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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(THIRD AMENDMENT)
-----------------------------
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 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 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
BOULDER, COLORADO 80301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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
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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 [ ]
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): $88,084,262 AS OF JUNE 4, 1996.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) INDICATE THE NUMBER OF SHARES
OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES
OF COMMON STOCK, AS OF JUNE 4, 1996.
TITLE OF CLASS NUMBER OF SHARES
COMMON STOCK 8,380,977
NON VOTING COMMON STOCK 400,000
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PART I
ITEM 1. BUSINESS
THE COMPANY
NaPro BioTherapeutics, Inc. ("the Company") is a natural product
pharmaceutical company which is focusing primarily on the development,
manufacture and commercialization of paclitaxel, a naturally-occurring
anti-cancer agent found in certain species of yew (TAXUS) trees. The Company's
paclitaxel is referred to herein as "NBT Paclitaxel."
The market for paclitaxel, the largest selling chemotherapy drug in the
world, is dominated by Bristol-Myers Squibb Company ("BMS"). BMS has publicly
announced that worldwide sales of their formulation of paclitaxel were
approximately $580 million in 1995 and $200 million in the first quarter of
1996, on a worldwide basis. BMS's paclitaxel is the only United States Food and
Drug Administration ("FDA") approved formulation of paclitaxel, which approval
is for the treatment of refractory (non-responsive) breast and ovarian cancers.
The Company believes that by combining its proprietary extraction, isolation and
purification ("EIP(TM)") manufacturing technology and the renewable sources of
TAXUS biomass being developed by the Company with its long-term, exclusive
clinical development, regulatory approval, marketing and distribution agreements
with two major international pharmaceutical companies, the Company will be
well-positioned to participate in the worldwide paclitaxel market.
To advance commercialization of NBT Paclitaxel, the Company has entered
into 20-year, exclusive agreements with each of F.H. Faulding & Co., Ltd.
("Faulding") and Baker Norton Pharmaceuticals, a subsidiary of IVAX Corporation
("IVAX" and together with Faulding, the "Strategic Partners") for the clinical
development, sales, marketing and distribution of NBT Paclitaxel. Faulding,
Australia's largest domestic pharmaceutical company, had 1995 sales of
approximately $1.3 billion, and IVAX, a diversified international health care
company, also had 1995 sales of approximately $1.3 billion.
The Strategic Partners have agreed to fund and, with the Company's input,
undertake 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 commercial requirements. Under the terms of each
agreement, IVAX and Faulding pay a fixed price for NBT Paclitaxel for
non-commercial sales. For NBT Paclitaxel sold commercially, Faulding pays the
Company a substantial share of gross revenues. For IVAX's commercial sales, IVAX
will pay the Company on a cost plus basis for the Company's manufacture of NBT
Paclitaxel and in addition will pay the Company a substantial share of IVAX's
NBT Paclitaxel profits.
Faulding obtained regulatory approval and began marketing NBT Paclitaxel as
a generic pharmaceutical in Australia in January 1995 for the treatment of
refractory breast and ovarian cancers and is seeking approval to sell NBT
Paclitaxel in other countries in its defined territory. IVAX filed an
investigational new drug exemption ("IND") application for NBT Paclitaxel with
the 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. 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.
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 and, if economical, to develop its own plantations on a large scale.
The Company intends to supplement its supply of biomass obtained from PBI by
entering into additional agreements with commercial growers of ornamental yew
trees. The Company is currently
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constructing a large-scale commercial EIP(TM) manufacturing facility with
planned capacity to meet the forecasted 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, and lower its cost of manufacture, the Company is developing, and
has applied for patent protection for, a semi-synthetic process for
manufacturing NBT Paclitaxel from certain other taxanes contained in renewable
biomass sources.
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 or 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 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 that their formulation of paclitaxel has achieved
world-wide commercial sales 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 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 conventional extraction and semi-synthesis.
In extraction, the manufacturing process must be designed to extract,
isolate and purify paclitaxel from yew biomass leaving behind other components,
including non-paclitaxel taxanes. The extraction, isolation and purification
processes, however, are 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 to that of the conventional extraction
process, except that the process not only isolates paclitaxel, but also isolates
and subsequently converts through chemical synthesis certain other taxanes
(which are otherwise considered waste byproducts) into paclitaxel, thereby
increasing the yield of paclitaxel from the same biomass source. The final
product of either method must have levels of impurity at or below acceptable
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. As a result of its slow
growing pattern, wild TAXUS is generally found 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 the bark, which
generally requires destroying the tree. As a result, there has been a
considerable amount of public debate and controversy 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
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halted harvesting bark from wild Pacific yew trees in 1994. See "Corporate
Strategy" and "Biomass; Manufacturing."
Other companies have developed taxane analogues which are similar, but not
chemically identical, to paclitaxel. For example, RPR, a large international
pharmaceutical company, has developed docetaxel, one such taxane analog, which
is being marketed in various parts of the world under the trademark Taxotere(R).
Taxotere(R) has a different toxicity profile from paclitaxel and has side
effects not observed with paclitaxel. In May 1996, the FDA approved Taxotere(R)
for treatment of anthracycline-resistant breast cancer in patients without
impaired liver function.
CORPORATE STRATEGY
The Company's objective is to be an efficient, low cost 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 approvals, including designing and conducting clinical
trials, as well as marketing NBT Paclitaxel in their respective territories, if
any such approvals are received. The Strategic Partners are required to purchase
all of their paclitaxel requirements from the Company. 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 additional agreements to purchase biomass and
mature yew bushes from commercial growers of ornamental yew trees and, if
economical, to develop its own plantation. 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 PBI
and other planned plantations. See "Biomass; Manufacturing."
SCALE-UP MANUFACTURING PROCESS. In order to meet the currently anticipated
supply needs of the Strategic Partners through 1999, the Company has commenced
construction of a large-scale commercial EIP(TM) manufacturing facility in
Boulder, Colorado which the Company expects to complete and validate in 1997.
The Company expects to augment its current manufacturing process with
semi-synthesis production in 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, subject to receipt of applicable
regulatory approvals. See "Biomass; Manufacturing."
CLINICAL STATUS OF NBT PACLITAXEL
Pursuant to the agreements with the Strategic Partners, the Strategic
Partners have primary responsibility for designing and conducting clinical
trials and for pursuing regulatory approval of NBT Paclitaxel throughout the
world. 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 DMFs containing certain of the Company's
proprietary manufacturing processes relating to the 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
its paclitaxel compound. Under the Waxman-Hatch 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
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of an Abbreviated New Drug Application ("ANDA") for generic substitutes until
such period of exclusivity expires. The exclusivity period in the United States
expires in December 1997. The FDA will accept and review, however, an NDA
submitted by another party during this period of exclusivity. 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 an NDA for NBT
Paclitaxel. See "Government Regulation and Product Approvals."
IVAX. IVAX is currently pursuing a strategy to obtain NDA approval of NBT
Paclitaxel in the United States 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 refractory breast and ovarian cancers. The breast cancer trial is
evaluating both a short-term and a long-term dosing schedule. The clinical trial
for the third 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 that clinical trials will proceed or be
completed as indicated, that NBT Paclitaxel will prove safe and effective, meet
applicable regulatory standards or be successfully marketed.
FAULDING. In January 1995, Faulding received regulatory approval from the
TGA to market ANZATAX(TM) (Faulding's brand name for NBT Paclitaxel) in
Australia for the treatment of refractory breast and ovarian cancers. Under
Australian law there is no exclusivity period comparable to that provided by the
Waxman-Hatch Act, and, therefore, approval of a generic substitute was possible
without the need for additional clinical trials. Faulding did, however, conduct
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 its
Canadian or United States manufacturing facilities. 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. Faulding 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. There can be no
assurance, however, that Faulding will receive approval in any of these
territories or will successfully market NBT Paclitaxel, even if such approvals
are received.
The Company plans to submit a DMF in support of an SNDA for NBT Paclitaxel
manufactured through a semi-synthesis process. An SNDA cannot be filed until
such time, if ever, as an NDA is approved for NBT Paclitaxel. 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 non-bark sources of paclitaxel as well as
different species of TAXUS plants other than those in the original NDA filing.
It is not anticipated that an SNDA could be filed before 1999, 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 and, therefore, are uncertain. As
such, there can be no assurance that the semi-synthetic process being developed
by the Company will receive regulatory approval. 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 for use in the production of
NBT Paclitaxel, the Company entered into the PBI Agreement in 1993 and intends
to enter into additional agreements to purchase biomass and mature yew bushes
from commercial growers of ornamental yew trees and, if economical to develop
its own plantations. The Company believes that
5
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the plantations being developed and to be developed under these agreements 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 be able to 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 other
potential sources of biomass in the event demand exceeds current expectations.
There can be no assurance that the use of the ornamental yew trees and bushes
and the use of non-bark sources of such trees and bushes will be approved by the
FDA for use in manufacturing NBT Paclitaxel.
MANUFACTURING. Crude paclitaxel is extracted from yew trees and bushes by
third party extractors and delivered to the Company's manufacturing facilities
in Boulder, Colorado and British Columbia, Canada. At these two facilities, the
impure paclitaxel undergoes 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 of the Company's small-scale
manufacturing facilities has been inspected by the TGA and approved for the
commercial production of NBT Paclitaxel for sale in Australia. TGA approval
applies to the manufacture of paclitaxel from both the bark of the wild Pacific
yew tree as well as from other raw material sources. On a combined basis, the
Company believes these facilities have adequate capacity to meet clinical and
commercial demand through the launch of commercial sales of NBT Paclitaxel in
the United States if NBT Paclitaxel receives regulatory approval. 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 currently expects 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. Upon completion of
validation, but prior to approval of the NDA for NBT Paclitaxel, the Company
anticipates the large-scale commercial facility and processes intended to be
used for commercial launch of NBT Paclitaxel in the United States 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 the Company will succeed in
adopting its EIP(TM) technology for large-scale commercial manufacturing, that
the facility will be completed or validated within the time periods indicated,
that such facility and manufacturing processes will receive necessary regulatory
approvals or, even if approved, will be capable of producing NBT Paclitaxel in
the quantities necessary to satisfy the requirements of the Strategic Partners.
The Company currently contracts with a third party for small-scale
paclitaxel 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 large-scale extraction requirements or build a large-scale commercial
extraction facility. There can be no assurance that a third party contract for
such large-scale extraction can be obtained on commercially reasonable terms or
that a large-scale 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 commercial extraction contract or to construct a
regulatory-approved large-scale commercial extraction facility on a timely basis
would have a material adverse effect on the Company.
In order to increase its manufacturing capacity, 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. Unlike extraction,
however, which attempts to isolate and purify only paclitaxel, semi-synthesis
isolates and purifies certain 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 sources
using a semi-synthesis process.
STRATEGIC ALLIANCES
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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, undertake
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
commercial purposes and each Strategic Partner is required to purchase all of
its paclitaxel requirements from the Company. Under the terms of each agreement,
IVAX and Faulding pay a fixed price for NBT Paclitaxel for non-commercial sales.
For NBT Paclitaxel sold commercially, Faulding pays the Company a substantial
share of gross revenue. For IVAX's commercial sales, IVAX will pay the Company
on a cost plus basis for the Company's manufacture of NBT Paclitaxel and in
addition will pay the Company a substantial share of IVAX's NBT Paclitaxel
profit. The Company believes that through its agreements with Faulding and IVAX,
it will be able to take advantage of their resources, including expertise in
clinical testing and sales, marketing and distribution. As a result of these
Strategic Alliances, 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. There
can be no assurance that the agreements with the Strategic Partners will not be
terminated prior to their expiration, that the Strategic Partners will succeed
in obtaining regulatory approvals for NBT Paclitaxel in the United States or
elsewhere or that they will succeed in marketing NBT Paclitaxel.
FAULDING. 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 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 Territory"). 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 a March 1995 amendment to the Faulding Agreement, Faulding agreed to
convert certain prepaid product sales and deferred revenue aggregating $1.1
million, which would have become due in 1995 and 1996, into a note in the
aggregate principal amount of $1.2 million, which matures 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)
if 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 initial public offering ("IPO"), 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.
IVAX. IVAX, a diversified international health care company with 1995 sales
of approximately $1.3 billion, is engaged in the research, development,
manufacture and sale of branded and generic pharmaceuticals and other related
health care
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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.
The IVAX Agreement grants IVAX the exclusive right to develop and market
NBT Paclitaxel in the United States and in every country outside the Faulding
Territory except for the Vatican City, China, the former Soviet Union and the
Middle East where such right is non-exclusive. 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. Under
certain circumstances, IVAX may obtain certain manufacturing information from
the Company and have NBT Paclitaxel manufactured by third parties.
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 formulated 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 "Security Ownership of Certain
Beneficial Owners and Management."
MARKETING AND SALES
Marketing and sales of NBT Paclitaxel will be conducted by the Strategic
Partners. The Company believes each of the Strategic Partners has 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, or competing on a global basis with existing or new competitors.
BMS, the world's largest oncology company with 1995 sales of paclitaxel of
approximately $580 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 United States, European Community, Australia, Canada and a
number of other countries. Taxotere(R) is approved in the United States for
treatment of anthracycline-resistant breast cancer in patients without impaired
liver function. Treatment with Taxotere(R),
8
<PAGE>
however, leads to certain side effects not observed with paclitaxel. It is
anticipated, however, that Taxotere/trademark/ will compete with 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's formulation of
paclitaxel by the Waxman-Hatch Act, the Company will be subject to competition
from generic paclitaxel manufacturers. In Europe, a similar exclusivity period
will end 10 years after BMS' initial approval. Finally, academic and research
organizations and pharmaceutical and biotechnology companies are pursuing, among
other things, genetically engineered drugs, chemical synthesis and cell-tissue
culture which may compete with the Company's products or technology. 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 expects BMS to compete intensely to maintain its dominance of the
paclitaxel market, including through pursuit of an aggressive patent strategy.
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
paclitaxel extracted from bark. Although the Company believes the 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 quantities 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.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company's success depends, in part, on its ability to obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. 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 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 or that, if
issued, the coverage claimed in the applications will not be significantly
reduced prior to issuance or, 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 patents
issued to the Company, if any, will provide it with competitive advantages or
that products or processes covered by such patents will not be challenged as
infringing upon the patents or proprietary rights of others or that any such
patents 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
9
<PAGE>
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 trade secrets 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. The Company is aware
of competitors and potential competitors who are pursuing patent protection for
various aspects of the extraction, preparation and production of natural and
semi-synthetic paclitaxel. 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. See "Strategic Alliances" and "Australian Petty
Patents."
AUSTRALIAN PETTY PATENTS
In September 1993 and July 1994, BMS was granted 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 art search which is significantly more limited in scope than the searches
done prior to issuance of standard patents. Following grant 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 believes, based on communications with Faulding, that BMS's claims will
likely be resolved in conjunction with Faulding's revocation action in late 1996
or early 1997. No assurance can be given, 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. See "Patents and
Proprietary Technology" and "Strategic Alliances."
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,
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<PAGE>
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 in the United
States may not begin without FDA approval.
The steps required before a pharmaceutical product 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. In addition to safety and efficacy requirements, the
FDA requires the applicant to 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, and 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,
although certain 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
11
<PAGE>
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 or facilities being constructed 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 although no assurance can be given.
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. Although the Company ceased harvesting bark in August
1994, the Company has in its inventory bark obtained from the wild Pacific yew
tree. 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 environmental
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's business, financial condition and results of
operations.
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<PAGE>
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 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 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's business, financial condition and
results of operations.
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 DMFs 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 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 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, that NBT Paclitaxel will prove to be safe and effective in
clinical trials or that IVAX will complete any clinical trials or obtain
regulatory approvals for NBT Paclitaxel in a timely manner, or at all, 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. The Company
also intends to engage in early stage research and development to identify other
potential natural product pharmaceuticals.
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 United States and
foreign operations (amounts in thousand dollars):
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<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 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
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.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently engaged in any material legal proceedings. See
"Patents and Proprietary Technology" and "Australian Petty Patents."
ITEM 4. MATTERS SUBMITTED TO STOCKHOLDERS' VOTE
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1995.
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PART II
ITEM 5. MARKET INFORMATION AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company completed its initial public offering on August 1, 1994. The
Common Stock is traded on the Nasdaq Small Cap under the symbol "NPRO." The
following table sets forth, for the fiscal periods indicated, the high and low
sale prices for the Common Stock on the Nasdaq Small Cap. On June 4, 1996, the
last reported sale price of the Common Stock on the Nasdaq Small Cap was $17.00
per share. Application has been made for inclusion of the Common Stock on the
Nasdaq National Market under the symbol "NPRO."
HIGH LOW
---- ----
1994
----
Third Quarter (from August 1, 1994)......... $ 6 5/8 $ 4 7/8
Fourth Quarter.............................. 6 3/8 6
1995
----
First Quarter............................... $ 6 5/8 $ 6
Second Quarter.............................. 10 1/8 6 1/8
Third Quarter............................... 12 3/4 9 3/8
Fourth Quarter.............................. 12 1/8 8 7/8
1996
----
First Quarter............................... $13 3/8 $ 8 7/8
Second Quarter (through June 4, 1996)....... 17 10 3/4
STOCKHOLDERS
As of June 4, 1996, there were approximately 152 stockholders of record of
the Company's Common Stock.
DIVIDENDS
To date, the Company has not paid any dividends on the Common Stock. The
Company intends to retain future earnings, if any, to finance the operation and
expansion of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future, if at all.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for each fiscal year in the
five-year period ended December 31, 1995 are derived from the Company's
financial statements, which have been audited by Ernst & Young LLP, independent
auditors, and are qualified by reference to such Financial Statements and Notes
thereto. The selected financial data presented below for the three months ended
March 31, 1995 and 1996 are derived from the Company's unaudited financial
statements which reflect all adjustments, consisting only of normal recurring
adjustments, the Company considers necessary for a fair presentation of the
financial position of the Company as of those dates and the results of
operations of the Company for those periods. Operating results for the three
months ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1996. The data presented
below should be read in conjunction with the consolidated financial statements
at December 31, 1994 and 1995 and for each of the three years in the period
ended
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<PAGE>
December 31, 1995, the related Notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information included elsewhere in this Report.
<TABLE>
<CAPTION>
THREE YEARS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------ -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales of products...................... $ 112 $ 363 $1,248 $1,002 $2,623 $1,148 $ 691
Other.................................. 12 202 1 5 -- -- --
------ -------- -------- -------- -------- -------- --------
Total revenues...................... 124 565 1,249 1,007 2,623 1,148 691
Operating expenses:
Research, development and cost of
products sold........................ 611 1,670 3,505 2,707 4,325 1,074 1,786
General and administrative............. 261 1,215 2,690 2,044 2,310 451 704
Faulding royalty....................... -- -- -- 1,000 -- -- --
Plantation costs....................... -- -- 7 1,238 272 269 --
------ -------- -------- -------- -------- -------- --------
Total operating expenses............ 872 2,885 6,202 6,989 6,907 1,794 2,490
------ -------- -------- -------- -------- -------- --------
Operating loss............................ (748) (2,320) (4,953) (5,982) (4,284) (646) (1,799)
Other income (expense):
Interest income........................ 5 24 79 188 373 49 100
Interest and other expense............. -- -- (34) (340) (160) (40) (61)
------ -------- -------- -------- -------- -------- --------
Loss before extraordinary item............ (743) (2,296) (4,908) (6,134) (4,071) (637) ( 1,760)
Loss on early extinguishment of debt...... -- -- -- (512) -- -- --
------ -------- -------- -------- -------- -------- --------
Net loss.................................. $(743) $(2,296) $(4,908) $(6,646) $(4,071) $(637) $(1,760)
====== ======== ======== ======== ======== ======== ========
Loss per share:
Before extraordinary item.............. $(0.22) $(0.38) $(0.79) $(0.91) $(0.51) $(0.08) $(0.21)
Extraordinary item..................... -- -- -- (0.08) -- -- --
------ -------- -------- -------- -------- -------- --------
Net loss(1)......................... $(0.22) $(0.38) $(0.79) $(0.99) $(0.51) $(0.08) $(0.21)
====== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding(1).... 3,439 6,103 6,201 6,761 7,973 7,713 8,527
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------- ----------
1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- ------- ----------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term securities.... $ 956 $ 86 $ 18 $1,400 $7,800 $ 5,590
Working capital..................................... 799 (26) (435) 3,169 8,452 6,731
Total assets........................................ 1,356 918 2,120 4,976 11,953 10,206
Long-term obligations, net of current maturities.... 152 709 1,435 1,273 1,618 1,739
Minority interest................................... -- -- -- -- 3,715 3,715
Accumulated deficit................................. (779) (3,075) (7,983) (14,629) (18,700) (20,460)
Stockholders' equity (deficit)...................... 909 (190) (944) 3,037 5,424 3,656
- ---------------------
(1) See Note 1 of the Notes to Financial Statements for information concerning
the computation of net loss per share.
</TABLE>
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION ANDRESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATION OF THE COMPANY SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. SPECIAL NOTE:
CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE REFORM ACT. SEE "CAUTIONARY STATEMENT" ON PAGE 23 FOR
ADDITIONAL FACTORS RELATING TO SUCH STATEMENTS.
GENERAL
Since its inception, 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. To date, substantially all of the sales of
NBT Paclitaxel have been to the Strategic Partners. 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 expenditures in connection with the
construction of large-scale commercial EIP(TM) manufacturing facilities, the
development of ornamental yew tree plantations, 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, 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 NBT 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 form of chemotherapy to be used alone or in combination with
other chemotherapeutic agents. The Company does not expect to be profitable
until at least 1997, if ever.
The Company recognizes revenue as product is shipped. Shipments to the
Strategic Partners are variable depending on the progress of clinical trials and
commercial requirements. This variability has resulted in volatility in revenue,
between quarters and between fiscal years. Such variability is expected to
continue until such time, if ever, as the market for NBT Paclitaxel has been
established in a major market. Payments for product used in clinical development
and research are at a fixed price which is substantially below the commercial
price for sales in Australia. The commercial selling price is dependant upon a
number of factors including the average wholesale price of the drug sold by the
Strategic Partners, which will vary over time by location, by Strategic Partner
and by competitive forces.
In January 1995, Faulding received approval to market NBT Paclitaxel
commercially in Australia under the trade name ANZATAX(TM). Until such time, if
ever, that NBT Paclitaxel receives regulatory approvals in major markets, 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
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, planned capital expenditures and
additional plantation development.
18
<PAGE>
RECENT DEVELOPMENTS
On May 23, 1996 (the "Call Date"), the Company called for redemption (the
"Redemption") all of the Company's outstanding 2,070,000 redeemable warrants
(the "Redeemable Warrants"). During the period (the "Call Period") following the
Call Date and ending at 5:00 p.m. on June 24, 1996 (the "Warrant Redemption
Date"), each holder of Redeemable Warrants has the right to elect one, or a
combination of, the following two options: (i) to exercise the Redeemable
Warrants into a similar number of shares of Common Stock for the exercise price
of $5.00 per share (the "Cash Exercise") or (ii) to exercise the Warrants in a
cash-less exchange by surrendering the Redeemable Warrants to the Company in
exchange for 0.70 shares of Common Stock per Redeemable Warrant (the "Cash-less
Exercise"). No holder of Redeemable Warrants is obligated to exercise the
Redeemable Warrants. If any holder of Redeemable Warrants does not choose Cash
Exercise or Cash-less Exercise during the Call Period, however, such holder's
Redeemable Warrants will be redeemed by the Company at $0.10 per Redeemable
Warrant. No fractional shares will be issued as a result of the Cash-less
Exercise.
RESULTS OF OPERATIONS
The Company was in the development stage through December 31, 1994. In
January 1995, the Company commenced commercial sales of NBT Paclitaxel to
Faulding for sale by Faulding in Australia. Comparison of operations between
years and historical trends do not necessarily indicate future trends and
operating results of the Company.
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. Although initial commercial sales commenced in January 1995
in Australia, 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 COST 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
production volumes.
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 costs associated with the
occupation of the Company's new facility in Boulder, Colorado and an increase in
administrative and support staff to support the Company's growth.
PLANTATION COSTS. The Company did not incur any plantation costs for the
three months ended March 31, 1996 as a result of 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 and
maintenance payments will be capitalized and amortized over the expected life of
the plantation as biomass is harvested.
INTEREST INCOME. Interest income increased from $50,000 to $0.1 million
for the three months ended March 31, 1996. This increase was the result of
larger free cash balances.
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 new borrowings under equipment
financing leases which were put in place in the fourth quarter of 1995 to
finance the purchase of laboratory, administrative and manufacturing equipment.
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 approximately $1.5 million at June 30, 1996.
19
<PAGE>
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 higher prices associated with
commercial sales of ANZATAX(TM) in Australia. Through December 31, 1995, the
majority of product sales had been for use in clinical trials and for research
and development purposes. Although initial commercial sales commenced in January
1995 in Australia, 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 COST 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 research costs, although the Company also experienced 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 to support the Company's growth.
FAULDING ROYALTY EXPENSE AND PLANTATION COSTS. 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. The decrease reflects the
absence of significant costs incurred during fiscal 1994 related to the
establishment of the PBI plantation. The $0.3 million in costs incurred in
fiscal 1995 primarily reflect costs of ongoing maintenance of the plantation
(see Note 8 to the Financial Statements). Additionally, there was no Faulding
royalty expense during fiscal 1995 because the Faulding royalty expense was a
one-time charge taken in 1994.
INTEREST INCOME. Interest income increased $0.2 million to $0.4 million
for the year ended December 31, 1995 from $0.2 for the year ended December 31,
1994. This increase was the result of larger average free cash balances,
relating to receipt of the proceeds in July 1995 and August 1995 from private
placements of the Company's preferred stock and the preferred stock of its
Canadian subsidiary.
INTEREST AND OTHER EXPENSES. Interest and other expenses decreased $0.1
million to $0.2 million for the year ended December 31, 1995 from $0.3 million
for the year ended December 31, 1994. The decrease resulted from the repayment
of bridge loans 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 COST OF PRODUCTS SOLD. Research, development
and cost of product sold 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 volumes of NBT
Paclitaxel for research purposes, as well as the absence of costs associated
with the early stage NBT Paclitaxel product development efforts which were
substantially completed in 1993.
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 a decrease
in legal costs relating to the negotiation of the agreements with the Strategic
Partners and certain intellectual property dispute proceedings that were
completed in 1994.
20
<PAGE>
FAULDING ROYALTY EXPENSE AND PLANTATION COSTS. 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 relating to the start up of the PBI plantation (see Note 8
to the Financial Statements).
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 associated with the net proceeds of the IPO and other financings.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased from
$34,000 to $0.3 million for the year ended December 31, 1994. The increase was
primarily the result of interest expense associated with the bridge notes
outstanding from March through August 1994.
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.
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 and had capital expenditures for the first quarter of 1996 of $0.1
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 the 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 the
Strategic Partners.
Through March 31, 1996, Faulding advanced to the Company a total of $1.1
million which was subsequently converted into a note in aggregate principal
amount of $1.2 million, maturing in 1997. Similarly, prior to August 1994, IVAX
had loaned various amounts to the Company. All such loans from IVAX have been
repaid. The Strategic Partners have made equity investments in the Company
totaling $5.0 million, and Faulding has purchased warrants (the "Faulding
Warrants") to purchase 400,000 shares of Nonvoting Common Stock of the Company
with an aggregate exercise price totaling $2.0 million. The Strategic Partners
have spent and continue to spend substantial amounts for the clinical and
regulatory development of NBT Paclitaxel. All other payments from the Strategic
Partners have been and will continue to be for shipments of NBT Paclitaxel.
Should either of the arrangements with the Strategic Partners be terminated, the
Company will be required to either replace such arrangements with new
arrangements or assume development of NBT Paclitaxel. Either of these events
would result in delays in commercialization, may require substantial additional
financing and would likely have a material adverse effect on the Company's
business, financial condition and results of operations.
Inventories increased $0.2 million to 1.4 million at March 31, 1996 from
$1.2 million at December 31, 1995. Inventories decreased $0.2 million to $1.2
million at December 31, 1995 from $1.4 million for the year ended 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.
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, Colorado laboratories and
facilities. In 1996, the Company expects to invest $3.0 million to $4.0 million
from the proceeds of a public offering of the Company's stock for which a
registration statement has been filed with the U.S. Securities and Exchange
Commission (the "Offering") in property, plant and equipment, primarily to
expand the plantations 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.
21
<PAGE>
The amount and timing of expenditures and need for future capital will
depend upon numerous factors, including the costs and progress of its process
and technology development activities, the cost and success of the Company's
plantation strategy, the progress of the Strategic Partners' clinical
development of NBT Paclitaxel, the timing and receipt of regulatory approvals,
the amount of revenues from the sale of NBT Paclitaxel, if any, the costs
involved in preparing, filing, prosecuting, maintaining any enforcing patent
claims and other intellectual property rights, developments related to
regulatory and reimbursement matters, competing technological and market
developments, changes in or terminations of existing strategic alliances and the
cost, timing and success of manufacturing scale-up, including construction of
large-scale commercial EIP(TM) and semi-synthesis manufacturing facilities. In
the event of unanticipated future capital requirements, the Company will need to
raise additional capital. There can be no assurance, however, that the Company
will be able to raise additional financing on acceptable terms, or at all.
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.
CAUTIONARY STATEMENT
This Report contains "forward looking statements" within the meaning of the
federal securities laws, including the plans of Faulding and IVAX for completion
of clinical trials of NBT Pacliataxel and the prospects for regulatory
approvals, the Company's plans to develop facilities to manufacture NBT
Paclitaxel, the Company's plans to obtain a renewable source of biomass and
other statements of expectations, beliefs, plans, and similar expressions
concerning matters that are not historical facts. These statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those expressed in the statements. Important factors that could cause such
differences include but are not limited to the Company's availability of capital
resources to fund construction of manufacturing facilities and the development
of alternative sources of biomass, potential limitations on the availability of
raw materials, the uncertainty of clinical trial results and the role of
regulators in that process and the formidable competition the Company can expect
from companies with greater capital resources.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item begins at Page F-1
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
22
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
LEONARD P. SHAYKIN, 52, 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 served
as founding and managing partner in Adler & Shaykin, an equity investment
partnership organized to sponsor leveraged buyouts. Prior thereto, 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 public gene therapy company, 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.).
PHILLIP FROST, M.D., 59, 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. 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. 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.
ARTHUR H. HAYES, JR., M.D., 63, 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, Dr. Hayes served as the Commissioner of the FDA.
From 1986 to 1991, he was President and Chief Executive Officer of EM
Pharmaceuticals, as well as a member of the board of directors. 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, Dean of
Admissions from 1976 to 1979 and Associate Professor of Medicine and
Pharmacology and Director of the Division of Clinical Pharmacology from 1972 to
1977. Dr. Hayes currently serves on the board of directors of Myriad Genetics,
Inc. (a genomic research 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.
E. GARRETT BEWKES, JR., 68, 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 and
currently serves as a director of Interstate Bakeries Corp.
VAUGHN D. BRYSON, 56 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, 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
23
<PAGE>
1984 until his retirement in 1993. Mr. Bryson is a Director of three public
companies, ARIAD Pharmaceuticals, Inc., Endo Vascular Technologies, Inc. and
Perclose, Inc. Mr. Bryson earned a B.S. in Pharmacy from the University of North
Carolina and completed the Stanford Sloan Program at Stanford University
Graduate School of Business.
PATRICIA A. PILIA, PH.D., 47, 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. (a predecessor of the Company)
and served as its Vice President and Director of Biotechnology. 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 the Medical
University of South Carolina ("MUSC"). Dr. Pilia 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.
STERLING K. AINSWORTH, PH.D., 56, 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. 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 MUSC, where he established, developed and directed MUSC's
Immunopathology Diagnostic Laboratory. 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.
MARK B. HACKEN, 60, 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 ("FHP International"), a $4 billion HMO with members
in 11 states, and its operating subsidiary, FHP Incorporated ("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 board of directors of FHP International and of FHP Incorporated 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 he was President of
that division. Mr. Hacken received a B.S. in Pharmacy from the University of
Florida.
RICHARD C. PFENNIGER, JR., 40, has served as a director of the Company
since June 1993. Mr. Pfenniger has served as Chief Operating Officer of IVAX
since April 1994. 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 during the seven-year period 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.
OTHER EXECUTIVE OFFICERS
LAWRENCE HELSON, M.D., 65, 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. Since July 1988, Dr.
Helson has been head of the Neuro-Oncology Laboratory in the Division of
Neoplastic Diseases, Department of Medicine at New York Medical College. From
July 1986 until June 1988, Dr. Helson was an Associate Director with ICI
Pharmaceuticals. From July 1968 until June 1986, Dr. Helson was an attending
physician with Memorial Sloan-Kettering, a cancer research center.
24
<PAGE>
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. Dr. Helson received his B.S. from the College of the City of New York
in 1953, his M.S. from the New York University Graduate School of Arts and
Sciences in 1957 and his M.D. from the University of Geneva (Switzerland)
Medical School in 1962.
GORDON H. LINK, JR., 42, a certified public accountant and a certified
management accountant, joined the Company as Vice President, Finance and Chief
Financial Officer in September 1993. Prior thereto, Mr. Link served concurrently
as Corporate Controller of Synergen, Inc. and of the Syntex-Synergen
Neuroscience Joint Venture. From February 1991 until April 1993, Mr. Link was
Treasurer of Synergen Development Corporation. 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.
DAVID L. DENNY, 44, has served as Vice President, Operations of the Company
since September 1995. From 1991 to 1993, Mr. Denny served as Vice-President of
Operations for Somatogen, Inc. Prior thereto, Mr. Denny served in manufacturing
and quality assurance capacities with Miles Pharmaceutical, Abbott Laboratories
and Kabi-Pharmacia. He received a B.S. in Biological Sciences from Tennessee
Technological University in 1972 and attended graduate school at the same
institution from 1972 to 1974.
JAMES D. MCCHESNEY, PH.D., 56, joined the Company as Vice-President of
Natural Products Chemistry in January 1996. From 1987 until June 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. In July 1993, Dr. McChesney was named Frederick A.P.
Barnard Distinguished Professor of Pharmacognosy at the University of
Mississippi. Dr. McChesney joined the School of Pharmacy at the University of
Mississippi in 1978 as Professor and Chair of the Department of Pharmacognosy.
After graduating with honors from Iowa State University in 1961 with a B.S. in
Chemical Technology, he earned 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.
25
<PAGE>
ITEM 11. COMPENSATION OF EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION
The following table sets forth compensation paid to Dr. Ainsworth, Mr.
Shaykin, Dr. Pilia and Mr. Link. None of the Company's other executive officers
had annual compensation in excess of $100,000 for services rendered during the
fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------ ----------------------------
AWARDS PAYOUTS
------ -------
SECURITIES
OTHER UNDER-
ANNUAL RESTRICTED LYING ALL OTHER
NAME AND PRINCIPAL COMPENSA- STOCK OPTIONS/ LTIP COMPENSA-
POSITION YEAR SALARY ($) BONUS($) TION($) AWARDS($) SARS(#) PAYOUTS($) TION ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sterling K. Ainsworth 1995 $152,077 $20,000 0 $20,000 40,000 0 0
President and C.E.O. 1994 138,111 0 0 0 0 0 0
1993 99,769 0 0 0 0 0 0
Leonard P. Shaykin 1995 $152,077 $20,000 0 $20,000 100,000(1) 0 0
Chairman of the Board 1994 106,192 0 0 0 0 0 0
1993 51,402 0 0 0 0 0 0
Patricia A. Pilia 1995 $116,592 $15,000 0 $15,000 20,000 0 0
Vice President, 1994 96,077 0 0 0 0 0 0
Secretary and 1993 73,662 0 0 0 0 0 0
Treasurer
Gordon H. Link, Jr. 1995 $101,385 $10,000 0 $10,000 10,000 0 0
Chief Financial 1994 92,480 0 0 0 16,667 0 0
Officer 1993 28,454 0 0 0 26,667 0 0
- -----------
(1) Includes option to purchase 50,000 shares of Common Stock granted in
October 1995, subject to approval of stockholders of amendments to the 1994
Long Term Performance Incentive Plan.
</TABLE>
26
<PAGE>
The following table sets forth each grant of options to purchase Common
Stock made during the year ended December 31, 1995 to Dr. Ainsworth, Mr.
Shaykin, Dr. Pilia and Mr. Link. Grants of options to such executive officers
were made under the 1994 Long Term Performance Incentive Plan (the "1994 Plan"):
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR BASE OPTION TERMS ($)(4)
OPTIONS EMPLOYEES IN PRICE PER SHARE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR(2) ($/SH) DATE(3) 5% 10%
- ------------------------ --------------- -------------- ----------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Sterling K. Ainsworth 40,000 11.83% $10.125 11/15/05 659,702 1,050,466
Leonard P. Shaykin 100,000(5) 29.57% $10.125 11/15/05 1,649,256 2,626,164
Patricia A. Pilia 20,000 5.91% $10.125 11/15/05 329,851 525,233
Gordon H. Link, Jr. 10,000 2.96% $10.125 11/15/05 164,926 262,616
<FN>
- -----------
(1) Options granted under the 1994 Plan become exercisable at the rate of 25%
of the shares subject to the option one year after the date of grant and
25% of the shares subject to the option each year thereafter.
(2) Based on the aggregate of 338,125 options granted under the 1994 Plan in
1995 to employees of the Company, including the named executive officers.
(3) These options have a 10-year term, subject to earlier termination upon
death, disability or termination of employment.
(4) The potential realizable value is calculated based on the term of the
option at its time of grant (10 years) assuming that the stock price on the
date of grant appreciates at the indicated annual rate compounded annually
for the entire term of the option and that the option is exercised and sold
on the last day of its term for the appreciated stock price. No gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders.
(5) Includes option to purchase 50,000 shares of Common Stock granted in
November 1995, subject to approval of stockholders of amendments to the
1994 Plan.
</FN>
</TABLE>
The following table sets forth information concerning outstanding options
held by Dr. Ainsworth, Mr. Shaykin, Dr. Pilia and Mr. Link as of the fiscal year
ended December 31, 1995.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS AT FISCAL YEAR IN-THE-MONEY OPTIONS/SARS AT FISCAL YEAR
END(#) END($)(3)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------- ----------------------------------------- -------------------------------------------
<S> <C> <C>
Sterling K. Ainsworth 122,667 / 40,000 $1,127,003 / $0
President and C.E.O.
Leonard P. Shaykin 0 / 100,000(1) $0 / $0
Chairman of the Board
Patricia A. Pilia 36,800 / 20,000 $338,100 / $0
Vice President,
Secretary and Treasurer
Gordon H. Link, Jr. 19,167(2) / 34,167 $146,465 / $162,890
Chief Financial Officer
<FN>
- ----------
(1) Includes option to purchase 50,000 shares of Common Stock granted in
November 1995, subject to approval of stockholders of amendments to the
1994 Plan.
(2) Includes options to purchase 1,667 shares of Common Stock that vested on
April 10, 1996.
(3) Represents the difference between the option exercise price and the
closing price of the Common Stock as quoted on the Nasdaq Small Cap on
December 29, 1996 ($9.38), multiplied by the corresponding number of
underlying shares.
</FN>
</TABLE>
27
<PAGE>
COMPENSATION OF DIRECTORS
Pursuant to the 1994 Plan, non-employee directors automatically are granted
each year, on the date of the Company's annual meeting of stockholders,
non-qualified options to purchase 5,000 shares of Common Stock. In addition, any
non-employee director who is first appointed or elected other than at an annual
meeting of stockholders automatically receives non-qualified options to purchase
5,000 shares of Common Stock upon such appointment or election. All such options
are exercisable at an exercise price equal to the fair market value of the
Common Stock on the date of grant and are subject to certain vesting schedules.
For a description of the 1994 Plan, see " 1994 Long-Term Performance Incentive
Plan."
Contingent upon approval by the stockholders, the Board of Directors has
adopted amendments to the 1994 Plan to (i) increase the number of shares of
Common Stock underlying automatic annual grants of non-qualified stock options
to non-employee directors from 5,000 to 10,000 shares and (ii) provide for
automatic annual grants of non-qualified stock options to purchase 10,000 shares
of Common Stock to directors who serve as chair of the Audit, Compensation and
Strategic Planning Committees of the Board of Directors. Automatic grants
associated with such amendments will be effective on the next business day
following the annual meeting, subject to approval of the proposed amendments.
Directors are reimbursed for their costs incurred in attending Board of
Directors meetings.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
The Company entered into an Employment and Executive Stock Agreement with
each of Mr. Shaykin and Drs. Ainsworth, Pilia and Helson (collectively, the
"Senior Executives"), effective as of June 7, 1993, and amended and restated
effective as of May 31, 1994 (collectively, the "Executive Agreements"). Each
Executive Agreement provides for an initial five-year employment term that
expires June 7, 1998 (the "Initial Term"), and is renewable each year thereafter
(each, a "Renewal Term") unless either party gives notice of termination to the
other party at least 180 days prior to the commencement of any Renewal Term.
The Executive Agreements provide for annual base salaries for Mr. Shaykin
and Drs. Ainsworth, Pilia and Helson of $150,000, $150,000, $115,000 and $75,000
respectively. Under the Executive Agreements, the Senior Executives may be
granted annual bonuses at the discretion of the Board's Compensation Committee.
In addition, $59,573 and $43,932 of unpaid salaries were deferred between March
1991 and December 1992 by Drs. Ainsworth and Pilia, respectively, in light of
the Company's financial condition. Mr. Shaykin and Dr. Helson are part-time
employees of the Company, and are not required under their respective Executive
Agreements to spend more than 20 and 15 hours in any week or 80 and 60 hours per
month on the Company's affairs, respectively.
Each Executive Agreement provides for certain benefits if, prior to the end
of the Initial Term or any Renewal Term, a Senior Executive's employment is
terminated either by the Company other than for Cause (as defined in the
Executive Agreements) or by the Senior Executive for Good Reason (as defined in
the Executive Agreements). In general, each Senior Executive would be entitled
to (i) a continuance of their respective salary and bonus, if any, through the
end of the Initial Term (but in no event for longer than three years in the case
of Mr. Shaykin and Dr. Helson) or the then-current Renewal Term, if applicable,
and (ii) health and welfare benefits as in effect immediately prior to
termination for a maximum of 18 months following termination. The foregoing
benefits would be limited by the amount deductible for income tax purposes under
the Internal Revenue Code of 1986, as amended (the "Code").
The Executive Agreements also contain provisions (i) prohibiting disclosure
of confidential information, (ii) granting to the Company rights to intellectual
property developed by the Senior Executives that relate to the Company's
business or developed in the course of employment with the Company (or that
otherwise relate in any way to health care or pharmaceuticals, in the case of
Drs. Ainsworth and Pilia) and (iii) prohibiting competition with the Company
during and for five years after the Senior Executive's employment.
Under the Executive Agreements, Mr. Shaykin and Drs. Ainsworth, Pilia and
Helson acquired 531,864, 578,592, 150,428 and 265,932 shares of Common Stock,
respectively (the "Executive Stock"). The purchase price for such shares was
$1.50 per share and is represented by promissory notes in favor of the Company
(collectively, the "Executive Notes"). The Executive Notes, which were amended
effective as of May 31, 1994, bear interest at the greater of (i) the prime rate
minus 1% (9% as of June 1995) and (ii) the applicable federal rate (set annually
on June 7). Principal and interest on the
28
<PAGE>
Executive Notes are due and payable upon the receipt of proceeds from a Senior
Executive's transfer of any shares of Executive Stock, in the full amount of
such proceeds. Notwithstanding the foregoing, the outstanding principal amount
of, and accrued and unpaid interest under, an Executive Note shall become
immediately due and payable upon the earliest to occur of (i) the Sale of the
Company (as defined in the Executive Agreements), (ii) the termination of a
Senior Executive's employment by the Company for Cause (as defined in the
Executive Agreement), by the Senior Executive other than for Good Reason (as
defined in the Executive Agreement), or by reason of a Senior Executive's death,
disability or incapacity and (iii) the Senior Executive's failure to pay any
principal or interest within 15 days of the date due.
The shares of Common Stock acquired by each Senior Executive were pledged
to the Company pursuant to a pledge agreement as security for payment of such
Senior Executive's Executive Note. In addition, the Executive Notes provide for
recourse against the respective Senior Executives to the extent of 25% of the
then outstanding principal amount. The Executive Agreements also contain
provisions restricting the transfer of Executive Stock and requiring the Senior
Executives to sell their Executive Stock under certain circumstances if the
Board approves a Sale of the Company.
Commencing May 9, 1995, each Senior Executive became able to repay all or
part of the outstanding principal and/or interest on his or her Executive Note
by remitting to the Company shares of his or her Common Stock, to be valued for
such purposes in an amount equal to the average of the last reported sales price
of the Common Stock for the five trading days prior to remittance multiplied by
the number of shares remitted. During 1995, each of Drs. Ainsworth, Pilia and
Helson remitted shares of Common Stock to the Company in exchange for
extinguishment of the debt represented by their respective Executive Notes. See
" Certain Relationships and Related Transactions--Indebtedness of Management."
1994 LONG-TERM PERFORMANCE INCENTIVE PLAN
In May 1994, the Company's Board of Directors adopted the 1994 Long-Term
Performance Incentive Plan which was subsequently approved by the stockholders
of the Company prior to the Company's IPO in August 1994. The 1994 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 1994 Plan. The 1994 Plan also
provides non-employee directors with stock option grants according to an
established formula.
The 1994 Plan affords the Company latitude in tailoring incentive
compensation to support corporate and business objectives, to anticipate and
respond to a changing business environment and competitive compensation
practices and, in the case of options granted to non-employee directors, to
strengthen further the non-employee directors' linkage with stockholder
interests.
The following is a description of the principal features of the 1994 Plan.
ADMINISTRATION. The Compensation Committee has exclusive discretion to
select the Participants and to determine the type, size and terms of each award,
to modify the terms of awards, to determine when awards will be granted and
paid, and to make all other determinations which it deems necessary or desirable
in the interpretation and administration of the 1994 Plan. The 1994 Plan
terminates ten years from the date that it is initially approved and adopted by
the stockholders of the Company, unless extended for up to an additional five
years by action of the Board of Directors. With limited exceptions, including
termination of employment as a result of death, disability or retirement, or
except as otherwise determined by the Compensation Committee, rights to these
forms of contingent compensation will be forfeited if a recipient's employment
or performance of services terminates within a specified period following the
award. Generally, a Participant's rights and interest under the 1994 Plan will
not be transferable except by will or by laws of descent and distribution.
AWARDS. Under the 1994 Plan, Participants are granted incentive awards
consisting of stock options, SARs, restricted stock, performance units,
performance grants and other types of awards.
STOCK OPTIONS. Participants are granted stock options which include
non-qualified stock options and incentive stock options. Stock options are
rights to purchase a specified number of shares of Common Stock at a price fixed
by the Compensation Committee. The option price may not be less than the fair
market value of the underlying shares of Common Stock on the date of grant. In
the case of purchased stock options, a specified number of non-qualified stock
options (with
29
<PAGE>
an option price as described above) will be offered for grant to selected
Participants in exchange for a purchase price, specified by the Compensation
Committee, which is payable at the time of grant. Options generally will expire
not later than ten years after the date on which they are granted. Options will
become exercisable at such times and in such installments as the Compensation
Committee shall determine. Payment of the option price must be made in full at
the time of exercise in such form (including, but not limited to, cash, Common
Stock or the surrender of another outstanding award or any combination thereof)
as the Compensation Committee may determine. Federal income tax payable as a
consequence of the exercise of such options is borne by the grantee.
SARS. SARS may be granted alone, or a holder of an option or other award
may be granted a related SAR, either at the time of grant or by amendment
thereafter. Upon exercise of an SAR, the holder must surrender the SAR and
surrender, unexercised, any related option or other award, and the holder will
receive in exchange, at the election of the Compensation Committee, cash or
Common Stock or other consideration, or any combination thereof, equal in value
to (or, in the discretion of the Compensation Committee, less than) the
difference between the exercise price or option price per share and the fair
market value per share of Common Stock on the last business day preceding the
date of exercise, times the number of shares subject to the SAR or option or
other award, or portion thereof, which is exercised.
RESTRICTED STOCK AWARDS. A restricted stock award is an award of a
specified number of shares of Common Stock which are subject to a restriction
against transfer and to a risk of forfeiture during a period set by the
Compensation Committee. During the restriction period, the Participant generally
has the right to vote and receive dividends on the shares.
PERFORMANCE GRANTS AND OTHER AWARDS. Performance grants are awards with a
final value, if any, that is determined by the degree to which specified
performance objectives have been achieved during an award period set by the
Compensation Committee, subject to such adjustments as the Compensation
Committee may approve based on relevant factors. Performance objectives are
based on such measures of performance, including, without limitation, measures
of industry, the Company, unit or Participant performance, or any combination of
the foregoing, as the Compensation Committee may determine. The Compensation
Committee may make such adjustments in the computation of any performance
measure as it may deem appropriate. A target value of an award will be
established (and may be amended thereafter) by the Compensation Committee and
may be a fixed dollar amount, an amount that varies from time to time based on
the value of a share of Common Stock, or an amount that is determinable from
other criteria specified by the Compensation Committee. Payment of the final
value of an award will be made as promptly as practicable after the end of the
award period or at such other time or times as the Compensation Committee may
determine. The 1994 Plan permits the grant of any other type of incentive
compensation award determined by the Compensation Committee to be consistent
with the purposes of the 1994 Plan.
FORMULA PLAN FOR NON-EMPLOYEE DIRECTORS. The 1994 Plan provides that 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, and, if first elected or appointed other than at
an annual meeting, upon such election or appointment, will receive, as of the
next business day following the date of each such election or appointment a
non-qualified option to purchase a specified number of shares of the Company's
Common Stock. Currently, non-employee directors are entitled to receive an
option for 5,000 shares of Common Stock under such automatic provisions. The
Board of Directors has approved an amendment to the 1994 Plan to increase the
number of shares subject to such automatic grant of options from 5,000 to
10,000, subject to stockholder approval. The Board of Directors has also
approved an amendment to such formula provisions, subject to stockholder
approval, to provide automatic annual grants of options to purchase 10,000
shares of Common Stock to the chair of the Audit, Compensation and Strategic
Planning Committees of the Board of Directors. Each option granted to
non-employee directors will have an option price equal to the fair market value
of the Company's Common Stock on the date of grant, will generally become
exercisable in full on the first anniversary following the date of grant and
will have a term of 10 years from the date of grant.
LIQUIDATION, CHANGES IN CONTROL; MERGERS. Upon the liquidation or
dissolution of the Company, all outstanding awards under the 1994 Plan will
terminate immediately prior to the consummation of such liquidation or
dissolution, unless otherwise provided by the Compensation Committee. Upon
certain events, including (i) any "person,"as such term is used in Sections
13(d) and 14(d) of the Exchange Act, including a "group" as defined in Section
13(d) of the Exchange Act but excluding the Company and any subsidiary and any
employee benefit plan sponsored or maintained by the Company or any subsidiary
(including any trustee of such plan acting as trustee), directly or indirectly,
becoming the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act, as amended from time to time), of securities of the Company representing
30
<PAGE>
25% or more of the combined voting power of the Company's then outstanding
securities; (ii) individuals who at the beginning of any 12-month period
constituted the Board ceasing for any reason other than death to constitute a
majority of such Board; or (iii) approval by the Company's stockholders of a
transaction involving the acquisition of the Company by an entity other than the
Company or any subsidiary through purchase of assets, by merger, or otherwise,
(A) any SARs and any options will become immediately exercisable in full; (B)
restrictions and deferral limitations applicable to any restricted stock and
other awards payable in shares of Common Stock will lapse and become immediately
exercisable in full; (C) generally, outstanding performance grants will become
vested and will be paid out based on the prorated target results for the awards
period in question; and (D) generally, the value of all outstanding options,
SARs, restricted stock, performance grants and any other type of award payable
in shares of Common Stock will be cashed out.
AMENDMENT AND TERMINATION. The Board may amend or suspend the 1994 Plan in
whole or in part at any time provided that stockholder approval is obtained
where failure to obtain such approval would adversely affect the compliance of
the 1994 Plan with Rule 16b-3 under the Exchange Act and with other applicable
law. The 1994 Plan will terminate on June 16, 2004 unless sooner terminated by
the Board. No amendment or termination of the Plan may materially affect any
rights of a Participant with respect to any Award without the written consent of
the Participant except where, in the Compensation Committee's discretion, it
determines that significant changes in the Participant's position, duties or
responsibilities, or significant changes in economic, legislative, regulatory,
tax, account or cost/benefit conditions have had or will have a substantial
effect on the performance of the Company or any of its subsidiaries or
affiliates.
FEDERAL INCOME TAX CONSEQUENCES OF AWARDS UNDER THE 1994 PLAN. The tax
consequences applicable to the Company and to a Participant in the 1994 Plan in
connection with an incentive stock option, non-qualified option, SAR, restricted
stock award, performance grant or other stock-based award granted to a
participant, or bonuses or other compensation paid in stock under the 1994 Plan
are complex and depend, in large part, on the surrounding facts and
circumstances. The following brief summary of certain significant United States
federal income tax consequences under existing law of the 1994 Plan is not
intended to be exhaustive and, among other things, does not describe state,
local or foreign tax consequences.
Under the Code, the grant of a stock option does not result in taxable
income to the optionee or any tax deduction to the Company. However, the
transfer of common stock of the Company to an optionee upon exercise of an
option may or may not give rise to taxable income to the optionee and tax
deductions to the Company, depending upon whether or not the option is an
incentive stock option or non-qualified option.
In general, a Participant will not recognize any income upon the exercise
of an incentive stock option, and the Company will not be entitled to a tax
deduction on account of such exercise. However, a Participant could be subject
to the alternative minimum tax upon exercise. If the Code requirements relating
to the holding periods for stock acquired on exercise of an incentive stock
option have been satisfied, a Participant who acquires Company Common Stock upon
the exercise of his or her incentive stock option will recognize any gain or
loss realized upon the sale of such stock as long-term capital gain or loss, but
the Company will not be entitled to any tax deduction on account of such sale.
If such holding period requirements are not satisfied with respect to such stock
acquired on exercise of an incentive stock option, the sale of the stock so
acquired will result in ordinary income being recognized by the Participant in
an amount equal to the excess, with certain adjustments, of the fair market
value of the underlying stock on the date of exercise over the option price and
the Company will be entitled to a tax deduction in the same amount. Any
additional gain realized by such Participant on such a sale of his or her stock
will be capital gain. If the total amount realized upon such a sale is less than
the exercise price of the incentive stock option, the difference will be a
capital loss to such Participant.
In the case of a non-qualified option, a Participant generally will
recognize ordinary income upon the exercise of such option in the amount equal
to the excess of the fair market value of the underlying stock on the date of
exercise over the option price, and the Company will be entitled to a tax
deduction in the same amount. Such participant will recognize as capital gain or
loss any profit or loss realized on the sale or exchange of any such shares
disposed of or sold.
The granting of SARs generally does not produce taxable income under the
Code to the Participant or a tax deduction to the Company. Upon exercise of a
SAR, the amount of any cash the Participant receives and the fair market value
as of the exercise date of any stock received are generally taxable to the
participant as ordinary income and are deductible by the Company.
A Participant generally will not recognize any income for federal income
tax purposes upon the award of restricted stock
31
<PAGE>
which is not transferable and is subject to a substantial risk of forfeiture.
Dividends paid with respect to restricted stock prior to the lapse of
restrictions applicable to such stock will be taxable as compensation income to
the employee. Generally, a Participant will recognize compensation income at the
first time such stock becomes transferable or no longer subject to a substantial
risk of forfeiture, in an amount equal to the fair market value of such shares
of the Company's Common Stock on the date the restrictions lapse. However, a
Participant may elect to recognize compensation income upon the grant of
restricted stock based on the fair market value of the shares of Common Stock of
the Company subject to such award on the date of such award. If a Participant
makes such an election, dividends paid with respect to such restricted shares
will not be treated as compensation, but rather as dividend income, and the
Participant will not recognize additional income when the restrictions
applicable to such restricted stock lapse. Assuming compliance with the
applicable withholding requirements, the Company will be entitled to a tax
deduction equal to the amount of ordinary income recognized by a Participant in
connection with his or her restricted stock award in the Company's taxable year
in which such Participant recognizes such income.
The payment of performance grants or other awards under the 1994 Plan in
the form of Common Stock is generally immediately taxable to the Participant and
deductible by the Company; however, to the extent that such stock is not
transferable and subject to a substantial risk of forfeiture, the tax
consequences to the Participant and the Company will be similar to the tax
consequences of awards of restricted stock as described above.
Under Section 162(m) of the Code, the Company may be limited as to federal
income tax deductions to the extent that total annual compensation in excess of
$1 million is paid to the chief executive officer of the Company or any one of
the other four highest paid executive officers employed by the Company on the
last day of the taxable year. However, certain "performance-based compensation,"
the material terms of which are disclosed to and approved by the Company's
stockholders, is not subject to this limitation on deductibility. The
Corporation has structured the stock option and SAR portions of the 1994 Plan
with the intention that compensation resulting therefrom would be qualified
performance-based compensation and would be deductible without regard to the
limitations otherwise imposed by Section 162(m) of the Code. The 1994 Plan
allows the Committee discretion to award restricted stock and other stock-based
awards that are intended to be qualified performance-based compensation. Bonuses
and other compensation payable in stock under the 1994 Plan are not intended to
qualify as performance-based compensation.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Under Section 16(a) 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,
Pilia and Helson were late in filing one Form 4, on which each such officer
reported one transaction, and no other directors or officers were late in filing
any reports on Forms 3, 4 and 5.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No executive officer of the Company serves or served on the compensation
committee of another entity one of whose executive officers served on the
compensation committee of the Company, and no executive officer of the Company
serves or served as a director of another entity who has or had an executive
officer serving on compensation committee of the Company, and no executive
officer of the Company serves or served as a member of the compensation
committee of another entity who has or had an executive officer serving as a
director of the Company. Mr. Shaykin, Chairman of the Board of the Company, was
appointed to serve on the Compensation Committee upon its inception in 1993 and
resigned following its first meeting in January 1994. Mr. Shaykin has been an
employee of the Company, and Chairman of the Board of Directors of the Company
since 1993. Effective June 7, 1993, Mr. Shaykin executed a note in favor of the
Company to represent the amount owed for Mr. Shaykin's acquisition of Executive
Stock pursuant to an employment agreement entered into between Mr. Shaykin and
the Company. See "--Certain Relationships and Related Transactions--Indebtedness
of Management." From January 1994 through March 1996, the Compensation
Committee, consisted of Mr. Bewkes, Chairman, and Mr. Pfenniger. From March 1996
to the present, the Compensation Committee has consisted of Mr. Bewkes,
Chairman, Mr. Bryson, and Mr. Pfenniger. Mr. Pfenniger served as Chief Operating
Officer of IVAX and held various other executive positions with certain IVAX
subsidiaries during 1995. See "Certain Relationships and Related
Transactions--IVAX."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of May 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
32
<PAGE>
outstanding Common Stock and Preferred Stock; (2) by each Director and
nominee for 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) 13.1% 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%
Phillip Frost 10,000(7) * 0 0%
c/o IVAX Corporation
8800 Northwest 36th Street
Miami, Florida 33178
Arthur H. Hayes, Jr. 0 0 0 0%
E. Garrett Bewkes, Jr. 80,167(8) * 0 0%
Vaughn D. Bryson 0 0 0 0%
Mark B. Hacken 0 0 0 0%
Richard C. Pfenniger, Jr. 11,000(9) * 0 0%
c/o IVAX Corporation
8800 Northwest 36th Street
Miami, Florida 33178
All Directors and Executive 2,908,140(10) 32.2% 0 0%
Officers as a Group (13 persons)
D&N Holding Company 1,126,398(3)(11) 13.2% 0 0%
c/o IVAX Corporation
8800 Northwest 36th Street
Miami, Florida 33178
Knowlton Brothers, Inc. 557,100(12) 6.5% 0 0%
530 Fifth Avenue
New York, NY 10036
Mervyn Adelson Trust 275,000(13) 3.3% 125,000 100%
c/o Nigro, Karlin & Segal
10100 Santa Monica Boulevard
Suite 1300
Los Angeles, CA 90067
<FN>
- ----------
* Less than 1%.
33
<PAGE>
(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 507,111 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 (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 Plan.
(7) Includes 10,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Frost under the 1994 Plan.
(8) Includes 13,500 shares of Common Stock issuable upon exercise of options
granted to Mr. Bewkes under the 1994 Plan.
(9) Includes 11,000 shares of Common Stock issuable upon exercise of options
granted to Mr. Pfenniger under the 1994 Plan.
(10) 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.
(11) 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 11.8% of IVAX's voting securities. Dr. Frost and Mr.
Pfenniger disclaim beneficial ownership of the shares of Common Stock held
by D&N.
34
<PAGE>
(12) 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 shares of Common Stock
solely for investment and the Reporting Persons have no plans to seek
control of the Company.
(13) Includes 110,000 shares of Common Stock and warrants to purchase 40,000
shares of Common Stock, and 125,000 shares of Convertible Preferred Stock,
Series A which is convertible into Common Stock. Mervyn Adelson, as
trustee of the Mervyn Adelson Trust, is deemed to beneficially own all
such stock.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
IVAX
In June 1993, the Company entered into a 20-year strategic alliance (the
"IVAX Agreement") with Baker Norton Pharmaceuticals, a subsidiary of IVAX, one
of the largest generic pharmaceutical companies in the United States, which
provides for certain exclusive and non-exclusive rights for IVAX to develop and
market the Company's paclitaxel. The Company continues to supply IVAX with
paclitaxel pursuant to the terms of the IVAX Agreement. During 1995, the
Company's sales of paclitaxel to IVAX were $589,660, or 22% of the Company's
revenues during such period and during the first quarter of 1996, the Company's
sales of paclitaxel to IVAX were $204,770, or 30% of the Company's revenues
during such period. IVAX, through D&N, currently beneficially owns 13.2 % of the
Common Stock.
Pursuant to the IVAX Agreement, IVAX may, under limited circumstances,
obtain manufacturing information from the Company, or, under some circumstances,
terminate its relationship with the Company or purchase paclitaxel from third
parties if the Company is unable to supply paclitaxel in sufficient quantities
to meet IVAX's requirements.
Phillip Frost and Richard C. Pfenniger, Jr., directors of the Company,
serve, respectively, as Chairman and Chief Executive Officer of IVAX, and as
Chief Operating Officer of IVAX, and hold various other executive positions with
certain IVAX subsidiaries. In addition, the Company has been advised that Dr.
Frost beneficially owns approximately 11.8% of IVAX's voting securities.
IVAX (through D&N), Mr. Shaykin, Dr. Ainsworth, Dr. Pilia and the Company
are parties to 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 (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) 5% 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.
INDEBTEDNESS OF MANAGEMENT
On August 14, 1995, Dr. Ainsworth remitted to the Company 83,907 shares
of Common Stock in exchange for extinguishment of the debt represented by the
Executive Note of $979,610.91 owed to the Company by Dr. Ainsworth.
35
<PAGE>
See"Executive Compensation--Employment Agreements and Termination of Employment
Agreements."
On August 14, 1995, Dr. Pilia remitted to the Company 21,815 shares of
Common Stock in exchange for extinguishment of the debt represented by the
Executive Note of $254,688.13 owed to the Company by Dr. Pilia. See "Executive
Compensation--Employment Agreements and Termination of Employment Agreements."
On August 14, 1995, Dr. Helson remitted to the Company 38,566 shares of
Common Stock in exchange for extinguishment of the debt represented by the
Executive Note of $450,247.85 owed to the Company by Dr. Helson. See "Executive
Compensation--Employment Agreements and Termination of Employment Agreements."
The transactions described above whereby a total of 144,288 shares of
Common Stock were returned to the Company in exchange for extinguishment of debt
were all conducted pursuant to the terms of the Employment and Executive Stock
Agreements, Executive Notes, and Executive Stock Pledge Agreements entered into
by the respective Executives and the Company on June 7, 1993, and subsequently
amended as of May 31, 1994. The stock value computed according to this formula
and used for the purpose of these transactions was $11.675 per share.
The aggregate outstanding principal of and unpaid interest accrued
under the Executive Note for Mr. Shaykin as of March 31, 1996 was $940,694.
OTHER
The Company and MediScience Associates, Inc. ("MediScience"), entered into
a consulting agreement (the "MediScience Agreement") whereby Dr. Hayes, who is
President and Chief Operating Officer of MediScience, will provide the Company
with consulting services in a variety of areas, including clinical research
planning, strategic positioning and regulatory guidance. The Company makes
quarterly payments to MediScience under the MediScience Agreement of $12,500 for
such services. Dr. Hayes is obligated to provide consulting services under the
MediScience Agreement indefinitely, provided that the MediScience Agreement is
terminable by the Company after July 11, 1996 with 90 days prior notice or by
MediScience at any time with 90 days prior notice.
Vaughn D. Bryson is Vice Chairman of Vector, an investment banking firm
that is the lead managing underwriter of a public offering of the Company for
which a registration statement has been filed with the Securities and Exchange
Commission. Mr. Bryson may also provide consulting services to the Company in
the area of pharmaceutical development in 1996.
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, attached.
(B) FINANCIAL STATEMENT SCHEDULES
None.
36
<PAGE>
(C) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
3.1 -- Amended and Restated Certificate of Incorporation of the Company.
Incorporated herein by reference from the Registration Statement on
Form S-1 of the Company, filed with the Securities and Exchange
Commission (the "Commission") on July 27, 1994 (File No. 33-78016).
3.2 -- Certificate of Designation for Convertible Preferred Stock, Series
A. Incorporated herein by reference from the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995 (File No.
0-2430).
3.3 -- Bylaws of the Company. Incorporated herein by reference from the
registration statement on Form S-1 of the Company Filed with the
Commission on July 27, 1994 (File No. 33-78016).
4.1 -- Form of Common Stock Certificate. Incorporated herein by reference
from the registration statement on Form S-1 of the Company, filed
with the Commission on July 27, 1994 (File No. 33-78016).
4.2 -- Underwriter's Warrant Agreement. Incorporated herein by reference
from the registration statement on Form S-1 of the Company, filed
with the Commission on July 27, 1994 (File No. 33-78016).
4.3 -- Warrant Agreement. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the
Commission on July 27, 1994 (File No. 33-78016).
4.4 -- Warrant Certificate. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the
Commission on July 27, 1994 (File No. 33-78016).
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. Incorporated herein by reference
from the registration statement on Form S-1 of the Company, filed
with the Commission on July 27, 1994 (File No. 33-78016).
10.2 -- Company's 1994 Long-Term Performance Incentive Plan. Incorporated
herein by reference from the registration statement on Form S-1 of
the Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.3 -- Common Stock Warrant dated as of June 7, 1993 between the Company
and Broadmark Capital Corporation. Incorporated herein by reference
from the registration statement on Form S-1 of the Company, filed
with the Commission on July 27, 1994 (File No. 33-78016).
10.4 -- Subscription Agreement dated as of June 7, 1993 between the Company
and D&N Holding Company. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the
Commission on July 27, 1994 (File No. 33-78016).
10.5 -- Stock Purchase Warrant dated as of June 7, 1993 between the Company
and Arthur D. Harrison. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the
Commission on July 27, 1994 (File No. 33-78016).
10.6 -- Stock Purchase Warrant dated as of June 7, 1993 between the Company
and D&N Holding Company. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the
Commission on July 27, 1994 (File No. 33-78016).
10.7 -- Stock Purchase Warrant dated as of June 7, 1993 between the Company
and Kirkland & Ellis. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the
Commission on July 27, 1994 (File No. 33-78016).
10.8 -- Stock Purchase Warrant dated as of December 15, 1992 between the
Company and Kirkland & Ellis. Incorporated herein by reference from
the registration statement on Form S-1 of the Company, filed with
the Commission on July 27, 1994 (File No. 33-78016).
10.9 -- Stock Purchase Warrant dated as of June 3, 1992 between the Company
and Herbert L. Lucas. Incorporated herein by reference from the
registration statement on Form S-1 of the Company, filed with the
Commission on July 27, 1994 (File No. 33-78016).
10.10 -- Stock Purchase Warrant dated as of June 3, 1992 between the
Company and H.J. Meyers & Co., Inc. Incorporated herein by reference
from the registration statement on Form S-1 of the Company, filed
with the Commission on July 27, 1994 (File No. 33-78016).
10.11 -- Stock Purchase Warrant dated as of June 3, 1992 between the
Company and Freshman, Marantz, Orlanski, Cooper, and Klein 1993
Investments. Incorporated herein by reference from the registration
statement on Form S-1 of the Company, filed with the Commission on
July 27, 1994 (File No. 33-78016).
37
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.12 -- Stock Purchase Warrant dated as of April 30, 1993 between the
Company and Pacific Regeneration Technologies, Inc. Incorporated
herein by reference from the registration statement on Form S-1 of
the Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
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. Incorporated herein
by reference from the registration statement on Form S-1 of the
Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
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. Incorporated herein by reference from the registration
statement on Form S-1 of the Company, filed with the Commission on
July 27, 1994 (File No. 33-78016).
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. Incorporated herein by
reference from the registration statement on Form S-1 of the
Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
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. Incorporated herein
by reference from the registration statement on Form S-1 of the
Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
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. Incorporated herein by
reference from the registration statement on Form S-1 of the
Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
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 Larry Helson. Incorporated herein by
reference from the registration statement on Form S-1 of the
Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.19 -- Company's Stock Option Agreement with Sterling K. Ainsworth.
Incorporated herein by reference from the registration statement on
Form S-1 of the Company, filed with the Commission on July 27, 1994
(File No. 33-78016).
10.20 -- Company's Stock Option Agreement with Patricia A. Pilia.
Incorporated herein by reference from the registration statement on
Form S-1 of the Company, filed with the Commission on July 27, 1994
(File No. 33-78016).
10.21 -- Services and Supply Agreement dated as of December 1, 1993 between
the Company and Pacific Biotechnologies Inc. Incorporated herein by
reference from the registration statement on Form S-1 of the
Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.22 -- Subscription Agreement dated as of April 29, 1993 between the
Company and Pacific Regeneration Technologies. Incorporated herein
by reference from the registration statement on Form S-1 of the
Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.23 -- Amended and Restated Master Agreement dated as of January 19, 1994
between the Company and F.H. Faulding & Co., Ltd. Incorporated
herein by reference from the registration statement on Form S-1 of
the Company, filed with the Commission on July 27, 1994 (File No.
33-78016).
10.24 -- Amendment No. 1 To Amended and Restated Master Agreement Dated
January 19, 1994, executed as of March 23, 1995. Incorporated herein
by reference from the Company's Annual Report on Form 10- K for the
year ended December 31, 1994 (File No. 0-24320).
10.25 -- Agreement dated as of June 7, 1993 between the Company and Baker
Norton Pharmaceuticals, Inc. Incorporated herein by reference from
the registration statement on Form S-1 of the Company, filed with
the Commission on July 27, 1994 (File No. 33-78016).
10.26 -- Lease dated February 28, 1995 between the Company and the Mutual
Life Assurance Company of Canada. Incorporated herein by reference
from the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995 (File No. 0-2430).
10.27 -- Subscription Agreement and Investment Letter between the Company
and NaPro Canada. Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30,
38
<PAGE>
1995 (File No. 0-2430).
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.28 -- Put/Call Agreement dated July 12, 1995 between the Company and the
Purchasers of Series A Preferred Shares of NaPro Canada. Incorporated
herein by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 (File No. 0-2430).
10.29 -- Side Letter dated July 21, 1995 to Put/Call Agreement.
Incorporated herein by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-2430).
10.30 -- Engagement Letter dated February 16, 1995, between the Company and
Capital West Partners. Incorporated herein by reference from the
Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1995 (File No. 0-2430).
10.31 -- Subscription Agreement between the Company and the purchasers of
Convertible Preferred Stock, Series A, of the Company. Incorporated
herein by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 (File No. 0-2430).
10.32 -- Purchase Agreement between the Company and certain purchasers of
Preferred Shares of NaPro Canada. Incorporated herein by reference
from the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995 (File No. 0-2430).
10.33 -- Purchase Agreement between the Company and BPI Capital Management
Corporation as to Preferred Shares of NaPro Canada. Incorporated
herein by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995 (File No. 0-2430).
10.34 -- Lease between the Company and Gunbarrel Facility L.L.C. dated
October 16, 1995. Incorporated herein by reference from the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
10.35 -- First Amendment to Lease November 27, 1995, between the Company and
Gunbarrel Facility L.L.C. Incorporated herein by reference from the
Company's Annual Report on Form 10-K for the year ended December 31,
1995.
10.36 -- Agreement between the Company and Pacific Biotechnologies Inc.
dated March 29, 1996. Incorporated herein by reference from the
Company's Annual Report on Form 10-K for the year ended December 31,
1995.
21.1 -- List of Subsidiaries(1)
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
24.1 -- Powers of Attorney(1)
- ------------------------------------
(1) 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.
39
<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 to be signed on its behalf
by the undersigned, thereunto duly authorized.
NAPRO BIOTHERAPEUTICS, INC.
By: __________*_______________
Sterling K. Ainsworth, Ph.D.
President, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company, in the
capacities and on the dates below indicated:
SIGNATURES TITLE DATE
* President and Chief Executive June 12, 1996
- ---------------------------- Officer; Director (Principal
Executive Officer)
Sterling K. Ainsworth
* Chairman of the Board of June 12, 1996
Directors
- -----------------------------
Leonard P. Shaykin
/S/ GORDON H. LINK, JR. Vice President, Chief Financial June 12, 1996
- ----------------------------- Officer (Principal Financial
Officer and Principal Accounting
Gordon H. Link, Jr. Officer)
* Director June 12, 1996
- -----------------------------
E. Garrett Bewkes, Jr.
* Director June 12, 1996
- -----------------------------
Phillip Frost
* Director June 12, 1996
- -----------------------------
Richard C. Pfenniger, Jr.
* Director June 12, 1996
- ----------------------------
Patricia A. Pilia
- ---------------------------- Director
Mark B. Hacken
- ---------------------------- Director
Vaughn D. Bryson
- ---------------------------- Director
Arthur H. Hayes, Jr.
* By: /S/
-------------------------------------
Gordon H. Link, Jr., Attorney in Fact
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, 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-7
Notes to Consolidated Financial Statements................................. F-8
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>
<TABLE>
<CAPTION>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, MARCH 31,
----------------------------- -------------
1994 1995 1996
------------ --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.............................................$ 892,146 $7,133,390 $ 4,922,895
Securities available for sale......................................... 507,752 -- --
Securities held to maturity........................................... -- 667,000 667,000
Accounts receivable................................................... 148,347 325,814 459,700
Inventory:
Raw materials...................................................... 499,966 286,617 819,918
Work-in-process.................................................... 380,545 432,898 289,066
Finished goods..................................................... 547,265 492,444 338,565
------------ ------------- -------------
1,427,776 1,211,959 1,447,549
Prepaid expenses and other ........................................... 859,539 310,451 329,239
------------ ------------- -------------
Total current assets..................................................... 3,835,560 9,648,614 7,826,383
Property and equipment, at cost (NOTE 4):
Laboratory equipment.................................................. 1,093,960 1,312,996 1,359,320
Leasehold improvements................................................ 248,729 507,816 495,065
Office equipment and other............................................ 113,485 275,902 343,074
Construction in progress.............................................. 122,504 406,948 428,171
------------ ------------- -------------
1,578,678 2,503,662 2,625,630
Accumulated depreciation.............................................. 524,578 721,498 824,596
------------ ------------- -------------
Property and equipment, net.............................................. 1,054,100 1,782,164 1,801,034
Restricted cash.......................................................... -- 123,750 177,399
Receivable from related parties.......................................... 18,487 18,487 24,738
Other assets............................................................. 67,805 380,335 376,383
------------ ------------- -------------
Total assets............................................................. $ 4,975,952 $11,953,350 $10,205,937
============ ============= =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------- -------------
1994 1995 1996
------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................................................$ 417,374 $ 662,726 $ 625,958
Accrued payroll and payroll taxes................................ 112,607 328,032 328,283
Capital lease obligations, current (NOTE 4)...................... 16,985 105,454 94,753
Notes payable, current (NOTE 3)................................. 83,443 38,801 46,488
Deferred revenue................................................. 36,000 51,431 --
------------- ------------- -------------
Total current liabilities............................................ 666,409 1,196,444 1,095,482
Capital lease obligations, long term (NOTE 4)........................ 3,471 298,811 411,352
Notes payable, long term (NOTE 3).................................... -- 1,150,000 1,158,333
Deferred revenue (NOTES 3 AND 8)..................................... 1,100,000 -- --
Compensation due to officers and directors........................... 169,358 169,358 169,358
Commitments and contingencies (NOTES 1 AND 9)
Minority interest.................................................... -- 3,715,139 3,715,139
Stockholders' equity (NOTE 6):
Series A preferred stock, $.001 par value;
2,000,000 shares authorized;
No issued and outstanding shares in 1994 and 125,000
issued and outstanding shares in 1995 and 1996
(unaudited) (preference in liquidation $1,000,000)......... -- 125 125
Nonvoting common stock, convertible on disposition into
400,000 shares of Common Stock, $.0075 par value;
1,000,000 shares authorized; 400,000 issued and
outstanding............................................... 3,000 3,000 3,000
Common stock, $.0075 par value;
9,000,000 authorized
7,713,443 shares issued in 1994, 8,525,265 shares issued
1995 and 8,529,932 shares issued in 1996 (unaudited)....... 57,851 63,939 63,973
Additional paid-in capital........................................ 20,123,991 26,675,099 26,681,313
Unearned compensation ............................................ (29,685) (9,426) (7,356)
Notes receivable from stockholders ............................... (2,488,996) (924,789) (940,694)
Deficit .......................................................... (14,629,447) (18,699,803) (20,459,541)
Treasury stock--none in 1994 and 144,288 in
1995 and 1996 (unaudited) .................................. -- (1,684,547) (1,684,547)
------------- ------------- -------------
Total stockholders' equity .......................................... 3,036,714 5,423,598 3,656,274
------------- ------------- -------------
Total liabilities and stockholders' equity .......................... $ 4,975,952 $11,953,350 $10,205,937
============= ============= =============
</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>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
------------------------------------------ --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of products ....................... $ 1,247,819 $ 1,002,037 $ 2,623,426 $ 1,148,181 $ 690,830
Other ................................... 567 5,176 -- -- --
----------- ----------- ----------- ----------- -----------
1,248,386 1,007,213 2,623,426 1,148,181 690,830
Expenses:
Research, development and cost of
products sold ......................... 3,505,465 2,706,767 4,325,274 1,074,669 1,786,137
General and administrative .............. 2,689,803 2,043,931 2,309,934 450,803 703,513
Faulding royalty (NOTE 6) ............... -- 1,000,000 -- -- --
Plantation fees (NOTE 8) ................ 6,976 1,238,256 272,052 268,720 --
----------- ----------- ----------- ----------- -----------
6,202,244 6,988,954 6,907,260 1,794,192 2,489,650
----------- ----------- ----------- ----------- -----------
Operating loss ............................. (4,953,858) (5,981,741) (4,283,834) (646,011) (1,798,820)
Other income (expense):
Interest income ......................... 79,326 188,026 373,306 49,126 100,135
Interest and other expense .............. (33,839) (339,830) (159,828) (40,059) (61,053)
----------- ----------- ----------- ----------- -----------
Loss before extraordinary item ............. (4,908,371) (6,133,545) (4,070,356) (636,944) (1,759,738)
Loss on early extinguishment
of debt (NOTE 6) ........................ -- (512,482) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss ................................... $(4,908,371) $(6,646,027) $(4,070,356) $ (636,944) $(1,759,738)
=========== =========== =========== =========== ===========
Loss per share:
Before extraordinary item ............... (0.79) (0.91) (0.51) (0.08) (0.21)
Extraordinary item ...................... -- (0.08) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss................................. $ (0.79) $ (0.99) $ (0.51) $ (0.08) $ (0.21)
=========== =========== =========== =========== ===========
Weighted average shares outstanding ........ 6,201,219 6,761,081 7,972,537 7,713,443 8,527,620
=========== =========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<PAGE>
NAPRO BIOTHERAPEUTICS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
NOTES
RECEIVABLE
SERIES A NONVOTING ADDITIONAL UNEARNED FROM
PERFERRED COMMON COMMON PAID-IN COMPENSA- STOCKHOLDER TREASURY
STOCK STOCK STOCK CAPITAL TION S DEFICIT STOCK TOTAL
--------- -------- --------- ----------- --------- ----------- ------------ ----------- ---------
<S> <C> <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
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) 5,423,59
Exercise of 4,667 stock
options at prices
ranging from $.75
per share to $2.40 per
share (unaudited)........ -- -- 34 6,214 -- -- -- -- 6,248
Interest receivable on
officers' notes
(unaudited).............. -- -- -- -- -- (15,905) -- -- (15,905)
Amortization of unearned
compensation (unaudited). -- -- -- -- 2,070 -- -- -- 2,070
Net loss (unaudited)........ -- -- -- -- -- -- (1,759,738) -- (1,759,738)
--------- -------- --------- ----------- --------- ----------- ------------ ----------- ----------
Balances at March 31, 1996
(unaudited)................. $125 $3,000 $63,973 $26,681,313 $(7,356) $(940,694)$(20,459,541) $(1,684,547)$3,656,273
========= ======== ========= =========== ========= =========== ============ =========== ==========
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
OPERATING ACTIVITIES (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss ........................................$(4,908,371) $(6,646,027) $(4,070,356) $ (636,944) $(1,759,738)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization................. 179,453 473,989 269,804 83,945 115,769
Employee termination expense.................. -- 82,334 -- -- --
Compensation for common stock and options..... 1,025,003 555,497 20,259 5,297 2,070
Loss on disposal of property and equipment.... 4,298 335,021 174,440 -- 15,249
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) (1,273,181) (133,886)
Inventory................................. (552,642) (705,771) 215,817 291,790 (235,590)
Prepaid expenses and other current assets. (27,725) (887,314) 116,218 647,624 (24,419)
Accounts payable.......................... 852,492 (735,613) 245,352 56,280 (52,199)
Accrued liabilities....................... 55,980 (48,366) 225,425 19,845 (25,654)
Deferred revenue.......................... 336,600 (300,598) 15,431 (468,816) (36,000)
------------ ------------ ------------ ------------ ------------
Net cash used by operating activities............ (3,269,235) (7,249,687) (2,976,103) (1,274,161) (2,134,398)
INVESTING ACTIVITIES
Additions to property and equipment.............. (527,446) (575,156) (1,209,326) (145,343) (138,221)
Purchase of securities........................... -- (2,932,260) (6,562,600) -- --
Proceeds from sale or maturity of securities..... -- 2,435,942 6,451,146 503,450 --
Transfer of restricted cash...................... -- -- (123,750) -- (53,649)
Proceeds from sale of property and equipment..... -- 2,200 250 -- --
------------ ------------ ------------ ------------ ------------
Net cash used by investing activities............ (527,446) (1,069,274) (1,444,280) 358,107 (191,870)
FINANCING ACTIVITIES
Increase in deferred revenue-long term........... 349,998 350,000 -- -- --
Proceeds from notes payable...................... 400,000 1,571,569 171,198 556,567 46,488
Payments under notes payable..................... (126,808) (2,154,590) (165,840) (57,777) (38,801)
Proceeds from sales-type lease................... -- -- 469,094 -- 160,947
Payments under capital leases.................... -- -- (85,285) -- (59,109)
Proceeds from sale of common and preferred stock 3,104,685 10,697,987 5,155,710 -- 6,248
Proceeds from sale of preferred stock by -- -- 5,959,060 -- --
subsidiary.......................................
Offering costs................................... -- (1,271,440) (842,310) -- --
------------ ------------ ------------ ------------ ------------
Net cash provided by financing activities........ 3,727,875 9,193,526 10,661,627 498,790 115,773
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... (68,806) 874,565 6,241,244 (417,264) (2,210,495)
Cash and cash equivalents at beginning of year... 86,387 17,581 892,146 892,146 7,133,390
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of year......... $ 17,581 $ 892,146 $ 7,133,390 $ 474,882 $ 4,922,895
============ ============ ============ ========== ============
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 35,278 15,905
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>
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
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 (the "Common Stock"),
1,000,000 shares of $.0075 par value nonvoting common stock, (the "Nonvoting
Common Stock") and 2,000,000 shares of $.001 par value preferred stock (the
"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. ("NaPro Canada").
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 Canada, 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.
The accompanying unaudited consolidated financial statements for the three
months period ended March 31, 1995 and 1996 have been prepared in accordance
with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1996.
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, a naturally occurring cancer-fighting compound found in
certain species of yew (TAXUS) trees. The Company's formulation of paclitaxel is
referred to herein as "NBT Paclitaxel."
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, NBT 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 NBT Paclitaxel and to develop,
commercialize and manufacture semi-synthetic NBT 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.
F-8
<PAGE>
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 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions are used in estimating fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
Notes payable and capital lease obligations: The carrying amounts of
borrowings under notes payable and capital lease obligations approximate
fair value.
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-9
<PAGE>
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.
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%
F-10
<PAGE>
RISKS AND UNCERTAINTIES RELATED TO DISTRIBUTION
The Company's currently largest customer, Faulding, distributes NBT Paclitaxel
in Australia. Faulding's main competitor in the Australian market, Bristol-Myers
Squibb Company ("BMS"), has brought legal action against Faulding on the basis
of infringement of certain BMS patents, which Faulding is claiming are invalid
in a separate suit. Litigation is an uncertain process, and no assurances can be
given that BMS will not obtain an injunction against Faulding which could
prevent Faulding from marketing NBT 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 NBT Paclitaxel until such time as
Faulding obtains its own nongeneric approval which does not rely on the
administration methods claimed in the BMS patents. If BMS 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-11
<PAGE>
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 MARCH 31
--------------------------- ------------
1994 1995 1996
(UNAUDITED)
--------- ------------ ------------
<S> <C> <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 $1,158,333
Note payable to stockholder, due in December 1995....................... 40,000 -- --
Note payable, due in March 1996, interest at 6.81%, accruing monthly.... -- 38,801 46,488
Note payable, due in March 1995......................................... 43,443 -- --
--------- ----------- ------------
83,443 1,188,801 1,204,821
Less amounts currently payable.......................................... 83,443 38,801 46,488
--------- ----------- ------------
Notes payable-long term.................................................$ -- $1,150,000 $1,158,333
========= ============ ============
</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-12
<PAGE>
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
---------
NPresent 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.
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 AND
NET 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$225,000, expiring in 2002.
F-13
<PAGE>
Under Section 382 of the Internal Revenue Code of 1986, as amended, the
utilization of net operating loss carryforwards is limited after an ownership
change, as defined in such Section 382, to an annual amount equal to the value
of the loss corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal long-term tax-exempt rate in effect
during the month the ownership change occurred. At least one such ownership
change has occurred. As a result, the Company will be subject to an annual
limitation on the use of its net operating losses. This limitation affects net
operating losses incurred up to the ownership change and does not reduce the
total amount of net operating loss which may be taken, but rather limits the
amount which may be used during a particular year. Therefore, in the event the
Company achieves profitability, such limitation would have the effect of
increasing the Company's tax liability and reducing the net income and available
cash resources of the Company if the taxable income during any year exceeded the
allowable loss carried forward to that year.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets with respect to United States
taxing authorities are as follows:
DECEMBER 31
------------------------
1994 1995
----------- -----------
Deferred tax liabilities:
Tax over book depreciation.........................$ 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-14
<PAGE>
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.
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 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 "Warrants"). 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 IPO 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
F-15
<PAGE>
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.
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 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 Stock at
a price of $.10 per warrant, the initial public offering price per warrant.
Shares of Nonvoting Common Stock will automatically convert to Common Stock
(with full voting rights), on a share-for-share basis, upon Faulding's
disposition thereof. The Nonvoting Common Stock 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 Stock, and the
Faulding Warrants are exercisable for Nonvoting Common Stock instead of Common
Stock until Faulding's disposition thereof. The proceeds from issuance of the
Nonvoting Common Stock 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 NBT 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, 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 NaPro Canada, for proceeds of $5,959,060.
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 Company's 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.
F-16
<PAGE>
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.
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 IPO. 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 Financing described in Note 6. In August 1994, in conjunction with
the IPO, 1,980 warrants were purchased by the IPO 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.
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
F-17
<PAGE>
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 Common Stock.
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
Granted (unaudited)................................. 36,000 10.13--11.13
Canceled (unaudited)................................ (3,500) 6.00--10.13
Exercised (unaudited)............................... (4,667) .75--2.40
--------
Outstanding at March 31, 1996 (unaudited)........... 595,440 .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, which the Company believes have the capabilities
to obtain commercial approval for NBT Paclitaxel and establish NBT 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 NBT 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. The $1,100,000 of advances were
subsequently converted into notes payable (see Note 3).
The Faulding Agreement provides that the Company shall supply all of Faulding's
requirements for paclitaxel. The Company is paid a fixed sum for NBT Paclitaxel
supplied for noncommercial uses, and a fixed percentage of Faulding's original
sales price for NBT 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
NBT Paclitaxel sold to third parties for commercial use. However, in 1994, the
Company exercised its right to eliminate this royalty under the Faulding
Agreement
F-18
<PAGE>
by paying Faulding $1,000,000 (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 $3,000,000
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
$1,400,000 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 NBT Paclitaxel
supplied for noncommercial uses, and a manufacturing payment plus a percentage
of IVAX's sales profit (as defined by the agreement) for NBT 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 Pacific Regeneration
Technologies, Inc., 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 PBI's 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 the IPO 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 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 expended as research and development and are separately reported on the
statement of operations.
F-19
<PAGE>
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
NBT Paclitaxel supplied for noncommercial uses, and a fixed percentage of
Faulding's sales price for NBT Paclitaxel supplied for commercial use. The
Company recognizes the corresponding revenue at the time of shipment of NBT
Paclitaxel to Faulding, based upon the intended use indicated by Faulding on its
purchase orders. Faulding's actual selling price, however, may differ from the
amounts originally budgeted and indicated to the Company. Faulding has agreed to
communicate to the Company the final amount of sales, and, average selling
prices, and on or about April 30, 1996, an adjustment will be calculated, which
may either increase or decrease the Company's revenue from sales of products to
Faulding for 1995.
F-20
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 and to the incorporation by reference in the
Registration Statement on Form S-8 pertaining to the NaPro BioTherapeutics,
Inc. 1993 Stock Option Plan and the NaPro BioTherapeutics, Inc. 1994 Long-Term
Performance Incentive Plan, 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/A, Third Amendment) for the
year ended December 31, 1995.
/s/ ERNST & YOUNG LLP
----------------------------
ERNST YOUNG LLP
Denver, Colorado
June 24, 1996
