneficial ownership of the shares of Common Stock held
by D&N.
(9) Information in the table as to beneficial ownership of Common Stock by
Knowlton Brothers, Inc. ("KBI") is based on a statement of ownership on
Schedule 13D filed by on behalf of KBI and a number of related entities,
namely: The Family Partnership, L.P., The Frontier Partnership, L.P.,
Flagship Partners, Ltd., Family Partners & Co., Frontier Partners & Co.,
Knowlton Associates, Inc., Winthrop Knowlton ("WK"), Stanley Knowlton
("SK"), Christopher Knowlton, Hugh Knowlton Trust For The Benefit of Erica
Knowlton and Margaret F. Knowlton as Custodian for Craig Stanley Knowlton
(collectively, the "Reporting Persons"). The Reporting Persons own
beneficially an aggregate amount of 557,100 shares of Common Stock
(including 125,000 shares that may be acquired upon conversion of shares of
Convertible Preferred Stock of the Company and 600 shares that may be
acquired upon exercise of warrants to purchase Common Stock), constituting
approximately 6.5 % of the shares of the Common Stock outstanding. Based
on such Schedule 13D, none of such Reporting Persons individually owns more
than 5.0% of the outstanding Common Stock. As described in such Schedule
13D, KBI, WK and SK may be deemed to beneficially own greater than 5.0%
percent of the outstanding Common Stock based on the relationships among
the Reporting Persons. According to such Schedule 13D, the Reporting
Persons have acquired such 557,100
23
<PAGE>
shares of Common Stock solely for investment and the Reporting Persons have
no plans to seek control of the Company.
(10) Mervyn Adelson, as trustee of the Mervyn Adelson Trust is deemed to
beneficially own the Preferred Stock.
PART IV
ITEM 14. EXHIBITS, FINANCIAL, STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- -----------------------------------------------------------------
(a) Financial Statements
The Financial Statement Index is found on Page F-1.
(b) Financial Statement Schedules/1/
None.
(c) Exhibits
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Amended and Restated Certificate of Incorporation of the
Company./(1)/
3.2 Certificate of Designation for Convertible Preferred Stock, Series
A./(2)/
3.3 Bylaws of the Company./(1)/
4.1 Common Stock Certificate./(1)/
4.2 Underwriter's Warrant Agreement./(1)/
4.3 Warrant Agreement./(1)/
4.4 Warrant Certificate./(1)/
4.5 The Certificate of Incorporation and Bylaws of the Company are
included as Exhibits 3.1 through 3.3
10.1* Company's 1993 Stock Option Plan./(1)/
10.2* Company's 1994 Long-Term Performance Incentive Plan./(1)/
10.3 Common Stock Warrant dated as of June 7, 1993 between the
Company and Broadmark Capital Corporation./(1)/
10.4 Subscription Agreement dated as of June 7, 1993 between the
Company and D&N Holding Company./(1)/
10.5 Stock Purchase Warrant dated as of June 7, 1993 between the
Company and Arthur D. Harrison./(1)/
10.6 Stock Purchase Warrant dated as of June 7, 1993 between the
Company and D&N Holding Company./(1)/
10.7 Stock Purchase Warrant dated as of June 7, 1993 between the
Company and Kirkland & Ellis./(1)/
10.8 Stock Purchase Warrant dated as of December 15, 1992 between
the Company and Kirkland & Ellis./(1)/
10.9 Stock Purchase Warrant dated as of June 3, 1992 between the
Company and Herbert L. Lucas./(1)/
10.10 Stock Purchase Warrant dated as of June 3, 1992 between the Company
and H.J. Meyers & Co., Inc./(1)/
- -----------------------
/1/ Filed previously.
24
<PAGE>
10.11 Stock Purchase Warrant dated as of June 3, 1992 between the Company
and Freshman, Marantz, Orlanski, Cooper, and Klein 1993
Investments./(1)/
10.12 Stock Purchase Warrant dated as of April 30, 1993 between the
Company and Pacific Regeneration Technologies, Inc./(1)/
10.13 Registration Agreement dated as of June 7, 1993 by and among the
Company, D&N Holding Company, Sterling K. Ainsworth, Patricia A.
Pilia, Leonard P. Shaykin, and Lawrence Helson./(1)/
10.14 Amended and Restated Stockholders Agreement dated as of May 31,
1994 by and among the Company, D&N Holding Company, Sterling K.
Ainsworth, Patricia A. Pilia, Leonard P. Shaykin, and Lawrence
Helson./(1)/
10.15* Amended and Restated Employment and Executive Stock Agreement dated
as of June 7, 1993 and amended and restated as of May 31, 1994
between the Company and Leonard P. Shaykin./(1)/
10.16* Amended and Restated Employment and Executive Stock Agreement dated
as of June 7, 1993 and amended and restated as of May 31, 1994
between the Company and Sterling K. Ainsworth./(1)/
10.17* Amended and Restated Employment and Executive Stock Agreement dated
as of June 7, 1993 and amended and restated as of May 31, 1994
between the Company and Patricia A. Pilia./(1)/
10.18* Amended and Restated Employment and Executive Stock Agreement dated
as of June 7, 1993 and amended and restated as of May 31, 1994
between the Company and Lawrence Helson./(1)/
10.19* Company's Stock Option Agreement with Sterling K. Ainsworth./(1)/
10.20* Company's Stock Option Agreement with Patricia A. Pilia./(1)/
10.21 Services and Supply Agreement dated as of December 1, 1993 between
the Company and Pacific BioTechnologies Inc./(1)/
10.22 Subscription Agreement dated as of April 29, 1993 between the
Company and Pacific Regeneration Technologies./(1)/
10.23 Amended and Restated Master Agreement dated as of January 19, 1994
between the Company and F.H. Faulding & Co., Ltd./(1)/
10.23A Amendment No. 1 To Amended and Restated Master Agreement Dated
January 19, 1994, executed as of March 23, 1995./(3)/
10.24 Agreement dated as of June 7, 1993 between the Company and Baker
Norton Pharmaceuticals, Inc./(1)/
10.25 Lease dated February 28, 1995 between the Company and the Mutual
Life Assurance Company of Canada/.(3)/
10.26 Subscription Agreement and Investment Letter between the Company
and NaPro Therapeutics (Canada), Inc./(2)/
10.26A Put/Call Agreement dated July 12, 1995 between the Company and the
Purchasers of Series A Preferred Shares of NaPro BioTherapeutics
(Canada) Inc./(2)/
10.26B Side Letter dated July 21, 1995 to Put/Call Agreement./(2)/
10.26C Engagement Letter dated February 16, 1995 between the Company and
Capital West Partners./(2)/
10.26D Subscription Agreement between the Company and the purchasers of
Convertible Preferred Stock, Series A, of the Company/(2)/
10.26E Purchase Agreement between the Company and certain purchasers of
Preferred Shares of NaPro BioTherapeutics (Canada) Inc./(2)/
10.26F Purchase Agreement between the Company and BPI Capital Management
Corporation as to Preferred Shares of NaPro BioTherapeutics
(Canada) Inc./(2)/
10.27 Lease between the Company and Gunbarrel Facility L.L.C. dated
October 16, 1995./(4)/
10.27A First Amendment to Lease November 27, 1995, between the Company and
Gunbarrel Facility L.L.C./(4)/
10.28 Agreement between the Company and Pacific BioTechnologies Inc.
dated March 29, 1996
21.1 List of Subsidiaries./(4)/
25
<PAGE>
23.1 Consent of Ernst & Young LLP /(4)/
24.1 Powers of Attorney /(4)/
______________________________
* Management Compensation Plan
/(1)/ Incorporated herein by reference from the registration statement on
Form S-1 of NaPro BioTherapeutics, Inc. Filed July 27, 1994; file 33-78016.
/(2)/ Incorporated herein by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995; Commission file number 0-
24320.
/(3)/ Incorporated herein by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1994; Commission file number 0-24320.
/(4)/ Filed previously.
(d) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1995.
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Audited Consolidated Financial Statements
- -------------------------------------------------
<S> <C>
Report of Independent Auditors................... F-2
Consolidated Balance Sheets...................... F-3
Consolidated Statements of Operations............ F-5
Consolidated Statements of Stockholders' Equity.. F-6
Consolidated Statements of Cash Flows............ F-8
Notes to Consolidated Financial Statements....... F-10
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
NaPro BioTherapeutics, Inc.
We have audited the accompanying consolidated balance sheets of NaPro
BioTherapeutics, Inc. and subsidiary as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of NaPro
BioTherapeutics, Inc. and subsidiary at December 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Denver, Colorado
January 26, 1996
F-2
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 892,146 $ 7,133,390
Securities available for sale....... 507,752 --
Securities held to maturity......... -- 667,000
Accounts receivable................. 148,347 325,814
Inventory:
Raw materials................... 499,966 286,617
Work-in-process.................. 380,545 432,898
Finished goods................... 547,265 492,444
---------- -----------
1,427,776 1,211,959
Prepaid expenses and other.......... 859,539 310,451
---------- -----------
Total current assets................ 3,835,560 9,648,614
Property and equipment, at cost:
Laboratory equipment (Note 4)....... 1,093,960 1,312,996
Leasehold improvements.............. 248,729 507,816
Office equipment and other.......... 113,485 275,902
Construction in progress............ 122,504 406,948
---------- -----------
1,578,678 2,503,662
Accumulated depreciation........ 524,578 721,498
---------- -----------
Property and equipment, net......... 1,054,100 1,782,164
Restricted cash..................... -- 123,750
Receivable from related parties..... 18,487 18,487
Other assets........................ 67,805 380,335
---------- -----------
Total assets........................ $4,975,952 $11,953,350
========== ===========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1994 1995
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 417,374 $ 662,726
Accrued payroll and payroll taxes................... 112,607 338,032
Capital lease obligations, current (Note 4)......... 16,985 105,454
Notes payable, current (Note 3)..................... 83,443 38,801
Deferred revenue.................................... 36,000 51,431
------------ ------------
Total current liabilities........................... 666,409 1,196,444
Capital lease obligations, long term (Note 4)....... 3,471 298,811
Notes payable, long term (Note 3)................... -- 1,150,000
Deferred revenue (Notes 3 and 8).................... 1,100,000 --
Compensation due to officers and directors.......... 169,358 169,358
Commitments and contingencies (Notes 1 and 9)
Minority interest................................... -- 3,715,139
Stockholders' equity (Note 6):
Series A preferred stock, $.001 par value:
Authorized shares -- 2,000,000
Issued and outstanding shares -- none in 1994 and
125,000 in 1995 (preference in liquidation
$1,000,000)...................................... -- 125
Nonvoting common stock, convertible on disposition
into voting common stock, $.0075 par value:
Authorized shares -- 1,000,000
Issued and outstanding shares -- 400,000............ 3,000 3,000
Common stock, $.0075 par value:
Authorized shares -- 19,000,000
Issued shares -- 7,713,443 in 1994 and
8,525,265 in 1995................................... 57,851 63,939
Additional paid-in capital.......................... 20,123,991 26,675,099
Unearned compensation............................... (29,685) (9,426)
Notes receivable from stockholders.................. (2,488,996) (924,789)
Deficit............................................. (14,629,447) (18,699,803)
Treasury stock -- none in 1994 and 144,788 in 1995.. -- (1,684,547)
------------ ------------
Total stockholders' equity.......................... 3,036,714 5,423,598
------------ ------------
Total liabilities and stockholders' equity.......... $ 4,975,952 $ 11,953,350
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1993 1994 1995
Revenues:
<S> <C> <C> <C>
Sales of products.................... $ 1,247,819 $ 1,002,037 $ 2,623,426
Other................................ 567 5,176 --
----------- ----------- -----------
1,248,386 1,007,213 2,623,426
Expenses:
Research, development and cost of
products sold..................... 3,505,465 2,706,767 4,325,274
General and administrative........... 2,689,803 2,043,931 2,309,934
Faulding royalty (Note 6)............ -- 1,000,000 --
Plantation fees (Note 8)............. 6,976 1,238,256 272,052
----------- ----------- -----------
6,202,244 6,988,954 6,907,260
----------- ----------- -----------
Operating loss....................... (4,953,858) (5,981,741) (4,283,834)
Other income (expense):
Interest income...................... 79,326 188,026 373,306
Interest and other expense........... (33,839) (339,830) (159,828)
----------- ----------- -----------
Net loss before extraordinary item... (4,908,371) (6,133,545) (4,070,356)
Loss on early extinguishment......... -- (512,482) --
of debt (Note 6)
----------- ----------- -----------
Net loss............................. $(4,908,371) $(6,646,027) $(4,070,356)
=========== =========== ===========
Net loss per share:
Before extraordinary item............ $(0.79) $ (0.91) $(0.51)
Extraordinary item................... -- (0.08) --
----------- ----------- -----------
Net loss............................. $(0.79) $ (0.99) $(0.51)
=========== =========== ===========
Weighted average shares outstanding.. 6,201,219 6,761,081 7,972,537
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993 AND 1994
<TABLE>
<CAPTION>
NOTES
SERIES A NONVOTING ADDITIONAL RECEIVABLE
PREFERRED COMMON STOCK PAID-IN UNEARNED FROM TREASURY
STOCK STOCK COMMON CAPITAL COMPENSATION STOCKHOLDERS DEFICIT STOCK TOTAL
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1992....................... $ $ $22,034 $ 2,913,881 $ (51,000) $ -- $ (3,075,049) $ -- $ (190,134)
Issuance of 1,124,398
shares of common stock at
$2.47 to $5.265 per share
and 113,778 warrants for
cash....................... -- -- 8,433 3,096,252 -- -- -- -- 3,104,685
Issuance of 1,526,814
shares of common stock at
$2.47 per share to
officers in exchange for
notes, unearned
compensation and cash...... -- -- 11,451 3,755,964 (1,477,203) (2,355,837) -- -- (65,625)
Grant of employee stock
options.................... -- -- -- 114,042 (85,417) -- -- -- 28,625
Issuance of warrant to
purchase 20,000 shares of
common stock in exchange
for legal services......... -- -- -- 53,950 -- -- -- -- 53,950
Issuance of warrant to
purchase 13,333 shares of
common stock in exchange
for employment services.... -- -- -- 7,900 -- -- -- -- 7,900
Amortization of unearned
compensation............... -- -- -- -- 1,025,003 -- -- -- 1,025,003
Net loss.................... -- -- -- -- -- -- (4,908,371) -- (4,908,371)
Balance at December 31,
1993....................... -- -- 41,918 9,941,989 (588,617) (2,355,837) (7,983,420) -- (943,967)
Issuance of 265,000 shares
of common stock at $2.40
per share in exchange for
cash, net of offering
costs of $87,022........... -- -- 1,988 546,991 -- -- -- -- 548,979
Issuance of 16,667 common
stock warrants at $.01
per share in exchange for
consulting services........ -- -- -- 42,500 -- -- -- -- 42,500
Issuance of 33,333 common
stock warrants at $1.125
per share in exchange for
employment services........ -- -- -- 39,834 -- -- -- -- 39,834
Issuance of 1,800,000
shares of common stock at
$5.00 per share and
2,070,000 warrants at
$0.10 per warrant for
cash, net of offering
costs of $1,184,418........ -- -- 13,500 7,339,082 -- -- -- -- 7,352,582
Issuance of 400,000 shares
of nonvoting common stock
at $5.00 per share for
cash and warrants to
purchase 400,000 shares
of nonvoting common stock
at $.10 per warrant....... -- 3,000 -- 2,037,000 -- -- -- -- 2,040,000
Exercise of 30,667 common
stock warrants for cash,
at prices ranging from
$.10 to $2.40 per share.... -- -- 230 33,735 -- -- -- -- 33,965
Issuance of 28,615 shares
of common stock at $5.00
per share in exchange for
notes payable.............. -- -- 215 142,860 -- -- -- -- 143,075
Amortization of unearned
compensation............... -- -- -- -- 558,932 -- -- -- 558,932
Interest receivable on
officers' notes............ -- -- -- -- -- (133,159) -- -- (133,159)
Net loss.................... -- -- -- -- -- -- (6,646,027) -- (6,646,027)
Balance at December 31, 1994 $ -- $3,000 $57,851 $20,123,991 $ (29,685) $(2,488,996) $(14,629,447) $ -- $ 3,036,714
</TABLE>
F-6
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
NOTES
SERIES A NONVOTING ADDITIONAL RECEIVABLE
PREFERRED COMMON STOCK PAID-IN UNEARNED FROM TREASURY
STOCK STOCK COMMON CAPITAL COMPENSATION STOCKHOLDERS DEFICIT STOCK TOTAL
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31,
1994....................... $ $3,000 $57,851 $20,123,991 $(29,685) $(2,488,996) $(14,629,447) $ -- $ 3,036,714
Issuance of 1,364,263
shares of preferred
stock at $8.00 per
share, net of offering
costs of $846,421
(725,513 shares in
minority interest)......... 639 -- -- 4,267,051 -- -- -- -- 4,267,690
Conversion of 513,750
shares of preferred
stock into 513,750
shares of common stock
and exchange of 266,421
shares of subsidiary's
preferred stock for
266,421 shares of common
stock...................... (514) -- 5,851 2,238,584 -- -- -- -- 2,243,921
Exercise of 31,651 stock
options at prices
ranging from $.75 per
share to $2.40 per share... -- -- 237 45,473 -- -- -- -- 45,710
Repurchase of 144,288
shares of common stock
at $11.675 per share in
exchange for
cancellation of
indebtedness............... -- -- -- -- -- 1,684,547 -- (1,684,547) --
Interest receivable on
officers' notes............ (120,340) (120,340)
Amortization of unearned
compensation............... -- -- -- -- 20,259 -- -- -- 20,259
Net loss.................... -- -- -- -- -- -- (4,070,356) -- (4,070,356)
Balances at December 31,
1995....................... $ 125 $3,000 $63,939 $26,675,099 $ (9,426) $ (924,789) $(18,699,803) $(1,684,547) $ 5,423,598
</TABLE>
F-7
<PAGE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1993 1994 1995
-----------------------------------------
<S> <C> <C> <C>
Net loss................................................ $(4,908,371) $(6,646,027) $(4,070,356)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization........................ 179,453 473,989 269,804
Employee termination expense......................... -- 82,334 --
Compensation for common stock and options............ 1,025,003 555,497 20,259
Loss on disposal of property and equipment........... 4,298 335,021 174,440
Loss on early extinguishment of debt................. -- 512,482 --
Gain on foreign currency transactions................ -- -- (11,026)
Changes in operating assets and liabilities:
Accounts receivable..................................... (234,323) 114,679 (177,467)
Inventory............................................... (552,642) (705,771) 215,817
Prepaid expenses and other current assets............... (27,725) (887,314) 116,218
Accounts payable........................................ 852,492 (735,613) 245,352
Accrued liabilities..................................... 55,980 (48,366) 225,425
Deferred revenue........................................ 336,600 (300,598) 15,431
----------- ----------- -----------
Net cash used by operating activities................... (3,269,235) (7,249,687) (2,976,103)
INVESTING ACTIVITIES
Additions to property and equipment..................... (527,446) (575,156) (1,209,326)
Purchase of securities.................................. -- (2,932,260) (6,562,600)
Proceeds from sale or maturity of securities............ -- 2,435,942 6,451,146
Transfer of restricted cash............................. -- -- (123,750)
Proceeds from sale of property and equipment............ -- 2,200 250
----------- ----------- -----------
Net cash used by investing activities................... (527,446) (1,069,274) (1,444,280)
FINANCING ACTIVITIES
Increase in deferred revenue-long term.................. 349,998 350,000 --
Proceeds from notes payable............................. 400,000 1,571,569 171,198
Payments under notes payable............................ (126,808) (2,154,590) (165,840)
Proceeds from sales-type lease.......................... -- -- 469,094
Payments under capital leases........................... -- -- (85,285)
Proceeds from sale of common and preferred stock........ 3,104,685 10,697,987 5,155,710
Proceeds from sale of preferred stock by subsidiary..... -- -- 5,959,060
Offering costs.......................................... -- (1,271,440) (842,310)
----------- ----------- -----------
Net cash provided by financing activities............... 3,727,875 9,193,526 10,661,627
----------- ----------- -----------
</TABLE>
F-9
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1993 1994 1995
-----------------------------------------
<S> <C> <C> <C>
Net increase (decrease) in cash and cash equivalents.... $ (68,806) $874,565 $6,241,244
Cash and cash equivalents at beginning of year.......... 86,387 17,581 892,146
---------- -------- ----------
Cash and cash equivalents at end of year................ $ 17,581 $892,146 $7,133,390
========== ======== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Issuance of common stock and granting of
common stock options, unearned compensation.......... $1,653,095 $ $
-- --
Notes and related interest receivable from
stockholders......................................... 2,355,837 133,158 120,356
Repayment of notes receivable from stockholders
through transfer of treasury stock to the Company.... -- -- 1,684,547
Conversion of deferred revenue to long-term debt........ -- -- 1,100,000
Conversion of preferred shares of subsidiary to
common shares of Parent.............................. -- -- 2,243,921
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
NaPro BioTherapeutics, Inc. (the "Company") was originally incorporated in 1991
as a Washington corporation. On September 8, 1993, the Company merged into a
wholly-owned subsidiary, a Delaware corporation, and increased its authorized
capital stock to 130,000,000 shares of $.001 par value common stock and
10,000,000 shares of $.001 par value nonvoting preferred stock. On March 16,
1994, the Company effected a 1-for-7.5 reverse stock split by exchanging each
7.5 shares of common stock for 1 share of $.0075 par value common stock, and
adjusted its authorized capital stock to 20,000,000 shares of $.0075 par value
common stock, and 2,000,000 shares of $.001 par value nonvoting preferred stock.
On July 24, 1994, the Company adjusted its authorized capital stock to
19,000,000 shares of $.0075 par value common stock, 1,000,000 shares of $.0075
par value nonvoting common stock, and 2,000,000 shares of $.001 par value
preferred stock. The accompanying financial statements and related notes give
retroactive effect to the merger, the adjustment to capital stock, and the
reverse stock split.
On November 4, 1994, the Company formed a wholly-owned subsidiary, NaPro
BioTherapeutics (Canada), Inc.
BASIS OF PRESENTATION
The accompanying financial statements include the consolidated financial
position, consolidated results of operations and consolidated cash flows of the
Company and its Canadian subsidiary, NaPro BioTherapeutics (Canada), Inc., of
which the Company holds 87.3% of the voting rights. All transactions have been
accounted for at historical cost. All balances and transactions between these
entities have been eliminated in the accompanying financial statements. Until
December 31, 1994, the Company was in the development stage.
DESCRIPTION OF BUSINESS
The Company is focused on developing, producing and licensing natural product
pharmaceuticals. To date, the Company has engaged primarily in developing and
applying its proprietary extraction, isolation and purification technology to
manufacture paclitaxel
F-11
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
(referred to in some scientific and medical literature as"taxol"/**/), a
naturally occurring cancer-fighting compound found in certain species of yew
(Taxus) trees.
The Company is dependent upon new financing to fund new research and development
as well as its other discretionary working capital requirements. The Company
anticipates, based on its existing available financial resources, on the
proceeds obtainable upon exercise of existing warrants and on its currently
proposed plans and assumptions relating to its operations (including assumptions
regarding the progress of its research and development, the timing and costs
associated with obtaining regulatory approvals for, and the manufacturing and
marketing of, its paclitaxel), that it has sufficient resources to finance its
planned operations during 1996. In the future the Company may require
substantial additional financing to construct and establish a full-scale
commercial manufacturing facility for paclitaxel and to develop, commercialize
and manufacture semisynthetic paclitaxel and other products. Management
believes that it will be able to obtain appropriate financing; however, there
can be no assurance that future additional financing will be available to the
Company when desired, on commercially reasonable terms, or at all. The
inability to obtain additional financing may have a material adverse effect on
the Company's development plans.
CASH EQUIVALENTS, SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The Company's cash equivalents are
comprised of money market funds. Securities available for sale are investment-
grade corporate or government securities and are carried at amortized cost which
approximates fair value. Securities held to maturity are certificates of
deposit maturing in July 1997 and are carried at amortized cost.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time of shipment. The
Company's production process is not distinct from its research and development
processes. Accordingly, the cost of products sold is included with the
Company's research and other
- -----------------
/**/"TAXOL" is a registered trademark of Bristol-Myers Squibb Company (Bristol-
Myers Squibb) for an anticancer pharmaceutical preparation containing
paclitaxel.
F-12
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
development expenses. Licensing fees and other revenues are recognized in
accordance with the terms of the applicable agreements. Payments received in
advance under these agreements are recorded as deferred revenue until earned.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out method) or market.
RESEARCH AND DEVELOPMENT
The Company expenses research and development costs as they are incurred. These
costs include salaries, laboratory supplies, travel, chemicals, facilities,
equipment and other expenditures.
DEPRECIATION
Depreciation of property and equipment is computed on the straight-line method
over estimated useful lives generally between three and seven years. Leasehold
improvements and equipment recorded under capital leases are amortized over the
shorter of their estimated useful lives or the lease term. Depreciation and
amortization expenses are allocated to either general and administrative or
research and development expense, depending on the use of the related property
and equipment.
NET LOSS PER SHARE
Except as noted below, net loss per share is computed using the weighted average
number of shares of common stock outstanding. Common equivalent shares from
stock options and warrants are excluded from the computation as their effect is
antidilutive, except that, pursuant to Securities and Exchange Commission Staff
Accounting Bulletin Number 83, Earnings per Share Computations in an Initial
Public Offering, 315,854 common and common equivalent shares issued during the
12-month period prior to the Company's August 1994 initial public offering at
prices below the anticipated public offering price were included in the
calculation as if they were outstanding for all periods presented, up to the
close of the initial public offering.
F-13
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS No. 121"), which
requires impairment losses to be recorded on long-lived assets used in
operations when indications of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company will adopt SFAS No. 121
in the first quarter of 1996 and, based on current circumstances, does not
believe adoption will have a significant impact on the financial statements.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123, Accounting and Disclosure of Stock-Based
Compensation ("SFAS No. 123"). SFAS No. 123 is applicable to fiscal years
beginning after December 15, 1995 and gives the option to either follow fair
value accounting or to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. The Company has determined that it will elect to continue to
follow APB No. 25 and related interpretations in accounting for its employee
stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 financial
statements to conform with the 1995 financial statement presentation.
F-14
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES; SIGNIFICANT CUSTOMERS
Domestic and foreign financial information is as follows:
<TABLE>
<CAPTION>
UNITED NORTH TOTAL
YEAR STATES AMERICA ELIMINATIONS COMPANY
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales to affiliated and
unaffiliated customers.... 1993 $1,247,819 $ -- $ -- $ 1,247,819
1994 1,002,037 148,347 (148,347) 1,002,037
1995 2,623,426 569,337 (569,337) 2,623,426
Operating loss............... 1993 4,953,858 -- -- 4,953,858
1994 5,913,420 68,321 -- 5,981,741
1995 3,851,234 432,600 -- 4,283,834
Identifiable assets
December 31,.............. 1994 5,019,168 672,226 (715,442) 4,975,952
1995 9,225,725 6,820,044 (4,092,419) 11,953,350
</TABLE>
For the years ended December 31, 1993, 1994 and 1995, approximately 80%, 15% and
75%, respectively, of the Company's sales were export sales to F.H. Faulding &
Co., Limited ("Faulding"). Further, substantially all of the Company's accounts
receivable at December 31, 1994 and 1995 were from this corporation (see Note
8). The Company is dependent on sales to its two development and marketing
partners, Faulding and the Baker Norton subsidiary of IVAX Corporation ("IVAX")
(see Note 8) and does not require collateral to secure accounts receivable from
these partners. Sales to these partners as a percent of total sales were as
follows:
1993 1994 1995
------------------
Faulding........ 80% 15% 75%
IVAX............ 1% 71% 22%
RISKS AND UNCERTAINTIES RELATED TO DISTRIBUTION
The Company's currently largest customer, Faulding, distributes a paclitaxel-
based drug in Australia. Faulding's main competitor in the Australian market,
Bristol-Myers Squibb, has
F-15
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
brought legal action against Faulding on the basis of infringement of certain
Bristol-Myers Squibb patents, which Faulding is claiming are invalid in a
separate suit. Based upon its review of the prior art and its discussions with
Faulding, management of the Company believes the Bristol Myers-Squibb action
will be successfully resisted. However, litigation is an uncertain process, and
no assurances can be given that Bristol-Myers Squibb will not obtain an
injunction against Faulding which could prevent Faulding from marketing
paclitaxel in Australia pursuant to Faulding's generic approval. If Faulding
were to be prevented from continuing to market paclitaxel in Australia pursuant
to its current generic approval, then Faulding would be unable to continue to
market the Company's paclitaxel until such time as Faulding obtains its own
nongeneric approval which does not rely on the administration methods claimed in
the Bristol-Myers Squibb patents. If Bristol-Myers Squibb is successful in
enforcing its patent claims against Faulding, such a result would have a
material adverse effect on the Company.
2. RELATED PARTY TRANSACTIONS
In conjunction with employment, the Company agreed to loan an officer of the
Company up to $20,000. In January 1994, $18,487 was advanced under this
agreement and remains outstanding at December 31, 1995.
From time to time, certain employees and officers of the Company may enter into
agreements with the Company to defer all or portions of their salaries as a
method to conserve cash in the Company. Such amounts totaled $169,358 at
December 31, 1994 and 1995. The Company has no obligation to repay such amounts
until the Company is profitable.
The Company recorded $707,190 and $589,660 in 1994 and 1995, respectively, in
sales to IVAX, a marketing and development partner which owned 14.3% and 13.2%
of the Company's outstanding shares of common stock (see Notes 1 and 8) at
December 31, 1994 and 1995, respectively.
In August 1995, the Company repurchased 144,288 shares of its common stock from
certain executive officers of the Company in exchange for the cancellation of
certain indebtedness owed by such officers of $1,684,547 to the Company.
Included in the canceled indebtedness was $192,867 of accrued interest (see Note
6).
F-16
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE
In 1992, 1993 and 1994, Faulding made advance payments to the Company totaling
$1,100,000. In March 1995, the Company and Faulding finalized an agreement to
convert the advance payments into a note payable with a face value of
$1,200,000, due in June 1997.
The $100,000 original issue discount is being amortized over the life of the
note and has a remaining balance of $50,000 at December 31, 1995. The portion
of the note on which interest accrues at the rate of 9% increases over time as
deliveries of product are made to Faulding. At December 31, 1995, interest is
being accrued on $700,000 of the principal balance. Interest accrual is
scheduled to commence in the first quarters of 1996 and 1997, with respect to
the remaining $300,000 and $200,000 of principal, respectively.
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1995
<S> <C> <C>
Note payable to Faulding, net of unamortized original
issue discount, due in June 1997, interest at 9%
accruing on $700,000, payable quarterly................... $ -- $1,150,000
Note payable to stockholder, due in December 1995........... 40,000 --
Note payable, due in March 1996, interest at 6.81%, accruing
monthly................................................... -- 38,801
Note payable, due in March 1995............................. 43,443 --
------- ----------
83,443 1,188,801
Less amounts currently payable.............................. 83,443 38,801
------- ----------
Notes payable-long term..................................... $ -- $1,150,000
======= ==========
</TABLE>
Interest paid approximated interest expense for the years ended December 31,
1993 and 1994. For the year ended December 31, 1995, interest paid was $69,780
and interest expense was $149,869.
Future minimum payments under notes payable are as follows:
1996...................................... $ 38,801
1997...................................... 1,200,000
----------
Total..................................... 1,238,801
Less unamortized original issue discount.. 50,000
----------
$1,188,801
==========
F-17
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. CAPITAL LEASE OBLIGATIONS
The Company's property held under capital leases consisted of the following,
which is included in property and equipment:
DECEMBER 31
-----------------
1994 1995
Office equipment....................... $11,496 $ 72,695
Laboratory equipment................... 83,661 356,468
------- --------
95,157 429,163
Less accumulated depreciation.......... 21,230 96,133
------- --------
$73,927 $333,030
======= ========
At December 31, 1995, minimum payments under capital lease obligations are:
1996............................................. $170,240
1997............................................. 162,534
1998............................................. 155,057
--------
Net minimum lease payments....................... 487,831
Less amount representing interest................ 83,566
--------
Present value of minimum lease payments.......... 404,265
Less current portion............................. 105,454
--------
$298,811
========
The Company has entered into an irrevocable standby letter of credit agreement
with a financial institution to support a capital lease agreement for up to
$500,000 at an interest rate of prime plus 2%. As of December 31, 1995, no
funds have been drawn on the letter of credit.
The Company is required to maintain certificates of deposit for 33% of the
remaining principal outstanding under capital lease obligations ($123,750 at
December 31, 1995) as collateral as long as a letter of credit is outstanding.
Such pledged amounts are classified as restricted cash in the accompanying
consolidated balance sheets.
F-18
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
The Company accounts for income taxes in conformity with Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes ("SFAS No. 109").
Under the provisions of SFAS No. 109, a deferred tax liability or asset (net of
a valuation allowance) is provided in the financial statements by applying the
provisions of applicable tax laws to measure the deferred tax consequences of
temporary differences that will result in net taxable or deductible amounts in
future years as a result of events recognized in the financial statements in the
current or preceding years.
As of December 31, 1995, the Company has net operating loss carryforwards for
income tax purposes of approximately $15,180,000 and research and development
credits of $159,000 to offset future taxable income in the United States,
expiring as follows:
RESEARCH
NET AND
OPERATING DEVELOPMENT
LOSSES CREDITS
2006..... $ 282,000 $ --
2007..... 1,826,000 52,000
2008..... 3,328,000 54,000
2009..... 4,600,000 38,000
2010..... 5,144,000 15,000
----------- --------
$15,180,000 $159,000
=========== ========
In Canada, the Company has net operating loss carryforwards of approximately
US$225,000, expiring in 2002.
Under Section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards is limited after an ownership
change, as defined in such Section 382, to an annual amount equal to the value
of the loss corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal long-term tax-exempt rate in effect
during the month the ownership change occurred. At least one such ownership
change has occurred. As a result, the Company will be subject to an annual
limitation on the use of its net operating losses. This limitation affects net
operating losses incurred up to the ownership change and does not reduce the
total amount of net operating loss which may be taken, but rather limits the
amount which may be used during a particular year. Therefore, in the event the
Company achieves profitability, such limitation would have the effect of
increasing the Company's tax liability and reducing the net income and available
cash resources of the Company if the taxable income during any year exceeded the
allowable loss carried forward to that year.
F-19
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax liabilities and assets with respect to United
States taxing authorities are as follows:
DECEMBER 31
-------------------------
1994 1995
Deferred tax liabilities:
Tax over book depreciation............ $ 13,587 $ --
Other................................. 43,466 41,724
----------- -----------
Total deferred tax liabilities........ 57,053 41,724
Deferred tax assets:
Tax net operating loss carry forward.. 3,873,693 5,734,815
Deferred compensation................. 63,510 63,510
Amortization.......................... 376,256 261,884
Deferred revenue...................... 426,000 19,287
Research and development credits...... 144,325 158,897
Excess of book over tax depreciation.. -- 72,174
Other................................. 134,348 113,922
----------- -----------
Total deferred tax assets............. 5,018,132 6,424,489
Valuation allowance................... (4,961,079) (6,382,765)
----------- -----------
Net deferred tax assets............... 57,053 41,724
----------- -----------
$ -- $ --
=========== ===========
Significant components of the Company's deferred tax assets with respect to
Canadian taxing authorities are as follows:
DECEMBER 31
-----------------
1994 1995
Deferred tax assets:
Excess of book over tax depreciation... $ -- $ 26,062
Valuation allowance.................... $ -- (26,062)
------ --------
$ -- $ --
====== ========
F-20
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY
COMMON STOCK PRIVATE PLACEMENTS
On April 29, 1993 and March 8, 1994 (see Note 8), the Company entered into
exclusive long-term contracts with a large reforestation company to develop a
renewable source of biomass. In connection with the March 8, 1994 contract, the
Company sold 18,000 shares of the Company's common stock and a warrant to
acquire an additional 2,667 shares of common stock for $104,685 in cash. The
warrant may be exercised immediately at a price of $9.375 per share and expires
June 30, 1996.
THE SUBSCRIPTION AGREEMENT AND EXECUTIVE AGREEMENTS
In June 1993, the Company entered into a Subscription Agreement (the
"Subscription Agreement") with IVAX pursuant to which the Company sold 1,106,398
shares of the Company's common stock and a warrant to acquire an additional
111,111 shares of common stock for $3,000,000 in cash. The warrant was
exercisable immediately at a nominal price, and expires in June 2003 (see Note
8).
In connection with the Subscription Agreement, the Company entered into
Employment and Executive Stock Agreements (the "Executive Agreements"), pursuant
to which the Company sold 1,526,814 shares of the Company's common stock at
$1.50 per share to certain officers in exchange for cash and promissory notes in
the aggregate amount of $2,289,076. The notes are secured by the common stock
and accrue interest at the lesser of: (i) the greater of the prime rate minus
1% and the applicable federal rate, or (ii) the highest rate per annum permitted
by law. The initial term of the Executive Agreements is five years. If an
officer's employment is terminated during the initial term of the Executive
Agreement, the shares held by that officer are subject to repurchase by the
Company at its election. The repurchase price is defined by the Executive
Agreements, but in no case will be less than the original cost of the shares.
The notes receivable and related accrued interest are recorded as a separate
reduction of stockholders' equity. In August 1995, the Company repurchased
144,288 shares of common stock from certain of these officers in cancellation of
$1,684,547 of this indebtedness (see Note 2).
The Subscription Agreement and Executive Agreements are subject to a
Stockholders Agreement which includes provisions regarding certain matters
including the composition of the Board of Directors, restrictions on the sale,
transfer or other disposition of shares sold in connection with these
agreements, and the Company's first offer right for voluntary election to
purchase all of the shares held by these stockholders.
F-21
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
BRIDGE FINANCING AND EXTRAORDINARY LOSS RESULTING FROM EXTINGUISHMENT
In April 1994, the Company completed the sale (the "Bridge Financing") to
private investors of 26.5 units (the "Units"), each Unit consisting of: (i)
10,000 shares of common stock and (ii) an unsecured 9% nonnegotiable convertible
promissory note of the Company in the principal amount of $50,000, due on the
earlier of the consummation of the Company's initial public offering or March
31, 1995, unless converted, at the option of the holder, into shares of common
stock upon the consummation of the Company's initial public offering, at a rate
equal to $5.00 per share of common stock (a"Bridge Note"). The purchase price
per Unit was $50,000. The Company received gross proceeds of $1,325,000 with
respect to the sale of such Units. After the payment of $132,500 in placement
fees to the underwriter who acted as placement agent for the Company with
respect to the sale of such Units, and other offering expenses of approximately
$75,000, the Company received net proceeds of approximately $1,117,500 from the
sale of the Units. The Bridge Financing resulted in the Company's issuance of a
total of $1,325,000 principal amount of Bridge Notes and 265,000 shares of
common stock. Upon closing of the Company's initial public offering, $1,185,000
in principal amount of Bridge Notes was paid in cash and $140,000 was converted
to 28,615 shares of common stock. The repayment of the Bridge Notes prior to
their one-year stated maturity resulted in a $512,482 extraordinary loss.
INITIAL PUBLIC OFFERING OF COMMON STOCK AND REDEEMABLE WARRANTS
In August 1994, the Company completed an initial public offering of its common
stock and redeemable warrants to purchase common stock (the "IPO"). The
offering consisted of 1,800,000 shares of common stock and redeemable warrants
to purchase 2,070,000 shares of common stock (including 270,000 redeemable
warrants to purchase common stock issued in connection with the underwriter's
overallotment). The common stock and warrants were purchased separately and are
separately transferable. Each warrant entitles the registered holder thereof to
purchase one share of common stock at a price of $5.00, subject to adjustment in
certain circumstances, for a period of three years, commencing February 1, 1995.
The warrants are redeemable by the Company, upon the consent of the underwriter,
at any time commencing February 1, 1995 upon notice of not less than 30 days, at
a price of $.10 per warrant, provided that the closing bid quotation of the
common stock on all 20 trading days ending on the third day prior to the day on
which the Company gives notice has been at least 150% of the then effective
exercise price of the warrants ($7.50 at December 31, 1994, subject to
adjustment). The net proceeds of the offering to the Company were $7,352,582
(after deduction of the underwriting discount and expenses of the offering). In
connection with the completion of the IPO, the Bridge Notes and certain notes
payable to IVAX Corporation and another shareholder as well as certain officer
salaries which had been deferred since September 1993 in order to preserve cash
were paid. In addition, the normal vesting of stock sold in conjunction with
the Executive Agreements was accelerated as a result of completion of the IPO,
resulting in a charge, during 1994, of $307,749 to general and administrative
expense.
F-22
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
FAULDING PRIVATE PLACEMENT AND ELIMINATION OF THE FAULDING ROYALTY
Contemporaneously with consummation of the IPO, the Company sold to Faulding in
a private transaction (the "Faulding Private Placement") 400,000 shares of the
Company's nonvoting common stock (the "Nonvoting Common") at a price of $5.00
per share, the initial public offering price per share in the IPO, and 400,000
warrants (the "Faulding Warrants") to purchase an additional 400,000 shares of
Nonvoting Common at a price of $.10 per warrant, the initial public offering
price per warrant. Shares of Nonvoting Common will automatically convert to
common stock (with full voting rights), on a share-for-share basis, upon
Faulding's disposition thereof. The Nonvoting Common and the Faulding Warrants
are identical in all respects to the common stock and warrants which were sold
in the IPO, except that, other than in limited circumstances, Faulding, as the
holder, has no voting rights with respect to the Nonvoting Common, and the
Faulding Warrants are exercisable for Nonvoting Common instead of common stock
until Faulding's disposition thereof. The proceeds from issuance of the
Nonvoting Common and Faulding Warrants were as follows: $1,000,000 was applied
directly to eliminate the Company's liability to Faulding resulting from
Faulding's royalty rights under the Faulding Agreement (the "Faulding Royalty")
and cash of $1,040,000 was received by the Company. Under the Faulding Royalty,
the Company would have been obligated to pay Faulding 4% of the Company's sales
price on the first 100,000 grams of paclitaxel it sold to third parties for
commercial use. The cost of eliminating the Faulding Royalty was expensed, and
was separately reflected in the statement of operations for the year ended
December 31, 1994.
PREFERRED STOCK PRIVATE PLACEMENT
In July 1995, the Company closed a private placement of 638,750 shares of
Convertible Preferred Stock, Series A (the "US Preferred") of the Company
("NaPro USA"), for proceeds of $5,114,111.
In July and August 1995, the Company closed a private placement of 725,513
shares of Convertible Preferred Stock, Series A (the "Canadian Preferred") of
the Company's Canadian subsidiary, NaPro BioTherapeutics (Canada), Inc. ("NaPro
Canada"), for proceeds of $5,959,060.
F-23
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
The U.S. Preferred has a liquidation preference of $8.00 per share and is
immediately convertible into common stock of the Company on a share-for-share
basis at the option of the holder. The U.S. Preferred may be redeemed by the
Company at its liquidation value beginning one year after issuance if the
average trading price for the NaPro USA common stock over a 20 trading day
period has equaled or exceeded $16.00 and beginning three years after issuance
if such trading price has equaled or exceeded $10.00. Holders may elect to
convert their U.S. Preferred into common stock of the Company at any time prior
to 15 business days before the date fixed for redemption. The U.S. Preferred
also may be redeemed at any time after September 30, 2000 at the option of the
holder. The Company may elect to pay the redemption price by issuing its common
stock valued at 95% of its then market price. The U.S. Preferred has one vote
per share.
The Canadian Preferred has a liquidation preference of CDN$11.00 per share and
may be exchanged for common stock of the Company on a share-for-share basis at
any time after December 1, 1995. The Company has the option to acquire the
Canadian Preferred at its liquidation value beginning one year after issuance if
the average trading price for the Company's common stock over a 20 trading day
period has equaled or exceeded the equivalent of CDN$22.00 and beginning three
years after issuance if such trading price has equaled or exceeded the
equivalent of CDN$13.75. Holders may elect to exchange their Canadian Preferred
for common stock of the Company at any time prior to 15 business days prior to
the date fixed for the Company to acquire the shares under the foregoing option.
Holders have the option to require the Company to purchase the Canadian
Preferred for its liquidation preference at any time after September 30, 2000.
The Company may elect to pay the purchase price of the Canadian Preferred by
issuing its common stock valued at 95% of its then market price. The Canadian
Preferred is entitled to one vote per share in NaPro Canada.
At December 31, 1995, a total of 513,750 shares of the U.S. Preferred had been
converted into 513,750 shares of Common Stock of the Company and 266,421 shares
of the Canadian Preferred had been exchanged for 266,421 shares of common stock
of the Company.
The Company registered under the Securities Act of 1933 the resale of shares of
its common stock issued upon conversion of the U.S. Preferred or exchange of the
Canadian Preferred. Neither the U.S. Preferred nor the Canadian Preferred has
any dividend requirement.
F-24
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK WARRANTS AND OPTIONS
COMMON STOCK WARRANTS
In December 1992 and June 1993, the Company granted to a consultant warrants to
purchase 20,000 shares of common stock at $1.875 per share. The warrants, which
were fully vested at December 31, 1993, expire in December 2002 (13,333 shares)
and June 2003 (6,667 shares). Additionally, the Company granted a warrant to a
director to purchase 13,333 shares of the Company's common stock, at an exercise
price of $1.875 per share. This warrant is exercisable immediately and expires
in June 2003. In June 1993, the Company issued IVAX a warrant to purchase
111,111 shares of common stock (see Notes 6 and 8).
In January 1994 and May 1994, the Company granted to a former consultant and
former employee warrants to purchase 33,333 and 16,667 shares, respectively, of
the Company's common stock, at exercise prices of $1.125 and $.01 per share,
respectively. The warrant to purchase 33,333 shares is exercisable immediately
and expires in April 1997. The warrant to purchase 16,667 shares was exercised
in conjunction with the Company's initial public offering. As a result of these
transactions the Company recognized $82,334 in expense. The expense was based
on an estimated fair market value of the underlying stock of $2.40 per share,
consistent with the value of the Bridge transaction described in Note 6. In
August 1994, in conjunction with the initial public offering, 1,980 warrants
were purchased by the underwriters.
NONPLAN STOCK OPTIONS
In November 1990, Pacific Biotechnology, Inc. ("PB"), one of the Company's
predecessors, granted options to purchase 613,333 shares (reduced to 199,233.6
shares in September 1991) of its common stock to two officers. The exercise
price is $.1875 per share and the options are fully exercisable during the
period from January 1, 1992 to December 31, 1999. In December 1991, when the
Company acquired all of the outstanding common stock of PB, all options to
purchase PB common stock were exchanged for options to purchase 159,143.30
shares of the Company's common stock under the same terms as the PB options. In
January 1994, the Company granted to the four outside directors of the Company
27,000 nonplan options to purchase shares of common stock which are immediately
exercisable at a price of $2.40 and which expire in January 2002.
F-25
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
THE 1993 STOCK OPTION PLAN
During 1993, the Board of Directors adopted the NaPro BioTherapeutics, Inc. 1993
Stock Option Plan (the "Plan") to provide stock options to employees and other
individuals as determined by the Board of Directors. The Plan provides for
option grants designated as either nonqualified or incentive stock options. The
Plan provides for the issuance of up to 146,667 shares of the Company's common
stock. The initial term of the Plan is ten years, and the maximum option
exercise period shall be no more than ten years from the date of grant. The
exercise price for the options will be the fair market value, as determined by
any market on which the Company's common stock is traded, or in the absence of
any market, the price shall be as determined by the Board of Directors, or if
the Company has offered and sold common stock within the preceding sixty days,
the price at which such common stock was sold. The term of an option for 667 or
more shares shall be eight years, and the term of an option for fewer than 667
shares shall be five years. Options for 667 shares or more shall vest 25% after
each anniversary date of the grant, and options for fewer than 667 shares shall
vest 50% after each anniversary date of the grant. The exercise price for
incentive stock options shall be no less than fair market value. The exercise
price for nonqualified stock options may be less than, equal to, or greater than
fair market value.
1994 LONG-TERM PERFORMANCE INCENTIVE PLAN
In May 1994, the Board of Directors adopted and in July 1994, the shareholders
approved, the 1994 Long-Term Performance Incentive Plan (the "Incentive Plan").
An aggregate of 375,000 shares were authorized for issuance under the Incentive
Plan, to be increased to 875,000 shares authorized, subject to stockholders'
approval. The Incentive Plan provides for granting to employees and other key
individuals who perform services for the Company ("Participants") the following
types of incentive awards: stock options, stock appreciation rights ("SARs"),
restricted stock, performance units, performance grants and other types of
awards that the Compensation Committee deems to be consistent with the purposes
of the Incentive Plan. In addition, each person who is not an employee of the
Company or one of its subsidiaries and who is elected or re-elected as a
director of the Company by the stockholders at any annual meeting of
stockholders commencing with the 1994 annual meeting, and, if first elected or
appointed other than at an annual meeting, upon such election or appointment,
will receive, as of the business day following the date of each such election or
appointment, a nonqualified option to purchase 5,000 shares of the Company's
common stock.
F-26
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK WARRANTS AND OPTIONS (CONTINUED)
The following summarizes stock option activity and balances:
STOCK EXERCISE
OPTIONS PRICE
---------------------
Outstanding at December 31, 1992.. 159,467 $ .19
Granted........................... 79,733 .75
Canceled.......................... (13,333) .75
-------
Outstanding at December 31, 1993.. 225,867 .19-.75
Granted........................... 144,934 2.40 -- 6.00
Canceled.......................... (6,667) 2.40
-------
Outstanding at December 31, 1994.. 364,134 .19 -- 6.00
Granted........................... 241,792 6.25 -- 11.75
Canceled.......................... (6,667) 2.40
Exercised......................... (31,652) .75 -- 2.40
-------
Outstanding at December 31, 1995.. 567,607 .19 -- 11.75
=======
Exercisable shares at December 31, 1995 are 234,252. The above stock options
not already exercisable vest over the next nine years.
8. STRATEGIC ALLIANCES
The Company has entered into strategic alliances with two pharmaceutical
companies, Faulding and IVAX, that have the capabilities to obtain commercial
approval for the Company's paclitaxel and establish the Company's paclitaxel as
a major product in the market. These strategic partners will assume
responsibility for funding the cost of all aspects of the required clinical and
regulatory processes in their respective markets, procedures that would be too
costly for the Company to undertake.
THE FAULDING AGREEMENT
In 1992, the Company entered into an initial 20-year exclusive agreement with
Faulding, which was amended in June 1993, January 1994 and March 1995 (the
"Faulding Agreement"), to develop and market paclitaxel in ten countries,
including Australia, New Zealand, and much of Southeast Asia. The Faulding
Agreement also grants Faulding the nonexclusive right to sell paclitaxel
supplied by the Company in certain countries in the Middle East. Pursuant to the
Faulding Agreement, Faulding paid the Company a $200,000 licensing fee and also
provided the Company $1,100,000 of advances. These amounts were converted into
notes payable upon the delivery by the Company of the corresponding value of
paclitaxel (see Note 3).
F-27
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STRATEGIC ALLIANCES (CONTINUED)
The Faulding Agreement provides that the Company shall supply all of Faulding's
requirements for paclitaxel. The Company is paid a fixed sum for paclitaxel
supplied for noncommercial uses, and a fixed percentage of Faulding's original
sales price for paclitaxel supplied for commercial use. In addition, pursuant
to the original Faulding Agreement, the Company would have been obligated to pay
Faulding a royalty of up to 4% on the first 100,000 grams of paclitaxel sold to
third parties for commercial use. However, in 1994, the Company exercised its
right to eliminate this royalty under the Faulding Agreement by paying Faulding
$1 million (see Notes 3 and 6).
THE IVAX AGREEMENT
In June 1993, the Company entered into an initial 20-year exclusive agreement
with IVAX to develop and market paclitaxel in the United States, Europe, Japan
and the rest of the world not covered by the Faulding Agreement, with the
exception of the former Soviet Union countries, China, certain countries in the
Middle East, and the Vatican, territories to which IVAX has nonexclusive rights.
Simultaneously with entering into the IVAX Agreement, IVAX made a $3 million
equity investment in the Company for 19.8% of the Company's then outstanding
common stock (see Note 6) and committed to give the Company an additional $1.4
million in loans over the next three years for acquiring yew tree bark. The
loan commitment terminated upon completion of the IPO.
The IVAX Agreement provides that the Company shall supply all of IVAX's
requirements for paclitaxel. The Company is paid a fixed sum for paclitaxel
supplied for noncommercial uses, and a manufacturing payment plus a percentage
of IVAX's sales profit (as defined by the agreement) for paclitaxel sold for
commercial uses.
THE PBI AGREEMENT
In March 1994, the Company entered into a ten-year initial-term contract with
Pacific Biotechnologies, Inc. ("PBI"), a subsidiary of PRT, one of the largest
reforestation companies in Canada (the "PBI Agreement"). Under the PBI
Agreement, PBI is planting and maintaining a plantation of yew trees and bushes
designed to provide the Company with a long-term renewable supply of Taxus
biomass. Pursuant to such agreement, the Company is obligated to pay PBI an
annual fee equal to its costs in performing its obligations under the agreement
plus overhead and a specified profit.
The Company applied $1,500,000 of the net proceeds of its August 1994 initial
public offering to prepay in full, at a discount, all fees, interest thereon,
and all other amounts accrued and which would accrue and be owed by the Company
to PBI under the PBI
F-28
<PAGE>
NaPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STRATEGIC ALLIANCES (CONTINUED)
Agreement through December 31, 1995. Amounts paid in excess of the amounts due
totaled $268,720 on December 31, 1994 and were recorded on the balance sheet as
prepaid expenses. No corresponding amounts are outstanding at December 31,
1995. In addition, the Company's obligation under the PBI Agreement to secure a
$100,000 letter of credit in favor of PBI was eliminated. Until such time as
plantation cultivation is developed and proven, expenditures under the PBI
Agreement are being expensed as research and development and are separately
reported on the statement of operations.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has executed noncancelable operating lease agreements for office,
research and production facilities. As of December 31, 1995, future minimum
lease payments under noncancelable operating lease agreements are as follows:
1996..................... $ 495,102
1997..................... 515,375
1998..................... 498,857
1999..................... 510,725
2000..................... 438,543
----------
Total.................... $2,458,602
==========
Rent expense for the years ended December 31, 1993, 1994 and 1995 amounted to
$215,138, $146,400 and $262,332, respectively.
UNCERTAINTY OVER THE SELLING PRICE UNDER THE FAULDING AGREEMENT
Under the Faulding Agreement (see Note 8), the Company is paid a fixed sum for
paclitaxel supplied for noncommercial uses, and a fixed percentage of Faulding's
sales price for paclitaxel supplied for commercial use. The Company recognizes
the corresponding revenue at the time of shipment of paclitaxel to Faulding,
based upon the intended use indicated by Faulding on its purchase orders.
However, Faulding may or may not use the paclitaxel in accordance with the
original intent indicated on its purchase orders. Additionally, Faulding's
actual selling price may differ from the amounts originally budgeted and
indicated to the Company. On or about April 30, 1996, Faulding has agreed to
communicate to the Company the final amount of sales, and an adjustment will be
calculated, which may either increase or decrease the Company's revenue from
sales of products to Faulding for 1995.
F-29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report on Form 10-K/A to
be signed on its behalf by the undersigned, thereunto duly authorized.
NaPro BioTherapeutics, Inc.
By: /s/ Sterling K. Ainsworth
---------------------------------------
Sterling K. Ainsworth, Ph.D.
President, Chief Executive Officer
F-30
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-3 (No. 33-95522) and in the related Prospectus of NaPro BioTherapeutics,
Inc. dated August 8, 1995 of our report dated January 26, 1996, with respect to
the consolidated financial statements of NaPro BioTherapeutics, Inc. included in
this Annual Report as amended (Form 10-K/A2) for the year ended December 31,
1995.
ERNST & YOUNG LLP
Denver, Colorado
May 14, 1996
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