FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report under Section 13 of the
Securities Exchange Act of 1934
Quarter ended March 31, 1999
Commission File Number 0-24320
NaPRO BIOTHERAPEUTICS, INC.
Incorporated in Delaware IRS ID No. 84-1187753
6304 Spine Road, Unit A
Boulder, CO 80301
(303) 530-3891
NaPro BioTherapeutics, Inc. ("NaPro" or "the Company") (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
The number of shares outstanding of each of the issuer's classes of common stock
as of May 6, 1999:
Common Stock, $.0075 par value 19,049,695
Non-voting Common Stock, $.0075 par value 395,000
Total number of pages in document--18
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NaPro BioTherapeutics, Inc.
Table of Contents
Page
Part I Financial Information
Consolidated Financial Statements
Balance Sheet 3
Statement of Operations 5
Statement of Cash Flow 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Quantitative and Qualitative Disclosures about
Market Risk 15
Part II Other Information
Legal Proceedings 15
Changes in Securities 15
Defaults Upon Senior Securities 15
Submission of Matters to a Vote of Security Holders 15
Other Information 15
Exhibits and Reports on Form 8-K 15
Signatures 16
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Part I. Financial Information
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc.
Balance Sheet
Assets
March 31, December 31,
1999 1998
unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 4,783,000 $ 7,244,000
Securities available for sale 200,000 197,000
Accounts receivable 854,000 403,000
Inventory 2,433,000 2,713,000
Restricted cash 980,000 1,320,000
Prepaid expense and other 1,021,000 343,000
------------- ------------
Total current assets 10,271,000 12,220,000
Property and equipment, net 11,323,000 11,558,000
Inventory 1,460,000 1,571,000
Other assets 317,000 317,000
------------- ------------
Total assets $ 23,371,000 $ 25,666,000
============= ============
See accompanying notes
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NaPro BioTherapeutics, Inc.
Balance Sheet
Liabilities and Stockholders' Equity
March 31, December 31,
1999 1998
(unaudited)
Current liabilities:
Accounts payable $ 1,472,000 $ 1,317,000
Accrued payroll and payroll taxes 555,000 451,000
Notes payable--current portion 350,000 421,000
Senior convertible debt - -
Deferred revenue 1,840,000 2,910,000
-------------- ------------------
Total current liabilities 4,217,000 5,099,000
Notes payable--long term 33,000 80,000
Senior convertible debt 3,769,000 5,176,000
-------------- ------------------
Total liabilities 8,019,000 10,355,000
Minority interest 622,000 622,000
Senior convertible redeemable preferred stock, Series C 3,184,000 3,805,000
Stockholders' equity Preferred stock, $.001 par value:
Authorized shares--2,000,000
Issued--none (unaudited in 1999) - -
Non-voting common stock, convertible on disposition
into voting common stock, $.0075 par value:
Authorized shares--1,000,000 shares
Issued and outstanding shares--395,000 (unaudited
in 1999) 3,000 3,000
Common stock, $.0075 par value:
30,000,000 authorized
19,085,805 shares issued in 1999 (unaudited),
and 17,902,407 in 1998 143,000 134,000
Additional paid-in capital 58,741,000 58,045,000
Deficit (45,557,000) (43,618,000)
Treasury stock--539,867 shares in 1999 (unaudited)
and 1,114,525 shares in 1998 (1,784,000) (3,680,000)
-------------- ------------------
Total stockholders' equity 11,546,000 10,884,000
-------------- ------------------
Total liabilities and stockholders' equity $ 23,371,000 $ 25,666,000
============= ==================
</TABLE>
See accompanying notes
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NaPro BioTherapeutics, Inc.
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------ -----
<S> <C> <C>
Sales $ 2,037,000 $ 2,415,000
Expense:
Research, development and cost of products sold 2,811,000 2,645,000
General and administrative 1,222,000 1,876,000
------------- ------------------
4,033,000 4,521,000
------------- ------------------
Operating loss (1,996,000) (2,106,000)
Other income (expense):
License fee 340,000 4,070,000
Interest income 75,000 93,000
Interest expense (176,000) (293,000)
------------- ------------------
Income (loss) before extraordinary item (1,757,000) 1,764,000
Extraordinary item--loss on early
extinguishment of debt (182,000) -
-------------- ------------------
Net income (loss) $ (1,939,000) $ 1,764,000
============= ==================
Earnings (loss) per share:
Income (loss) before extraordinary item $ (0.10) $ 0.13
Extraordinary item (0.01) -
--------------- ------------------
Net Income (loss) $ (0.11) $ 0.13
================= ==================
Earnings (loss) per share, assuming dilution:
Income (loss) before extraordinary item $ (0.10) $ 0.10
Extraordinary item (0.01) -
---------------- ----------------
Net income (loss) $ (0.11) $ 0.10
=============== =================
Weighted average shares outstanding 17,663,429 13,549,358
=============== =================
Weighted average shares outstanding, assuming dilution 17,663,429 16,961,508
=============== =================
</TABLE>
See accompanying notes.
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NaPro BioTherapeutics, Inc.
Statement of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------ -----
Operating activity
<S> <C> <C>
Net income (loss) $ (1,939,000) $ 1,764,000
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activity:
Depreciation 392,000 497,000
Accretion of debt issue cost, warrant allocation
and conversion rights allocation 94,000 142,000
Compensation paid with common stock,
options and warrants 227,000 139,000
Interest expense paid with common stock 6,000 102,000
Loss on early extinguishment of debt 35,000 7,000
Changes in operating assets and liabilities:
Accounts receivable (450,000) 536,000
Inventory 390,000 (660,000)
Prepaid expense and other assets 220,000 (25,000)
Accounts payable 156,000 (523,000)
Accrued liabilities 104,000 64,000
Deferred revenue (1,070,000) 2,698,000
------------- -------------
Net cash provided (used) by operating activity (1,835,000) 4,741,000
Investing activity
Transfer from (to) restricted cash 340,000 (1,950,000)
Additions to property and equipment (180,000) (311,000)
Proceeds from the sale of property and equipment 12,000 3,000
------------- -------------
Net cash provided (used) by investing activity 172,000 (2,258,000)
Financing activity
Proceeds from notes payable 66,000 80,000
Preferred stock dividend (46,000) -
Payments on notes payable (818,000) (829,000)
Proceeds from sale of common stock,
and exercise of common stock warrants - 42,000
------------- -------------
Net cash used by financing activity (798,000) (707,000)
------------- --------------
Net increase (decrease) in cash and cash equivalents (2,461,000) 1,776,000
Cash and cash equivalents at beginning of period 7,244,000 8,102,000
------------- --------------
Cash and cash equivalents at end of period $ 4,783,000 $ 9,878,000
============= ==============
NaPro BioTherapeutics, Inc. and Subsidiaries
Statement of Cash Flow (continued)
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Three Months Ended
March 31,
1999 1998
------ -----
Supplemental schedule of activity:
Interest paid $ 83,000 $ 145,000
Noncash transactions:
Conversion of senior convertible debt to common stock 959,000 713,000
Conversion of convertible preferred shares
to common stock 659,000 60,000
Exchange of preferred shares of subsidiary for
common stock of parent - 1,951,000
Issuance of common stock for compensation
previously accrued 3,000 40,000
Accretion of convertible preferred stock conversion
rights valuation, offering cost and warrant valuation 38,000 234,000
Contribution of common stock from treasury to
retirement plan 898,000 -
</TABLE>
See accompanying notes.
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NaPro BioTherapeutics, Inc.
Notes to Consolidated Financial Statements
March 31, 1999
(Unaudited)
1. Basis of Presentation
The accompanying financial statements are unaudited. However, in the opinion of
management, the financial statements reflect all adjustments, consisting of only
normal recurring adjustments, necessary for fair presentation. Interim results
of operations are not indicative of results for the full year. These financial
statements should be read in conjunction with the NaPro Annual Report on Form
10-K for the year ended December 31, 1998.
2. Inventory March 31, December 31,
1999 1998
Raw materials $ 143,000 $ 151,000
Work-in-process 1,333,000 930,000
Finished goods 957,000 1,632,000
----------- -----------
$2,433,000 $2,713,000
========== ==========
Non-current inventory
Raw materials $ 906,000 $ 833,000
Work-in-process 554,000 738,000
----------- -----------
$1,460,000 $1,571,000
========== ==========
3. Common Stock
In the March 1999 quarter NaPro issued 741,535 shares of common stock in
conversion of $927,000 of NaPro's senior convertible debt and issued 4,936
shares of common stock in payment of $6,000 interest on the senior convertible
debt. In the March 1999 quarter NaPro issued 446,955 shares of common stock in
conversion of 1,556 shares of NaPro's senior convertible preferred stock and
issued 1,927 shares of common stock in payment of $3,000 in dividends on the
senior convertible preferred stock.
Endeavoring to retain as many of its qualified employees as possible in a
competitive marketplace, in 1999 NaPro issued 554,161 shares of common stock
from its treasury to the Company's retirement plans for use in making the 1999
retirement plan contributions. In the March 1999 quarter NaPro expensed $210,000
for the portion of the contributions applicable to the quarter.
4. Earnings per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share. In calculating diluted earnings per share for the period in
which a loss is reported, the impact of all additional shares is antidilutive,
and thus not included in the calculation.
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<TABLE>
<CAPTION>
March 31,
1999 1998
Numerator:
<S> <C> <C>
Net income (loss) $ (1,939,000) $ 1,764,000
Preferred stock dividends (49,000) (62,000)
-------------- ------------
Numerator for earnings (loss) per share - income
available to common stockholders $ (1,988,000) $ 1,702,000
Effect of dilutive securities:
Senior convertible debt - 19,000
Preferred stock dividends - 47,000
-------------- ------------
Numerator for earnings (loss) per share, assuming dilution - income
available to common stockholders after assumed conversions $ (1,988,000) $ 1,768,000
============== ===========
Denominator:
Denominator for earnings (loss) per share - weighted
average shares outstanding 17,663,429 13,549,358
Senior convertible debt - 954,960
Convertible preferred stock - 2,031,700
Non-voting common stock - 395,000
Stock options and warrants - 30,490
-------------- -----------
Dilutive potential common shares - 3,412,490
-------------- -----------
Denominator for earnings (loss) per share, assuming dilution adjusted
weighted-average shares outstanding and assumed
conversions 17,663,429 16,961,508
============== ============
Earnings (loss) per share $ (0.11) $ 0.13
=============== ===============
Earnings (loss) per share, assuming dilution $ (0.11) $ 0.10
=============== ===============
</TABLE>
5. Extraordinary Item
In January 1999, NaPro redeemed $633,000 in note principal on its senior
convertible notes. NaPro recorded a loss on early extinguishment of debt of
$182,000 which includes a $158,000 premium paid and $24,000 of unamortized debt
issue cost.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provide information which the Company's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein as well as with the consolidated financial
statements, notes thereto and the related management's discussion and analysis
of financial condition and results of operations included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
General
NaPro 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. NaPro's paclitaxel is referred to herein as "NaPro Paclitaxel."
NaPro has devoted its efforts primarily to the development and implementation of
its proprietary extraction, isolation and purification (EIPTM) technology for
producing NaPro Paclitaxel. To advance the
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development and commercialization of NaPro Paclitaxel, NaPro entered into
20-year, exclusive agree ments with each of Faulding and IVAX for the clinical
development, sales, marketing and distribution of NaPro Paclitaxel. As described
more fully below, NaPro's exclusive agreement with IVAX was terminated in March
1998 pursuant to a termination agreement with IVAX (the "Termination Agree
ment"). NaPro is actively seeking one or more partners to replace IVAX. NaPro is
currently dependent for revenue exclusively on sales of NaPro Paclitaxel, on
fees from licencing its technology and on amounts payable by IVAX to NaPro under
the Termination Agreement
Through March 31, 1999, NaPro's production of NaPro Paclitaxel was limited
primarily to research and pilot-scale production, and much of NaPro's product
sales were for use in clinical trials and for research and development purposes.
Accordingly, NaPro has generated only limited revenue from such activity and has
incurred significant operating losses, including operating losses of
approximately $13.4 million and $13.8 million for the years ended December 31,
1998 and 1997, respectively. For the quarter ended March 31, 1999, NaPro
recorded an operating loss of $2 million, resulting in an accumulated deficit of
$45.6 million. NaPro expects that it will continue to have a high level of
operating expense and will be required to make significant up-front expenditures
in connection with its biomass procurement, product development and research and
development activities. NaPro anticipates that annual losses will continue until
such time, if ever, as NaPro is able to generate sufficient revenue to support
its operations.
NaPro believes that its ability to generate such revenue depends primarily on
the ability to enter into agreements with one or more partners for the clinical
development, sales, marketing and distribution of NaPro Paclitaxel, to obtain
regulatory approval in the U.S. or another major market for the commercial sale
of NaPro Paclitaxel, to obtain regulatory approval for its manufacturing
facilities and to construct manufacturing facilities that produce quantities of
NaPro Paclitaxel sufficient to supply NaPro's current and any future strategic
partners' requirements for commercial sales.
In January 1995, Faulding received approval to market NaPro Paclitaxel
commercially in Australia under the trade name ANZATAX(TM). The ability of
Faulding to continue to market NaPro Paclitaxel in Australia pursuant to
Faulding's marketing approval and the success of these marketing efforts will
continue to have a significant affect on NaPro's revenue and profitability.
In February 1997, Bristol-Myers Squibb Company ("BMS") submitted a Supplemental
New Drug Application with orphan drug designation for paclitaxel for the
treatment of Kaposi's sarcoma ("KS") ahead of the filing by IVAX of a New Drug
Application ("NDA") for the same indication. The BMS application was approved by
the Food and Drug Administration ("FDA") in August 1997. Under the Orphan Drug
Act of 1983, this approval resulted in IVAX/NaPro being denied marketing
approval for the KS indication for seven years.
In February 1998, due to the delay in receiving marketing approval for NBT
Paclitaxel, NaPro underwent a restructuring to decrease overall cost, announcing
the planned layoff of 53 employees. As part of this restructuring, NaPro
discontinued operations at its British Columbia manufacturing facility and
suspended construction of its commercial scale manufacturing facility in
Boulder, Colorado. Completion of the Boulder facility will require additional
financing, which NaPro intends to seek at such time as NaPro anticipates
sufficient product demand to warrant completion of the facility.
In March 1998, NaPro and IVAX entered into the Termination Agreement.
Termination of the IVAX Agreement leaves NaPro free to seek regulatory approvals
and market NaPro Paclitaxel itself or to seek a new partner or partners with
which to pursue regulatory approvals and marketing of NBT Paclitaxel, in either
such case in areas outside the Faulding territory. NaPro continues negotiations
which are expected to lead to the selection of one or more marketing and
development partners. NaPro believes that new
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development and marketing agreements may allow NaPro to take advantage of its
partners' knowledge and expertise in clinical testing and sales, marketing and
distribution. However, the termination of its agreement with IVAX currently
leaves NaPro without such a partner, and there can be no assurance that NaPro
will be able to secure such approvals or form new long-term relationships for
the approval, marketing, and distribution of NaPro Paclitaxel in these areas, or
that NaPro or such partner, if found, will be able to secure regulatory approval
or effectively market NaPro Paclitaxel. NaPro's future growth and profitability
will depend on the success of NaPro's strategic partners in fostering acceptance
in the oncology market for NaPro Paclitaxel as a preferred form of chemotherapy
to be used along or in combination with other chemotherapeutic agents. Failure
to find such a strategic partner could have a material adverse effect on NaPro.
Results of Operations
Quarter ended March 31, 1999 compared to the quarter ended March 31, 1998 Sales
for the 1999 quarter were $2 million, representing a decrease of $400,000 from
the 1998 quarter. Sales to IVAX for the 1999 quarter were $1 million, down
$400,000 from the 1998 quarter. Sales to IVAX, as a result of the Termination
Agreement, are expected to end in the second 1999 quarter. Future sales in
territory outside that covered by NaPro's agreement with Faulding (the "Faulding
Agreement") may be dependent upon the ability of NaPro to secure new agreements
supporting the development and marketing of NaPro Paclitaxel within that
territory. The change in sales other than to IVAX related primarily to the
timing of product shipments. Shipments to NaPro's strategic partners may vary
significantly on a quarter-to-quarter basis depending on a number of factors
including the timing and size of any clinical trials conducted by the strategic
partners and the level of inventory carried by the strategic partners. This
quarter-to-quarter variability will continue until stable commercial demand has
been established for the product in a major market.
Research, development and cost of products sold expense for the 1999 quarter was
$2,800,000, up $200,000 from the 1998 quarter, primarily because of expanded
clinical trials.
General and administrative expense for the 1999 quarter was $1.2 million, down
$700,000 from the 1998 quarter. The decrease is primarily attributable to
decrease in outside services and legal fees.
License fee income for the 1999 quarter was $300,000, down $3.7 million from the
1998 quarter. This income in both quarters related to a license fee paid by IVAX
in conjunction with the Termination Agreement. Under the Termination Agreement,
NaPro expects to record up to an additional $1 million in license fees in the
second quarter of 1999 (all of which has been received but is escrowed pending
future product deliveries). NaPro is actively seeking one or more new
pharmaceutical partners to replace IVAX. There can be no assurance, however,
that NaPro will succeed in obtaining any new pharmaceuti cal partners or in
earning any license fees other than the license fee being paid under the
Termination Agreement.
Interest expense for the 1999 quarter was $200,000, a decrease of $100,000 from
the 1998 quarter. The decrease is attributable to a smaller balance due on the
senior convertible debt. (See Liquidity and Capital Resources).
Liquidity and Capital Resources
NaPro's capital requirements have been and will continue to be significant. At
March 31, 1999, NaPro had a working capital balance of $6.1 million. This
compared to a working capital balance of $7.1 million as of December 31, 1998.
To date, the funding of NaPro's capital requirements has been dependent
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primarily on the net proceeds of public offerings of its common stock of
approximately $21.1 million, on private placements of its equity securities of
approximately $27.8 million, on the exercise of warrants and options of $5.7
million, on net borrowings of $12 million, and on loans and advances from its
stockholders and strategic partners.
NaPro's existing capital and anticipated 1999 sales are expected to provide
adequate capital to fund its necessary operations and capital expenditures in
1999. Pharmaceutical development is, however, a costly and time consuming
process. NaPro is actively pursuing partners to assist in the development and
marketing of its products, and may seek other forms of long-term financing
should such financing become available on acceptable terms.
In June 1997, NaPro privately placed $10.3 million of senior convertible notes
(the "Convertible Notes"). The notes mature in June 2000 and bear an interest
rate of 5%. Interest on the notes is payable in cash or in common stock at
NaPro's option. The notes are convertible into common stock at a 10% discount
from the lowest market price of the common stock during specified periods prior
to the conversion. If not converted, upon maturity, the notes will be exchanged
for 13.75% 5-year debentures. In the March 1999 quarter NaPro issued 741,535
shares of common stock in conversion of $927,000 principal of the notes, and
4,936 shares of common stock in payment of $6,000 interest on the notes.
In January and March 1998, and January and March, 1999, the notes were amended
(see below). In January 1999 NaPro redeemed $633,000 in note principal and paid
$162,000 premium and interest in connection with the redemption. NaPro
anticipates that it may elect to pay off all or part of the notes during 1999,
although there can be no assurance that it will have the necessary funds to do
so, or even if such funds are available, that it will pay off all or part of the
notes.
In December 1997, NaPro closed a private placement of 5,000 shares of Series C
Senior Convertible Preferred Stock (the "C Preferred") for an aggregate issuance
price of $5 million. The C Preferred accrues dividends at 5% per year payable in
common stock or cash at NaPro's option. The C Preferred is convertible into
common stock at a 5% discount from the market price during specified periods
prior to the conversion date. After December 8, 2000, NaPro has the right to pay
the redemption price in the form of 13.75% notes due in December 2005.
In January and March, 1998 and January and March, 1999, NaPro entered into
amendments (the "Amendments") with the C Preferred investor and the holders of
the Convertible Notes (together the Investors"). Subject to certain exceptions,
the Amendments limit: (a) the number of shares which could be converted in the
event the stock price is below $4.00 per share to no more than 450,000 shares
per month through May 14, 1999 and (b) the ability of the Investors to force
NaPro to redeem any portion of the securities for cash. In May 1999 NaPro
entered into an amendment with the C Preferred investor to extend through May
31, 1999 the limitations on monthly conversions that had been scheduled to
expire on May 14, 1999. The holders of its Convertible Notes did not agree to
extend the limitations on monthly conversions, and such limitations expired on
May 14, 1999. The remaining balances in the C Preferred and the Convertible
Notes are $3,047,000 and $3,396,000, respectively, at May 14, 1999. At its
option and upon compliance with specified notice provisions, NaPro may redeem
all or part of the C Preferred and Convertible Notes for amounts ranging from
130% to 140% of the outstanding principal and accrued dividends and interest.
In the March 1999 quarter NaPro issued 446,955 shares of common stock in
conversion of the C Preferred and 1,927 shares of common stock in payment of
dividends on the C Preferred.
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In June 1993, NaPro entered into an initial 10 year exclusive agreement with
IVAX to develop and market paclitaxel in the United States, Europe, and other
parts of the world (the "IVAX Agreement"). NaPro and IVAX terminated the IVAX
Agreement on March 20, 1998. Under terms of the Termination Agreement, IVAX
received a royalty-free, limited, non-exclusive license to one of NaPro's
patents (the "Patent") in the United States, Europe and certain other world
markets. In return, NaPro received a cash payment of $6 million, $2 million of
which was placed in escrow to be released as remaining product is delivered. In
April, 1998, IVAX returned approximately 1.1 million shares of NaPro common
stock. In addition, upon the issuance of the Patent in various countries, IVAX
made additional payments of $6.4 million. NaPro will continue to manufacture a
fixed amount of paclitaxel for delivery to IVAX periodically during the first
half of 1999. In the March 1999 quarter NaPro received $340,000 of the escrow.
NaPro expects to receive the remaining $980,000 in the second quarter of 1999.
Working Capital and Cash Flow Cash and cash equivalents decreased $2.4 million
to $4.8 million for the quarter ended March 31, 1999 from $7.2 million at
December 31, 1998. During the 1999 quarter net cash used by operations was $1.8
million. Investing activity provided cash of $200,000 while financing activity
used $800,000.
Inventory decreased $400,000 to $3.9 million at March 31, 1999 from $4.3 million
at December 31, 1998. The amount of work-in-progress inventory and finished
goods inventory is dependent on a number of factors, including the shipping
requirements of NaPro's strategic partners and NaPro's production planning for
meeting those needs. Inventory balances may vary significantly during product
development and launch periods.
Capital Expenditures NaPro expended $200,000 during the first quarter of 1999
for capital projects. These expenditures were primarily for plantation cost.
Since the FDA's determination that NaPro Paclitaxel could not be marketed in the
U.S. for KS during BMS's period of exclusivity under the Orphan Drug Act, NaPro
has significantly reduced the scope of its operations and has reduced or delayed
capital expenditures. NaPro is seeking a new strategic partner or partners to
replace IVAX. The nature of NaPro's relationship with its strategic partners may
significantly change its planned capital expenditures.
The amount and timing of future capital expenditures will depend upon numerous
factors, including the establishment of additional strategic relationships, the
progress of NaPro's research and development programs, the magnitude and scope
of these activities, the cost of preparing, filing, prosecuting, maintaining and
enforcing patent claims and other intellectual property rights, competing
technological and marketing developments, changes in or terminations of existing
strategic relationships and the cost of manufacturing scale-up. NaPro may seek
additional long-term financing to fund capital expenditures should such
financing become available on terms acceptable to NaPro.
Year 2000 Issue Until recently many computer programs used only the last two
digits to refer to a year. Such programs do not properly recognize a year that
begins with "20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results. This matter is commonly
referred to as the Year 2000 issue or Y2K.
Two years ago NaPro implemented an assessment of its systems and other assets
which could be subject to Y2K. NaPro has completed the assessment of its primary
systems and has brought all but one of the systems into Y2K compliance. A
compliant upgrade currently exists for the noncompliant system, which will be
brought into compliance no later than June 1999.
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NaPro is assessing its secondary systems and other assets, including
microprocessor-controlled equipment, and expects to complete that assessment no
later than August 1999. The potential for significant interruption from
secondary systems exists, although NaPro believes that the likelihood of
interruption caused by Y2K failures in secondary systems is small.
In addition to its internal systems NaPro is evaluating potential impact on
NaPro of Y2K issues with its vendors and customers. NaPro cannot directly
control Y2K compliance by its vendors and customers. NaPro is communicating with
its key vendors and customers regarding this matter. NaPro knows of no vendor or
customer that has Y2K issues that have a potential of interrupting NaPro in a
manner that could significantly adversely affect NaPro's operations. However,
NaPro uses a number of vendors that NaPro believes to be the best or the only
qualified source of a particular good or service. Sales to NaPro's customers
potentially could be interrupted by customers' Y2K issues. Should a significant
customer incur Y2K problems with its testing, release or other systems, NaPro's
sales could be materially affected. NaPro will continue to monitor the level of
Y2K compliance with respect to its key vendors and customers and will further
develop contingency plans to cover the failure of a key vendor, including
identification and qualification of alternative suppliers. Management believes
that exposure to vendor or customer Y2K issues creates no material risk to
NaPro. However, no assurance can be given with certainty that Y2K issues with
vendors or customers will not significantly affect NaPro.
NaPro's Y2K effort has caused no significant deferral of other information
technology projects.
NaPro's Y2K contingency plan includes completion of the evaluation and
remediation process discussed above, including communication with its key
vendors and customers regarding potential for Y2K issues; identification of the
best alternative vendor for sensitive goods and services; coordination and
planning with such alternative vendors.
Management believes that Y2K issues related to both internal and external
systems will have no material effect on NaPro's business, results of operations
or financial condition, and that NaPro's Y2K risk is not material. However, no
such assurance can be given with certainty. The cost of addressing Y2K has not
been material; management believes that the cost of completing Y2K compliance
will not be material.
Special Note Regarding Forward-looking Statements
Certain statements in this report constitute "forward-look statements" within
the meaning of the federal securities laws, including the Private Securities
Litigation Reform Act of 1995. In addition, NaPro or persons acting on its
behalf sometimes make forward-looking statements in other written and oral
communications. Such forward-looking statements may include, among other things,
statements concerning NaPro's plans, objectives and future economic prospects,
such as matters relative to seeking and obtaining strategic partners; the
availability of patent and other protection for its intellectual property; the
completion of clinical trials and regulatory filings; the prospects for and
timing of regulatory approvals; the need for and availability of additional
capital; the amount and timing of capital expendi tures; timing of product
introductions and revenue; the availability of raw materials; prospects for
future operations; and other statements of expectations, beliefs, future plans
and strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of NaPro, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the following: adverse economic and general business
conditions; competition from BMS and other existing and new producers of
paclitaxel and other drugs; technological advances in cancer treatment and drug
development; the ability to obtain rights to technol ogy; the ability to obtain
and enforce patents; the ability to obtain raw materials and commercialize
manufacturing processes; the effectiveness of NaPro Paclitaxel and other
pharmaceuticals developed by NaPro in treating disease; the results of clinical
studies; the results of research and development activities; the business
abilities and judgment of NaPro's management and other personnel; the
availability of qualified personnel generally; actions by the FDA or other
regulatory agencies; changes in and the ability of NaPro to comply with
governmental regulations; the effect of capital market conditions and other
factors on capital availability for NaPro and other biopharmaceutical companies;
the ability of Faulding to perform its obligations under its existing agreement
with NaPro; the effect on NaPro's revenue, cash flow and earnings from foreign
exchange rate fluctuations; the ability of NaPro to establish relationships with
capable strategic partners to develop and market NaPro Paclitaxel in the
territories not covered by the Faulding Agreement; any Y2K issues of NaPro, its
customers or vendors; and other factors referenced in this Report.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
This information is incorporated by reference to the December 31, 1998 Form
10-K. There have been no material changes in market risk subsequent to such
disclosure.
Part II--Other Information
Item 1. Legal Proceedings
There have been no material developments in the Company's legal proceedings from
the disclosure in the December 31, 1998 Form 10-K.
Item 2. Changes in Securities
In the March 1999 quarter, NaPro issued 741,535 shares of common stock in
conversion of $927,000 of NaPro's convertible senior debt and 4,936 shares of
common stock in payment of $6,000 interest on the senior convertible debt. In
the same quarter, NaPro issued 446,955 shares of common stock in conversion of
1,556 shares of NaPro's senior convertible preferred stock, and 1,927 shares of
common stock in payment of $3,000 of dividends on the convertible preferred
stock. The issuance of shares of common stock upon conversion of the senior
convertible securities was exempt from registration under section 3(a)(9) of the
Securities Act of 1933, as amended (the "Securities Act"). The issuance of
shares of common stock in the payment of interest and dividends was exempt as a
private placement to sophisticated investors under section 4(2) of the
Securities Act and Regulation D thereunder.
Certain provisions of the C Preferred may limit the ability of NaPro to pay
dividends on its common stock and to repurchase shares of its common stock.
Item 3. Defaults upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Securities Holders. None.
Item 5. Other Information. None
Item 6. Exhibits and Reports on Form 8-K.
NaPro filed a Current Report on Form 8-K dated January 7, 1999 reporting an
agreement between NaPro and the holders of the Convertible Notes and Convertible
Preferred Stock amending the terms of such securities, and a Current Report on
Form 8-K dated January 22, 1999 reporting a letter agreement between NaPro and
holders of warrants originally issued to the underwriter of the Company's
initial public
15
<PAGE>
offering which amended the terms of such warrants and reflecting corresponding
changes in information to be included in a prospectus related to the resale of
shares issuable upon exercise of such warrants.
Exhibit
Number Description of Exhibit
10.1 Letter Agreement dated May 14, 1999, by and among NaPro and Advantage Fund
II, Ltd.
27.1 Financial Data Schedule
----------------------------
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, NaPro has
duly caused this report to be signed on its behalf.
NaPro BioTherapeutics, Inc.
May 12, 1999 /s/ Sterling K. Ainsworth
---------------------------
Sterling K. Ainsworth
President and Chief Executive Officer
(Principal Executive Officer)
May 12, 1999 /s/ Gordon Link
---------------------------
Gordon Link
Vice President and Chief Financial Officer
(Principal Financial Officer)
May 12, 1999 /s/ Robert L. Poley
---------------------------
Robert L. Poley
Controller
(Principal Accounting Officer)
16
<PAGE>
Exhibit 10.1
May 14, 1999
To the Holder of the Series C Senior Convertible Preferred Stock of NaPro
BioTherapeutics, Inc.
Gentlemen:
Reference is made to (i) the Subscription Agreement (the "Subscription
Agreement"), dated as of December 8, 1997 by and between NaPro BioTherapeutics,
Inc., a Delaware corporation (the "Company" or the "Corporation"), and Advantage
Fund II, Ltd. (the "Holder"); (ii) the Certificate of Designations of Series C
Senior Convertible Preferred Stock (the "Certificate"); (iii) the Amendment
Agreement dated January 28, 1998, by and between the Company and the Holder (the
"January Amendment"); (iv) the Letter Agreement, dated March 31, 1998, by and
between the Company and the Holder (the "March Amendment"); (v) the Letter
Agreement, dated January 7, 1999, by and between the Company and the Holder (the
"January 1999 Amendment"); and (vi) the Letter Agreement, dated March 24, 1999,
by and between the Company and the Holder (the "March 1999 Amendment").
Capitalized terms used herein and not defined shall have the meanings assigned
to them in the Subscription Agreement and the Certificate, as modified by the
January, March, January 1999, and March 1999 Amendments.
The Holder and the Company agree as follows:
1. The following definitions in Section 1 of the January 1999 Amendment, as
amended by the March 1999 Amendment, are hereby amended and restated to read as
follows:
"Initial Redemption Notice Period" means the period that begins on
January 1, 1999 and ends on May 31, 1999.
"Middle Redemption Amount" means a number of shares of Series C
Preferred Stock equal to 2, 051 less the sum of (x) the aggregate number of
shares of Series C Preferred Stock that are converted by holders of shares of
Series C Preferred Stock or for which the holders of shares of Series C
Preferred Stock give Conversion Notices on or after January 1, 1999 and prior to
May 31, 1999 plus (y) the aggregate number of shares of Series C Preferred Stock
that have been redeemed or called for redemption on or after January 1, 1999 and
prior to the date the Company gives a particular Redemption Notice to redeem
shares of Series C Preferred Stock pursuant to Section 9(a)(5) (together with
accrued and unpaid dividends and Arrearage Interest, if any, on the shares of
Series C Preferred Stock included in the Middle Redemption Amount to the date of
determination).
<PAGE>
"Middle Redemption Notice Period" means the period that begins on June
1, 1999 and ends on June 30, 1999.
2. Paragraph (iv) of Section 10(c) of the Certificate, which was deemed to
have been added to Section 10 of the Certificate in accordance with Paragraph 7
of the January 1999 Amendment and was amended in the March 1999 Amendment, is
hereby further amended and restated to read as follows:
(iv) Notwithstanding any other provision herein, during the period
beginning on January 1, 1999 and ending on May 31, 1999, a holder of shares of
Series C Preferred Stock shall not be entitled to convert shares of Series C
Preferred Stock at a Conversion Price that is less than $4.00 if such conversion
would result in the aggregate number of shares of Common Stock issued hereunder
(whether through conversion or in payment of dividends or otherwise) at a
Conversion Price (or Computed Price, in the case of shares issued as dividends)
of less than $4.00 during the calendar month of the proposed conversion for
which the determination under this paragraph (iv) is being made exceeding
150,000 shares of Common Stock. The Conversion Price set forth in this Section
10(c)(vi) shall be subject to adjustment on the same basis set forth in the
parenthetical phrase in clause (1) of the definition of the term Conversion
Price (as in effect prior to the January Amendment) for any such events that
occur on or after December 31, 1998.
3. Except as specifically amended or deemed amended hereby, the
Subscription Agreement, as previously amended, and the terms of the shares of
Series C Preferred Stock shall remain in full force and effect and the Company
hereby confirms to the Holder that the Subscription Agreement and the terms of
the shares of Series C Preferred Stock, as deemed amended by the January
Amendment, the March Amendment, the January 1999 Amendment, the March 1999
Amendment and this Agreement, remain binding obligations of the Company that are
not at the time of execution and delivery of this Agreement subject to any
defense, offset, counterclaim or other claim by the Company of invalidity or
unenforceability. If the foregoing correctly sets forth our agreement, please so
indicate by signing the appropriate line below, whereupon this letter shall
constitute a binding agreement between the Company and the Holder under the laws
of the State of New York.
NAPRO BIOTHERAPEUTICS, INC.
By: /s/ Gordon H. Link, Jr.
---------------------------
Gordon H. Link, Jr.
Chief Financial Officer
Accepted and agreed:
ADVANTAGE FUND II, LTD.
By: /s/ Declan Quilligan
---------------------------
Name: Declan Quilligan
Title:Partner
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