SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 of the Securities Exchange Act of 1934
Year Ended December 31, 1999
Commission File Number 0-24320
NAPRO BIOTHERAPEUTICS, INC.
Incorporated in Delaware IRS ID No. 84-1187753
6304 Spine Road, Unit A
Boulder, Colorado 80301
(303) 530-3891
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0075 par value; Preferred Stock Purchase Rights
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, and
(2) has been subject to such filing require ments for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K will be
contained, to the best of registrant's knowledge, in a definitive proxy
statement incorporated by reference in Part III of this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $177,336,000 as of March 24, 2000.
The number of shares outstanding of each of the registrant's classes of common
stock, as of March 24, 2000:
Common Stock 23,197,477
Nonvoting Common Stock 395,000
Incorporated by reference in Part III of this report is certain information
contained in the NaPro Proxy Statement for its 2000 Annual Meeting of
Stockholders.
- 1 -
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Item Page
<S> <C> <C> <C>
Part I 1 Business 3
2 Properties 20
3 Legal Proceedings 20
4 Matters Submitted to Stockholders' Vote 21
Part II 5 Market Information and Related Stockholder Matters 22
6 Selected Financial Data 23
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
7A Quantitative and Qualitative Disclosures about
Market Risk 31
8 Financial Statements and Supplementary Data 32
9 Changes in and Disagreements with Accountants 32
Part III 10 Directors and Executive Officers 33
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners and
Management 33
13 Certain Relationships and Related Transactions 33
Part IV 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 33
</TABLE>
- 2 -
<PAGE>
Part I
Item 1
Business
General
NaPro BioTherapeutics, Inc. (together with its subsidiaries, "NaPro" or "the
Company") is a natural product pharmaceutical company focused primarily on the
development, manufacture and commercialization of cancer chemotherapeutic
agents and related technologies. Natural product substances have been, and
continue to be, the primary source of new chemotherapeutic anti-cancer agents,
especially compounds which exert their anti-cancer activity by novel mechanisms
of action. NaPro's lead product is paclitaxel, a naturally occurring
chemotherapeutic anti-cancer agent found in certain species of yew (Taxus)
trees. In addition to its efforts with paclitaxel, NaPro is actively engaged in
evaluating the in-licensing or purchase of potential new products and/or
technologies, either derived from natural products or otherwise. Such
evaluations may involve individual molecules, classes of compounds or platform
technologies, both in the cancer field and otherwise, which could involve the
acquisition of entire private or publicly traded companies. NaPro is also
working internally on several classes of compounds which have promising in vitro
and in vivo activity as anti-tumor agents that function by new and novel
mechanisms that may increase the likelihood of their success as new
chemotherapeutic agents. See chart at end of this section.
To date, the majority of NaPro's resources have been directed toward the
development and manufacture of paclitaxel. The market for paclitaxel is
dominated by Bristol-Myers Squibb Company ("Bristol"). Bristol has publicly
announced that worldwide sales of its formulation of paclitaxel were
approximately $1.5 billion in 1999 and approximately $1.2 billion in 1998.
Bristol's paclitaxel is the only U.S. Food and Drug Administration ("FDA")
approved formulation of paclitaxel in the United States and is indicated for the
treatment of breast and ovarian cancers, Kaposi's sarcoma, and non-small cell
lung cancer when used in combination with cisplatin. NaPro believes that by
combining its proprietary extraction, isolation and purification ("EIP(TM)") and
semisynthetic manufacturing technology, the renewable sources of Taxus biomass
being developed by NaPro, and current as well as possible future long-term,
exclusive agreements with major international pharmaceutical companies, NaPro
will be positioned to participate significantly in the worldwide paclitaxel
market. There can be no assurance, however, that NaPro paclitaxel will prove
safe and effective, meet applicable standards necessary for regulatory approvals
or be successfully marketed.
NaPro's strategy for advancing the development and commercialization of NaPro
paclitaxel has been to form strategic alliances through long-term exclusive
agreements with major pharmaceutical companies. On July 23, 1999, NaPro entered
into a 20-year collaborative agreement (the "Abbott Agreement") with Abbott
Laboratories ("Abbott") to develop and commercialize one or more formulations of
paclitaxel for the treatment of a variety of cancer indications. The exclusive
agreement covers only the United States and Canada. Pursuant to the Abbott
Agreement, NaPro will be responsible for supply of bulk drug and may jointly
conduct clinical trials with Abbott. Abbott will be responsible for finishing,
regulatory filings, marketing and sale of the finished drug product. NaPro has
licensed to Abbott its paclitaxel-related patents
- 3 -
<PAGE>
in the United States and Canada. Most primary decisions related to the
development program will be made by a joint NaPro-Abbott Development Committee.
See "Strategic Alliances - Abbott."
In 1992, NaPro entered into a 20-year exclusive agreement (the "Faulding
Agreement") with F.H. Faulding & Co., Ltd., Australia's largest domestic
pharmaceutical company ("Faulding"), for the clinical development, sales,
marketing and distribution of NaPro paclitaxel in Australia, New Zealand and
much of southeast Asia. Faulding currently sells NaPro paclitaxel in 18
countries. See "Strategic Alliances - Faulding."
NaPro supplies NaPro paclitaxel to Faulding, which formulates it into a
commercial drug product named ANZATAX(TM). Faulding has agreed to fund and, with
NaPro's input, perform development work leading to regulatory approvals of
ANZATAX(TM) in its territories. NaPro is responsible for supplying Faulding with
NaPro paclitaxel for clinical and commercial purposes. NaPro is currently
receiving payments from Faulding based on clinical sales and commercial sales
in territories where sales of ANZATAX(TM) have been approved.
Faulding obtained regulatory approval and began marketing ANZATAX(TM) as a
pharmaceutical for the treatment of refractory breast and ovarian cancers in
Australia in January 1995. Faulding subsequently obtained regulatory approval
and began marketing ANZATAX(TM) in several countries in the Middle East and
Asia, and is seeking approvals to market ANZATAX(TM) in other countries in its
defined territory. See "Clinical Status of NaPro paclitaxel, Faulding."
NaPro is in discussions with companies aimed at forming alliances for the
development, sales, marketing and distribution of NaPro paclitaxel in Europe,
South America and other territories. There can be no assurance, however, that
NaPro will succeed in entering into additional strategic development and
marketing agreements.
The compound, paclitaxel, is not patented. Bristol has obtained, however, U.S.
patents covering the method of administration upon which its FDA approval was
received. A number of companies have filed applications with the FDA for generic
paclitaxel based upon Bristol's initial FDA approval. Anyone obtaining FDA
approval for generic paclitaxel will rely upon a method of administration that
might infringe the Bristol patents. Bristol has sued those companies that are
seeking FDA approval for generic paclitaxel for infringement of its patents. The
court before which the action is pending ruled that several key claims of the
patents are invalid. The court has approved an expedited appeal of the ruling.
NaPro and Abbott are reviewing the effects of the foregoing on their drug
development program. See "Patents and Proprietary Technology."
NaPro is currently conducting the preclinical development of a proprietary oral
delivery system for paclitaxel. NaPro believes that the oral method of
administration will have several advantages over the currently used intravenous
delivery of the drug, including the elimination of the adverse reactions caused
by the current intravenous vehicle and the elimination of risk inherent in
intravenous administration of any drug. Commercialization of the technology
under development will depend on completion of the preclinical formulation
development, successful clinical demonstration of safety and efficacy, and FDA
approval to market. In addition, successful commercialization of this technology
may involve acquisition of intellectual property by NaPro, successful
prosecution of NaPro's intellectual property rights, and/or avoidance of
infringements of intellectual property rights of third parties. The success of
none of these steps can be assured.
The following chart identifies the commercial products and several classes of
compounds in which NaPro is currently engaged in research.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
NaPro Drugs: Commercial or in Development
Product Indication(s) Development Status
- ------- ------------- ------------------
<S> <C> <C>
ANZATAX(TM)paclitaxel for Breast & Ovarian Cancer Commercialized in 18
injection (Faulding) countries outside the US
NaPro Paclitaxel for Injection Solid tumors Clinical
NaPro Oral Paclitaxel Proprietary delivery system Preclinical
for solid tumors
NaPro 82739, NaPro 80239, Solid tumors Development candidate
NaPro 80661 selection
</TABLE>
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, chemotherapy or a combination of these therapies. Since gaining
approval in December 1992, paclitaxel has become the largest selling drug of the
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 arresting cell division and
inducing the 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.
In June 1991, the NCI formalized a Collaborative Research and Development
Agreement ("CRADA") for development of paclitaxel with Bristol, the world's
largest oncology company. Bristol assumed develop ment of paclitaxel, including
completion of the necessary clinical trials and manufacturing scale-up. In June
1992, Bristol submitted a New Drug Application ("NDA") to the FDA. Bristol
received approval for the sale of paclitaxel as a treatment for refractory
ovarian cancer in December 1992 and has subsequently received approval for the
sale of paclitaxel as a treatment for various other cancer indications.
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. The concentration of
taxanes in yew trees is very small, generally less than 1,000 parts per million,
and accordingly, the process of extracting taxanes from yew biomass is
complicated and challenging. Several production approaches can be used to arrive
at a final stage paclitaxel product for use in clinical trials and for
commercialization. NaPro believes the two most prevalent processes used today
are conventional biomass extraction and semisynthesis.
- 5 -
<PAGE>
With conventional 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 more than 100
different taxanes present in yew biomass. In a semisynthesis 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 certain other taxanes (which are otherwise
considered waste byprod ucts) and converts these taxanes into paclitaxel through
chemical synthesis. By converting other taxanes into paclitaxel, the
semisynthesis process increases the yield of paclitaxel from the same quantity
of biomass. Regardless of which process is used, the final product must have
levels of impurities meeting regulatory criteria.
Historically, the Pacific yew tree was the primary source of biomass. Most
species of Taxus, including the Pacific yew, grow slowly, requiring a number of
years to reach harvestable size. As a result of its slow growth, Taxus in the
wild is generally found in old growth forests, frequently the habitat of
endangered species, including the spotted owl. Biomass from the Pacific yew tree
has historically included the bark, obtained only by destroying the tree. As a
result, there was 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 tree. NaPro halted harvesting bark from
wild Pacific yew trees in 1994. See "Corporate Strategy" and "Biomass -
Manufacturing."
Other companies have developed taxane analogues that are similar, but not
chemically identical, to paclitaxel. For example, Aventis S.A., ("Aventis"), 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 than
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.
Clinical Development of NaPro Paclitaxel
Pursuant to the Abbott Agreement, NaPro is responsible for supply of bulk drug
and may jointly conduct clinical trials with Abbott. Abbott is responsible for
finishing, regulatory filings, marketing and sale of the finished drug product.
NaPro has licensed to Abbott its paclitaxel-related patents in the United States
and Canada. Most primary decisions related to the development program will be
made by a joint NaPro- Abbott Development Committee.
Pursuant to the Faulding Agreement, Faulding has the primary responsibility for
pursuing regulatory approval of NaPro paclitaxel within the Faulding territory.
NaPro has responsibility for supporting the regulatory approvals in regard to
information related to NaPro's manufacturing processes. NaPro has filed
confidential Drug Master Files ("DMF") and other information containing certain
of NaPro's proprietary processes used in the manufacture of NaPro paclitaxel
with regulatory agencies in the United States, Canada, Europe, Australia and
southeast Asia. In addition, NaPro performed toxicological and chemical
characterization necessary for filing an Investigational New Drug Application
("IND") for extracted paclitaxel.
Existing regulatory approvals have a direct impact on the clinical and marketing
strategy being pursued by NaPro. In December 1992, Bristol obtained NDA approval
in the United States for its paclitaxel product. Under the Waxman-Hatch Act, a
non-patented drug such as paclitaxel that gains approval through an NDA process
is granted a five-year period of marketing exclusivity, which prevents
submission by another party of an Abbreviated New Drug Application ("ANDA") for
generic substitutes until such
- 6 -
<PAGE>
period of exclusivity expires. Bristol's exclusivity period in the United Stated
expired in December 1997. Additional provisions under the Waxman-Hatch Act may
result in an additional 30 month delay in the approval of an ANDA if the sponsor
(in this case Bristol) has published a patent related to the product. This
30-month period of exclusivity ends June 2, 2000. A statute comparable to the
Waxman-Hatch Act exists in Europe, although the related period of exclusivity is
ten years. See "Government Regulation and Product Approvals."
NaPro NaPro filed an IND in May 1998, and initiated clinical trials of NaPro
paclitaxel for three indications in June 1998 and March 1999. These studies were
not specifically designed to support an NDA filing. Meetings and correspondence
with the FDA continue with respect to expanding the NaPro/Abbott drug
development program in paclitaxel. NaPro does not currently intend to disclose
the status or results of clinical studies prior to submitting those results in
regulatory filings. The two companies have engaged in communication with the FDA
concerning a development plan for various clinical indications. There can be no
assurance that these trials will demonstrate NaPro paclitaxel to be safe or
effective.
Faulding In January 1995, Faulding received generic regulatory approval from the
Australian Therapeutic Goods Administration ("TGA") to market ANZATAX(TM) in
Australia. 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. NaPro and Faulding have obtained regulatory
approval from the TGA for NaPro to supply NaPro paclitaxel to Faulding from its
U.S. and Canadian manufacturing facilities. In addition to Australia, Faulding
markets ANZATAX(TM) in Cyprus, Egypt, Hong Kong, India, Jordan, Kuwait, Lebanon,
Oman, Pakistan, Peoples Republic of China, the Phillippines, Republic of China
(Taiwan), Saudi Arabia, Singapore, Thailand, Turkey and Vietnam. Faulding has
marketing applications pending in three other countries. There can be no
assurance, however, that Faulding will receive approval in any of these
additional countries.
Biomass - Manufacturing
Biomass Paclitaxel and other taxanes used in the production of NaPro paclitaxel
are present in many parts of various species of yew trees. NaPro's EIP(TM)
technology is designed to allow extraction and purification of paclitaxel and
extration of other taxanes, which can be chemically converted into paclitaxel,
from renewable sources of biomass such as needles and limbstock harvested from
cultivated yew trees.
NaPro believes that it may be able to reduce its raw material cost while at the
same time allowing it to increase the yield of NaPro paclitaxel by planting and
propagating a reliable and renewable homogeneous biomass source. In order to
have access to such a stable, long-term supply of biomass for use in the
production of NaPro paclitaxel, NaPro entered into agreements with, among
others, PRT Biopharms Inc. ("PBI") in 1993, Zelenka Nursery, Inc. in 1996 and
Cass-Mill, Inc. in 1997 (the "PBI Agreement", "Zelenka Agreement" and "Cass-Mill
Agreement", respectively). NaPro made its first small harvest at Zelenka in
1996, and during 1997 completed another small harvest at Zelenka. During 1998,
NaPro conducted a larger harvest at Zelenka. During 1999, NaPro conducted its
initial harvest at Cass-Mill. During 1998 and 1999, NaPro conducted research
related to enhancing paclitaxel production in cultivated yew trees. The PBI
Agreement was terminated in 1998. Under the terms of termination, there is up to
a 2 year winding down of the agreement. A fair market value lease of the
facilities and contract for ongoing maintenance of the plantation is currently
under negotiation with PBI. NaPro believes that it has sufficient time to
harvest the trees and/or to locate and contract with a new nursery for the
planting and care of the yew trees that had been planted under the PBI
Agreement.
- 7 -
<PAGE>
Manufacturing The manufacture of paclitaxel occurs in three steps. First, a
crude paclitaxel is extracted from cultivated yew trees and delivered to NaPro's
manufacturing facilities. Second, the extracted crude paclitaxel mixture is
isolated and purified and, in the final step, the resulting active drug
substance is delivered to Faulding's final fill and finish facility in Australia
where NaPro paclitaxel is formulated by Faulding for final packaging. For
product delivered to Abbott, the fill and finish will be performed at an Abbott
facility.
From December 1996 to February 1998, a third party extracted crude paclitaxel
from cultivated yew trees pursuant to a manufacturing agreement with NaPro. In
February 1998 that agreement was terminated under an arrangement that provided
for, with certain exceptions, mutual releases from the obligations of the
manufacturing agreement and from claims related to such agreement. NaPro
believes that it has sufficient quantities of crude paclitaxel to fulfill
NaPro's requirements for its clinical program. However, at such time as NaPro
needs additional crude paclitaxel, NaPro will be required to find another
third-party extractor or undertake such extraction itself. NaPro believes that
it will be able to develop or obtain adequate extraction operations when needed,
but no assurance thereof can be provided. In addition to paclitaxel manufactured
from its own yew trees, NaPro also manufactures paclitaxel from raw material
extracted from yew trees purchased from others.
NaPro currently operates a manufacturing facility in Boulder, Colorado and until
April 1998 operated a small-scale manufacturing facility in British Columbia,
Canada. In December 1997, the FDA refused to allow marketing of NaPro paclitaxel
in the United States under an NDA filed by IVAX Corporation ("IVAX"), NaPro's
then strategic partner in the United States, because of an exclusive right
previously granted to Bristol under the Orphan Drug Act. See "Strategic
Alliances." Such refusal resulted in a decrease in the projected demand for
NaPro paclitaxel. As a result, NaPro suspended manufacturing in British Columbia
in April 1998. Both NaPro's Colorado manufacturing facility and its British
Columbia manufacturing facility have been inspected by the TGA and approved for
the commercial production of NaPro paclitaxel for sale in Australia. NaPro
believes that the Boulder, Colorado facility has adequate capacity to meet
Faulding's clinical and commercial requirements and NaPro's clinical demands for
the near future.
With the prospect of NaPro paclitaxel entering the U.S. market under the IVAX
NDA, NaPro pursued construction of a large-scale commercial manufacturing
facility in Boulder, Colorado. During 1997, NaPro completed necessary structural
modifications to the facility and began equipment installation. As a result of
the FDA's refusal to allow marketing under the IVAX NDA, equipment installation
was stopped in December 1997. NaPro believes that construction of this
large-scale facility can be resumed and completed at such time, if ever, as the
demand for NaPro paclitaxel requires an increase in production beyond the
capacity of its existing facilities. There can be no assurance, however, that
NaPro will succeed in adapting its EIP(TM) technology for large scale commercial
manufacturing, or that such facility and manufacturing processes will receive
necessary regulatory approvals.
In order to diversify its supply options and increase its manufacturing
capacity, NaPro is developing, and has applied for patent protection for, a
semisynthesis process for manufacturing NaPro paclitaxel from certain other
taxanes contained in renewable biomass sources. NaPro owns or has licensed
several issued patents relating to this process and has applied for others.
Semisynthesis manufacturing initially involves extraction of paclitaxel and
other taxanes from yew sources. Certain of the taxanes are then chemically
converted into paclitaxel. During 1999, NaPro manufactured crude paclitaxel with
the semisynthesis process in a pilot-scale contracted facility. This crude
paclitaxel was then purified at NaPro's manufacturing facility in Boulder,
Colorado. Because this semisynthesis process uses both paclitaxel and other
taxanes, NaPro expects that use of a semisynthesis process will increase the
paclitaxel yield from its
- 8 -
<PAGE>
biomass sources. However, the use of semisynthesis will require regulatory
approvals, which cannot be assured. Furthermore, there can be no assurance
NaPro's semisynthesis process will perform as expected or that NaPro will be
able to effectively adapt the process to commercial-scale manufacturing. See
"Patents and Proprietary Technology."
Strategic Alliances
NaPro's strategy has been to pursue and enter into strategic alliances with
large international pharmaceuti cal companies. In April 1998, NaPro initiated
discussions toward the formation of new strategic alliances. These discussions
with various potential partners ultimately resulted in a 20 year collaborative
agreement with Abbott Laboratories to develop and commercialize one or more
formulations of paclitaxel for the treatment of a variety of cancer indications.
The exclusive agreement with Abbott is limited to paclitaxel and covers the
United States and Canada. It was executed on July 23, 1999. Pursuant to the
Abbott Agreement, NaPro is responsible for supplying bulk drug and may jointly
conduct clinical trials with Abbott. Abbott is responsible for finishing,
regulatory filings, marketing and sale of the finished drug product. NaPro has
licensed to Abbott its paclitaxel-related patents. Most primary decisions
related to the development program will be made by a joint NaPro-Abbott
Development Committee. In connection with the Abbott Agreement, NaPro may
receive total funding of up to $125 million from Abbott in the form of
development and marketing milestone payments, a secured loan and an equity
investment. On July 26, 1999, NaPro received $5 million, consisting of an
initial $1 million milestone payment, $2 million for the purchase by Abbott of
NaPro common stock at $5.00 per share, and a $2 million draw-down on a secured
loan. NaPro has access to up to $20 million under a secured loan arrangement
with Abbott, of which NaPro has drawn $5 million as of December 31, 1999. The
loan bears a primary interest rate of 6.5% and is due in full on the earliest
of: 1) the second anniversary of the first sale of finished product by Abbott to
a wholesaler or end-user customer following approval of finished product by the
FDA; 2) the termination of the Abbott Agreement; or 3) January 1, 2007. The loan
is limited to a borrowing base of collateralized assets, recomputed monthly.
Under terms of the Agreement, Abbott will purchase bulk drug from NaPro. Once
the paclitaxel product is approved and commercialized, Abbott will pay a
percentage of its net paclitaxel sales to NaPro, less Abbott's payments to NaPro
for purchase of bulk drug. Abbott may terminate the Agreement at any time with
or without cause. Should Abbott terminate without cause, it is obligated to make
certain payments to NaPro.
In addition to the Abbott Agreement, NaPro has formed a strategic alliance
through a long-term exclusive agreement with Faulding that covers ten countries,
including Australia, New Zealand and much of Southeast Asia (the "Faulding
Territory"). Pursuant to this agreement, Faulding agreed to fund and, with
NaPro's input, undertake the development work required to obtain regulatory
approvals for commercializ ing NaPro paclitaxel in the Faulding Territory. NaPro
is responsible for supplying Faulding with NaPro paclitaxel for clinical trials
and commercial purposes and Faulding is required to purchase all of its
paclitaxel requirements from NaPro. Faulding pays a fixed price for
non-commercial sales and a substantial share of gross revenue for NaPro
paclitaxel sold commercially. Under the Faulding agreement, NaPro is able to
utilize Faulding's resources, including expertise in clinical testing and sales,
marketing and distribution. NaPro believes that its alliance with Faulding
enables it to compete more effectively, within the Faulding territory, with
Bristol, Aventis, 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, however, that Faulding will succeed in obtaining further
regulatory approvals to market NaPro paclitaxel within its territory.
Furthermore, if such approvals are received, there can be no assurance that
Faulding will market NaPro paclitaxel successfully in these additional
countries.
- 9 -
<PAGE>
Until March 20, 1998, NaPro and IVAX were parties to a long-term, exclusive
agreement (the "IVAX Agreement"), under which IVAX was responsible for
performing clinical trials, filing for regulatory approvals, and selling,
marketing, and distributing commercial formulations of NaPro paclitaxel. In
March 1998, NaPro and IVAX entered into an agreement (the "Termination
Agreement") terminating the long-term, exclusive agreement.
Abbott Abbott is a large, multinational, diversified health care company with
1999 sales of over $13 billion. The Abbott Agreement grants Abbott the exclusive
right to develop and market NaPro paclitaxel in the United States and Canada for
intravenous and oral anti-cancer uses. Pursuant to the Abbott Agreement, Abbott
is required to purchase all of its requirements of paclitaxel from NaPro, except
in certain circumstances when NaPro is unable to supply Abbott's requirements.
Abbott may terminate the Abbott Agreement at any time with or without cause.
Except for limited instances where termination is due to specific breaches of
the Abbott Agreement by NaPro, NaPro retains exclusive rights to any clinical
data which may be generated during the course of the Abbott Agreement. Pursuant
to the Abbott Agreement, NaPro is required to indemnify Abbott for defects in
NaPro paclitaxel that is shipped to Abbott, for breaches of NaPro's warranties
or obligations under the Abbott Agreement, for harm caused by inappropriate
co-marketing activities, and for certain intellectual property and product
liability claims. Abbott is required to indemnify NaPro for defects in a
finished product containing NaPro paclitaxel manufactured by Abbott, for
breaches of Abbott's representations and warranties under the Abbott Agreement,
for harm caused by inappropriate marketing activities, and for certain
intellectual property and product liability claims.
Abbott owns 400,000 shares of NaPro common stock, which it purchased at $5 per
share. Upon satisfaction of certain milestones relating to paclitaxel
development, Abbott is required to purchase an aggregate of 1,600,000 additional
shares of NaPro Common Stock at $5 per share. There can be no assurance,
however, that any of these milestones will be reached, or that the Abbott will
not terminate the Abbott Agreement, and therefore it is not certain that Abbott
will be required to purchase such shares.
Faulding Faulding, Australia's largest pharmaceutical company with 1999 sales of
approximately $1.2 billion, actively markets anti-cancer pharmaceuticals and
other health care products in Australia, Southeast Asia and other countries
throughout the world. NaPro entered into a development and marketing agreement
with Faulding in 1992. The Faulding Agreement, as amended and restated, has an
initial term of 20 years, through 2012, and will continue thereafter from year
to year unless terminated by either party.
The Faulding Agreement grants Faulding the exclusive right to develop and market
NaPro paclitaxel in ten countries, including Australia, New Zealand and much of
Southeast Asia. The Faulding Agreement also grants Faulding the non-exclusive
right to sell NaPro 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 NaPro, except in certain circumstances when
NaPro is unable to supply Faulding's requirements.
Faulding may terminate the Faulding Agreement: (i) upon the reorganization or
insolvency of NaPro; (ii) if Faulding becomes controlled by a pharmaceutical
company that sells paclitaxel in the Faulding territory; (iii) if NaPro becomes
controlled by IVAX or Bristol; (iv) if NaPro is purchased by a pharmaceutical
company that sells paclitaxel in the Faulding territory and that company refuses
to be bound by the terms of the Faulding Agreement; or (v) if NaPro is unable to
meet the paclitaxel supply requirements of Faulding. NaPro 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.
- 10 -
<PAGE>
NaPro is required to indemnify Faulding pursuant to the Faulding Agreement for
any defect in NaPro paclitaxel that is shipped to Faulding and for uncured
breaches of NaPro's warranties or obligations under the Faulding Agreement.
Faulding is required to indemnify NaPro against all losses (i) resulting from a
defect in a product containing NaPro paclitaxel manufactured by Faulding except
where such defect is the fault of NaPro, (ii) resulting from a product
containing NaPro paclitaxel formulated, stored, handled, promoted, distributed,
registered or sold by Faulding and (iii) for uncured breaches of Faulding's
representations and warranties under the Faulding Agreement.
Faulding currently owns 395,000 shares of NaPro Nonvoting Common Stock.
Marketing and Sales
Marketing and sales of NaPro paclitaxel in the Faulding Territory are conducted
by Faulding. Anticipated marketing and sales, if any, of NaPro paclitaxel in the
Abbott Territory, will be conducted by Abbott. Currently, NaPro has no sales
force, has only limited marketing capabilities and has no present intention to
establish a sales or marketing force. Sales to Faulding account for a
substantial portion of NaPro's revenue. As a result, the loss of Faulding or
Abbott as a customer or the failure of Faulding or Abbott to successfully market
NaPro paclitaxel could have a material adverse effect on NaPro in the absence of
a comparable alternative strategic alliance arrangement. See "Strategic
Alliances."
Competition
The biopharmaceutical industry is an expanding and rapidly changing industry
characterized by intense competition for product sales, financing, executive
talent and intellectual property. NaPro competes with all entities developing
and producing therapeutic agents for cancer treatment, many of whom have much
greater capital resources and research and development capabilities.
Within the paclitaxel segment of this industry, the success of competitors in
entering the market for paclitaxel may reduce NaPro's potential market share and
reduce the price of NaPro paclitaxel, each of which could have a material
adverse effect on NaPro. In addition, regulatory approvals and marketing are
being handled exclusively by Abbott and Faulding within their respective
territories. Although NaPro believes Abbott and Faulding have capable drug
development and marketing abilities, there can be no assurance that they will be
capable or effective in gaining additional regulatory approvals on a timely
basis, if at all, or be able to compete effectively with existing or new
competitors within their territories.
Bristol, the world's largest oncology company, is marketing paclitaxel
commercially in the United States, Australia, Canada, Europe and certain other
territories. In addition, Aventis 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, the European Union,
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. While treatment with Taxotere(R) may
cause certain side effects not observed with paclitaxel, Taxotere(R) competes
with paclitaxel, and thereby may reduce overall paclitaxel sales. In addition,
in connection with the termination of the IVAX Agreement, NaPro licensed one of
its patents to IVAX on a non-exclusive basis. NaPro anticipates that IVAX will
continue to seek entry to the global paclitaxel market independently of NaPro
and may compete with NaPro in the future. Furthermore, due to the expiration, in
December 1997, of the five-year marketing protection from generic competition
which was provided to Bristol's paclitaxel product by the Waxman-Hatch Act, IVAX
and other generic manufacturers could enter the U.S. market in 2000. In most
cases, a similar European exclusivity period will end 10
- 11 -
<PAGE>
years after Bristol's initial approval. However, IVAX may market paclitaxel for
Kaposi's Sarcoma (with potential for additional "off label" uses as well) in
Europe in 2000. NaPro is aware of several pharmaceutical companies that are in
the process of developing generic paclitaxel in the United States, Canada,
Mexico and Europe. Finally, academic and research organizations and
pharmaceutical and biotechnology companies are pursuing, among other things,
genetically engineered drugs, chemical synthesis and cell-tissue culture that
may compete with NaPro's products or technology. In addition, certain companies
are pursuing the production of paclitaxel and other taxanes from natural product
extraction techniques.
Many of NaPro's competitors, most notably Bristol and Aventis, have
substantially greater capital resources, research and development capabilities,
manufacturing and marketing resources and experience than NaPro. NaPro expects
Bristol to compete intensely to maintain its dominance of the paclitaxel market,
including pursuit of an aggressive patent strategy. NaPro's competitors may
succeed in developing products that are more effective or less costly than any
that may be developed by NaPro and may gain regulatory approval prior to NaPro.
Many companies and research institutions are also seeking means to obtain
paclitaxel and taxanes from 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, NaPro is aware of several potential
competitors that have developed and patented or are developing various processes
for producing paclitaxel and paclitaxel-related substances semisynthetically,
which may allow such competitors to produce a low-cost paclitaxel. 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 NaPro.
Patents and Proprietary Technology
NaPro'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, NaPro seeks protection of its proprietary
technology by applying for patents in the United States and abroad. NaPro owns
patents and patent applications in the United States and in other countries
throughout the world. Additionally, NaPro 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. NaPro
expects to make such additional filings as it believes appropriate. The majority
of these patents and applications relate to certain paclitaxel formulations,
methods of administration and/or uses of paclitaxel, paclitaxel analogs and
related compounds, and methods for paclitaxel and taxane manufacture. NaPro has
also licensed technology relating to a class of compounds which has promising in
vitro activity as an anti- tumor agent. Recently, NaPro has entered into an
exclusive license agreement related to a patented targeted delivery technology.
NaPro believes that application of this targeted technology may enhance the
safety and/or efficacy of certain chemotherapeutic compounds by preferentially
targeting cancerous cells. There can be no assurance that either NaPro'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. There can be no assurance that NaPro will be able to
obtain any necessary or desired additional licenses to patents or technologies
of others or that NaPro will be able to develop its own additional patentable
technologies. In addition, there can be no assurance that future patents issued
to NaPro, if any, will provide it with competitive advantages, 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 affect on the ability of NaPro 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
- 12 -
<PAGE>
patent literature often lags behind actual discoveries. As a result, NaPro
cannot be certain it or any of its licensors was the first creator of inventions
covered by NaPro's or its licensors' pending patent applica tions or that NaPro
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 NaPro, that others will not design
technology to circumvent NaPro's patents or proprietary rights.
Much of NaPro's proprietary technology, including much of its EIP(TM)
technology, is not protected by patents and is held by NaPro as trade secrets.
NaPro's success will depend in part on its ability to protect the trade secrets
relating to extracting, isolating and purifying paclitaxel as well as to other
technology. NaPro relies on proprietary know-how and confidential information
and employs various methods, such as entering into confidentiality and
non-compete agreements with its 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 NaPro
cannot assure that it will be able to protect adequately its trade secrets or
that other companies will not acquire information that NaPro considers to be
proprietary. The inability to maintain its trade secrets for its exclusive use
could have a material adverse effect on NaPro.
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, including those relating to
extracting paclitaxel and preparing the drug for finished formulation, are or
may be patented. In addition, certain methods of administering paclitaxel are or
may be patented. Certain of these patents are owned or controlled by Bristol and
Aventis. Bristol's key patents include a patent that covers stabilized
paclitaxel compositions for formulation and patents that cover various
paclitaxel dosing regimens. Bristol's dosing regimen patent claims in the United
States include claims to a 3-hour infusion of 135-175mg/m2 of paclitaxel, which
is the current FDA-approved regimen for Taxol(R). Taxol(R) is a registered
trademark of Bristol for an anti-cancer pharmaceutical preparation containing
paclitaxel. The compound, paclitaxel, is not patented. Bristol has obtained,
however, U.S. patents covering the method of administration upon which its FDA
approval was received. A number of companies have filed applications with the
FDA for generic paclitaxel based upon Bristol's initial FDA approval. Anyone
obtaining FDA approval for generic paclitaxel will rely upon a method of
administration that might infringe the Bristol patents. Bristol has sued those
companies that are seeking FDA approval for generic paclitaxel for infringement
of its patents. The court before which the action is pending ruled that several
key claims of the patents are invalid. The court has approved an expedited
appeal of the ruling. NaPro and Abbott are reviewing the effects of the
foregoing on their drug development program. The appeals process could take
anywhere from several months to several years. Under U.S. laws, during the
patent appeals process, Bristol would retain U.S. patent rights to the disputed
patents until all appeals are exhausted. Therefore, if the appeal is ultimately
resolved in Bristol's favor, and the validity of Bristol's patents is upheld,
generic competitors could face substantial liability for patent infringement.
NaPro is aware of competitors and potential competitors who are pursuing patent
protection for various aspects of the extraction, preparation, formulation,
administration and production of natural, semisynthetic and synthetic
paclitaxel. If NaPro's technology, products or activities are deemed to infringe
the rights of others, NaPro could be subject to damages or prevented from using
such technology, or NaPro could be required to obtain licenses to use such
technology. No assurance can be given that any such licenses would be made
available on terms acceptable to NaPro, or at all. If NaPro were unable to
obtain such licenses or was prevented from using its technology, it could
encounter significant delays in product market introductions while it attempted
to design around the patents or rights infringed, or could find the development,
manufacture or sale of products to be foreclosed, any of which would likely have
a material
- 13 -
<PAGE>
adverse effect on NaPro. In addition, NaPro could experience a loss of revenue
and may incur substantial cost in defending itself and indemnifying Faulding or
Abbott in patent infringement or proprietary rights violation actions brought
against them. NaPro could also incur substantial cost if 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 NaPro, even if the eventual
outcome were favorable. See "Strategic Alliances" and "Item 3 - Legal
Proceedings."
Government Regulation and Product Approvals
The production and marketing of NaPro paclitaxel and NaPro's research and
development activities are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. In the United
States, drugs are subject to FDA regulation. The Federal Food, Drug and Cosmetic
Act ("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 pharmaceutical products. 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 new 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 current Good Manufacturing
Practices ("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 and in vivo
cytotoxicity, pharmacology, product chemistry and product formulation to assess
the potential safety and activity of the product. 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,
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. Supplies
for clinical trials must be manufactured and formulated according to cGMP.
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
- 14 -
<PAGE>
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 and present minimum risk to the
volunteer subjects.
Clinical trials typically are conducted in three sequential phases, which may
overlap. In Phase I, the initial introduction of the drug into humans, the drug
is tested for safety (adverse effects), dosage tolerance, absorption,
distribution, metabolism, 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; (iii) identify possible adverse
effects and safety risks; and (iv) define the structure of larger Phase III
trials. When a compound is found likely 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, effort and expense. 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.
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 product. An NDA is a systematic
compilation of data, analysis and conclusions on a new drug product based on
studies conducted under an IND. An NDA requests approval to market a particular
drug in a particular formulation for a specific disease indication. The NDA
testing and approval process requires substantial time, effort and expense, 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, if problems occur following initial marketing or if
previously unknown information demonstrates a lack of safety or effectiveness.
Following an approved NDA, a Supplemental NDA ("SNDA") may be submitted to the
FDA which requests a change in the existing approval. An SNDA can be for changes
in formulation, manufacturing or quality control, 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 NaPro paclitaxel is acquired, NaPro'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 NaPro's United States and Canadian manufacturing facilities by a
cGMP Auditor of the Australian TGA, the TGA issued approvals to NaPro as an
Australian cGMP compliant paclitaxel manufacturer. In addition, NaPro's Boulder,
Colorado facility was found to be in compliance with U.S. cGMP regulations by
the FDA. These facilities are subject to periodic reinspection, and there can be
no assurance that the FDA or foreign regulatory authorities will find NaPro's
current facilities, or facilities being constructed, to be in compliance with
U.S. cGMP regulations or analogous foreign standards in the future. Subsequent
discovery of previously unknown problems with a product or NaPro's manufacturing
- 15 -
<PAGE>
facilities may result in restrictions, including withdrawal of the product from
the market. Failure to comply with the applicable regulatory requirements by
NaPro, Faulding, or any future strategic partner could, among other things,
result in criminal prosecution and fines, product recalls, product seizures and
operating restrictions.
When patents or other periods of exclusivity on brand-name drugs expire,
manufacturers can apply to the FDA to sell generic versions by submitting an
ANDA. An ANDA contains data that provide for the review, by the FDA's Center for
Drug Evaluation and Research, Office of Generic Drugs, and ultimate approval, of
a generic drug product. Generic drug applications are termed "abbreviated"
because they are generally not required to include preclinical (animal) and
clinical (human) data to establish safety and effectiveness. Instead, generic
applicants must scientifically demonstrate that their product is bioequivalent
(i.e., performs in the same manner as the innovator drug). They must also fully
document the generic drug's chemistry, manufacturing steps, and quality control
measures. Each step of the process must be detailed for FDA review. The FDA must
be assured that the raw materials and the finished product meet USP
specifications, if these have been set. Stability of the generic drug under
extremes of heat and humidity must be shown before it can be sold. Once on the
market, the manufacturer must continue to monitor the drug's stability. The
generic applicant must show that the container and its closure system do not
interact with the drug. A full description of the facilities used to
manufacture, process, test, package, label and control the drug must be
provided. The generic applicant must certify that it complies with federal
regulations about cGMP and undergo FDA inspection of the manufacturing facility
to assure compliance. The generic drug's labeling must contain information that
is essentially the same as that of the approved drug. The FDA's review process
may take from 9 to 24 months. Once approved, an applicant may manufacture and
market the generic drug product to provide a safe, effective, low cost
alternative for the American public.
To the extent required by the terms of the Termination Agreement, NaPro has
supported and is required to continue to support the IVAX NDA in the United
States and an equivalent filing in the European Union for a period co-incident
with the original term of the IVAX Agreement. In this capacity, NaPro has
communicated with the FDA to discuss the biomass strategy employing
plantation-grown yews and technical issues associated with NaPro's DMF submitted
in support of the approval of its bulk drug product as part of the IVAX NDA. In
addition, during 1998, NaPro's manufacturing facilities underwent a pre-approval
inspection by the European Agency for the Evaluation of Medicinal Products (the
"European Agency") in support of IVAX's European regulatory submission. Based
upon the findings of that inspection and NaPro's responses, the inspectors
recommended to the European Agency that NaPro's Boulder, Colorado manufacturing
facility be named as a supplier for paclitaxel.
NaPro is also subject to U.S. statutes and regulations applicable to exporting
drugs. Such laws 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 law, one of which is Australia.
NaPro's paclitaxel has received valid marketing authorization from Australia and
NaPro's Boulder, Colorado manufacturing facility has been found to be compliant
with cGMP by the Australian TGA.
NaPro is also subject to, among others, the regulations of Canada, the Province
of British Columbia, the U.S. Environmental Protection Agency, the Department of
Interior (U.S. Fish and Wildlife Services and the Bureau of Land Management),
the Department of Agriculture (U.S. Forest Service) and other countries and
regulatory agencies. Pursuant to the National Environmental Policy Act, certain
U.S. agencies have prepared an Environmental Impact Statement that addresses the
impact of harvesting wild Pacific yew trees, including cutting down Pacific yew
trees on federally-managed land. NaPro is also
- 16 -
<PAGE>
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. NaPro has
made and will continue to make expenditures to comply with such requirements,
however, there can be no assurance that NaPro is at all times in complete
compliance with all such requirements. Compliance with these regulations is
time-consuming and costly. The failure to comply with these regulations,
however, could have a material adverse effect on NaPro's business, financial
condition and results of operations.
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 products, delay regulatory approval or otherwise
adversely affect NaPro's ability to produce or sell NaPro paclitaxel or other
products. Adverse govern mental regulations which might arise from future
legislative or administrative regulations or other actions cannot be predicted.
In addition, certain paclitaxel production has been opposed by the Oregon
Natural Resources Council ("ONRC") because of their concern over Pacific yew in
old growth forests. The ONRC and the FDA have reached an agreement on the
National Environmental Policy Act ("NEPA") requirements for NDAs, ANDAs and INDs
reporting clinical trials with more than 200 patients using paclitaxel from
Pacific yew trees. The agreement provides that an applicant shall include an
Environmen tal Assessment ("EA") which will identify all sources of Pacific yew
which are expected to be harvested in connection with the manufacture of
paclitaxel relating to the application. The FDA is to subject such EAs to the
NEPA process and shall complete and issue a Finding of No Significant Impact, or
an Environmental Impact Statement and Record of Decision as required by NEPA,
before approving any NDA or ANDA involving paclitaxel derived from or otherwise
involving the Pacific yew tree. Because NaPro relies on plantation-grown yews,
and will not harvest any Pacific yew trees to manufacture paclitaxel for a
marketed product, NaPro believes that the ONRC-FDA agreement requirements can be
met, and that these requirements will not jeopardize approval of any NDA that
may be filed by NaPro in the future. However, there can be no assurance that the
ONRC and other environmental activist groups will not oppose other activities of
NaPro, which may have the effect of delaying or halting production of NaPro
paclitaxel, each of which could have a material adverse effect on NaPro's
business, financial condition and results of operations.
NaPro currently manufactures paclitaxel for use in the United States from
cultivated hicksii yew. NaPro may elect to manufacture commercial paclitaxel for
use in the United States from other species or cultivars of yew, and will
address any related environmental assessment matters on a case-by-case basis.
Outside the United States, NaPro'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.
NaPro has filed confidential DMFs and other documents containing certain of
NaPro's proprietary manufacturing processes with regulatory agencies in the
United States, Australia, Canada and Europe, relating to NaPro's manufacture of
NaPro paclitaxel. Faulding, referring to NaPro's Australian DMF, has received
marketing approval in Australia and other countries for NaPro paclitaxel for
treating refractory ovarian and breast cancers. Additionally, Faulding has
completed clinical trials with NaPro 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 NaPro paclitaxel.
IVAX, using NaPro's U.S. DMF, filed an IND with the FDA in June 1994, relating
to NaPro paclitaxel and began its Phase I clinical trials relating to NaPro
paclitaxel in the United States in October 1994.
- 17 -
<PAGE>
IVAX began Phase II/III clinical trials in May 1995. In 1997, IVAX filed the
IVAX NDA seeking commercial approval to sell NaPro paclitaxel in the United
States. On December 24,1997, the FDA ruled on the IVAX NDA and determined that
NaPro paclitaxel was safe and effective in the treatment of Kaposi's sarcoma,
but denied IVAX the authority to market NaPro paclitaxel due to Bristol's prior
orphan drug approval for that indication. No assurance can be given, however,
that NaPro paclitaxel will prove to be safe and effective in future clinical
trials, or that NaPro will be able to obtain approval to market NaPro paclitaxel
in the United States or other countries.
NaPro filed an IND in May 1998, and initiated clinical trials of NaPro
paclitaxel for three indications in June 1998 and March 1999. These studies were
not specifically designed to support an NDA filing. Meetings and correspondence
with the FDA continue with respect to expanding the NaPro/Abbott drug
development program in paclitaxel. NaPro does not currently intend to disclose
the status or results of clinical studies prior to submitting those results in
regulatory filings. The two companies have engaged in communication with the FDA
concerning a development plan for various clinical indications. There can be no
assurance that these trials will demonstrate NaPro paclitaxel to be safe or
effective.
Research and Development
During the years ended December 31, 1997, 1998 and 1999, NaPro spent
approximately $11.8 million, $10 million and $12 million respectively, on
Company sponsored research and development activity and to produce NaPro
paclitaxel sold to Faulding and IVAX. Research and development is expected to
remain a significant cost component of NaPro's business. In the short term,
research and development is expected to concentrate primarily on clinical
trials, improvement of paclitaxel yield, production cost reduction, development
of NaPro's semisynthesis process for paclitaxel production, and yield
improvement in NaPro's paclitaxel production methodology for processing needles,
limbstock and roots. NaPro plans to contract out research considered essential
but for which it lacks facilities or staff. NaPro also plans to continue in
early stage research and development of other potential natural product cancer
chemotherapeutic drugs with novel mechanisms of action. NaPro is assessing
late-stage pharmaceutical product development opportunities in an effort to
expand its pipeline of new products. See "General."
- 18 -
<PAGE>
Foreign and Domestic Operations; Export Sales
The following table sets forth, for the past three years, revenue, profitability
(operating loss), and identifiable assets attributable to NaPro's U.S. and
foreign operations (amounts in thousand dollars):
Year Ended December 31,
1999 1998 1997
---- ---- ----
Sales to Unaffiliated Customers
U.S. $7,592 $4,498 $2,684
Canada - 454 1,130
--------- ------- -------
Total Sales (1) 7,592 4,952 3,814
Operating Loss
U.S. (10,624) (12,852) (12,854)
Canada (165) (526) (952)
Identifiable Assets
U.S. 16,095 23,260 26,419
Canada 3,162 2,406 3,939
- ------------
(1) Includes export sales to Australia of $5,121 in 1999, $2,189 in 1998 and
$1,303 in 1997.
Sales from Canada included sales of product manufactured and shipped from NaPro
Canada, NaPro's Canadian subsidiary. Such products sold by NaPro Canada to NaPro
were then re-sold to Faulding for use outside the United States. Such "exported"
products never physically entered the United States. NaPro suspended Canadian
operations in 1998.
Sales of NaPro paclitaxel into foreign markets accounted for approximately 48%
of NaPro's revenue for the year ended December 31, 1998 and 68% of NaPro's
revenue for the year ended December 31, 1999. NaPro anticipates that a
significant portion of its revenue will continue to be derived from sales of its
products in foreign markets for at least the year ending December 31, 2000.
A substantial portion of NaPro'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 NaPro'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 a material adverse effect on NaPro.
Employees
On February 17, 1998, NaPro announced a planned layoff of 53 employees, with a
resulting 43% reduction in full time positions. As part of this downsizing,
NaPro Canada discontinued production at its British Columbia manufacturing
facility.
As of March 15, 2000, NaPro had 81 full-time employees, 3 part-time employees,
and 3 project employees. Thirteen of these employees hold Ph.D. or M.D. degrees.
Four employees were engaged in
- 19 -
<PAGE>
biological and clinical research, 23 in chemical research, 14 in quality
assurance, 23 in manufacturing, 18 in administration and finance, 3 in
regulatory affairs, and 2 in legal. NaPro believes that its relations with its
employees are good.
Item 2
Properties
NaPro leases approximately 54,000 square feet of space in Boulder, Colorado,
that is used for research and development and is planned to be used for
commercial-scale manufacturing upon completion of improvements and installation
and validation of equipment. This facility is also used for NaPro's executive
offices and warehousing of raw materials and equipment. NaPro leases an
additional 5,900 square feet of space in Boulder that is used for manufacturing.
NaPro leases a facility of approximately 3,400 square feet in British Columbia,
Canada that was used for manufacturing until April 1998, but is currently
inactive.
As part of the downsizing announced by the Company on February 17, 1998, NaPro
temporarily closed its British Columbia manufacturing facility and suspended
construction of its large scale manufacturing facility in Boulder. Completion of
the Boulder facility will require additional financing, which NaPro intends to
seek at such time as it anticipates sufficient product demand to warrant
completion of the facility. The British Columbia manufacturing facility is
currently inactive, but NaPro believes this facility could be reactivated at
such time as additional manufacturing capacity is required.
Item 3
Legal Proceedings
On May 14, 1997, Bristol was issued a European patent relating to certain
methods of treatment with paclitaxel. On the same day, NaPro instituted
revocation proceedings in the United Kingdom against this European Patent as
issued in the U.K. and a separate but related British Patent also owned by
Bristol.
The revocation action was not in response to any lawsuit or allegations of
infringement against NaPro relating to the patents, but Bristol subsequently
sued NaPro and Baker Norton Pharmaceuticals, Inc., a subsidiary of IVAX ("BNP")
in the United Kingdom, alleging patent infringement with respect to clinical
trials carried out in the United Kingdom involving paclitaxel. NaPro and BNP
counter-claimed to revoke the patent as invalid. The outcome of the trial of
that action, concerning EP (UK) Patent Number 0,584,001 (the "Bristol Patent")
(GB Patent Number 2,269,319 was surrendered by Bristol), was a judgment rendered
by the English High Court on October 1, 1998. The judge held that the Bristol
Patent was invalid on the basis of lack of novelty and obviousness.
Bristol has lodged a Notice of Appeal dated November 1998 from the High Court
decision. It is NaPro's belief that this appeal will be decided sometime during
2000. In view of the minimal activity, if any, by NaPro in the United Kingdom,
NaPro believes that the risk of an award of substantial damages against NaPro,
in the event of an unfavorable Court of Appeal ruling, to be low. In addition,
BNP is required to indemnify NaPro for any damages (not including payment of
attorneys' fees) suffered as a result of this legal action. However, litigation
is an uncertain process, and an adverse result of the appeal could have a
material adverse effect on NaPro.
- 20 -
<PAGE>
Item 4
Matters Submitted to Stockholders' Vote
At the Annual Meeting of Stockholders held on October 28, 1999 (the "Annual
Meeting"), the following proposals were adopted as indicated:
1. The election of one Class III director to hold office until the 2002
annual meeting of stockholders:
Number of Shares
Nominee For Withheld
- ------- --- --------
Sterling K. Ainsworth 21,324,694 321,949
In addition, the terms for the following members of the Board of Directors
continued after the Annual Meeting: Leonard Shaykin; Patricia A. Pilia, Ph.D.;
Arthur H. Hayes, Jr., M.D.; Stanley Knowlton; and Seth Rudnick, M.D.
2. Approval of an amendment to NaPro's 1994 Long Term Incentive Plan
increasing the number of shares of common stock thereunder:
Number of
Shares
For 18,800,796
Against 2,049,513
Abstain 796,334
3. The ratification of the selection by the Board of Directors of Ernst &
Young LLP as NaPro's independent auditors for the year ending December
31, 1999.
Number of
Shares
For 21,603,128
Against 30,033
Abstain 13,482
- 21 -
<PAGE>
Part II
Item 5
Market Information and Related Stockholder Matters
Market Information
NaPro's common stock is traded in the Nasdaq National Market under the symbol
"NPRO." The following table sets forth, for the periods indicated, the high and
low closing sale prices for the common stock.
High Low
2000 First Quarter (through $10 $2 9/16
March 24, 2000
1999 Fourth Quarter $ 3 7/16 $2 3/16
Third Quarter 3 7/8 1 21/32
Second Quarter 2 3/16 1 5/8
First Quarter 2 1/2 1 3/18
1998 Fourth Quarter $ 1 29/32 $ 7/8
Third Quarter 2 7/32 31/32
Second Quarter 2 7/32 1 1/16
First Quarter 2 1/2 27/32
Stockholders
As of December 31, 1999 there were approximately 202 common stockholders of
record.
Dividends
To date, NaPro has not paid any dividends on the common stock. NaPro 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.
Recent Sales of Unregistered Securities
On June 4, 1997, NaPro privately issued $10.3 million of senior convertible
notes due in 2000. The notes were sold to private investors. The notes are
convertible into common stock at a 10% discount from the market price of the
common stock during specified periods prior to the conversion. In 1999, 1998 and
1997 NaPro issued 19,234, 296,017 and 2,239 shares of common stock,
respectively, in payment of $27,000, $295,000 and $9,000 interest on the notes
and 3,585,203, 2,833,587 and 342,667 shares of common stock on the conversion of
$5,061,000, $2,900,000 and $1,059,000 principal of the notes. As a negotiated
transaction with sophisticated investors not involving any public offering, the
sale of the notes, and the issuance of common stock in the payment of interest
and upon conversion of the notes, was exempt under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act") and Regulation D
thereunder.
- 22 -
<PAGE>
On December 8, 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 is convertible into common stock
at a 5% discount from the conversion date. In 1999 and 1998, NaPro issued
1,299,085 and 986,666 shares of common stock, respectively, in conversion of the
C Preferred and 6,761 and 186,656 shares of common stock in payment of dividends
on the C Preferred. As an issuance to a single sophisticated investor not
involving any public offering, the sale of the C Preferred and the issuance of
common stock in the payment of dividends and upon conversion of the C Preferred
was exempt under Section 4(2) of the Securities Act and Regulation D thereunder.
On July 23, 1999, as part of the Abbott Agreement, NaPro privately sold to
Abbott 400,000 shares of common stock. As a negotiated transaction with an
accredited investor not involving any public offering, the sale of common stock
to Abbott was exempt under Section 4(2) of the Securities Act and Regulation D
thereunder.
On December 31, 1999, NaPro issued 16,000 shares of common stock upon exercise
of a founders' stock option by an officer and director. On March 23, 1998 NaPro
issued 145,467 shares of common stock upon exercise of founders' stock options
by two individuals, both officers and directors. As issuances to accredited
investors not involving any public offering, the issuances were exempt under
Section 4(2) of the Securities Act and Regulation D thereunder. These issuances
upon the exercise of compensatory stock options granted before NaPro was a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), were also exempt under Rule 701 under the Securities Act.
Item 6
Selected Financial Data
The selected financial data presented below for each year in the five years
ended December 31, 1999, are derived from NaPro'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 data presented
below should be read in conjunction with the consolidated financial statements
at December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999, 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.
- 23 -
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Product Sales $ 7,592 $ 4,952 $ 3,814 $ 3,473 $ 2,623
--------- -------- -------- -------- -------
Operating Expense:
Research, development and cost of products sold 12,047 9,973 11,769 6,837 4,325
General and administrative 6,188 6,458 5,992 3,712 2,309
(Gain) loss on retirement of assets 146 1,899 (141) 27 1
Plantation cost - - - - 272
-------------------------------------- ------------ --------
Total operating expense 18,381 18,330 17,620 10,576 6,907
--------- --------- ---------- --------- --------
Operating loss (10,789) (13,378) (13,806) (7,103) (4,284)
Other income (expense):
License fees 2,320 11,110 - - -
Interest income 309 550 494 651 373
Interest expense (842) (902) (2,161) (373) (160)
--------- ----------- ----------- ---------- ---------
Net loss $ (9,002) $ (2,620) $(15,473) $ (6,825) $(4,071)
========= ========== ========= ========= ========
Net loss attributable to common stockholders $10,213) $ (3,212) $(15,537) $ (6,825) $(4,071)
======== ========== ========= ========= ========
Net loss per share $ (0.50) $ (0.22) $ (1.28) $ (0.68) $ (0.51)
========= ========== ========== ========= ========
Weighted average shares outstanding 20,554 14,642 12,104 9,973 7,973
======== ========= ========= ========= =======
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term securities $ 1,937 $ 7,441 $ 8,102 $14,767 $ 7,800
Working capital 2,915 7,121 (2,485) 14,224 8,453
Total assets 19,257 25,666 30,358 25,021 11,953
Long-term obligations, net of current maturities 4,723 80 480 751 1,618
Senior convertible debt, long term portion - 5,176 - - -
Senior convertible redeemable preferred stock - 3,805 4,344 - -
Minority interest 622 622 2,574 3,715 3,715
Accumulated deficit (52,620) (43,618) (40,998) (25,525) (18,700)
Stockholders' equity 11,133 10,884 7,262 16,569 5,424
</TABLE>
Item 7
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the results of
operations of NaPro. This discussion should be read in conjunction with the
Financial Statements and Notes included elsewhere in this report. Special Note:
Certain statements set forth below constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). See "Special Note Regarding Forward Looking Statements."
General
NaPro is a natural product pharmaceutical company focused primarily on the
development, manufacture and commercialization of cancer chemotherapeutic agents
and related technologies. Natural product substances have been, and continue to
be, the primary source of new chemotherapeutic anti-cancer agents, especially
compounds which exert their anti-cancer activity by novel mechanisms of action.
NaPro's lead product is paclitaxel, a naturally occurring chemotherapeutic
anti-cancer agent found in certain species of
- 24 -
<PAGE>
yew (Taxus) trees. In addition to its efforts with paclitaxel, NaPro is actively
engaged in evaluating the in-licensing or purchase of potential new products
and/or technologies, either derived from natural products or otherwise. Such
evaluations may involve individual molecules, classes of compounds or platform
technologies, both in the cancer field and otherwise, which could involve the
acquisition of entire private or publicly traded companies. NaPro is also
working internally on several classes of compounds which have promising in vitro
and in vivo activity as anti-tumor agents that function by new and novel
mechanisms that may increase the likelihood of their success as new
chemotherapeutic agents. NaPro has terminated discussions for the licensing of
certain technology that were reported in its Form 12b-25 filed with the
Securities and Exchange Commission on March 30, 2000. NaPro is in active
discussions with others and remains committed to the diversification of its
business through the acquisition and development of new products and compounds.
Regarding paclitaxel, NaPro has devoted its efforts to the development and
implementation of its propriety extraction, isolation and purification (EIP(TM))
technology and the development of its proprietary semisynthetic method for
producing NaPro paclitaxel. To advance the development and commercializa tion of
NaPro paclitaxel, NaPro is party to 20-year, exclusive agreements with Abbott
Laboratories ("Abbott") and F.H. Faulding & Co., Ltd. ("Faulding") for the
clinical development, sales, marketing and distribution of NaPro paclitaxel.
Although NaPro has increased sales through December 31, 1999, NaPro continues to
incur substantial expense for research and development related to clinical
trials, improving manufacturing processes and other development activity.
Accordingly, NaPro has incurred significant operating losses, including
operating losses of approximately $10.8 million, $13.4 million and $13.8 million
for the years ended December 31, 1999, 1998 and 1997, respectively, resulting in
an accumulated deficit of $52.6 million as of December 31, 1999. 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 operating losses will continue until such
time, if ever, as NaPro is able to generate sufficient revenue to support its
operations.
Primarily, the ability of NaPro to generate sufficient revenue to support its
operations depends upon the successful completion of a joint drug development
program with Abbott, a New Drug Application ("NDA") filing, and regulatory and
marketing approval by the U.S. Food and Drug Administration ("FDA") followed by
Abbott's successful marketing of the product. In addition to the NaPro-Abbott
drug development program efforts, NaPro is actively searching for other partners
to facilitate the marketing of its product in major markets outside the United
States.
In February 1997, Bristol-Myers Squibb Company ("Bristol") 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 an
NDA for the same indication. The Bristol application was approved by the 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
paclitaxel, NaPro underwent a restructuring to decrease overall cost and
announced the layoff of 53 employees that resulted in a one-time charge of
approximately $250,000. 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
- 25 -
<PAGE>
of the facility. NaPro incurred $434,000 of losses on asset retirements and
$110,000 of other expense as a result of the suspended construction.
In March 1998, NaPro and IVAX Corporation ("IVAX") terminated the marketing
arrangement which had previously been in place between the two companies.
On July 23, 1999, NaPro entered into a collaborative agreement of up to 20 years
(the "Abbott Agreement") with Abbott to develop and commercialize one or more
formulations of paclitaxel for the treatment of a variety of cancer indications.
The exclusive agreement covers the United States and Canada. Abbott may
terminate the Agreement at any time with or without cause. Should Abbott
terminate without cause, it is obligated to make certain payments to NaPro.
NaPro will be responsible for supply of bulk drug and may jointly conduct
clinical trials with Abbott. Abbott will be responsible for finishing,
regulatory filings, marketing and sale of the finished drug product. NaPro has
licensed its paclitaxel-related patents to Abbott. Most primary decisions
related to the development program will be made by a joint NaPro-Abbott
Development Committee. Under the Abbott Agreement NaPro and Abbott are
developing the next phase of pivotal clinical studies on one or more different
cancers in a variety of populations.
NaPro has planned with Abbott a drug development program exploring the use of
NaPro's patented formulation of paclitaxel using its patented method of
administration. NaPro anticipates that information gained in such program will
be useful in the filing of a regulatory submission with the FDA for NaPro
paclitaxel. The cost of such program is increasing and will be significant.
NaPro has received and will, contingent upon successful development of product
and achievement of milestones, receive funding from Abbott in the form of
development and marketing milestone payments, a secured loan and an equity
investment. In 1999, NaPro received $8 million, consisting of an initial $1
million fee, $2 million from the purchase by Abbott of NaPro common stock at
$5.00 per share, and a $5 million draw-down on the secured loan.
Contingent upon NaPro's successful achievement of all development milestones and
in addition to the payments received in 1999, NaPro could receive up to $45
million consisting of $37 million in development fees and up to $8 million for
the purchase of 1.6 million shares of NaPro common stock. In addition, NaPro
will have access to up to a total of $20 million under a secured loan
arrangement with Abbott, including the 1999 draws of $5 million. The loan bears
a primary interest rate of 6.5% and is due in full on the earlier of: 1) the
second anniversary of the first sale of finished product by Abbott to a
wholesaler or end-user customer following approval of finished product by the
FDA; 2) the termination of the Abbott Agreement; or 3) January 1, 2007. The loan
is limited to a borrowing base of collateralized assets, recomputed monthly.
Substantially all of NaPro's hard assets are collateralized as security for the
loan.
Contingent upon receiving regulatory approval and achieving certain commercial
sales thresholds over several years, NaPro may receive additional milestone
payments from Abbott in the range of zero to $57 million. No assurance can be
given that regulatory approval or sales thresholds will be achieved.
Under terms of the Abbott Agreement, Abbott will purchase bulk drug from NaPro.
Once the paclitaxel product is approved and commercialized, Abbott will pay a
percentage of its net paclitaxel sales to NaPro, less Abbott's payments to NaPro
for purchase of bulk drug.
- 26 -
<PAGE>
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
- ---------------------------------------------------------------------
Sales. 1999 sales were $7.6 million, up $2.6 million from 1998. Sales to
Faulding for 1999 were $5.1 million, up $2.9 million from 1998. The increase was
partially due to an increase in the number of countries in which Faulding is
licensed to sell paclitaxel. The increase was also partially due to the timing
of product shipments and to inventory fluctuations of NaPro's strategic
partners. Sales to IVAX, as a result of the Termination Agreement, ended in the
third 1999 quarter. Sales may vary significantly depending on a number of
factors, including the potential, if any, for commercial sales in the Abbott
territory, the timing and size of any clinical trials, NaPro's obtaining
additional strategic partners, changes in demand, the level of inventory carried
and changes in approved markets. This variability will continue until stable
commercial demand has been established for the product in at least one principal
market.
Research, Development and Cost of Products Sold. Research and development
expense and cost of products sold for 1999 was $12 million, up by $2 million
from 1998. The increase resulted primarily from an increase in clinical trial
activity and increased cost associated with development of the semisynthetic
manufacturing process. NaPro's production process is not distinct from its
research and development processes. Accordingly, the cost of products sold is
included within NaPro's research and development expense.
General and Administrative Expense. General and administrative expense for 1999
was $6.2 million, down $300,000 from 1998. The decrease is attributable
primarily to a decrease of $700,000 in legal expense related to European patent
litigation, partially offset by increased compensation and increases in
retirement plan contributions.
License Fee Income. License fees for 1999 were $2.3 million, down $8.8 million
from 1998. The 1999 amount included $1 million in milestone payments under the
Abbott Agreement. The remainder of the 1999 license fees and all of the 1998
license fees were paid under the terms of the IVAX Termination Agreement.
License fees and milestone payments are unusual and may be non-recurring. No
further payments are expected under the IVAX agreement.
Interest Income. Interest income for 1999 was $300,000, down $200,000 from 1998.
The decrease is primarily attributable to lower overall balances of interest
bearing investments. See "Liquidity and Capital Resources."
Interest Expense. Interest and other expense for 1999 was $800,000, down
$100,000 from 1998. The decrease is primarily attributable to the decreased
interest on the senior convertible debt because of the final conversion,
partially offset by interest on the Abbott loan. See "Liquidity and Capital
Resources."
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
- ---------------------------------------------------------------------
Sales. 1998 sales were $5 million, up $1.2 million from 1997. Sales to IVAX for
1998 were $2.7 million, up $400,000 from 1997. Sales other than to IVAX for 1998
were $2.2 million, up $700,000 from 1997. The increase was due primarily to the
timing of product shipments and to inventory fluctuations of NaPro's strategic
partners.
Research, Development and Cost of Products Sold. Research and development
expense and cost of products sold for 1998 was $10 million, down by $1.8 million
from 1997. The decrease resulted primarily from the benefits of the February
1998 restructuring, a decrease in the level of process development and research,
and lower production cost.
- 27 -
<PAGE>
General and Administrative Expense. General and administrative expense for 1998
was $6.5 million, up $500,000 from 1997. The increase was attributable primarily
to increases of $700,000 in legal expense related to the European patent
litigation and $200,000 of consulting expense primarily related to the IVAX
Termination Agreement, partially offset by a reduction in recruiting and
relocation expense.
License Fee Income. License fees for 1998 were $11.1 million, up $11.1 million
from 1997. All of the 1998 license fees were paid under the terms of the IVAX
termination agreement.
Interest Income. Interest income for 1998 was $600,000, up $100,000 from 1997.
The increase was attributable to overall higher interest rates realized on
interest bearing investments.
Interest Expense. Interest and other expense for 1998 was $900,000, down $1.3
million from 1997. The decrease was primarily attributable to the non-recurrence
of the $1.1 million 1997 expense related to the amortization of original issue
discount on the senior convertible debt, to decreased interest on the senior
convertible debt and to decreased borrowing on equipment financing.
Liquidity and Capital Resources
NaPro's capital requirements have been and will continue to be significant. As
of December 31, 1999, NaPro had a working capital balance of $2.9 million
compared to a working capital balance of $7.1 million as of December 31, 1998.
NaPro has a $20 million secured borrowing arrangement with Abbott, of which $5
million had been drawn as of December 31, 1999. Therefore, NaPro does not have
the need to carry large balances of cash. To date, the funding of NaPro's
capital requirements has been dependent 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 $29.5 million, on the
exercise of warrants and options of $5.9 million, on net borrowings of $15.6
million, and on loans and advances from its stockholders and strategic partners.
NaPro's existing capital, projected 2000 sales, and available borrowing under
the Abbott loan are expected to provide adequate capital to fund its necessary
operations and capital expenditures in 2000. However, pharmaceutical development
is a costly and time consuming process. NaPro is actively pursuing additional
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. NaPro may in-license or purchase new products or
technologies. The cost of acquiring and developing such resources, and related
capital expenditures, may be very large. As a result, NaPro may need to attract
substantial amounts of capital. No assurance can be given that NaPro will be
able to do so.
In June 1997, NaPro privately placed $10.3 million of senior convertible notes.
The notes bore interest of 5% and were all redeemed or converted into common
stock by July 1999. Interest on the notes was payable in cash or in common stock
at NaPro's option. In 1999 NaPro issued 3,585,203 shares of common stock in
conversion of $5,061,000 principal of the notes, and 19,234 shares of common
stock in payment of $27,000 interest on the notes.
In 1998 NaPro redeemed $647,000 in note principal and paid $53,000 premium and
interest in connection with the redemption. In 1999 NaPro redeemed $633,000 in
note principal and paid $162,000 premium and interest in connection with the
redemption.
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
- 28 -
<PAGE>
accrued dividends at 5% per year payable in common stock or cash at NaPro's
option. In 1999, NaPro issued 1,299,085 shares of common stock in conversion of
the C Preferred and 6,761 shares of common stock in payment of dividends on the
C Preferred. By September 1999, all of the C Preferred had been redeemed or
converted into common stock. NaPro exercised its option to redeem $2 million of
the C Preferred at 140% of the outstanding principal and accrued dividends and
interest.
Working Capital and Cash Flow Cash and cash equivalents decreased $5.3 million
to $1.9 million for the year ended December 31, 1999 from $7.2 million at
December 31, 1998. Net cash used by 1999 operations of $8.4 million was offset
by investing activity of $600,000 and by financing activity of $2.5 million.
Inventory increased $400,000 from December 31, 1998 to $4.6 million at December
31, 1999. 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 $900,000 during 1999 for capital projects.
These expenditures primarily included plantation cost and laboratory equipment.
The amount and timing of future capital expenditures will depend upon numerous
factors, including the cost of manufacturing scale-up for paclitaxel; the cost
of development of new products; the cost of manufacturing resources for new
products; the nature of NaPro's relationship with its strategic partners; 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; and changes in or terminations of existing strategic
relationships. NaPro may seek additional long-term financing to fund capital
expenditures should such financing become available on terms acceptable to
NaPro.
Net Operating Loss Carryforwards As of December 31, 1999, NaPro had
approximately $43 million of net operating loss carryforwards to offset future
taxable income. The Tax Reform Act of 1986 contains provisions that limit the
utilization of net operating loss carryforwards if there has been a "change of
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit NaPro's utilization of its net operating loss
carryforwards, and could be triggered by sales of securities by NaPro or its
stockholders.
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 have failed or created erroneous results. This matter is
commonly referred to as the Year 2000 issue or Y2K.
NaPro upgraded several computer programs which had not been Y2K compliant. To
date NaPro has incurred no problems caused by Y2K. The programs which were
upgraded would have been upgraded regardless of Y2K. Accordingly, NaPro has
incurred no significant expense in becoming Y2K compliant.
- 29 -
<PAGE>
Special Note Regarding Forward-looking Statements
Certain statements in this report constitute "forward-looking statements" within
the meaning of the federal securities laws, including the Reform Act. 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 additional
strategic partners and developing new products;
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 expenditures;
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 for
ward-looking statements. Such factors include, among other things, the
following:
adverse economic and general business conditions;
competition from Bristol 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 technology;
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;
- 30 -
<PAGE>
the results of clinical studies;
the results of research and development activities;
the ability to purchase or license new products;
the successful development of new products;
the business abilities and judgment of NaPro's management and other
personnel;
the availability of qualified personnel generally;
the ability of contract manufacturers to perform adequately under
anticipated contracts;
changes in and compliance with governmental regulations;
the effect of capital market conditions and other factors on capital
availability for NaPro and other biopharmaceutical companies;
the ability of Abbott and Faulding to perform their obligations under
their existing agreements with NaPro;
the ability of NaPro to perform its obligations under its existing
agreements with Abbott and Faulding;
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 Abbott and Faulding Agreements;
and other factors referenced in this report.
Item 7A
Quantitative and Qualitative Disclosures about Market Risk.
During 1999, virtually all of NaPro's revenue resulted from sales of NaPro
paclitaxel to Faulding and IVAX. The final shipment of NaPro paclitaxel required
by the Termination Agreement was made to IVAX during the third quarter of 1999.
Following this final delivery to IVAX, and in the absence of sales to another
strategic partner, sales of NaPro paclitaxel to Faulding will constitute
substantially all of NaPro's sales revenue in 2000. NaPro anticipates sales to
Abbott; such sales may be quite limited until such time as NaPro and Abbott
obtain approval for commercial sales, if ever.
Faulding purchases NaPro paclitaxel from NaPro at a price which varies in
proportion to the price at which Faulding sells NaPro paclitaxel. Under the
Faulding Agreement, NaPro is paid a fixed sum for NaPro paclitaxel supplied for
noncommercial uses, and a fixed percentage of Faulding's sales price for NaPro
paclitaxel supplied for commercial use. In March of each year, Faulding
estimates the sales price it will receive for NaPro paclitaxel in the upcoming
year, and, based upon that estimate, NaPro determines the price it will charge
Faulding for NaPro paclitaxel (the "Unadjusted Price"). NaPro recognizes the
- 31 -
<PAGE>
corresponding revenue at the time of shipment of NaPro paclitaxel to Faulding,
based upon the intended use indicated by Faulding on its purchase orders.
However, Faulding may or may not use the product in accordance with the original
use stated on its purchase orders. Additionally, Faulding's actual selling price
may differ from the amounts originally budgeted and indicated to NaPro on its
purchase orders. On or about May 31, 2000, Faulding will communicate to NaPro
the final amount and type of sales made during the period beginning on April 1,
1999 and ending on March 31, 2000, and an adjustment will be calculated that may
increase or decrease NaPro's revenue from sales of products to Faulding during
this period.
Faulding's sales are made in the currencies of each of the countries in which it
sells NaPro paclitaxel. As a result, NaPro's revenue from sales is affected by
fluctuations in the value of these various foreign currencies relative to the
U.S. dollar. Faulding's largest single market is Australia, accounting for
approximately 31% of Faulding's commercial sales during the period beginning
March 31, 1998 and ending March 31, 1999. In the past, fluctuations in various
currencies, especially the Australian dollar, were a major factor in prior
reductions in the Unadjusted Price. If changes in foreign currency markets
continue to cause a decrease in the price per gram NaPro receives from Faulding,
there could be a material adverse effect on NaPro's earnings and cash flow. For
example, during the period beginning March 31, 1998 and ending March 31, 1999,
NaPro's revenue attributable to sales of NaPro paclitaxel to be resold
commercially by Faulding totaled $2,156,000. Had there been additional negative
pressure on the relevant exchange rates such that the Unadjusted Price had been
reduced by 15% NaPro's earnings would have been reduced by approximately
$323,000 and NaPro would have experienced materially reduced cash flow. However,
while Faulding will continue to have a significant impact on NaPro's revenue,
NaPro's continuation of operations is dependent upon sources other than revenue
from Faulding. NaPro anticipates that its operations will be dependent upon
borrowing and equity funding provided by the strategic alliance with Abbott. See
"Item 1 - Business - Strategic Alliances."
To the extent NaPro's efforts in developing international markets outside the
Faulding Territories are successful, NaPro may face similar foreign currency
exchange risk as that described above for Faulding.
Certain statements set forth in Item 7A may constitute "forward-looking
statements" within the meaning of the Reform Act. See "Special Note Regarding
Forward-looking Statements."
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
- 32 -
<PAGE>
Part III
Item 10
Directors and Executive Officers
The information concerning NaPro's directors and executive officers is
incorporated by reference to the section entitled "Election of Directors" in
NaPro's definitive Proxy Statement with respect to NaPro's 2000 Annual Meeting
of Stockholders (the "Proxy Statement").
Item 11
Executive Compensation
The section labeled "Executive Compensation" appearing in NaPro's Proxy
Statement is incorporated herein by reference, except for such information as
need not be incorporated by reference under rules promulgated by the Securities
and Exchange Commission.
Item 12
Security Ownership of Certain Beneficial Owners and Management
The section labeled "Security Ownership of Directors and Executive Officers and
Certain Beneficial Owners" appearing in NaPro's Proxy Statement is incorporated
herein by reference.
Item 13
Certain Relationships and Related Transactions
The section labeled "Certain Relationships and Related Transactions" appearing
in NaPro's Proxy Statement is incorporated herein by reference.
Part IV
Item 14
Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Financial Statements
The Financial Statement Index is on Page F-1.
Financial Statement Schedules
All schedules are omitted because they are not applicable or not required or
because the information is included in the consolidated financial statements or
the notes thereto.
Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1999.
- 33 -
<PAGE>
Exhibit
Number Description of Exhibit
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended August 2, 1996(1)
3.2 Certificate of Amendment dated September 29, 1998 to the Amended and
Restated Certificate of Incorporation of the Company (2)
3.3 Certificate of Designation for Convertible Preferred Stock, Series A
(3)
3.4 Certificate of Designation for Series B Junior Participating Preferred
Stock (4)
3.5 Certificate of Designation of Series C Senior Convertible Preferred
Stock (5)
3.6 Bylaws of the Company (6)
4.1 Common Stock Certificate (6)
4.2 Underwriter's Warrant Agreement (6)
4.3 Warrant Agreement (6)
4.4 Warrant Certificate (6)
4.5 Rights Agreement dated as of November 8, 1996 between the Company and
American Stock Transfer and Trust Company, as Rights Agent (7)
4.6 The Certificate of Incorporation and Bylaws of the Company are included
as Exhibits 3.1 - 3.6.
10.1* Company's 1993 Stock Option Plan (6)
10.2* Company's 1994 Long-Term Performance Incentive Plan, as amended May 28,
1998 (2)
10.3 Stock Purchase Warrant dated as of June 7, 1993 between the Company and
Arthur D. Harrison (6)
10.4 Stock Purchase Warrant dated as of June 7, 1993 between the Company and
Kirkland & Ellis (6)
10.5 Stock Purchase Warrant dated as of December 15, 1992 between the
Company and Kirkland & Ellis (6)
10.6* Employment Agreement effective October 5, 1998 between NaPro and
Leonard P. Shaykin (8)
10.7* Employment Agreement effective October 5,1998 between NaPro and
Sterling K. Ainsworth (8)
10.8* Employment Agreement effective October 5, 1998 between NaPro and
Patricia A. Pilia (8)
10.9* Employment Agreement effective October 5, 1998 between NaPro and Gordon
Link (8)
10.10* Employment Agreement effective October 5, 1998 between NaPro and David
L. Denny (8)
10.11* Employment Agreement effective October 5, 1998 between NaPro and Kai P.
Larson
10.12* Employment Agreement effective October 5, 1998 between NaPro and James
D. McChesney (8)
- 34 -
<PAGE>
10.13 Amended and Restated Master Agreement dated as of January 19, 1994
between the Company and F.H. Faulding & Co., Ltd. (6)
10.14 Amendment No. 1 To Amended and Restated Master Agreement dated January
19, 1994, executed as of March 23, 1995 (9)
10.15 Agreement dated as of June 7, 1993 between the Company and Baker Norton
Pharmaceuticals, Inc. (15)
10.16 Termination Agreement dated as of March 20, 1998 among the Company,
IVAX Baker Norton Pharmaceuticals, Inc. ("BNP") and D&N Holding
Corporation ("D&N") (15)
10.17 Escrow Agreement dated as of March 24, 1998 by and between the Company,
BNP and U.S. Bank National Association d/b/a Colorado National Bank
(15)
10.18 Letter Agreement, dated March 20, 1998, by and between the Company,
Leonard P. Shaykin and D&N (15)
10.19 NaPro Release dated as of March 20, 1998 (15)
10.20 IVAX, BNP and D&N Release dated as of March 20, 1998 (15)
10.21 Development, License and Supply Agreement dated July 23, 1999 by and
between the Company and Abbott Laboratories, Inc. (20)
10.22 Loan and Security Agreement dated July 23, 1999 by and between the
Company and Abbott Laboratories, Inc. (20)
10.23 Stock Purchase Agreement dated July 23, 1999 by and between the Company
and Abbott Laboratories, Inc. (20)
10.24 Lease dated February 28, 1995 between the Company and the Mutual Life
of Canada (3)
10.25 Subscription Agreement and Investment Letter between the Company
and NaPro BioTherapeutics (Canada), Inc. (3)
10.26 Put/Call Agreement dated July 12, 1995 between the Company and the
Purchasers of Series A Preferred Shares of NaPro BioTherapeutics
(Canada) Inc. (3)
10.27 Side Letter dated July 21, 1995 to Put/Call Agreement (3)
10.28 Lease between the Company and Gunbarrel Facility L.L.C. dated October
16, 1995 (10)
10.29 First Amendment to Lease November 27, 1995, between the Company and
Gunbarrel Facility L.L.C. (10)
10.30 Services and Supply Agreement dated as of December 1, 1993 between the
Company and Pacific BioTechnologies Inc. (6)
10.31 Agreement between the Company and Pacific BioTechnologies Inc. dated
March 29, 1996 (10)
10.32 Letter agreement between the Company and Pacific BioTechnologies Inc.
dated August 14, 1998
10.33 Culture Agreement dated March 1, 1996 between Zelenka Nursery, Inc.
("Zelenka") and the Company(11)
10.34 Agreement for Sale, Harvest and Storage of Nursery Stock dated May 1,
1996 between Zelenka and the Company (11)
- 37 -
<PAGE>
10.35 Culture Agreement dated as of March 1, 1997 between Zelenka and the
Company (12)
10.36 Lease Agreement dated as of March 1, 1997 between Zelenka and the
Company (12)
10.37 Agreement for Sale, Harvest and Storage of Nursery Stock dated as of
March 1, 1997 between Zelenka and the Company (12)
10.38 Culture Agreement dated July 26, 1997 between Cass-Mill, Inc. and the
Company
10.39 Form of Common Stock Purchase Warrant (13)
10.40 Pledge and Security Agreement dated as of June 4, 1997 between NaPro
and First Trust of New York, National Association, as Collateral Agent
(13)
10.41 Subscription Agreement between the Company and Advantage Fund II, Ltd.,
as to Series C Senior Convertible Preferred Stock (5)
10.42 Common Stock Purchase Warrant between the Company and Advantage Fund
II, Ltd. (5)
10.43 Amendment Agreement, dated as of January 28, 1998, by and among the
Company and the note holders' named therein (14)
10.44 Amendment Agreement, dated as of January 28, 1998, by and among the
Company and Advantage Fund II, Ltd. (14)
10.45 Letter Agreement, dated March 20, 1998, by and among the Company and
the noteholders named therein (15)
10.46 Letter Agreement, dated March 31, 1998, by and among the Company and
Advantage Fund II, Ltd. (15)
10.47 Letter Agreement, dated January 7, 1999, by and among the Company and
the noteholders named therein (16)
10.48 Letter Agreement, dated January 7, 1999, by and among the Company and
Advantage Fund II, Ltd. (16)
10.49 Letter Agreement, dated March 24, 1999 by and among the Company and the
noteholders named therein (17)
10.50 Letter Agreement dated March 24, 199 by and among the Company and
Advantage Fund II, Ltd.(17)
10.51 Letter Agreement dated May 14, 1999, by and among the Company and
Advantage Fund II, Ltd. (18)
10.52 Letter Agreement dated June 22, 1999, by and between NaPro and
Advantage Fund II, Ltd. (19)
21.1 List of Subsidiaries (21)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
- --------------------------------------------------------------
* A management compensation plan.
** Confidential treatment has been requested with respect to the redacted
portions of this exhibit.
(1) Incorporated herein by reference from the Company's Annual Report on
Form 10-K filed with the Commission for the year ended December 31,
1996 (File No. 0-24320).
- 38 -
<PAGE>
(2) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 (File No. 0-24320).
(3) Incorporated herein by reference from the Company's Quarterly Report on
Form 10-Q filed with the Commission for the quarter ended June 30, 1995
(File No. 0-24320).
(4) Incorporated herein by reference from the Company's November 8, 1996
Current Report Form 8-K (File No. 0-24320).
(5) Incorporated herein by reference from the Company's Registration
Statement on Form S-3, filed on December 16, 1997 (File No. 333-42419).
(6) Incorporated herein by reference from the Registration Statement on
Form S-1 of the Company, filed with the Commission on July 24, 1994
(File No. 33-78016).
(7) Incorporated herein by reference from the Registration Statement of the
Company on Form 8-A, filed with the Commission on November 26, 1996
(File No. 0-24320).
(8) Incorporated herein by reference to the Company's Quarter Report on
Form 10-Q for the period ending September 30, 1998 (File No. 0-24320).
(9) 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) Incorporated herein by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 (File No. 0-24320).
(11) Incorporated herein by reference from the Registration Statement on
Form S-1 of the Company filed with the Commission on August 1, 1996
(File No. 333-3051).
(12) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 0-24320).
(13) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the period ending June 30, 1997 (File No. 0-24320).
(14) Incorporated herein by reference to the Company's Current Report on
Form 8-K, dated January 28, 1998 (File No. 0-24320).
(15) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated March 20, 1998 (File No. 0-243201).
(16) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated January 7, 1999 (File No. 0-243201).
(17) Incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 (File No. 0-24320).
(18) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q for the period ending March 31, 1999 (File No. 0-24320).
(19) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated June 22, 1999 (File No. 0-243201).
(20) Incorporated herein by reference to the Company's Current Report on
Form 8-K, dated July 23, 1999 (File No. 0-243201).
(21) Incorporated herein by reference from the Registration Statement of the
Company on Form S-1, filed with the Commission on May 20, 1996 (File
No. 33-78016).
- 39 -
<PAGE>
Signatures
Pursuant to Section 13 of the Securities Exchange Act of 1934, NaPro caused this
amendment to its report on Form 10-K to be signed on its behalf.
NAPRO BIOTHERAPEUTICS, INC.
By: /s/ Leonard P. Shaykin April 7, 2000
- ----------------------------
Leonard P. Shaykin
Chairman of the Board of Directors,
Chief Executive Officer
<TABLE>
<CAPTION>
Pursuant to the Exchange Act, this report has been signed on behalf of NaPro and
in the capacities indicated.
<S> <C> <C>
/s/ Leonard P. Shaykin Chairman of the Board of Directors, April 7, 2000
- ------------------------------
Leonard P. Shaykin Chief Executive Officer
/s/ Sterling K. Ainsworth Vice Chairman, President, April 7, 2000
- ------------------------------
Sterling K. Ainsworth, Ph.D. Chief Scientific Officer, Director
/s/ Patricia A. Pilia Executive Vice President, April 7, 2000
- ----------------------------------
Patricia A. Pilia, Ph.D. Director
/s/ Gordon H. Link, Jr. Vice President, April 7, 2000
- ------------------------------
Gordon H. Link, Jr Chief Financial Officer
(Principal Financial Officer)
/s/ Robert L. Poley Controller April 7, 2000
- --------------------------------
Robert L. Poley (Principal Accounting Officer)
/s/ Arthur H. Hayes, Jr. Director April 7, 2000
- ------------------------------
Arthur H. Hayes, Jr., M.D.
/s/ Stanley Knowlton Director April 7, 2000
- -------------------------------
Stanley Knowlton
/s/ Seth Rudnick Director April 7, 2000
- ---------------------------------
Seth Rudnick, M.D.
</TABLE>
- 40 -
NaPro BioTherapeutics, Inc. and Subsidiaries
Financial Statements
Years ended December 31, 1999, 1998 and 1997
Index to Financial Statements
Report of Independent Auditors...............................F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheet...................................F-3
Consolidated Operations Statement............................F-5
Consolidated Stockholders' Equity Statement..................F-6
Consolidated Cash Flow Statement............................F-10
Notes to Consolidated Financial Statements .................F-12
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
NaPro BioTherapeutics, Inc.
We have audited the accompanying consolidated balance sheet of NaPro
BioTherapeutics, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flow for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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 subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG LLP
Denver, Colorado
March 3, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31,
1999 1998
---- ----
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $1,937,000 $ 7,244,000
Securities available for sale - 197,000
Restricted cash - 1,320,000
Accounts receivable 1,416,000 403,000
Inventory:
Raw materials 129,000 151,000
Work-in-process 481,000 930,000
Finished goods 1,578,000 1,632,000
----------- -----------
2,188,000 2,713,000
Prepaid expense and other 153,000 343,000
------------ ------------
Total current assets 5,694,000 12,220,000
Property and equipment, at cost:
Plantation cost 4,953,000 4,234,000
Laboratory equipment 3,010,000 2,948,000
Leasehold improvements 4,478,000 4,478,000
Office equipment and other 654,000 664,000
Construction in progress 3,882,000 3,912,000
------------ ------------
16,977,000 16,236,000
Accumulated depreciation 6,284,000 4,678,000
------------ ------------
Property and equipment, net 10,693,000 11,558,000
Inventory:
Raw materials 1,562,000 833,000
Work-in-process 892,000 738,000
------------ -------------
2,454,000 1,571,000
Other assets 416,000 317,000
------------ -------------
Total assets $19,257,000 $25,666,000
=========== ===========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31,
1999 1998
---- ----
Liabilities and stockholders' equity
Current liabilities:
<S> <C> <C>
Accounts payable $2,174,000 $ 1,317,000
Accrued payroll and payroll taxes 557,000 451,000
Notes payable--current (Note 3) 48,000 421,000
Deferred revenue - 2,910,000
---------------- ------------
Total current liabilities 2,779,000 5,099,000
Notes payable--long term (Note 3) 4,723,000 80,000
Senior convertible debt (Note 4) - 5,176,000
Commitments and contingencies (Note 10)
Minority interest (Note 7) 622,000 622,000
Senior convertible redeemable preferred stock,
Series C (Note 5) - 3,805,000
Stockholders' equity (Note 7):
Preferred stock,$.001 par value:
Authorized shares--2,000,000 - -
Nonvoting common stock, convertible on disposition
into voting common stock, $.0075 par value:
Authorized shares--1,000,000
Issued and outstanding shares--395,000
in 1999 and 1998 3,000 3,000
Common stock, $.0075 par value:
Authorized shares--30,000,000
Issued shares--23,482,671 in 1999;
17,902,407 in 1998 176,000 134,000
Additional paid-in capital 65,358,000 58,045,000
Deficit (52,620,000) (43,618,000)
Treasury stock--539,867 shares in 1999;
1,114,525 shares in 1998 ( 1,784,000) (3,680,000)
------------- -------------
Total stockholders' equity 11,133,000 10,884,000
------------ -------------
Total liabilities and stockholders' equity $19,257,000 $25,666,000
============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Operations Statement
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Product sales $ 7,592,000 $ 4,952,000 $ 3,814,000
------------ ------------ ------------
Expense:
Research, development and cost of
products sold 12,047,000 9,973,000 11,769,000
General and administrative 6,188,000 6,458,000 5,992,000
(Gain) loss on retirement of assets 146,000 1,899,000 (141,000)
-------------- ------------- --------------
18,381,000 18,330,000 17,620,000
------------- ------------- ------------
Operating loss (10,789,000) (13,378,000) (13,806,000)
Other income (expense):
License fees 2,320,000 11,110,000 -
Interest income 309,000 550,000 494,000
Interest expense (842,000) (902,000) (2,161,000)
-------------- ------------- --------------
Net loss $ (9,002,000) $(2,620,000) $(15,473,000)
============= ============ =============
Net loss attributable to common stockholders $(10,213,000) $(3,212,000) $(15,537,000)
============= ============ =============
Basic and diluted net loss per share $ (0.50) $ (0.22) $ (1.28)
================ =============== ================
Weighted average shares outstanding 20,553,557 14,641,769 12,104,395
============= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Stockholders' Equity Statement
Years Ended December 31, 1997, 1998 and 1999
Notes
Nonvoting Number Additional Receivable
Common Common of Common Paid-in From
Stock Stock Shares Issued Capital Stockholders
--------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 4,000 $ 89,000 11,986,089 $ 44,670,000 $ (985,000)
Conversion of 200,000 shares non-voting common
stock to 200,000 shares of common stock (1,000) 1,000 200,000 - -
Interest receivable on officers' notes - - - - (5,000)
Repurchase of 74,550 shares treasury
stock at $13.275 in exchange
for cancellation of indebtedness - - - - 990,000
Issuance of 4,268 restricted shares
of common stock for compensation - - 4,268 40,000 -
Exercise of employee stock options for 2,466
shares of common stock at $2.40 per share - - 2,466 6,000 -
Exercises of warrants for 62,326 shares of common
stock at prices ranging from $1.125 to $7.50 - 1,000 62,326 256,000 -
per share
Convertible debt allocation to conversion
rights and warrant for 323,700 shares - - - 1,773,000 -
Exercise of warrants for 200,000 shares of common
stock at $5.00 per share - 2,000 200,000 998,000 -
Issuance of 47,482 shares of common stock in
payment for interest on debt at prices
ranging from $5.78 to $8.375 - - 47,482 344,000 -
Conversion of 125,000 shares of preferred stock
into 125,000 shares of common stock and
exchange of 140,920 shares of subsidiary's
preferred stock for 140,920 shares of common stock - 2,000 265,920 1,139,000 -
Conversion of senior convertible note to 344,906
shares of common stock at prices ranging from
$2.50 to $5.78 per share - 3,000 344,906 996,000 -
Issuance of option grant to purchase 49,785 shares of
common stock at $7.25 per share in exchange for
consulting services - - - 20,000 -
Treasury
Deficit Stock Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance as of December 31, 1996 $ (25,525,000) $ (1,684,000) $ 16,569,000
Conversion of 200,000 shares non-voting common
stock to 200,000 shares of common stock - - -
Interest receivable on officers' notes - - (5,000)
Repurchase of 74,550 shares treasury
stock at $13.275 in exchange
for cancellation of indebtedness - (990,000) -
Issuance of 4,268 restricted shares
of common stock for compensation - - 40,000
Exercise of employee stock options for 2,466
shares of common stock at $2.40 per share - - 6,000
Exercises of warrants for 62,326 shares of common
stock at prices ranging from $1.125 to $7.50 - - 257,000
per share
Convertible debt allocation to conversion
rights and warrant for 323,700 shares - - 1,773,000
Exercise of warrants for 200,000 shares of common
stock at $5.00 per share - - 1,000,000
Issuance of 47,482 shares of common stock in
payment for interest on debt at prices
ranging from $5.78 to $8.375 - - 344,000
Conversion of 125,000 shares of preferred stock
into 125,000 shares of common stock and
exchange of 140,920 shares of subsidiary's
preferred stock for 140,920 shares of common - - 1,141,000
Conversion of senior convertible note to 344,906
shares of common stock at prices ranging fro
$2.50 to $5.78 per share - - 999,000
Issuance of option grant to purchase 49,785 share
common stock at $7.25 per share in exchange
consulting services - - 20,000
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Stockholders' Equity Statement
Years Ended December 31, 1997, 1998 and 1999
Notes
Nonvoting Number Additional Receivable
Common Common of Common Paid-in From
Stock Stock Shares Issued Capital Stockholders
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Convertible preferred stock allocation to conversion
rights and warrant for 175,000 shares - - - 459,000 -
Contribution of 20,564 shares of common stock
at $2.50 per share to retirement plan - - 20,564 51,000 -
Stock option compensation - - - 145,000 -
Accretion of conversion rights and warrant to
convertible preferred stock - - - (64,000) -
Net loss - - - - -
--------------- --------------- --------------- -------------- --------------
Balance as of December 31, 1997 3,000 98,000 13,134,021 50,833,000 -
Issuance of option grants to purchase 30,265 shares of
common stock at prices ranging from $1.00 to $2.00
per share in exchange for consulting services - - - 23,000 -
Issuance of 186,656 shares of common stock in payment
for dividends on convertible preferred stock at prices
ranging from $0.82 to $1.43 per share - 1,000 186,656 (1,000) -
Compensation relating to repricing warrants - - - 97,000 -
Receipt of 1,126,398 shares treasury stock
as part of contract termination agreement - - - 1,768,000 -
Issuance of 4,264 restricted shares of common stock
for compensation - - 4,264 40,000 -
Exercise of employee stock options for 163,467
shares of common stock at prices ranging from
$0.188 to $0.75 per share - 1,000 163,467 41,000 -
Issuance of 296,019 shares of common stock in
payment for interest on debt at prices ranging
from $0.84 to $1.24 - 2,000 296,019 293,000 -
Contribution of 56,827 shares of common stock
at $1.64 per share to retirement plan - 1,000 56,827 92,000 -
Exchange of 240,900 shares of subsidiary's preferred
stock for 240,900 shares of common stock - 2,000 240,900 1,949,000 -
Treasury
Deficit Stock Total
--------------- --------------- ---------------
<S>
Convertible preferred stock allocation to conversion
rights and warrant for 175,000 shares - - 459,000
Contribution of 20,564 shares of common stock
at $2.50 per share to retirement plan - - 51,000
Stock option compensation - - 145,000
Accretion of conversion rights and warrant to
convertible preferred stock - - (64,000)
Net loss (15,473,000) - (15,473,000)
--------------- --------------- ---------------
Balance as of December 31, 1997 (40,998,000) (2,674,000) 7,262,000
Issuance of option grants to purchase 30,265 shares of
common stock at prices ranging from $1.00 to $2.00
per share in exchange for consulting services - - 23,000
Issuance of 186,656 shares of common stock in payment
for dividends on convertible preferred stock at prices
ranging from $0.82 to $1.43 per share - - -
Compensation relating to repricing warrants - - 97,000
Receipt of 1,126,398 shares treasury stock
as part of contract termination agreement - (1,768,000) -
Issuance of 4,264 restricted shares of common stock
for compensation - - 40,000
Exercise of employee stock options for 163,467
shares of common stock at prices ranging from
$0.188 to $0.75 per share - - 42,000
Issuance of 296,019 shares of common stock in
payment for interest on debt at prices ranging
from $0.84 to $1.24 - - 295,000
Contribution of 56,827 shares of common stock
at $1.64 per share to retirement plan - - 93,000
Exchange of 240,900 shares of subsidiary's preferred
stock for 240,900 shares of common stock - - 1,951,000
</TABLE>
F-7
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Stockholders' Equity Statement
Years Ended December 31, 1997, 1998 and 1999
Notes
Nonvoting Number Additional Receivable
Common Common of Common Paid-in From
Stock Stock Shares Issued Capital Stockholders
--------------- ------------ --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Conversion of senior convertible note to 2,833,587
shares of common stock at prices ranging from
$0.70 to $1.72 per share - 21,000 2,833,587 2,734,000 -
Accretion of offering cost, conversion rights and value
of warrant as preferred dividends on redeemable
preferred stock - - - (362,000) -
Conversion of redeemable, convertible preferred stock
to 986,666 shares of common stock at prices ranging
from $0.82 to $1.43 - 8,000 986,666 889,000 -
Payment of convertible preferred stock dividends in
cash - - - (51,000) -
Contribution of 230,711 shares of common stock from
the treasury at $2.00 per share to retirement plan - - - (300,000) -
Net Loss - - - - -
--------------- ------------ --------------- -------------- -------------
Balance as of December 31, 1998 $ 3,000 $ 134,000 17,902,407 $ 58,045,000 $ -
Issuance of option grants to purchase 42,795 shares
of common stock at prices
ranging from $1.72 to $2.25
per share in exchange for consulting services - - - 65,000 -
Issuance of 6,761 shares of common stock in payment
for dividends on convertible preferred stock
at prices ranging from $1.16 to $1.96 per share - - 6,761 - -
Issuance of 173,991 shares of common stock
for compensation - 1,000 173,991 369,000 -
Exercise of employee stock options for 60,476
shares of common stock at prices ranging from
$0.19 to $2.00 per share - 1,000 60,476 80,000 -
Issuance of 400,000 shares of common stock at
$5.00 per share net of issue cost of $294,000 - 3,000 400,000 1,703,000 -
Treasury
Deficit Stock Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Conversion of senior convertible note to 2,833,587
shares of common stock at prices ranging from
$0.70 to $1.72 per share - - 2,755,000
Accretion of offering cost, conversion rights and value
of warrant as preferred dividends on redeemable
preferred stock - - (362,000)
Conversion of redeemable, convertible preferred stock
to 986,666 shares of common stock at prices ranging
from $0.82 to $1.43 - - 897,000
Payment of convertible preferred stock dividends in
cash - - (51,000)
Contribution of 230,711 shares of common stock from
the treasury at $2.00 per share to retirement plan - 762,000 462,000
Net Loss (2,620,000) - (2,620,000)
--------------- --------------- ---------------
Balance as of December 31, 1998 $(43,618,000) $ (3,680,000) $ 10,884,000
Issuance of option grants to purchase 42,795 shares
of common stock at prices
ranging from $1.72 to $2.25
per share in exchange for consulting services - - 65,000
Issuance of 6,761 shares of common stock in payment
for dividends on convertible preferred stock
at prices ranging from $1.16 to $1.96 per share - - -
Issuance of 173,991 shares of common stock
for compensation - - 370,000
Exercise of employee stock options for 60,476
shares of common stock at prices ranging from
$0.19 to $2.00 per share - - 81,000
Issuance of 400,000 shares of common stock at
$5.00 per share net of issue cost of $294,000 - - 1,706,000
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Stockholders' Equity Statement
Years Ended December 31, 1997, 1998 and 1999
Notes
Nonvoting Number Additional Receivable
Common Common of Common Paid-in From
Stock Stock Shares Issued Capital Stockholders
--------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Issuance of 19,234 shares of common stock in
payment for interest on debt at prices ranging
from $1.07 to $1.80 per share - - 19,234 27,000 -
Conversion of senior convertible notes to 3,585,203
shares of common stock at prices ranging from
$1.07 to $1.80 per share - 27,000 3,585,203 4,931,000 -
Accretion of offering cost, conversion rights and value
of warrant as preferred dividends on redeemable
preferred stock - - - (298,000) -
Conversion of redeemable, convertible preferred stock
to 1,299,085 shares of common stock at prices ranging
from $1.16 to $1.96 - 10,000 1,299,085 2,093,000 -
Payment of convertible preferred stock dividends in
cash - - - (98,000) -
Contribution of 574,658 shares of common stock from
the treasury at $2.00 per share to retirement plans - - - (770,000) -
Premium on redemption of 2,000 shares of redeemable
convertible preferred stock - - - (805,000) -
Issuance of 35,514 shares of common stock for cash
and cashless exercises of 170,504 warrants - - 35,514 16,000 -
Net Loss - - - - -
--------------- --------------- --------------- -------------- ---------------
Balance as of December 31, 1999 $ 3,000 $ 176,000 23,482,671 $ 65,358,000 $ -
Treasury
Deficit Stock Total
--------------- --------------- ---------------
<S> <C> <C> <C>
Issuance of 19,234 shares of common stock in
payment for interest on debt at prices ranging
from $1.07 to $1.80 per share - - 27,000
Conversion of senior convertible notes to 3,585,203
shares of common stock at prices ranging from
$1.07 to $1.80 per share - - 4,958,000
Accretion of offering cost, conversion rights and value
of warrant as preferred dividends on redeemable
preferred stock - - (298,000)
Conversion of redeemable, convertible preferred stock
to 1,299,085 shares of common stock at prices ranging
from $1.16 to $1.96 - - 2,103,000
Payment of convertible preferred stock dividends in
cash - - (98,000)
Contribution of 574,658 shares of common stock from
the treasury at $2.00 per share to retirement plans - 1,896,000 1,126,000
Premium on redemption of 2,000 shares of redeemable
convertible preferred stock - - (805,000)
Issuance of 35,514 shares of common stock for cash
and cashless exercises of 170,504 warrants - - 16,000
Net Loss (9,002,000) - (9,002,000)
--------------- --------------- ---------------
Balance as of December 31, 1999 $(52,620,000) $ (1,784,000) $ 11,133,000
</TABLE>
See accompanying notes.
F-9
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Cash Flow Statement
Year Ended December 31,
1999 1998 1997
---- ---- ----
Operating activity
<S> <C> <C> <C>
Net loss $(9,002,000) $(2,620,000) $ (15,473,000)
Adjustments to reconcile net loss
to net cash provided (used) by operating activity:
Depreciation 1,604,000 1,732,000 1,686,000
Accretion of debt issue cost, warrant
allocation and conversion rights allocation 413,000 429,000 1,447,000
Compensation paid with common stock,
options and warrants 1,584,000 666,000 216,000
Interest expense paid with common stock 27,000 295,000 344,000
(Gain)/loss on retirement of assets 146,000 1,896,000 (116,000)
Changes in operating assets and liabilities:
Accounts receivable (1,013,000) 1,104,000 (846,000)
Inventory (343,000) 254,000 (2,017,000)
Prepaid expense and other assets 90,000 358,000 (138,000)
Accounts payable 857,000 (2,884,000) 2,598,000
Accrued liabilities 106,000 (95,000) 91,000
Deferred revenue (2,910,000) 1,020,000 1,854,000
------------ ------------ -----------
Net cash provided (used) by operating activity (8,441,000) 2,155,000 (10,354,000)
Investing activity
Additions to property and equipment (918,000) (474,000) (11,634,000)
Proceeds from sale of property and equipment 16,000 105,000 939,000
Purchase of securities held to maturity - - (4,227,000)
Proceeds from securities available for sale - - 2,650,000
Proceeds from securities held to maturity 197,000 - 6,876,000
Transfer of restricted cash 1,320,000 (1,271,000) 81,000
------------ ----------- ------------
Net cash provided (used) by investing activity 615,000 (1,640,000) (5,315,000)
Financing activity
Proceeds from notes payable, net of issuance cost 4,914,000 188,000 10,197,000
Payments on notes payable (1,295,000) (1,556,000) (1,959,000)
Preferred stock dividend (98,000) (51,000) -
Redemption of preferred stock (2,805,000) - -
Proceeds from sale of common and preferred
stock and exercise of common stock
warrants and options 2,097,000 46,000 6,262,000
Offering cost of common and preferred stock (294,000) - (260,000)
------------------------------ ----------
Net cash provided (used) by financing activity 2,519,000 (1,373,000) 14,240,000
----------- ----------- -----------
Net decrease in cash and cash equivalents (5,307,000) (858,000) (1,429,000)
Cash and cash equivalents at beginning of year 7,244,000 8,102,000 9,531,000
----------- ------------ -----------
Cash and cash equivalents at end of year $1,937,000 $ 7,244,000 $ 8,102,000
=========== ============ ===========
</TABLE>
F-10
<PAGE>
<TABLE>
<CAPTION>
NaPro BioTherapeutics, Inc. and Subsidiaries
Consolidated Cash Flow Statement (continued)
Year ended December 31,
1999 1998 1997
---- ---- ----
Supplemental schedule of noncash investing and
financing activities
<S> <C> <C> <C>
Conversion of senior convertible debt to
common stock $4,958,000 $2,755,000 $1,059,000
Conversion of convertible preferred shares
to common stock 2,103,000 897,000 -
Exchange of preferred shares of subsidiary
for common stock of NaPro - 1,951,000 1,141,000
Issuance of common stock for compensation
previously accrued - 40,000 40,000
Issuance of common stock as payment of dividends 10,000 179,000 -
Accretion of convertible preferred stock
conversion rights valuation, offering
cost and warrant valuation 298,000 362,000 64,000
Receipt of common stock into treasury - 1,768,000 -
Issuance of senior convertible debt for
placement fee - - 300,000
Notes and related interest receivable from
stockholders - - 5,000
Repayment of notes receivable from stockholders
through transfer of stock into treasury - - 990,000
Non-cash exercise of warrants 64,000 - -
Plantation cost harvested to inventory 113,000 - -
</TABLE>
See accompanying notes.
F-11
<PAGE>
December 31, 1999
1. Basis of Presentation and Summary of Significant Accounting Policies
Organization
NaPro BioTherapeutics, Inc. ("NaPro" or "the Company"), a Delaware corporation,
was incorporated in 1991. In 1994 NaPro completed an initial public offering
("IPO") of its common stock. In 1994 NaPro formed a subsidiary, NaPro
BioTherapeutics (Canada), Inc., of which the Company owns 98% of the voting
rights. In 1996 NaPro formed a wholly owned subsidiary, NaPro BioTherapeutics
(Ireland) Limited. In 1997 NaPro formed a wholly-owned subsidiary, NBT Ltd., a
Cayman Islands corporation.
Basis of Presentation
The accompanying financial statements include the consolidated financial
position, consolidated results of operations and consolidated cash flow of NaPro
and its subsidiaries. All transactions have been accounted for at historical
cost. All balances and transactions between these entities have been eliminated
in the accompanying financial statements.
Description of Business
NaPro focuses on the development, manufacture and commercialization of natural
product pharma- ceuticals, particularly paclitaxel (referred to in some
scientific and medical literature as "taxol"*), a naturally occurring
cancer-fighting compound found in certain species of yew (Taxus) trees.
Cash Equivalents and Securities Available for Sale
NaPro considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents. Securities available for sale were
investment-grade securities and were carried at fair value.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, securities, accounts
receivable and payable, notes payable (other than the note payable to Abbott
Laboratories ("Abbott")) and senior convertible debt approximate fair value. The
fair value of senior convertible debt and notes payable other than the Abbott
note is estimated using discounted cash flow analysis based on NaPro's estimated
current borrowing rate for similar types of arrangements. NaPro has not
estimated the fair value of the Abbott note because it is not practical to
estimate due to a lack of quoted market price for such debt.
- --------------
*TAXOL(R) is a registered trademark of Bristol-Myers Squibb Company (Bristol)
for an anticancer pharmaceutical preparation containing paclitaxel.
F-12
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market.
Research and Development
NaPro expenses research and development cost as it is incurred.
Plantation Cost
NaPro has determined the cultivation of renewable sources of biomass to be used
in the manufacture of paclitaxel is a technically feasible business strategy.
NaPro capitalizes plantation expenditures incurred prior to the first commercial
harvest. Plantation expenditures include the acquisition cost of trees and the
related cost of planting and growing. NaPro depletes such cost evenly over the
expected number of annual harvests, six to eight, and retains a 20% residual
value to be depleted at the time the whole tree is harvested. If in any year a
harvest is not performed, the depletion is deferred and added to the depletion
that would otherwise be charged to the next actual harvest, as the harvest would
benefit from an additional year's growth.
Long-Lived Assets
The carrying amount of long-lived assets is reviewed when facts and
circumstances suggest they may be impaired. If this review indicates long-lived
assets will not be recoverable as determined based on the undiscounted cash flow
estimated to be generated by these assets, the carrying amount of these
long-lived assets is reduced to estimated fair value or discounted cash flow, as
appropriate.
Depreciation and Amortization
Depreciation of property and equipment is computed on the straight-line method
over estimated useful lives between three and seven years. Leasehold
improvements are amortized over the lesser of estimated useful lives or the
lease term. Depreciation and amortization expense is allocated to either
research, development and cost of products sold, or general and administrative
expense, depending on the use of the related property and equipment.
Stock Options
NaPro has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations
in accounting for outstanding stock options. Under APB 25, when the exercise
price of NaPro's stock options equals the fair value of the underlying stock on
the date of grant, no compensation expense is recognized.
F-13
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
Revenue Recognition
Revenue from product sales is recognized at the time of shipment or if shipped
on consignment, at time of draw-down from consignment. NaPro's production
process is not distinct from its research and develop ment processes.
Accordingly, the cost of products sold is included with NaPro's research and
development expense. Payments received in advance against future sales are
recorded as deferred revenue until earned.
Net Loss Per Share
NaPro's basic and diluted net loss per share is computed using the weighted
average number of shares of common stock outstanding. Potential common shares
from stock options, warrants and convertible securities are excluded from the
computation of diluted earnings per share as their effect is antidilutive. The
following table sets forth the computation of basic and diluted net loss per
share:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Numerator:
<S> <C> <C> <C>
Net loss $( 9,002,000) $(2,620,000) $(15,473,000)
Premium on redemption of preferred
stock (805,000) - -
Preferred stock dividends (406,000) (592,000) (64,000)
--------------- ------------ ---------------
Numerator for loss per share--
loss attributable to common stockholders $(10,213,000) $(3,212,000) $(15,537,000)
============= =========== ============
Denominator:
Denominator for loss per share --
weighted average shares 20,553,557 14,641,769 12,104,395
============= =========== ===========
Basic and diluted net loss per share $ (0.50) $ (0.22) $ (1.28)
================= ============== ==============
</TABLE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of management's estimates and
assumptions. Actual results could vary from the estimates used.
F-14
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
Foreign and Domestic Operations and Export Sales; Significant Customers
Domestic and foreign financial information follow:
<TABLE>
<CAPTION>
United Elimin-
Year States Canada ations Total
---- ------- ------ -------- -----
<S> <C> <C> <C> <C> <C>
Net sales to affiliated and unaffiliated customers 1999 $ 7,592,000$ - $ - $ 7,592,000
1998 4,952,000 454,000 (454,000) 4,952,000
1997 3,814,000 1,130,000 (1,130,000) 3,814,000
Operating loss 1999 10,624,000 165,000 - 10,789,000
1998 12,852,000 526,000 - 13,378,000
1997 12,854,000 952,000 - 13,806,000
Identifiable assets
December 31, 1999 21,432,000 3,162,000 (5,337,000) 19,257,000
1998 27,976,000 2,406,000 (4,716,000) 25,666,000
</TABLE>
NaPro is dependent on sales to its development and marketing partner, F.H.
Faulding & Co., Ltd. ("Faulding"). In 1998 NaPro terminated its agreement with
its former marketing partner, the Baker Norton subsidiary of IVAX Corporation
("IVAX"). In 1999 NaPro completed its sales obligations to IVAX. See Note 9.
NaPro does not require collateral to secure accounts receivable. Substantially
all of NaPro's accounts receivable at December 31, 1999 and 1998 were from these
partners. Sales to these partners as a percent of total sales were:
1999 1998 1997
---- ---- ----
Faulding 67% 44% 34%
IVAX 31% 55% 60%
Export sales follow:
Sales 1999 1998 1997
---- ---- ----
Australia $5,121,000 $2,189,000 $1,303,000
Other Foreign 3,000 193,000 193,000
------------ ----------- ----------
Total Foreign 5,124,000 2,382,000 1,496,000
United States 2,468,000 2,570,000 2,318,000
---------- ---------- ----------
Total Sales $7,592,000 $4,952,000 $3,814,000
========== ========== ==========
2. Other Related Party Transactions
In 1997 NaPro used the services of a consulting firm in which a former NaPro
director is a principal. NaPro paid $107,000 in fees and services to the firm
and issued stock options for 49,785 shares of common stock (see Note 8).
F-15
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
3. Notes Payable
Notes payable consist of:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
---- ----
<S> <C> <C>
Note payable, due in May 1999, interest at 13.50%,
principal and interest payable monthly $ - $ 26,000
Note payable, due in July 1999, interest at 13.78%,
principal and interest payable monthly - 96,000
Note payable, due in October 1999, interest at
13.25%, principal and interest payable monthly - 85,000
Note payable, due in May 2000, interest at 11.76%,
principal and interest payable monthly - 257,000
Note payable, due in March 2000, interest at 6.26%,
principal and interest payable monthly 48,000 37,000
Note payable to Abbott, interest at 6.5%, interest
only payable quarterly, net of issuance cost of
$277,000 (see Note 9) 4,723,000 -
--------- ---------
4,771,000 501,000
Less amounts currently payable 48,000 421,000
---------- ---------
Notes payable - long term $4,723,000 $ 80,000
========== =========
</TABLE>
The long term note payable at December 31, 1999 is the Abbott note. It is due in
full on the earliest of: 1) the second anniversary of the first sale of finished
product by Abbott to a wholesaler or end-user customer following approval of
finished product by the U.S. Food and Drug Administration ("FDA"); 2) the
termination of the Agreement; or 3) January 1, 2007.
For the years ended December 31, 1999, 1998, and 1997, interest paid in cash was
$281,000, $189,000, and $286,000 respectively. Also, 1999, 1998 and 1997
interest expense includes $27,000, $295,000 and $407,000 paid in NaPro common
stock on the senior convertible debt.
NaPro had entered into an irrevocable standby letter of credit agreement with a
financial institution to support a note payable for up to $200,000 at an
interest rate of prime plus 2%. In April 1999, NaPro paid off the note and the
letter of credit was canceled.
4. Senior Convertible Notes
In June 1997 NaPro privately issued $10.3 million of senior convertible notes.
The notes bore interest at a rate of 5% per year. In 1998 and 1999 the notes
were amended (see Note 5). Interest on the notes was paid in common stock or
cash at NaPro's option. The notes were convertible into common stock at a 10%
discount from the lowest market price of the common stock during specified
periods prior to the conversion, subject to a maximum conversion price of $1.92,
as amended. As part of this transaction, NaPro issued warrants to purchase up to
323,700 shares of common stock at $10.00, including a warrant to purchase 33,700
shares of common stock that was issued to the placement
F-16
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
agent. The $10.00 exercise price was subsequently reduced to $1.50 in amendments
to the terms of the notes (see Note 5). NaPro filed a registration statement
with the SEC for the resale of shares acquired on conversion of notes and
exercise of warrants. Net proceeds from the notes totaled $9.5 million after the
placement agent's fees and other offering cost.
The placement agent was issued $300,000 of the notes as half of the placement
fee. The remaining half of the fee was paid in cash. The $600,000 placement fee
was capitalized as a discount to the notes and was amortized over the life of
the notes. $1.1 million of the face amount of the notes was assigned to the
conversion rights and recorded as a note discount. This note discount was
amortized to interest expense over the 180 days following the date of sale of
the notes.
$662,000 of the face amount of the notes was assigned to the 323,700 warrants
issued in the transaction and was recorded as a note discount. This note
discount was amortized to interest expense over the life of the notes.
In 1999, 1998 and 1997, respectively, NaPro issued 3,585,203, 2,833,587 and
344,906 shares of common stock in conversion of the notes, and 19,234, 296,019
and 47,482 shares of common stock in payment of interest on the notes.
IIn 1998 NaPro redeemed $647,000 in note principal and paid $53,000 premium and
interest in connection with the redemption. In 1999 NaPro redeemed $633,000 in
note principal and paid $162,000 premium and interest in connection with the
redemption. Through August, 1999, all of the notes had been redeemed or were
converted into common stock.
5. Redeemable, convertible preferred stock
On December 8, 1997 NaPro privately issued $5 million of nonvoting redeemable,
convertible preferred stock, Series C (the "C Preferred") at $1,000 per share
(5,000 shares). The C Preferred accrued dividends at 5% per year, which were
cumulative, payable in common stock or cash at NaPro's option. The C Preferred
was convertible into common stock at a 5% discount from the market price during
specified periods prior to the conversion date (the "Variable Conversion Price")
subject to a maximum conversion price of $1.90, as amended. The C Preferred had
a liquidation preference equal to issue price plus accrued dividends.
Additionally, NaPro issued to the investor a warrant to purchase 175,000 shares
of common stock at $10.00 per share, subsequently amended to $2.00 per share.
NaPro incurred offering cost of about $260,000, which was recorded as a discount
and was accreted as dividends over the life of the C Preferred. NaPro assigned
$263,000 of the proceeds to the value of the conversion rights, which was
recorded, as a discount on the C Preferred, to additional paid-in capital and
was accreted as preferred dividends over the four months following issuance.
NaPro also assigned $196,000 of the proceeds to the value of the warrant, which
was recorded, as a discount on C Preferred, to additional paid-in capital, and
was accreted as preferred dividends over the life of the C Preferred.
F-17
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
In 1998 and 1999, NaPro entered into amendments with the C Preferred investor
and the holders of the convertible notes (together the "Investors"). The parties
agreed to: (a) certain limitations on the number of shares which could be
converted, and (b) limit the ability of the Investors to force NaPro to redeem
any portion of the securities for cash.
In 1999 and 1998, NaPro issued 1,299,085 and 986,666 shares of common stock in
conversion of the C Preferred and 6,761 and 186,656 shares of common stock in
payment of dividends on the C Preferred, respectively. In August 1999, NaPro
redeemed for cash $2 million of shares of its C Preferred at a cost of $2.8
million including redemption premiums and outstanding accrued but unpaid
dividends. Through 1999 all of NaPro's C Preferred had been redeemed or was
converted into common stock. Funding for the redemption of the convertible notes
and the C Preferred was provided by NaPro's cash and cash received from Abbott.
6. Income Taxes
As of December 31, 1999, NaPro had the following net operating loss
carryforwards and research and development credits to offset future taxable
income in the United States:
Net Research and
Expiring Operating Development
December 31, Losses Credits
2007 $ 1,746,000 $ 52,000
2008 3,328,000 54,000
2009 4,713,000 38,000
2010 4,960,000 15,000
2011 7,389,000 49,000
2012 12,043,000 140,000
2018 - 205,000
2019 8,642,000 357,000
------------ ---------
$42,821,000 $910,000
=========== ========
The Tax Reform Act of 1986 contains provisions that limit the utilization of net
operating loss and tax credit carryforwards if there has been a "change of
ownership" as described in Section 382 of the Internal Revenue Code. Such a
change of ownership may limit NaPro's utilization of its net operating loss and
tax credit carryforwards, and could be triggered by sales of securities by NaPro
or its stockholders.
In Canada, NaPro has net operating loss carryforwards of approximately
US$1,442,000, expiring in 2002, 2003, 2004, 2005 and 2006.
F-18
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
Significant components of NaPro's deferred tax assets are:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
Deferred tax assets:
<S> <C> <C> <C>
Tax net operating loss carryforward $16,062,000 $12,763,000 $13,118,000
Research and development credits 910,000 663,000 386,000
Depreciation 1,027,000 637,000 108,000
Deferred revenue - 596,000 696,000
Other 231,000 217,000 310,000
-------------- ------------- -----------
Total deferred tax assets 18,230,000 14,876,000 14,618,000
Valuation allowance (18,230,000) (14,876,000) (14,618,000)
------------ ------------ ------------
Net deferred tax assets $ - $ - $ -
============ ============= ============
</TABLE>
7. Stockholders' Equity
The IVAX Subscription Agreement and Executive Agreements
In June 1993 NaPro entered into a subscription agreement (the "Subscription
Agreement") with IVAX pursuant to which NaPro sold IVAX common stock and a
warrant to acquire additional common stock. In March 1998, the warrant was
returned to NaPro and canceled in exchange for NaPro's indemnification of IVAX
with respect to the warrant. NaPro common stock was returned to NaPro by IVAX as
the result of the termination of the IVAX relationship. The Subscription
Agreement was terminated in March 1998. See Note 9.
Faulding Stock Ownership
Faulding owns 395,000 shares of NaPro Nonvoting Common Stock.
Preferred Stock Private Placement
In July and August 1995, NaPro closed a private placement of 725,513 shares of
Exchangeable Preferred Stock, Series A (the "Canadian Preferred") of NaPro's
Canadian subsidiary, NaPro BioTherapeutics (Canada), Inc. ("NaPro Canada"), for
net proceeds of $5,959,000.
The Canadian Preferred has a liquidation preference of CD$11.00 per share and
may be exchanged for common stock of NaPro on a share-for-share basis. NaPro has
the option to acquire the Canadian Preferred at its liquidation value if the
average trading price for the NaPro common stock over a 20 trading day period
has equaled or exceeded the equivalent of CD$13.75. Holders may elect to
exchange their Canadian Preferred for common stock of NaPro at any time prior to
15 business days prior to the date fixed for NaPro to acquire the shares under
the foregoing option. Holders have the option to require NaPro to purchase the
Canadian Preferred for its liquidation preference at any time after September
30, 2000.
F-19
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
NaPro 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, 1998 and 1999, 648,241 shares of the Canadian Preferred had been
exchanged for 648,241 shares of common stock of NaPro and 77,272 shares of the
Canadian Preferred remain outstanding.
NaPro has registered under the Securities Act of 1933 the resale of the shares
of its common stock to be issued upon exchange of the Canadian Preferred. The
Canadian Preferred has no dividend requirement.
Stockholder Rights Plan
In November 1996, NaPro adopted a Stockholder Rights Plan and distributed a
dividend of one Right to purchase one one-hundredth of a share of a new series
of junior participating preferred stock, Series B, for each share of NaPro
common stock. The objective of the Rights Plan is to secure for stockholders the
long term value of their investment and to protect stockholders from coercive
takeover attempts by strongly encouraging anyone seeking to acquire NaPro to
negotiate with its Board of Directors. The adoption of the Rights Plan was not
in response to any hostile takeover proposal.
The Rights trade with common stock as a unit unless the Rights become
exercisable upon the occurrence of certain triggering events relating to the
acquisition of 20% or more of common stock. In certain events after the Rights
become exercisable they will entitle each holder, other than the acquirer, to
purchase, at the Rights' then current exercise price (currently set at $60), a
number of shares of common stock having market value of twice the Right's
exercise price or a number of the acquiring company's common shares having a
market value at the time of twice the Rights' exercise price. For example, in
the event of an acquisition of greater than 20% of NaPro's stock without
approval of the NaPro Board of Directors, NaPro's stockholders (other than the
20% acquirer) would have the right to purchase $120 worth of stock for $60. A
stockholder would have one such right for each share of stock held at the time
the rights become exercisable.
NaPro may amend the Rights except in certain limited respects or redeem the
Rights at $0.01 per Right, in each case at any time prior to the Rights becoming
exercisable. The Rights will expire on November 8, 2006.
3,800,741 unissued, authorized shares of common stock are reserved for future
issuance for Canadian Preferred, Nonvoting Common, common stock options and
warrants.
8. Common Stock Warrants and Options
Warrant Restructuring
On December 4, 1998, NaPro entered into letter agreements with each of the
holders of certain warrants to purchase NaPro common stock (the "Warrants") and
warrants to purchase Warrants (the "Other Warrants"), modifying the terms of the
Warrants and Other Warrants. The Warrants and the Other Warrants were issued to
the underwriters of NaPro's initial public offering in 1994. Pursuant to these
letter
F-20
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
agreements, the number of shares of common stock underlying the Warrants and
Other Warrants was reduced by 50%, the exercise price of the Warrants was
reduced from $7.50 to $1.90 and the exercise price of the Other Warrants was
reduced from $.30 to $.15. As a result of these changes, the number of shares of
common stock underlying the Warrants and the Other Warrants was reduced from
331,008 to 165,504. These warrants were all exercised in 1999.
During 1998 and 1999 changes were made to warrants issued in connection with the
senior convertible debt and the C Preferred (see Notes 4 and 5).
The following summarizes warrant activity:
<TABLE>
<CAPTION>
Exercise Expiration
Warrants Price Dates
<S> <C> <C> <C>
Outstanding at December 31, 1997 974,153 $0.075 - $7.500 1999-2003
Canceled in restructuring (1,153,408) 2.500 - 10.500 1999-2001
Issued in restructuring 987,904 1.500 - 2.500 1999-2001
Remitted (see Note 7) (111,111) 0.075 2003
----------
Outstanding at December 31, 1998 697,538 $1.500 - $2.500 1999-2003
Exercised (170,504) 1.900 - 2.000 1999-2001
----------
Outstanding at December 31, 1999 527,034 1.500 - 2.000 2001-2003
========
</TABLE>
Option Restructuring
On March 25, 1998 the compensation committee of NaPro's board of directors (the
"Compensation Committee") reviewed the status of NaPro's outstanding options.
The compensation committee determined that as a result of the drop in the value
of the common stock at the end of 1997 and beginning of 1998, which was the
result of regulatory issues not within the control of the grantees, the existing
options did not effectively serve their purpose of helping to retain directors,
officers, employees and consultants and to closely align the interests of these
groups with those of NaPro. In order to renew these incentives, the Compensation
Committee approved and recommended to the Board of Directors the Option
Restructuring Plan. The Option Restructuring Plan gave holders of NaPro's
options the opportunity to change the terms of their existing options having an
exercise price above $3.00 (the "Covered Options"). If the holder of Covered
Options chose to participate, the following changes were made to all that
person's Covered Options: (i) the number of shares of common stock underlying
such options was reduced by 20% or 50% (depending on the participant's
relationship to NaPro); (ii) the exercise price was set at $1.8175 (the closing
price of NaPro's common stock on March 27, 1998); (iii) the vesting schedule of
such options recom menced as of March 27, 1998, with the result that all time
toward vesting was lost as of that date; and (iv)
F-21
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
the termination dates of such options were reset from March 27, 1998, and in the
case of consultants no longer providing services to NaPro and former directors
of NaPro, the period during which such options could be exercised was shortened.
Holders of an aggregate of 836,785 Covered Options elected to participate in the
Option Restructuring Plan, with the effect that the number of shares of common
stock underlying such options was reduced to 632,799.
Nonplan Stock Options
In November 1990, Pacific Biotechnology, Inc. ("PB"), one of the NaPro'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 NaPro
acquired all of the outstanding common stock of PB, all options to purchase PB
common stock were exchanged for options to purchase 159,467 shares of NaPro's
common stock (the "Formation Options") under the same terms as the PB options.
In 1998, 143,467 of the Formation Options were exercised; the remaining 16,000
were exercised in 1999.
In January 1994, NaPro granted to the four NaPro outside directors 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 2004. In September
1997, NaPro granted to its employees 20,075 nonplan options to purchase shares
of common stock which vest over two years and which expire in September 2007
(see also Note 2). As a result of the option restructuring and of employees
leaving NaPro, 19,075 of these options were canceled or forfeited, with the
result that 1,000 of these options remained outstanding on December 31, 1999. In
addition, during 1997, third parties were granted nonplan options to purchase an
aggregate of 49,785 shares of common stock at an exercise price of $7.25. As a
result of the option restructuring, those options were exchanged for nonplan
options to purchase 24,899 shares of common stock at an exercise price of
$1.8125.
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 NaPro'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 term of
options for 667 or more shares is eight years, and the term of options for fewer
than 667 shares is five years. Options for 667 shares or more vest 25% after
each anniversary date of the grant, and options for fewer than 667 shares vest
50% after each anniversary date of the grant. The exercise price for stock
options issued under the Plan is equal to the fair market value of NaPro's
common stock on the day of grant.
F-22
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
1994 Long-Term Performance Incentive Plan
In July 1994, NaPro's stockholders approved the 1994 Long-Term Performance
Incentive Plan (the "Incentive Plan"). Originally, an aggregate of 375,000
shares were authorized for issuance under the Incentive Plan. In 1996, 1998 and
1999 NaPro's stockholders approved increases in the number of authorized shares,
and, as a result of these increases, there are currently 2,675,000 shares
authorized for issuance under the Incentive Plan. The Incentive Plan provides
for granting to employees and other key individuals who perform services for
NaPro ("Participants") the following types of incentive awards: stock options,
stock appreciation rights, restricted stock, performance units, performance
grants and other types of awards that the Compensation Committee deems to be
consistent with the purposes of the Incentive Plan. In addition, each person who
is not an employee of NaPro or one of its subsidiaries and (i) who is elected or
re-elected as a director of NaPro by the stockholders at any annual meeting of
stockhold ers, (ii) who continues as a director following an annual meeting of
NaPro's stockholders at which such director is not subject to re-election or
(iii) is appointed as a director of NaPro in accordance with its bylaws 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 10,000 shares of NaPro's common stock. The
Incentive Plan also provides for annual automatic grants of options to purchase
10,000 shares to the chairs of the board of directors' Audit, Compensation and
Strategic Planning Committees.
The 1998 Stock Option Plan
In 1998, the board of directors adopted the 1998 Stock Option Plan (the "1998
Plan") to provide stock options for employees and other individuals performing
services for NaPro. Originally, an aggregate of 125,000 shares was authorized
for issuance under the 1998 Plan. In 1999 and February 2000 the board of
directors approved increases in the number of authorized shares. As a result of
these increases, there are currently 925,000 shares authorized for issuance
under the 1998 Plan. Under the terms of the 1998 Plan, non-qualified stock
options cannot be granted to persons who are NaPro officers or directors.
The following summarizes stock option activity and balances:
F-23
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Weighted
Average
Stock Exercise Exercise
Options Price Price
<S> <C> <C> <C>
Outstanding at December 31, 1996 981,389 $0.188 - $11.750 $6.55
Granted 262,310 7.125 - 10.250 7.58
Forfeited (50,450) 7.125 - 10.125 7.50
Exercised (2,466) 2.400 2.40
----------
Outstanding at December 31, 1997 1,190,783 $0.188 - $11.750 $6.57
Granted 978,705 1.000 - 8.313 1.39
Forfeited (67,968) 1.000 - 10.250 5.36
Exercised (163,467) 0.188 - 0.750 0.26
Canceled in restructuring (836,785) 3.650 - 11.750 8.49
Issued in restructuring 632,799 1.813 1.81
Outstanding at December 31, 1998 1,734,067 $0.188 - $10.250 $1.71
Granted 1,244,295 1.719 - 2.656 2.39
Forfeited (116,451) 1.000 - 10.250 2.07
Exercised (60,476) 0.188 - 2.000 1.38
-----------
Outstanding at December 31, 1999 2,801,435 0.750 - 10.125 2.00
</TABLE>
The weighted-average fair value of options granted during 1999 was $1.60.
Exercisable options at December 31, 1999 were 846,230 with a weighted-average
exercise price of $2.04 and a weighted-average remaining contractual life of 8.7
years.
Pro forma information regarding net income and earnings per share is required by
FASB Statement 123, which also requires that the information be determined as if
NaPro had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that statement. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997 respectively: risk-free interest rate ranges of 5.24% to 6.35%,
4.24% to 5.67%, and 6.20% to 6.46%; no expected dividend; volatility factor of
.868 to .876, .858, and .591 to .596; and an estimated expected life range of
three to six years.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. NaPro's pro forma
information follows:
F-24
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $ (9,821,000) $(3,104,000) $(16,711,000)
============== ============ =============
Pro forma net loss attributable to
common stockholders $(11,032,000) $(3,696,000) $(16,775,000)
============= ============ =============
Pro forma loss per share $ (0.54) $ (0.25) $ (1.38)
============= ============ ==============
</TABLE>
Statement 123 is applicable only to options granted subsequent to December 31,
1994. Because options outstanding at December 31, 1994 vested over periods of up
to four years, the pro forma effect of the Statement was not fully reflected
until 1998.
9. Strategic Alliances
NaPro has strategic alliances with two pharmaceutical companies, Abbott and
Faulding, that have the capabilities to obtain commercial approval for NaPro
paclitaxel in various markets and to establish NaPro paclitaxel as a major
product in the markets. Faulding commenced commercial sales in 1995. NaPro had
previously had an alliance with IVAX which was terminated in March 1998.
Abbott Agreement
On July 23, 1999 NaPro entered into a collaborative agreement of up to 20 years
(the "Agreement") with Abbott to develop and commercialize one or more
formulations of paclitaxel for the treatment of a variety of cancer indications.
The exclusive agreement covers the United States and Canada. Abbott may
terminate the Agreement at any time with or without cause. Should Abbott
terminate without cause, it is obligated to make certain payments to NaPro.
NaPro is responsible for supply of bulk drug and will jointly conduct clinical
trials with Abbott. Abbott is responsible for finishing, regulatory filings,
marketing and sale of the finished drug product. NaPro has licensed to Abbott
its paclitaxel-related patents. Most primary decisions related to the
development program will be made by a joint NaPro and Abbott development
committee.
NaPro has received and will, contingent upon successful development of product
and achievement of milestones, receive funding from Abbott in the form of
development and marketing milestone payments, a secured loan and an equity
investment. In 1999 NaPro received $8 million, consisting of an initial $1
million fee, $2 million from the purchase by Abbott of NaPro common stock at
$5.00 per share, and $5 million of draws on a secured loan.
Contingent upon NaPro's successful achievement of all development milestones and
in addition to the payments received in 1999, NaPro could receive up to $45
million consisting of $37 million in development fees and up to $8 million for
the purchase of 1.6 million shares of NaPro common stock.
Contingent upon receiving regulatory approval and achieving certain commercial
sales thresholds over several years, NaPro may receive additional milestone
payments from Abbott in the range of zero to $57 million. No assurance can be
given that regulatory approval or sales thresholds will be achieved.
F-25
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
NaPro has access to up to a total of $20 million under a secured loan
arrangement with Abbott, including the 1999 draws of $5 million. The loan bears
a primary interest rate of 6.5% and is due in full on the earliest of: 1) the
second anniversary of the first sale of finished product by Abbott to a
wholesaler or end-user customer following approval of finished product by the
FDA; 2) the termination of the Agreement; or 3) January 1, 2007. The loan is
limited to a borrowing base of collateralized assets, recomputed monthly.
Substantially all of NaPro's hard assets are collateralized as security for the
loan.
Under terms of the Agreement, Abbott will purchase bulk drug from NaPro. Once
the paclitaxel product is approved and commercialized, Abbott will pay a
percentage of its net paclitaxel sales to NaPro, less Abbott's payments to NaPro
for purchase of bulk drug.
The Faulding Agreement
In 1992, NaPro entered into an initial 20 year exclusive agreement with
Faulding, which was amended in June 1993, January 1994 and March 1995 (the
"Faulding Agreement"), to develop and market paclitaxel in ten countries,
including Australia, New Zealand, and much of Southeast Asia. The Faulding
Agreement also grants Faulding the nonexclusive right to sell paclitaxel
supplied by NaPro in certain countries in the Middle East. The Faulding
Agreement provides that NaPro shall supply all of Faulding's requirements for
paclitaxel. NaPro is paid a fixed sum for paclitaxel supplied for noncommercial
uses, and a fixed percentage of Faulding's original sales price for paclitaxel
supplied for commercial use (see Note 10). Faulding has responsibility for
funding the cost of all aspects of the required clinical and regulatory
processes in its markets.
The IVAX Agreement (terminated in March 1998)
In June 1993, NaPro entered into an initial 20 year exclusive agreement with
IVAX to develop and market paclitaxel in the United States, Europe, Japan and
much of the rest of the world not covered by the Faulding Agreement (the "IVAX
Agreement").
NaPro and IVAX terminated the IVAX Agreement on March 20, 1998. Under 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
manufactured a fixed amount of paclitaxel for delivery to IVAX periodically
during 1998 and 1999. All such paclitaxel was sold to IVAX at a fixed price. In
1998 and 1999 NaPro received $680,000 and $1,320,000 of the $2 million escrow,
respectively. NaPro does not anticipate sales to IVAX after 1999.
The PBI Agreement
In March 1994, NaPro entered into a contract with PRT Biopharms, Inc. ("PBI"), a
subsidiary of Pacific Regeneration Technologies, Inc., one of the largest
reforestation companies in Canada (the "PBI Agree ment"). Under the PBI
Agreement, PBI planted and is maintaining a plantation of yew trees. Pursuant to
F-26
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
such agreement, NaPro is obligated to pay PBI an annual fee equal to its
budgeted (estimated) cost in performing its obligations under the agreement plus
overhead and a specified profit. The PBI Agreement was terminated in 1998. Under
the terms of termination, there is up to a three year winding down of the
agreement. NaPro will harvest the trees and/or transplant them to other
properties.
10. Commitments and Contingencies
Operating Leases
NaPro has executed noncancellable operating lease agreements for office,
research and production facilities and for plantations. As of December 31, 1999,
future minimum lease payments under noncancellable operating lease agreements
are as follows:
2000 $763,000
2001 82,000
2002 12,000
2003 12,000
Thereafter 25,000
----------
Total $894,000
========
Rent expense for the years ended December 31, 1999, 1998 and 1997 was $793,000
$600,000, and $629,000, respectively.
Intellectual Property Contingency
NaPro's intellectual property is a key asset. NaPro's intellectual property
rights are subject to legal challenge. Such rights are uncertain and involve
complex legal and factual questions for which important legal principles are
largely unresolved. A number of other entities have developed technologies that
may be related to NaPro's technology. Some of these entities are larger and have
significantly greater resources than NaPro. Some of the technologies may
conflict with NaPro's technologies, and therefore increase the potential of
legal challenge.
NaPro relies on trade secret protection for its confidential and proprietary
information. There can be no assurance that competitors or potential competitors
of NaPro will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to NaPro's trade secrets or
disclose such technology, or that NaPro can meaningfully protect its trade
secrets.
Uncertainty Over the Selling Price Under the Faulding Agreement
Under the Faulding Agreement (see Note 9), NaPro is paid a fixed sum for
paclitaxel supplied for noncommercial uses, and a fixed percentage of Faulding's
sales price for paclitaxel supplied for commercial use. NaPro recognizes the
corresponding revenue at the time of shipment of paclitaxel to Faulding, based
upon the intended use indicated by Faulding on its purchase orders. However,
Faulding may or may not
F-27
<PAGE>
NaPro BioTherapeutics, Inc. and Subsidiaries
Notes to Consolidated Financial Statements, continued
use the paclitaxel in accordance with the original intent indicated on its
purchase orders. Additionally, Faulding's actual selling price may differ from
the amounts originally budgeted and indicated to NaPro. On or about May 31,
2000, Faulding will communicate to NaPro the final amount of sales for the
period April 1, 1999 to March 31, 2000, and an adjustment will be calculated,
which may either increase or decrease NaPro's revenue from sales of products to
Faulding for 1999 and 2000.
11. Retirement Plans
NaPro has a defined contribution retirement plan for its employees established
in accordance with the provisions of Internal Revenue Code section 401(k) (the
"Plan"). Employees over the age of 17 are eligible to participate in the Plan on
the first day of the month immediately following the completion of six months of
continuous service or 1,000 hours of service during a 12 continuous month
period.
Participants may contribute up to 15% of their pay to the Plan. NaPro may make
additional contributions to the Plan on behalf of the participants in the form
of cash or in shares of NaPro's common stock. In 1999, 1998 and 1997, NaPro
elected to match the first $2,000 in contributions of each participating
employee with NaPro common stock at a rate of 200% for 1999 and 1998, valued at
$332,000 and $164,000 respectively; and at a rate of 50% for 1997, valued at
$51,000. NaPro elected to make a discretionary contribution in the form of NaPro
common stock at the rates of 6% and 10% of all eligible employees' pay for 1999
and 1998, valued at $314,000 and $391,000, respectively.
During 1999 NaPro adopted an Employee Stock Ownership Plan (ESOP) for its
employees established in accordance with the provisions of Internal Revenue
Code. Employees over the age of 17 are eligible to participate in the ESOP on
the first day of the month immediately following the completion of six months of
continuous service or 1,000 hours of service during a 12 continuous month
period. Participants make no contributions to the ESOP. Each year NaPro
contributes NaPro common stock to the ESOP with a value of 10% of all eligible
employees' pay, subject to amendment. For 1999 NaPro contributed 239,952 shares
to the ESOP, valued at $480,000. 232,037 shares have been allocated to
participants. All shares held by the ESOP are treated as outstanding in
computing earnings per share.
12. Restructuring
On February 17, 1998, NaPro announced the planned layoff of 53 employees
resulting in a one-time charge of approximately $250,000, which reflects the
actual cost incurred, charged to research, development and cost of products sold
expense and to general and administrative expense. The layoff was in response to
the December 24, 1997 ruling by the FDA that IVAX and NaPro could not market
paclitaxel in the U.S. for the treatment of Kaposi's sarcoma due to Bristol's
prior approval, under the Orphan Drug Act, for the use of paclitaxel in the
treatment of Kaposi's sarcoma. As part of the layoff, NaPro temporarily closed
its British Columbia manufacturing facility. NaPro also suspended construction
of a manufacturing facility in Boulder, Colorado. Completion of this facility
will require additional financing which will be sought at the time NaPro has
sufficient product demand to warrant completion of the facility. NaPro incurred
$434,000 of losses on asset retirements and $110,000 of other expense as a
result of the suspended construction.
F-28
Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") is entered into effective this 5th day
of October, 1998 (the "Effective Date"), by and between NaPro BioTherapeutics,
Inc., a Delaware corporation (the "Company"), and Kai P. Larson ("Executive").
Certain capitalized terms used in this Agreement have the meaning set forth in
Paragraph 17 hereof.
RECITALS
A. WHEREAS, Executive is currently employed by the Company; and
B. WHEREAS, the Company desires to secure the continued services of Executive as
an employee of the Company, and to provide for certain compensation and benefit
arrangements for Executive in the event of Executive's termination of employment
under certain circumstances, and Executive is willing to enter into this
Agreement and perform such services.
TERMS AND CONDITIONS
In consideration of the respective covenants and agreements of the
parties contained in this Agreement, the parties agree as follows:
1. Employment Services. The Company hereby agrees to engage Executive,
and Executive hereby agrees to perform services for the Company, on the terms
and conditions set forth in this Agreement. During the Employment Period (as
defined below), the Company and Executive agree that Executive will serve as an
executive officer of the Company in the position of Director, Legal Affairs with
the duties, responsibilities and authority as set forth on Schedule A, or will
have such other executive title and such other executive duties,
responsibilities and authority as Executive and the Company may agree upon from
time to time, and will perform such services of an executive and administrative
character to the Company and its present or future Subsidiaries consistent with
the duties of the Company's other executive officers, as the Company's Board of
Directors (the "Board") may from time to time direct (the "Employment Services")
or the Bylaws of the Company may provide. The Employment Services shall commence
upon the Effective Date of this Agreement and terminate as provided in Paragraph
6 (the "Employment Period").
2. Performance.
(a) Executive shall report to the Chief Executive Officer (or
person acting in a similar capacity if the Company has no Chief Executive
Officer), and Executive shall devote his best efforts and his full business time
and attention (except for permitted vacation periods) to the business of the
Company and its Subsidiaries; provided, however, that upon prior agreement by
the Chief Executive Officer, and subject to the terms of this Agreement,
Executive may engage in independent activities in areas unrelated to the
Company's business or the Company's actual or demonstrably anticipated business;
and provided, further, that no such independent activities shall materially
detract from the essentially full time commitment of Executive to the business
and affairs of the Company. Executive shall perform his duties and
responsibilities to the best of his abilities in a diligent, trustworthy,
businesslike and professional manner.
(b) Unless the Company and Executive otherwise agree,
Executive shall perform the Employment Services at the Company's executive
offices and traveling on business as Executive and the Company shall reasonably
deem necessary.
<PAGE>
3. Compensation.
(a) During the Employment Period, the Company will pay
Executive for the Employment Services a base salary (the "Base Salary") at the
annual rate of $108,000 or such other increased rate as the compensation
committee of the Board or Board committee performing equivalent functions (the
"Compensation Committee") (or if the Board has no Compensation Committee at the
time, then the Board) may designate from time to time, such salary to be paid at
such periods as salary is paid to other executive officers of the Company. The
Compensation Committee (or the Board, if applicable) shall review the Base
Salary of the Executive at least annually on the anniversary of the Effective
Date and may, in its sole discretion, increase (but not decrease) such Base
Salary from time to time. Payment of the Base Salary shall be subject to the
customary withholding tax and other employment taxes as required with respect to
compensation paid by a corporation to an employee.
(b) Executive may receive an annual bonus in such amount, if
any, as the Compensation Committee (or if the Board has no Compensation
Committee at the time, then the Board), in its discretion, may award to
Executive, based upon Executive's and the Company's performance during each year
of the Employment Period, provided, however that each annual bonus payable to
Executive during the Employment Period shall not be less than the greater of (i)
$15,000 or (ii) the amount of the highest annual bonus paid to Executive for the
three most recent fiscal years of the Company.
(c) The Executive shall be entitled to receive such stock
options during the Employment Period as determined from time to time by the
Compensation Committee (or if the Board has no Compensation Committee at the
time, then the Board).
4. Reimbursement for Expenses. The Company shall promptly reimburse
Executive for all reasonable out-of-pocket expenses incurred by him in the
course of performing his duties under this Agreement, subject to the Company's
reasonable requirements with respect to reporting and documentation of such
expenses.
5. Benefits. Executive shall be entitled to all fringe benefits offered
by the Company and to participate in all of the Company's employee benefit
programs both on the same basis as available to executives of the Company, and
shall be entitled to such other benefits as may from time to time be made
available to Executive. The Company shall use commercially reasonable best
efforts to obtain and keep directors' and officers' liability insurance coverage
in effect in an amount equivalent to that of a well-insured, similarly-situated
company; provided, however, that the failure to obtain and keep such insurance
in effect after the Company has exercised such commercially reasonable best
efforts shall not be a breach of the Company's obligations under this Agreement.
During the Employment Period, Executive shall be entitled to four weeks of paid
vacation during each year of the Employment Period and may carry over up to four
weeks of vacation from one year to the next succeeding year only.
<PAGE>
6. Term and Termination.
(a) Except as otherwise provided in this Agreement, the
Employment Period shall terminate upon the earlier of:
(i) three years from the Effective Date hereof (the
"Initial Term"); provided, however, that the Employment Period shall be
extended by one year after the Initial Term and each year thereafter on
the anniversary of the Effective Date of this Agreement (each such
extension, a "Renewal Term") unless either Executive or the Board shall
have given written notice to the other party no later than 180 days
prior to the commencement of any Renewal Term of his or its desire to
terminate the Employment Period on the date prior to the commencement
of such Renewal Term;
(ii) Executive's incapacity or permanent disability
(which in either case shall be deemed to occur only in the event
Executive is unable to perform the Employment Services for 180 days in
any 12-month period) or death;
(iii) termination by Executive voluntarily or for
Good Reason (as defined below);
(iv) termination by the Company with or without
Cause (as defined below).
(b) If the Employment Period is terminated (i) by the Company
without Cause or (ii) by Executive for Good Reason, then Executive shall be
entitled to receive, so long as Executive has not breached the provisions of
Paragraphs 9, 10, 12, 13, 14, or 16 hereof in a manner that could adversely
affect the Company, his Base Salary in cash at the periods set forth in
Paragraph 3, at a rate equal to the then applicable rate set forth in Paragraph
3 for a period equal to greater of (x) the remainder of the Initial Term or the
then current Renewal Term, as applicable, or (y) one year plus in either case
(I) the greater of (A) the most recent annual bonus, if any, awarded to
Executive pursuant to Paragraph 3(b) during the Company's fiscal year of or
during the Company's fiscal year prior to termination, as the case may be, (B)
the average amount of the last three annual bonuses, if any, awarded to
Executive pursuant to Paragraph 3(b) prior to termination, or (C) $15,000,
multiplied by in any case not less than the number of years for which Executive
is entitled to receive his Base Salary pursuant to this Paragraph 6(b) (prorated
for any partial year) (such bonus amounts to be paid pro rata over the term for
which Executive is entitled to receive his Base Salary pursuant to this
Paragraph 6(b)); plus (II) at Executive's election, medical, dental and any
other health insurance, life insurance, accidental death and dismemberment
insurance and disability protection no less favorable to Executive and his
dependents covered thereby (including that Executive shall remain obligated to
continue to pay any costs or expenses which Executive would otherwise be
obligated to pay pursuant to such insurance or other protections provided
pursuant to Paragraph 5 as in existence on the date of such termination) until
the first to occur of (i) the date of Executive's re-employment and subsequent
opportunity to participate in any health insurance program with comparable
coverage provided by such new employer, including without limitation, coverage
with respect to any pre-existing conditions or (ii) eighteen months after such
termination date.
(c) If a Change of Control (as defined below) occurs and
Executive is thereafter offered and accepts continued employment with the
Company (or its successor), and either (i) he is still employed by the Company
on the first calendar anniversary of the Change of Control, or (ii) his
employment with the
<PAGE>
Company is terminated by the Company without Cause or he terminates his
employment for Good Reason during such one year period, the Company shall pay
Executive, in addition to any other amounts payable hereunder, a "stay bonus"
equal to one year's then current Base Salary. Such "stay bonus" shall be paid in
a cash lump sum to Executive within twenty (20) days following the earlier of
(i) the first anniversary of the date of the Change of Control or (ii) the date
of his termination of employment with the Company. For purposes of this
Agreement, a "Change of Control" means the happening of any of the following:
(i) the merger or consolidation of the Company into a new surviving company in
which the holders of the Company's voting securities (on a fully-diluted basis)
immediately prior to the merger or consolidation own less than a majority of the
ordinary voting power to elect directors of the new surviving company (on a
fully diluted basis), or (ii) when any "person" as defined in Section 3(a)(9) of
the Securities Exchange Act of 1934 (the "34 Act") and as used in Sections 13(d)
and 14(d) thereof, including a "group" as defined in Section 13(d) of the 34 Act
but excluding the Company and any Subsidiary or any employee benefit plan
sponsored or maintained by the Company or any Subsidiary (including a trustee of
such plan acting as trustee), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the 34 Act, as amended from time to
time), of securities of the Company representing 25% or more of the combined
voting power of the Company's then outstanding securities.
(d) Except as provided in Paragraphs 6(b) or (c), upon
termination of the Employment Period, Executive shall be entitled to receive
only (i) accrued but unpaid salary and bonus through the date of such
termination and (ii) unpaid salary with respect to any vacation days accrued but
not taken as of the date of such termination.
(e) For purposes of this Agreement, "Cause" shall mean (i) the
conviction (or plea of nolo contendere) of a felony or a crime involving moral
turpitude or the commission of any other act which has an adverse effect on the
Company and which involves dishonesty, disloyalty or fraud with respect to the
Company or any of its Subsidiaries, (ii) conduct bringing the Company or any of
its Subsidiaries into substantial public disgrace or disrepute, including,
without limitation, such conduct resulting from repeated acts of alcohol or drug
abuse, (iii) continued failure by Executive to substantially perform his duties
as reasonably directed by the Board for a period of 15 days after the Board has
made a demand for substantial performance which specifically identifies the
manner in which the Board believes that Executive has not substantially
performed his duties, or (iv) gross negligence or misconduct not in good faith
with respect to the Company or any of its Subsidiaries, or (v) any other
material breach of this Agreement which is not cured within 15 days after
Executive's receipt of written notice thereof.
(f) For purposes of this Agreement, termination of the
Employment Period by Executive for "Good Reason" shall mean termination by
Executive (i) within 90 days after Executive has been assigned, without his
consent, to any duties substantially inconsistent with his position, duties,
responsibilities or status with the Company as contemplated in Paragraph 1 of
this Agreement; (ii) following a Change of Control, upon failure of the Company
to pay Executive an annual bonus equal to the average amount of such annual
bonus paid to Executive during the three fiscal years of the Company immediately
preceding the year in which the Change of Control occurs; (iii) following a
reduction of Executive's Base Salary after a Change of Control; (iv) if
Executive is required to regularly perform the duties of his employment more
than 50 miles from Boulder, Colorado; or (v) upon a material breach of this
Agreement by the Company which is not cured within 30 days after the Company's
receipt of written notice thereof. Executive shall provide written notice to the
Company of any and all grounds that Executive alleges constitute "Good Reason"
and the Company shall have 30 days after receipt of such written notice to cure
any such alleged grounds for "Good Reason". If, following the expiration of such
30 day period, Executive still believes that "Good Reason" exists for his
termination of Employment, the provisions of Paragraph 7 shall apply.
<PAGE>
(g) Promptly (but in any event within 20 days) following any
termination of the Employment Period, and as of that date, the Company will
notify Executive of the itemized and aggregate cash value of the payments and
benefits, as determined under Section 280G of the Internal Revenue Code (the
"Code"), received or to be received by Executive in connection with the
termination of his employment (whether payable pursuant to the terms of this
Agreement or otherwise). At the same time, the Company shall advise Executive of
the portion of such payments or benefits which constitute parachute payments
within the meaning of the Code and which may subject Executive to the payment of
excise taxes pursuant to Section 4999 and the expected amount of such taxes
(such payments or benefits being hereinafter referred to as "Parachute
Payments").
(h) Notwithstanding the provisions of Paragraph 6(b) hereof,
if all or any portion of the payments or benefits provided under Paragraph 6(b)
either alone or together with other payments or benefits which Executive has
received or is then entitled to receive from the Company and any of its
Subsidiaries would constitute Parachute Payments, such payments or benefits
provided to Executive under Paragraph 6(b) shall be reduced to the extent
necessary so that no portion thereof shall be subject to the excise tax imposed
by Section 4999 of the Code; but only if, by reason of such reduction,
Executive's net after tax benefit shall exceed the net after tax benefit if such
reduction were not made. "Net after tax benefit" for purposes of this Paragraph
6(h) shall mean the sum of (i) the total amount payable to Executive under
Paragraphs 6(b) and (c) hereof, plus (ii) all other payments and benefits which
Executive has received or is then entitle to receive from the Company and any of
its subsidiaries that would constitute a Parachute Payment, less (iii) the
amount of federal income taxes payable with respect to the payment and benefits
described in (i) and (ii) above calculated at the maximum marginal income tax
rate for each year in which such payments and benefits shall be paid to
Executive (based upon the rate in effect for such year as set forth in the Code
at the Termination Date), less (iv) the amount of excise taxes imposed with
respect to the payments and benefits described in (i) and (ii) above by Section
4999 of the Code.
For purposes of this Paragraph 6(h), Executive's base amount,
the present value of the Parachute Payments, the amount of the excise tax and
all other appropriate matters shall be determined by the Company's independent
auditors in accordance with the principles of Section 280G of the Code and based
upon the advice of tax counsel selected by the Company, which tax counsel shall
be reasonably satisfactory to Executive.
7. Notice of Certain Termination. In the event that either (i) the
Company shall terminate Executive for Cause or (ii) Executive shall terminate
for Good Reason, then any such termination shall be communicated by written
notice to the other party hereto. Any such notice shall specify (x) the
effective date of termination of the Employment Period, which, except as
otherwise provided in Paragraph 6(f), shall not be more than 30 days after the
date the notice is delivered (the "Termination Effective Date") and (y) in
reasonable detail the facts and circumstances underlying a determination that
the termination is for Cause or for Good Reason, as the case may be. If within
15 days after any notice of termination of Executive for Cause by the Company is
given, or if within 15 days after the Company's 30 day cure period under
Paragraph 6(f) has expired, the party receiving such notice notifies the other
party that a good faith dispute exists concerning the characterization of the
termination, the Termination Effective Date shall be the date on which such
dispute is finally resolved either by written agreement of the parties or by
binding arbitration conducted pursuant to the rules of the American Arbitration
Association. Notwithstanding the pendency of any such dispute, the
<PAGE>
Company shall continue Executive and his dependents as participants in all
medical, dental and any other health insurance and similar benefit plans of the
Company in which he and they were participating when the notice giving rise to
the dispute was given, until the dispute is finally resolved. Benefits provided
under this Paragraph 7 are in addition to all other amounts due under this
Agreement and shall not be offset against, or reduce any other amounts due
under, this Agreement.
8. Insurance. The Company may, at its election and for its
benefit, insure Executive against accidental death, and Executive shall submit
to such physical examination and supply such information as may be required in
connection therewith.
9. Non-disclosure of Confidential Information.
(a) Unless Executive first secures written consent from the
Company pursuant to procedures implemented by Company after the date hereof,
Executive shall not disclose or use at any time, either during the Employment
Period or thereafter, any Confidential Information (as defined in Paragraph 17)
except to the extent Executive reasonably believes is necessary to disclose or
use such Confidential Information in performing the Employment Services.
Executive further agrees that Executive will use Executive's commercial best
efforts to safeguard the Confidential Information and protect it against
disclosure, misuse, espionage, loss and theft, including, without limitation,
causing recipients of Confidential Information to enter into non-disclosure
agreements with the Company. Subject to the provisions of Paragraphs 10 and 13,
nothing herein shall be construed to prevent Executive from using Executive's
general knowledge and skill after termination of this agreement, whether
Executive acquired such knowledge or skill before or during the Employment
Period.
(b) In the event the Company has entered into confidentiality
agreements with third parties (not including Company employees) which contain
provisions different from those set forth in this Agreement, Executive agrees,
in addition to the provisions of Paragraph 9(a), to comply with any such
different provisions of which Executive is notified by the Company.
10. Company Ownership of Intellectual Property. Executive hereby
assigns to the Company all right, title and interest in and to all Intellectual
Property (as defined in Paragraph 17) contributed to or conceived or made by
Executive during the Employment Period and prior to the Employment Period during
the period Executive was employed by or engaged in research or development
activities for or with the Company or its predecessors and affiliates (whether
alone or jointly with others) to the extent such Intellectual Property is not
owned by the Company as a matter of law. Executive shall promptly and fully
communicate to the Company all Intellectual Property conceived, contributed to
or made by Executive and shall cooperate with the Company to protect the
Company's interests in such Intellectual Property including, without limitation,
providing assistance in securing patent protection and copyright registrations
and signing all documents reasonably requested by the Company, even if such
request occurs after the Employment Period. The Company shall pay Executive's
reasonable expenses of cooperating with the Company in protecting the Company's
interests in such Intellectual Property unless the subject matter of the
requested cooperation is related to actions taken or failed to be taken by
Executive wrongfully or otherwise not in good faith.
11. Executive's Rights. Paragraph 10 of this Agreement does not
apply to an invention for which no equipment, supplies, facilities or trade
secret information of the Company was used and which was
<PAGE>
developed entirely on Executive's own time, unless (a) the invention relates (i)
to the business of the Company, or (ii) to the Company's actual or demonstrably
anticipated material research or development, or (b) the invention results from
any work performed by Executive for the Company.
12. Return of Materials. Upon Termination of the Employment Period, or
at any time reasonable requested by the Company, Executive shall promptly
deliver to the Company all copies of Confidential Information in Executive's
possession and control, including written records, manuals, lab notebooks,
customer and supplier lists and all other materials containing any Confidential
Information. If the Company requests, Executive shall provide written
confirmation that Executive has returned all such materials. Subject to the
provisions of this Agreement, including, without limitation, Paragraph 11,
notwithstanding anything in this Agreement to the contrary, upon termination of
the Employment Period, the Company, at Executive's request, shall promptly
return to Executive any equipment or other materials owned by Executive then
being used by or then in the possession of the Company.
13. Non-Competition. Executive acknowledges and agrees that during the
Employment Period and for a period of five years thereafter (the "Non-compete
Period"), Executive will not, without the prior written consent of the Company,
directly or indirectly, provide products or services substantially similar to
the Employment Services to any business or entity that provides or offers or
demonstrably plans to provide or offer, products or services that (i) are the
same as or substantially similar to the products or services provided by the
Company at any time during the Employment Period, (ii) relate to the Company's
Intellectual Property (whether the Company acquired such Intellectual Property
pursuant to this Agreement or otherwise), or (iii) relate to any subject matter
of the Company's actual or demonstrably anticipated material research and
development during the Employment Period, including without limitation, taxol,
taxanes and any other compounds, within any geographical area in which the
Company or any of its subsidiaries provide or plan to provide such products or
services.
14. Non-Solicitation. Executive acknowledges and agrees that during the
Non-compete Period Executive will not (a) solicit, induce or attempt to induce,
directly or indirectly, any employee of the Company to leave the employment of
the Company to work for Executive or for any other person, firm or corporation
or (b) hire any employee of the Company.
15. Acknowledgment of Reasonableness. Executive acknowledges and
agrees that the limitations set forth in Paragraphs 13 and 14 are reasonable
with respect to scope, duration and geographic area and are properly required
for the protection of the legitimate business interest of the Company.
16. Further Assistance. During the Non-compete Period, Executive will
not make any disclosure or other communication to any person, issue any public
statements or otherwise cause to be disclosed any information which is designed,
intended or might reasonably be anticipated to discourage any persons from doing
business with the Company or otherwise have a negative impact or adverse effect
on the Company, except to the extent such disclosure is required by law. During
the Non-compete Period, Executive will provide assistance reasonably requested
by the Company in connection with actions taken by Executive during the
Employment Period, including but not limited to assistance in connection with
any lawsuits or other claims against the Company arising from events during the
Employment Period, provided that the Company shall reimburse all reasonable
expenses (including without limitation, reasonable loss of compensation from
other sources resulting from such assistance during normal business hours).
<PAGE>
17. Certain Definitions.
"Affiliate" means a person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, the person specified.
"Confidential Information" means all information (whether or
not specifically labeled or identified as confidential), in any form or medium,
that is disclosed to, or developed or learned by Executive during the Employment
Period and prior to the Employment Period during the period Executive was
employed by or engaged in research or development activities for or with the
Company or its predecessors and affiliates or that relates to the business,
products, services, customers, research or development of the Company, its
Subsidiaries, its Affiliates, or third parties with whom the Company, its
Subsidiaries or its Affiliates does business or from whom the Company or its
Affiliates receives information. Confidential Information shall not include any
information that (i) has become publicly known through no wrongful act or breach
of any obligation of confidentiality, as evidenced by written records or
documents; or (ii) was rightfully received by Executive on a non-confidential
basis from a third party (provided that such third party is not known to
Executive to be bound by a confidentiality agreement with the Company or another
party), as evidenced by written records or documents.
"Independent Third Party" means any person, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended, and the rules and regulations thereunder, who, immediately prior to
the contemplated transaction, does not own in excess of 5% of the Company's
Common Stock on a fully-diluted basis, who is not controlling, controlled by or
under common control with any such 5% owner of the Company's Common Stock and
who is not the spouse or descendent (by birth or adoption) of any such 5% owner
of the Company's Common Stock.
"Intellectual Property" means any idea, invention, design,
development, device, method or process (whether or not patentable or reduced to
practice or including Confidential Information) and all related patents and
patent applications, any copyrightable work or mask work (whether or not
including Confidential Information) and all related registrations and
applications for registration, and all other proprietary rights.
"Subsidiaries" means any corporation of which the securities
having a majority of the voting power in electing directors are, at the time of
determination, owned by the Company, directly or through one of more
Subsidiaries.
18. Executive Representations. Executive hereby represents and warrants
to the Company that (a) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which he is bound, and (b) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be
the valid and binding obligation of Executive, enforceable in accordance with
its terms.
19. Company Representations. The Company hereby represents and
warrants to Executive that (a) the execution, delivery and performance of this
Agreement by the Company does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree
<PAGE>
to which Company is a party or by which it is bound, and (b) upon the execution
and delivery of this Agreement by Executive, this Agreement shall be the valid
and binding obligation of the Company, enforceable in accordance with its terms.
20. Severability and Modification. If any provision of this Agreement
shall be held or declared to be illegal, invalid or unenforceable, such illegal,
invalid or unenforceable provision shall not affect any other provision of this
Agreement, and the remainder of this Agreement shall continue in full force and
effect as though such provision had not been contained in this Agreement. If the
scope of any provision in this Agreement is found to be broad to permit
enforcement of such provision to its full extent, Executive consents to judicial
modification of such provision and enforcement to the maximum extent permitted
by law.
21. Notices. Except as otherwise expressly set forth in this Agreement,
all notices, requests and other communications to be given or delivered under or
by reason of the provisions of this Agreement shall be in writing and shall be
given (and, except as otherwise provided in this Agreement, shall be deemed to
have been duly given if so given) when delivered if given in person or by
telegram, three days after being mailed by first class registered or certified
mail, return receipt requested, postage prepaid, or one day after being sent
prepaid via reputable overnight courier to the parties at the following
addresses (or such other address as shall be furnished in writing by like
notice; provided, however, that notice of change of address shall be effective
only upon receipt):
Notices to Executive
Kai P. Larson
c/o NaPro BioTherapeutics, Inc.
6304 Spine Road, Unit A
Boulder, Colorado 80301
Notices to Company
NaPro BioTherapeutics, Inc.
6304 Spine Road, Unit A
Boulder, Colorado 80301
Attn Patricia A. Pilia, Ph.D.
Executive Vice President
with a copy to:
Holme Roberts & Owen
1700 Lincoln, Suite 4100
Denver, CO 80203
Attn: Francis Wheeler
<PAGE>
22. Entire Agreement. This Agreement contains the entire
agreement between parties with respect to the subject matter hereof and
supersedes any previous understandings or agreements, whether written or oral,
regarding such subject matter.
23. Governing Law. All questions concerning the construction,
validity and interpretations of this Agreement will be governed by the internal
law, and not the law of conflicts, of the State of Colorado.
24. Survival. Paragraphs 6, 9, 10, 11, 12, 13, 14 and 16 and any other
provision of this Agreement which by its terms could survive termination of the
Employment Period shall survive and continue in full force in accordance with
their terms notwithstanding any termination of the Employment Period.
25. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
26. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective successors and assigns; provided that in no event shall Executive's
obligations under this Agreement be delegated or transferred by Executive, nor
shall Executive's rights be subject to encumbrance or to the claims of
Executive's creditors. This Agreement is for the sole benefit of the parties
hereto and shall not create any rights in third parties other than Executive's
spouse or beneficiary as expressly set forth herein.
27. Remedies. Except as otherwise provided in this Agreement, (i) each
of the parties to this Agreement will be entitled to enforce its rights under
this Agreement specifically, to recover damages by reason of any breach of any
provision of this Agreement and to exercise all other rights to which it may be
entitled and (ii) disputes under this Agreement not finally resolved in writing
by the parties within sixty days after one party gives notice in good faith to
the other party that a bona fide dispute exists shall be resolved pursuant to
binding arbitration conducted in Denver, Colorado in accordance with the rules
of the American Arbitration Association. The prevailing party in any such
arbitration shall be entitled to have its costs and expenses (including
reasonable attorney's fees and expenses) relating to such arbitration paid by
the other party if the arbitrator(s) conducting such arbitration so determine.
Notwithstanding the foregoing, the parties agree and acknowledge that money
damages may not be an adequate remedy for breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court of
law or equity of competent jurisdiction for specific performance and/or
injunctive relief in order to enforce or prevent any violations of the
provisions of this Agreement. The prevailing party in any suit shall be entitled
to recover reasonable attorneys fees and costs from the other party.
28. Modifications and Waivers. No provision of this Agreement may be
modified, altered or amended except by an instrument in writing executed by the
parties hereto. No waiver by either party hereto of any breach by the other
party hereto of any term or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar terms or
provisions at the time or at any prior or subsequent time.
29. Headings. The headings contained herein are solely for the
purpose of reference, are not part of this Agreement and shall not in any way
affect the meaning or interpretation of this Agreement.
<PAGE>
30. Notification of Subsequent Employer. Executive agrees that
the Company may present a copy of this Agreement to any third party.
31. UNDERSTAND AGREEMENT. EXECUTIVE REPRESENTS AND WARRANTS THAT (a)
EXECUTIVE HAS READ AND UNDERSTOOD EACH AND EVERY PROVISION OF THIS AGREEMENT,
(b) EXECUTIVE HAS HAD THE OPPORTUNITY TO OBTAIN ADVICE FROM LEGAL COUNSEL OF
EXECUTIVE'S CHOICE, OTHER THAN COUNSEL TO THE COMPANY (WHO IS NOT REPRESENTING
THE EXECUTIVE), IN ORDER TO INTERPRET ANY AND ALL PROVISIONS OF THIS AGREEMENT,
(c) EXECUTIVE HAS HAD THE OPPORTUNITY TO ASK THE COMPANY QUESTIONS ABOUT THIS
AGREEMENT AND ANY OF SUCH QUESTIONS EXECUTIVE HAS ASKED HAVE BEEN ANSWERED TO
EXECUTIVE'S SATISFACTION, AND (d) EXECUTIVE HAS BEEN GIVEN A COPY OF THIS
AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day and year first above written.
EXECUTIVE
/s/
NAPRO BIOTHERAPEUTICS, INC.
By: /s/
Exhibit 10.32
Letter agreement between the Company and Pacific BioTechnologies Inc.
dated August 14, 1998
The 1996 Agreement for 2 million cuttings is modified as follows:
The 2 million cuttings will be purchased by NaPro for U.S$.20 each. (US$400,000
for the cuttings of which US$350,000 has been paid previously). NaPro will pay
PRT US$.0575 per cutting for planting of the cuttings into liner beds
(US$115,000 for planting). NaPro will pay PRT US$65,000 per year for maintenance
of the 2 million cuttings. Payment for the maintenance shall be due annually in
advance, with the first year's payment due immediately and the second year's
payment due by August 15, 1999. PRT shall not be required to maintain the
cuttings beyond October 15, 2000. Total owed by NaPro to PRT for cuttings,
planting, and first year's maintenance is US$580,000 less US$350,000 already
paid for a net payment to PRT of US$230,000.
Claims under the 1993 Plantation Agreement:
NaPro will abandon its claims for payment under the Plantation Agreement for
services rendered but not paid for, including the charges referred to in the
August 7 letter. The net effect of the settlement of the NaPro and PRT claims is
that neither party owes the other anything under the Plantation Agreement
through the first 2 quarters of 1998 (through June 1, 1998). PRT and NaPro will
enter into negotiations regarding a lease and will also discuss the possibility
of PRT maintaining the plantation during the notice period. I believe that we
are scheduled to meet and begin these negotiations in early September. In the
interim, while we are resolving the issues of the lease and deciding if PRT or a
third party will maintain the plantation, NaPro will pay PRT for maintenance
services performed from June 1, 1998 onward according to the terms of the
Plantation Agreement.
If my understanding of the compromise as set forth in this letter is consistent
with that of PRT, please countersign this letter as evidence of settlement of
our respective claims according to the terms set forth above.
Very Truly Yours,
NaPro BioTherapeutics, Inc.
BY: /s/ Gordon Link
VP Finance, Chief Financial Officer
Accepted and Agreed,
Pacific Biopharms, Inc.
BY: /s/ Christopher Worthy
VP Finance, Chief Financial Officer
CULTURE AGREEMENT
<PAGE>
This Agreement is made as of this 26th day of July 1997 and is between
Cass-Mill, Inc. of 770 Lake Street, Madison, OH 44057 ("Cass-Mill") and NaPro
BioTherapeutics, Inc. of 6304 Spine Road, Unit A, Boulder, CO 80301 ("NaPro")
with respect to the culture of certain Taxus Media Hicksii trees.
STATEMENT OF BACKGROUND INFORMATION
NaPro is the owner of certain Trees (defined below)
The Trees are to be planted in the ground on real property owned or
leased by Cass-Mill
NaPro desires that Cass-Mill care for and culture the Trees, including
any Trees subsequently planted on that property, and that Cass-Mill harvest,
cut, store, and ship to NaPro all or certain portions of the Trees as directed
by NaPro, and Cass-Mill has agreed to do so
The parties desire to set forth the terms of their agreements in this
writing.
STATEMENT OF AGREEMENT
For their mutual convenience and protection, and in consideration of
the mutual covenants and benefits contained in this Agreement, the parties agree
as follows:
SECTION ONE: CULTURE OF TREES
1.1 Definition of Trees. The "Trees" for purposes of this Agreement
shall be defined as follows: all of those Taxus trees which are provided by
NaPro to Cass-Mill or are procured by Cass-Mill on NaPro's behalf or are
purchased from Cass-Mill by NaPro. All such trees, whether currently in the
ground or subsequently planted, shall be collectively referred to herein as the
"Trees". Such real property shall be referred to herein as the "Leased Property"
1.2 Care and Culture of Trees. During the term of this Agreement,
Cass-Mill agrees to plant new Trees as instructed by NaPro, and to grow,
maintain, and care for all the Trees pursuant to the instructions of NaPro. In
the absence of such instructions, Cass-Mill agrees that its care of the Trees
shall be consistent with Cass-Mill's normal reasonable cultural practices.
Cass-Mill shall bear all costs and expenses in connection with the care and
maintenance of the Trees, provided that Cass-Mill shall be reimbursed for such
expenses as provided below under Section Three.
1.3 Definition of Properties. These Trees shall be cultivated on
property owned by Cass-Mill ("Owned Property") or leased by Cass-Mill from third
parties ("Leased Property"). Collectively these properties shall be referred to
herein as the "Cass-Mill Property".
SECTION TWO: HARVESTING AND STORING
2.1 General. In addition to Cass-Mill's obligations described above in
paragraph 1.2, Cass-Mill agrees to harvest, cut, place in storage, pack and
prepare for shipping any of the Trees or Tree cuttings as instructed by NaPro
(pursuant to the NaPro Specifications as defined in the Purchase Agreement as
they may be revised from time to time). All Trees or Tree cuttings shall be
shipped FOB Cass-Mill at NaPro's expense.
SECTION THREE: COMPENSATION AND EXCLUSIVITY
<PAGE>
3.1 Compensation. As compensation for its services under this
Agreement, Cass-Mill shall be entitled to receive a sum equal to 1.5 multiplied
by Cass-Mill's actual costs and expenses incurred in connection with: (1)
Cass-Mill's care and maintenance of the Trees hereunder, (2) Cass-Mill's
harvesting, storing, maintaining, packing, cutting, or shipping preparation of
the Trees or Tree cuttings. Cass-Mill's costs and expenses for purposes of this
paragraph shall not include any costs of leasing the Leased Property.
3.2 Invoices and Payment. Cass-Mill shall be entitled to invoice NaPro
for any sums due hereunder on a monthly basis. Such invoices shall be paid
within thirty (30) days of the invoice date.
3.3 Exclusivity. During the term of this Agreement, NaPro agrees that
Cass-Mill shall be the exclusive provider of all cultural services, all
harvesting and cutting services, all storage services, and any other services
provided hereunder, with respect to all of the Trees located on the Cass-Mill
Property and that NaPro will not contract or arrange for any other provider of
such services with respect to the Trees or the cuttings thereof. Nothing in this
section shall be construed to prevent NaPro from purchasing Trees from other
sources, or utilizing other parties to culture taxus, provided that such work is
not done on the Cass-Mill Property. Cass-Mill agrees that neither it nor any
affiliated company shall sell, culture, or otherwise supply Taxus materials to
any other parties for pharmaceutical uses during the term of this Agreement.
NaPro further provides that Cass-Mill shall be the only grower and service
provider in Lake and Ashtabula Counties, Ohio, USA.
SECTION FOUR: TERM AND TERMINATION
4.1 Term. The term of this Agreement shall commence on July 26, 1996
and shall continue for a period of five years, unless earlier terminated by the
parties hereunder. Unless this Agreement is terminated under the terms of
paragraph 4.3 below, the term of this Agreement (and any extended term hereof)
and the obligations of the parties hereunder shall continue even if one (1) or
more of the Subleases expires, provided that if all of the Subleases expire (and
if NaPro and Cass-Mill thereby lose the right of access to such subleased
property and any remaining Trees located thereon), then this Agreement will
terminate following completion by both parties of all of the obligations of the
parties hereunder which do not require access to the subleased real property
(i.e. storage of harvested cuttings, payment of sums due for labor, materials,
etc.)
4.2 Extensions of Term. NaPro shall be entitled to renew the term of
this Agreement, on the same terms and conditions set forth herein, for three
separate five year renewal terms. If NaPro desires to exercise any such option,
it shall do so in writing to Cass-Mill at least 90 days prior to the expiration
of the original or extended term.
4.3 Termination. This Agreement may not be terminated by either party
hereto except as provided in this paragraph 4.3. If either party fails to pay
any sums due hereunder or any sums due under the Purchase Agreement or the
Subleases within ten (10) days after such sums are due, or if either party
defaults under any of its other obligations under this Agreement, the Purchase
Agreement, the Leases, or the Subleases, and such default continues for (10)
days after written notice thereof, then the non-defaulting party shall be
entitled to terminate this Agreement and recover any damages resulting from the
breach, in addition to any other legal or contractual remedy available to the
non-defaulting party.
4.4 Obligations Upon Termination. Upon the termination or
expiration of this Agreement, all amounts due to either party under this
Agreement shall become due and payable within 10 days following the termination
or expiration.
<PAGE>
SECTION FIVE: LEASE ISSUES
5.1 Ground Leases, Ownership, and Mortgages. Cass-Mill represents and
warrants that Exhibit 5.1 contains: (1) true and correct copies of all leases
pertaining to Leased Property, (the "Ground Leases"), (ii) true and correct
copies of the deed to the Owned Property and any encumbrances upon the Owned
Property, and (iii) any true and correct copies of any mortgage upon either the
Leased or Owned Properties.
5.2 Leases and Subleases. As of the effective date of this Agreement,
Cass-Mill and NaPro shall enter into subleases with respect to the Leased
Property ("Subleases") and leases with respect to Owned Property ("Leases").
Such Leases and Subleases shall be in the form attached hereto as Exhibits
5.2(a) and 5.2(b). Each such Lease and Sublease shall form a part of this
Agreement and any breach of the provisions of any Lease or Sublease shall be
deemed a breach of this Agreement.
5.3 Attornment and Non-Disturbance. Cass-Mill shall obtain and record
agreements from (i) the holders of any mortgage upon either the Owned or Leased
Property whether such mortgage currently exists or is created in the future
("Mortgage") and (ii) from the owner of any Leased Property, which provide that
all of NaPro's rights under the Leases and Subleases shall not be affected or
disturbed by subordination of the lease or any sublease to Mortgagee. Such
agreement shall further provide that if the owner or mortgagee shall acquire
title to the Owned or Leased Property during the term of the Lease or Sublease,
NaPro will attorn to and recognize such successor owner as successor lessor and
the successor owner shall accept such attornment and recognize all of NaPro's
rights in accordance with the provisions of the Leases or Subleases. Such
agreements must be satisfactory to NaPro and conform to the requirements of the
Leases and Subleases.
5.4 Ground Leases and Renewals. Simultaneous to entering into the
Leases and Subleases, Cass-Mill shall obtain a renewal or extension of each of
the Ground Leases with respect to the Leased Property. The terms of any Ground
Lease renewal must be mutually agreeable to Cass-Mill and NaPro. If the parties
cannot agree upon a Ground Lease renewal with respect to the Leased Property,
then NaPro shall be free to negotiate directly with the landowner regarding the
leasing of the Leased Property, and Cass-Mill shall assist NaPro (at no
additional cost to Cass-Mill) in the negotiation and execution of a lease
between NaPro and the landowner regarding the Leased Property. No such lease,
however, shall take effect prior to the expiration or termination of the Ground
Lease.
5.5 Failure to Obtain Lease Renewals. In the event that the parties are
unable to obtain a renewal of any one or more of the Ground Leases, and the
parties therefore will lose (prior to the expiration or termination of this
Agreement) access to the property upon which some or all of the Trees are
located, then NaPro may, at its option, cause those affected Trees to be
harvested by Cass-Mill (pursuant to paragraph 2.1 hereof) or cause those
affected Trees to be relocated to another site. If NaPro elects to relocate the
Trees, then Cass-Mill will remove such trees and ready such trees for transport
as instructed by NaPro. If Cass-Mill and NaPro mutually agree that such Trees
shall be relocated to a Cass-Mill owned or Cass-Mill controlled site, then: (i)
Cass-Mill shall re-plant such Trees on such site, (ii) such Trees shall remain
subject to this Culture Agreement, (iii) Cass-Mill will continue to perform the
services contemplated by this Culture Agreement as set forth herein. If the
Trees are relocated to a site which Cass-Mill does not own or control, then
unless otherwise agreed by the parties, this Culture Agreement shall terminate
with respect to the affected Trees following shipment of such Trees by
Cass-Mill. NaPro shall pay Cass-Mill a sum equal to 1.5 multiplied by
Cass-Mill's actual costs and expenses incurred in connection with any services
provided under this paragraph 5.5
5.6 Cass-Mill Purchase of Real Property. If Cass-Mill purchases any
of the Leased Property, then NaPro shall enter into a lease with Cass-Mill for
such real property, the material terms of which are substantially similar to the
terms of the Sublease (and underlying Ground Lease) pursuant to which NaPro had
previously leased the property, except that (1) the new lease shall have a term
and renewal terms which correspond to the term and renewal terms of this
Agreement, and (2) the rental paid by NaPro under any such lease (including
renewal terms) shall be an amount which may be agreed upon by NaPro and
Cass-Mill upon the execution of the lease, or in the absence of such an
agreement, the fair rental value as determined by arbitration as provided in
paragraph 6.1. NaPro and Cass-Mill may also enter into such a lease upon any
other terms as may be mutually agreeable to NaPro and Cass-Mill.
<PAGE>
SECTION SIX: GENERAL TERMS
6.1 Arbitration. Any disagreements or disputes between the parties with
regard to this Culture Agreement shall be resolved exclusively by arbitration
which shall be binding upon both of the parties. The arbitration shall be
conducted by a panel of three arbitrators under the rules of the American
Arbitration Association. One arbitrator shall be selected by Cass-Mill, one by
NaPro, and one by the two selected arbitrators shall apply Colorado law. Unless
otherwise allocated by the arbitrators, the parties shall share equally the fees
and expenses of the arbitrators .
6.2 Definition of Cass-Mill's Costs.
a. Cass-Mill's actual costs and expenses shall be calculated
based upon generally accepted accounting principles. Such costs shall not
include marketing costs or general administrative costs except to the extent
that those costs are part of Cass-Mill's loaded labor rate.
b. NaPro shall have the right to audit Cass-Mill's books and
records pertaining to calculation of Cass-Mill's costs. Any such inventory shall
be conducted at reasonable intervals and at reasonable times, and shall not
interfere with the business operations of Cass-Mill. Furthermore, NaPro agrees
to keep confidential and not to disclose to any other party (except to any
professional advisors or employees who have a need to know) any information or
documents learned or discovered by NaPro in connection with any such audit. If
any such audit uncovers or overcharges or undercharges, the parties shall
attempt to agree upon the amounts of such overcharges or undercharges and pay to
one another any such amount as may be necessary to correct the overcharge or
undercharge. If the parties cannot agree on any overcharge or undercharge,
either party shall be entitled to submit their question to arbitration under
paragraph 6.1 If the parties agree or an arbitration determines that Cass-Mill
has overcharged NaPro an amount greater than ten percent (10%), then Cass-Mill
shall bear the cost of the audit by NaPro and the cost of arbitration.
Otherwise, the cost of the audit and arbitration shall be borne by NaPro.
6.3 Further Assurances. Cass-Mill shall comply with any requests
by NaPro for aid in perfection of NaPro's ownership interest in the Trees. Such
steps may include among others, the execution of documents required for UCC
filings.
6.4 Force Majure. Neither party shall be liable to the other in the
event that performance of its obligations hereunder shall be prevented by any
cause beyond its reasonable control, including without limitation acts of God,
acts of government, accident, fire, delay or destruction of means of transport
or other disaster ("events of force majure"0, but the affected party shall use
best efforts to avoid or remove the cause of such nonperformance and shall
continue performance hereunder with the utmost dispatch whenever such cause is
removed.
6.5 Confidentiality. Cass-Mill agrees to keep confidential all
information regarding the storage and preparation of the Trees and Tree
cuttings, any fertilizers or other growth stimulators used, the quantity of
materials shipped, and any other information about NaPro's business or
operations which is obtained through this relationship. In addition, Cass-Mill
employees who have access to such information shall sign a confidentiality
agreement in the form of Appendix 6.5
6.6 New Technology. Any inventions and intellectual property developed
pursuant to this agreement shall be the sole property to NaPro. In the event
that Cass-Mill develops any intellectual property or patentable invention in
connection with the planting, maintenance, cultivation, harvesting, preparation,
or packaging of the Trees, Cass-Mill shall promptly disclose such inventions to
NaPro. Cass-Mill agrees to assign any such intellectual property and inventions
to NaPro and to execute any documents necessary to effect such transfer.
SECTION SEVEN: MISCELLANEOUS
7.1 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns. Cass-Mill shall not assign any of their rights,
privileges, or
<PAGE>
obligations under this Agreement without the written consent of NaPro.
7.2 Notices. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed certified or registered mail, return receipt
requested with postage prepaid, to the parties at their addresses on page one of
this Agreement. Any party may change its address by providing notice hereunder
to all of the other parties.
7.3 Headings. The headings of sections herein and in the exhibits
referred to herein are for convenience only and shall not control of effect any
meaning or interpretation of any provision of this Agreement.
7.4 Entire Agreement: Modifications. This Agreement contains the
entire agreement among the parties hereto with respect to the transactions
contemplated hereby. This Agreement may be modified only by a written
agreement signed by all of the parties hereto.
7.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.6 Applicable Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Colorado.
7.7 Severability. In the event that any of the provisions of this
Agreement shall be held to be invalid or unenforceable, the same shall not
affect the validity or enforceability of any other provisions of this Agreement,
unless such validity or unenforceability shall materially affect and frustrate
the intentions of the parties.
7.8 Time is of the Essence. All of the parties hereto agree and
acknowledge that time is of the essence in connection with this Agreement.
7.9 No Waiver. No waiver of any rights of either party hereunder shall
be effective against such party unless set forth in writing and signed by such
party. Further, no waiver of any right hereunder shall be construed to be a
waiver of such right or any other right hereunder or in the future.
CASS-MILL NURSERY, INC.
/s/ John Cassell
John Cassell
GM, CEO
NAPRO BIOTHERAPEUTICS, INC.
/s/ Gordon Link
Gordon Link
VP, Chief Financial Officer
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 333-05561) pertaining to the 1993 Stock Option Plan and the 1994
Long-Term Performance Incentive Plan, and the Registration Statements (Form S-3
No. 33-95522, Form S-3 No. 333-42419, Form S-3 No. 333-29477, and Form S-3 No.
33-78016) of NaPro BioTherapeutics, Inc. and in the related Prospectuses of our
report dated March 3, 2000 with respect to the consolidated financial statements
of NaPro BioTherapeutics, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1999.
/s/ Ernst & Young LLP
Denver, Colorado
April 14, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Dec-31-1999
<CASH> 1,937
<SECURITIES> 0
<RECEIVABLES> 1,416
<ALLOWANCES> 0
<INVENTORY> 2,188
<CURRENT-ASSETS> 5,694
<PP&E> 16,977
<DEPRECIATION> 6,284
<TOTAL-ASSETS> 19,257
<CURRENT-LIABILITIES> 2,779
<BONDS> 4,723
0
0
<COMMON> 176
<OTHER-SE> 10,957
<TOTAL-LIABILITY-AND-EQUITY> 19,257
<SALES> 7,592
<TOTAL-REVENUES> 7,592
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 18,235
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 842
<INCOME-PRETAX> (9,002)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,002)
<EPS-BASIC> (.50)
<EPS-DILUTED> (.50)
</TABLE>
