<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________TO__________
Commission file number 33-90516
NEOPHARM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 51-0327886
(State or other (I.R.S. Employer
jurisdiction of
incorporation or Identification Number)
organization)
100 Corporate North
Suite 215
Bannockburn, Illinois 60015
(Address of principal executive offices) (Zip Code)
(847) 295-8678
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report:
Title of each class Number of shares outstanding
------------------- ----------------------------
Common Stock ($.0002145 par value) 8,195,810
Warrants to purchase shares of
Common Stock ($.0002145 par value) 837,067
<PAGE> 2
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I Financial Information
ITEM 1. Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II Other Information 10
SIGNATURE PAGE 11
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 755,324 $ 2,776,697
Notes receivable - shareholder -- 52,634
Prepaid expenses and other 45,099 --
----------- -----------
Total current assets 800,423 2,829,331
Equipment, furniture and leasehold improvements:
Equipment 79,811 32,492
Furniture 61,484 26,231
Leasehold improvements 17,394 --
Less accumulated depreciation (51,639) (33,555)
----------- -----------
Total equipment, furniture
and leasehold improvements, net 107,050 25,168
----------- -----------
Total assets $ 907,473 $ 2,854,499
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities:
Obligations under research agreements $ 120,000 $ 150,000
Accounts payable and accrued liabilities 190,196 275,427
Accrued compensation -- 55,000
----------- -----------
Total current liabilities 310,196 480,427
Commitments and contingencies -- --
Stockholders' equity (deficit):
Common stock, $.0002145 par value;
15,000,000 shares authorized:
8,195,810 shares issued and
outstanding, respectively 1,758 1,758
Additional paid-in capital 6,259,636 6,259,636
Deficit accumulated during the
development stage (5,664,117) (3,887,322)
----------- -----------
Total stockholders' equity (deficit) 597,277 2,374,072
----------- -----------
Total liabilities and stockholders'
equity (deficit) $ 907,473 $ 2,854,499
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
3
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NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
INCEPTION
(JUNE 15, 1990)
THREE MONTHS NINE MONTHS THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Licensing revenues $ -- $ -- $ -- $ 550,000 $ 550,000
Expenses:
Research and
development 372,786 372,678 921,085 861,381 6,395,616
General and
administrative 325,346 292,796 936,747 772,069 4,083,599
---------- ---------- ----------- ------------ ------------
Total Expenses 698,132 665,474 1,857,832 1,633,450 10,479,215
Loss from operations (698,132) (665,474) (1,857,832) (1,083,450) (9,929,215)
Interest income 15,587 49,134 81,037 158,524 529,813
Interest expense -- -- -- -- (735,606)
---------- ---------- ----------- ------------ ------------
Interest income
(expense) - net 15,587 49,134 81,037 158,524 (205,793)
Net loss $ (682,545) $ (616,340) $(1,776,795) $ (924,926) $(10,135,008)
========== ========== =========== ============ ============
Net loss per share $ (.08) $ (.08) $ (.22) $ (.11)
========== ========== =========== ============
Weighted average
shares used in
computing net loss
per share 8,195,810 8,150,268 8,195,810 8,137,323
========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
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NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
INCEPTION
(JUNE 15, 1990)
THROUGH
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss $(1,776,795) $ (924,926) $(10,135,008)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization 18,084 4,335 63,438
Gain on disposal of equipment
and furniture -- -- (408)
Services contributed (non-cash)
by related party -- -- 101,042
Interest payable to principal
shareholder converted to stock -- -- 523,385
Compensation expense from non-employee
stock options -- -- 219,035
Restricted stock grant -- -- 48,750
Changes in assets and liabilities:
Decrease (increase) in other assets 7,535 (67,821) (56,199)
(Decrease) increase in accounts
payable and accrued liabilities (170,231) (141,374) 310,196
----------- ----------- ------------
Net cash used in operating activities (1,921,407) (1,129,786) (8,925,769)
----------- ----------- ------------
Cash flows used in investing activities:
Purchase of equipment and furniture (99,966) (13,242) (159,791)
Proceeds from disposal of
equipment and furniture -- -- 810
----------- ----------- ------------
Net cash used in investing activities (99,966) (13,242) (158,981)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from loan payable to
principal stockholder -- -- 1,500,000
Advance on line of credit -- -- 2,114,652
Reduction in line of credit -- -- (2,114,652)
Costs incurred related to the
initial public offering -- -- (688,321)
Proceeds from initial public offering -- -- 8,585,438
Proceeds from issuance of common stock -- 77,072 442,957
----------- ----------- ------------
Net cash provided by financing activities -- 77,072 9,840,074
----------- ----------- ------------
Net increase (decrease) in cash (2,021,373) (1,065,956) 755,324
Cash, beginning of period 2,776,697 4,479,041 --
----------- ----------- ------------
Cash, end of period $ 755,324 $ 3,413,085 $ 755,324
=========== =========== ============
Supplemental disclosure of cash paid for:
Interest $ -- $ -- $ 212,222
Income taxes -- -- --
</TABLE>
The accompanying notes are an integral part of these statements.
5
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NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 BASIS OF PRESENTATION
The financial information herein is unaudited, other than the Balance Sheet at
December 31, 1997, which is derived from the audited financial statements.
The accompanying unaudited statements of NeoPharm, Inc. (the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not contain all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying unaudited
interim financial statements contain all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the Company's financial
position as of September 30, 1998, the results of operations for the three and
nine months ended September 30, 1998 and 1997, the results of operations from
inception (June 15, 1990) to date (September 30, 1998), the changes in cash
flows for the nine month periods ended September 30, 1998 and 1997, and the
changes in cash flows from inception to date.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these financial statements
be read in conjunction with the financial statements and notes included in the
Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
NOTE 2 ACCOUNTING POLICIES
Effective the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No.
130"), which requires companies to report all changes in equity during a period,
except those resulting from investing by owners and distribution to owners, in a
financial statement for the period in which they are recognized. As of September
30, 1998, the Company has no items of other Comprehensive Income and
accordingly, is not required to report Comprehensive Income.
6
<PAGE> 7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Any statements made by NeoPharm Inc. (the "Company") in this quarterly report
that are forward looking are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
that important factors may affect the Company's actual results and could cause
such results to differ materially from forward-looking statements made by or on
behalf of the Company. Such factors include, but are not limited to, changing
market conditions, the impact of competitive products and pricing, the timely
development, approval by the Food and Drug Administration ("FDA") and foreign
health authorities, and market acceptance, of the Company's products in
development, the Company's ability to further raise capital, the Company's
dependence on key personnel, and other factors referenced under "Risk Factors"
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997.
Overview
The Company was founded in 1990 and is a development stage company engaged in
the research and development of drugs for the diagnosis and treatment of various
forms of cancer. Originally incorporated under the name Oncomed, Inc., the
Company changed its name to NeoPharm, Inc. in March, 1995. Presently the Company
has several drugs which are in varying stages of development: BUdR
(Broxuridine), liposome encapsulated doxorubicin ("LED"), liposome encapsulated
paclitaxel ("LEP"), liposome encapsulated antisense oligodeoxynucleotides
("LE-AON") and IL-13 chimeric protein (IL13-PE38QQR) ("IL-13").
Since its inception in 1990, the Company has devoted substantially all of its
efforts and resources to sponsoring and conducting research and development on
its own behalf and through collaborations with academic research and clinical
institutions. Through September 30, 1998, with the exception of license fees,
the Company has not generated any revenue from operations.
The Company has filed one New Drug Application ("NDA") related to the use of
BUdR as a prognostic indicator in breast cancer. This NDA was filed in December
of 1996. In December of 1997, FDA's Oncology Advisory Committee ("ODAC")
reviewed the NDA filing and voted not to recommend this indication to the FDA
for approval. Since that decision, the Company has met with the FDA to respond
to the concerns raised by ODAC. Based on these discussions, the Company is
gathering additional data in order to respond to the FDA. Upon completion of the
data gathering and analysis, the Company intends to file an amendment to its NDA
for the approval of BUdR as an S-Phase labeling marker for breast cancer.
The Company's IL-13 chimeric protein product is the subject of a Cooperative
Research and Development Agreement ("CRADA") with the FDA and the subject of a
licensing agreement with the National Institute of Health. The IL-13 chimeric
protein is the fusion of the receptor-binding ligand IL-13 with a derivative of
Pseudomonas exotoxin (PE38QQR). Research has demonstrated that some solid tumors
express high numbers of IL-13 receptors on their cell surfaces. These receptor
sites become a specific target for the IL-13 chimeric protein for inducing
cytotoxicity at nanogram concentrations. Normal organs of the body are shown to
exhibit minimal receptor sites thereby sparing these organs from any toxic
effect.
The Company's liposome products are spheres of subcellular size composed
primarily of phospholipids, certain of which are the primary components of
living cell membranes. By encapsulating certain chemotherapeutic drugs in
liposomes, the toxic side effects associated with the drug can be reduced and
the dose increased, thereby potentially increasing the effectiveness of therapy
through both increased drug action against cancer cells and reduced side
effects. The Company believes its liposomes overcome the effects of multiple
drug resistance, which is observed in an estimated 300,000 cancer patients each
year.
The Company recently initiated human clinical trials involving LEP. These trials
are initially being conducted at Allegheny University Medical Center in
Philadelphia and were initiated after extensive preclinical testing showed that
LEP was significantly better tolerated that the current formulation of
paclitaxel with equal anti-tumor activity. These clinical trials will use LEP on
patients with a variety of cancers.
7
<PAGE> 8
The Company recently began Phase II trials with LED in patients with prostate
cancer. The trials are being conducted at several different academic research
institutions. Preliminary results should be available in 1999 from this study.
The Company's operating results may fluctuate from period to period as a result
of, among other things, the receipt of license fee payments, the timing and
costs associated with clinical trials and the regulatory approval process, and
the acquisition of additional product rights. The Company participates in a
highly dynamic industry, which often results in significant volatility of the
Company's common stock price. Any setbacks in clinical trials, in the regulatory
approval process or in relationships with collaborative partners, and any
shortfalls in revenue or earnings from levels expected by securities analysts,
among other developments, have in the past had and could in the future have an
immediate and significant adverse effect on the trading price of the Company's
common stock in any given period.
Results of Operations - Nine Months Ended September 30, 1998 vs. Nine Months
Ended September 30, 1997
Research and development expenses increased by 7% or $59,704 for the nine month
period ended September 30, 1998 compared to the nine month period ended
September 30, 1997. 1998 activity relates to the start up of LED, LEP and IL-13
research and development efforts, and to a lesser extent, efforts related to
submitting additional data to the FDA related to the Broxine NDA. 1997 activity
was primarily focused on the NDA related to Broxine.
General and administration expenses increased 21% or $164,678 for the nine month
period ended September 30, 1998 compared to the nine month period ended
September 30, 1997, primarily due to increased payroll expenses and investor
relation activities.
The Company generated interest income on excess cash balances of $81,037 and
$158,524 for the nine month periods ended September 30, 1998 and September 30,
1997, respectively.
The net loss for the nine month period ended September 30, 1998 was $1,776,795
compared to a net loss of $924,926 for the nine month period ended September 30,
1997. The Company received $550,000 of licensing revenue in the second quarter
of 1997 but recorded no revenues in 1998. The Company expects losses to continue
as planned product development continues.
Results of Operations - Three Months Ended September 30, 1998 vs. Three Months
Ended September 30, 1997
Research and development expenses remained essentially unchanged for the three
month period ended September 30, 1998 compared to the three month period ended
September 30, 1997. 1998 activity relates to the start up of LED, LEP and IL-13
research and development efforts whereas 1997 activity was primarily focused on
the NDA related to Broxine.
General and administration expenses increased 11% or $32,550 for the three month
period ended September 30, 1998 compared to the three month period ended
September 30, 1997, primarily due to increased payroll expenses and investor
relation activities.
The Company generated interest income on excess cash balances of $15,587 and
$49,134 for the three month periods ended September 30, 1998 and September 30,
1997, respectively.
The net loss for the three month period ended September 30, 1998 was $682,545
compared to the net loss of $616,340 for the three month period ended September
30, 1997. The Company expects losses to continue as planned product development
continues.
Liquidity and Capital Resources
Cash expenditures have exceeded revenues since the Company's inception.
Operations were initially funded through a loan from the Company's Chairman and
a bank line-of-credit, and since January 1996, the initial public offering of
common stock. The Company expects to incur additional expenses, resulting in
potentially significant
8
<PAGE> 9
losses, as it continues and expands its research and development activities and
undertakes additional clinical trials of compounds obtained under proprietary
licenses. The Company also expects to incur substantial administrative and
commercialization expenditures in the future as it seeks FDA approval of drugs
under development and initiates marketing activities.
On October 22, 1998, the Company established a $3,000,000 line of credit with
the John N. Kapoor Trust dtd. 9/20/89, an entity affiliated with the Company's
Chairman. Interest on borrowings on the line of credit will accrue at the rate
of 2% over the prime rate of the Northern Trust Bank. The accrued interest and
outstanding principal becomes due and payable the earlier of October 1, 2001 or
the date upon which the Company completes a public or private offering of debt
or equity securities or a licensing agreement for its products.
At September 30, 1998, the Company's cash and cash equivalents were $755,324
compared to $2,776,697 at December 31, 1997. The Company plans to finance its
immediate needs principally from its existing capital resources and interest
thereon, and to the extent available, through collaborative agreements with
corporate partners and future public and private financing. The Company's long
term capital needs will require substantial additional funding in order to
continue its research and product development programs. The Company's long-term
capital requirements and the adequacy of its available funds will depend upon
many factors, including results of research and development, results of product
testing, relationships with potential partnerships and collaborations, and the
FDA regulatory process. No assurance can be given that additional funding will
be available when needed or on terms acceptable to the Company. Insufficient
funds may require the Company to delay, scale-back or eliminate certain of its
research and development programs or to license third parties to commercialize
products or technologies that the Company would otherwise undertake itself.
The Year 2000 Issue
The year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company has conducted a review of its computer
systems and management believes that the Year 2000 issue will not materially
impact it.
9
<PAGE> 10
PART II - OTHER INFORMATION
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<CAPTION>
<S> <C> <C>
Item 1. Legal Proceedings None
Item 2. Changes in Securities None
Item 3. Defaults Upon Senior Securities None
Item 4. Submission of Matters to a Vote None
of Security-Holders
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.15 Line of Credit Agreement, dated as of
September 30, 1998, by and between the
Company and the John N. Kapoor Trust
(b) Reports on Form 8-K None
</TABLE>
10
<PAGE> 11
SIGNATURE PAGE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
NEOPHARM, INC.
By: /s/ Kevin M. Harris
---------------------------
Kevin M. Harris,
Chief Financial Officer
and authorized officer
Date: November 13, 1998
11
<PAGE> 1
Exhibit 10.15
LINE OF CREDIT AGREEMENT
- -------------------------------------------------------------------------------
The John N. Kapoor Trust, dtd. 9/20/89 (the "Lender"), whose principal address
is 225 East Deerpath Road, Suite 250, Lake Forest, Illinois 60045, has approved
the credit facility listed below to NeoPharm, Inc., a Delaware corporation,
whose address is 100 Corporate North, Suite 215, Bannockburn, Illinois 60015
(the "Borrower"), subject to the terms listed below.
1.0 CREDIT FACILITY.
1.1 CREDIT AUTHORIZATION. The Lender has approved the credit
authorization listed below (the "Credit Facility") subject to the terms and
conditions of this Agreement and the Lender's continuing satisfaction with the
Borrower's financial status. Disbursements under the Credit Facility will be
made in accordance with the terms hereof. Any disbursement on one or more
occasions shall not commit the Lender to make any subsequent disbursement.
LINE OF CREDIT FACILITY. The Lender has approved a Credit Facility to
the Borrower in the principal sum not to exceed $3,000,000.00 in the
aggregate at any one time outstanding. The Credit Facility shall be in the
form of loans evidenced by a Business Loan Note substantially in the form
attached hereto as Exhibit A, executed concurrently (the "Note") the
proceeds of which shall be used to fund the Borrower's research and
development operations and for general working capital needs. Funds may
be drawn under the Credit Facility during the period commencing on the
date hereof and ending on the earlier of (i) the date upon which Borrower
has drawn the maximum amount permitted to be drawn under the Credit
Facility or (ii) the Termination Date (as herein defined), after which no
further funds may be drawn under the Credit Facility and Lender's
obligation hereunder to make additional loans under the Credit Facility
shall terminate. As used herein, the "Termination Date" shall be the date
of which all principal and interest under the Credit Facility shall be due
and payable and shall be the earliest to occur of (i) October 1, 2001, (ii)
the date upon which Borrower shall complete a public or private offering,
or series of related offerings, of its equity or debt securities which, in
the aggregate, results in net proceeds to the Borrower of more than
$3,000,000.00 , or (iii) the occurrence of an Event of Default (as herein
defined).
2.0 CONDITIONS PRECEDENT.
2.1 CONDITIONS PRECEDENT TO INITIAL EXTENSION OF CREDIT. Before the
first extension of credit under this Agreement, the Borrower shall deliver to
the Lender, in form and substance satisfactory to the Lender:
A. LOAN DOCUMENTS. The Note, financing statements, security agreements,
subordination agreements and any other loan documents which the Lender
may reasonably require to give effect to the transaction described in this
agreement (the "Related Documents");
B. EVIDENCE OF DUE ORGANIZATION AND GOOD STANDING. Evidence of the due
organization and good standing of the Borrower which evidence shall
include, at a minimum, articles of incorporation certified as of a current
date by the Secretary of State of the State of Delaware, bylaws certified
by the Secretary of Borrower, and a certificate of good standing from the
State of Delaware;
C. EVIDENCE OF AUTHORITY TO ENTER INTO LOAN DOCUMENTS. Evidence that (i)
Borrower is authorized to enter into the transactions described in this
Agreement and the other Related Documents, and (ii) the person signing on
behalf of Borrower is authorized to do so.
D. CONTINUING SECURITY AGREEMENT. Borrower will execute a continuing
security agreement, substantially in the form attached hereto as Exhibit B.
E. LIEN WAIVERS. Lien waivers, if necessary, including, but not limited
to mechanics lien waivers with respect to the Subdivision in form and
substance satisfactory to Lender; and
F. BOOKS AND RECORDS. Such other information or books and records of
Borrower as Lender may reasonably require.
2.2 CONDITIONS PRECEDENT TO EACH EXTENSION OF CREDIT. Before any
extension of credit under this Agreement, the following conditions must be
satisfied:
A. REPRESENTATIONS. The representations of Borrower contained herein
shall be true on and as of the date of the extension of credit;
B. NO EVENT OF DEFAULT. No Event of Default has occurred and is
continuing or would result from the extension of credit;
<PAGE> 2
C. ADDITIONAL APPROVALS, OPINIONS AND DOCUMENTS. The Lender has
received any other approvals, opinions and documents as it may reasonably
request; and
D. SECTION 7.2 COMPLIANCE. Borrower is in compliance with all the terms,
conditions and covenants of Section 7.2 hereof.
3.0 REQUESTS TO BORROW. The Borrower may authorize certain of its
officers and other agents to request advances under the Credit Facility by
facsimile, telephone or other means of communication but such request shall be
made not less than ten (10) days prior to the date that borrowing under the
Credit Facility is required to be funded.
4.0 FEES AND EXPENSES. Borrower shall not be required to pay Lender a
closing fee for the authorization of the Credit Facility. Upon request,
Borrower shall pay the Lender's fees and expenses in connection with the
execution, delivery and performance of this Agreement (including, without
limitation, reasonable attorneys' fees) and Lender's other out-of-pocket
expenses including, but not limited to, search fees and filing fees allocated
to the Credit Facility. Reasonable collateral audit fees shall be borne by the
Lender.
5.0 SECURITY.
5.1 COLLATERAL. To secure the payment of the borrowings under the Credit
Facility, the Borrower grants to the Lender a continuing first security
interest in all of Borrower's property, now existing or hereafter acquired, and
all its additions, substitutions, increments, proceeds and products of
Borrower's property (the "Collateral") including, without limitation, the
following:
A. ACCOUNTS RECEIVABLE. All of the Borrower's accounts, chattel paper,
general intangibles (including, without limitation, contract rights and
patents and patent rights of any nature), instruments, and documents (as
those terms are defined in the Uniform Commercial Code), rights to refunds
of taxes paid at any time to any governmental entity, and any letters of
credit and drafts under them given in support of the foregoing, wherever
located.
B. INVENTORY. All of the Borrower's inventory, wherever located. The
Borrower has delivered to the Lender executed security agreements and
financing statements in form and substance satisfactory to Lender.
C. EQUIPMENT. All of the Borrower's equipment, wherever located. The
Borrower has delivered to lender executed security agreements and
financing statements in form and substance satisfactory to the Lender.
5.2 FORBEARANCE. No forbearance or extension of time granted any
subsequent owner of the Collateral shall release the Borrower from liability.
5.3 ADDITIONAL COLLATERAL/SETOFF. To further secure payment of the
borrowings under the Credit Facility and all of the Borrower's other
liabilities to the Lender, the Borrower grants to the Lender a continuing
security interest in all securities and other property of the Borrower now or
hereafter in the custody, possession or control of the Lender. The Lender
has the right at any time to apply its own debt or liability to the Borrower,
or to any other party liable for payment of the Credit Facility, in whole or
partial payment of the Credit Facility or other present or future
liabilities, without any requirement of mutual maturity.
5.4 CROSS-LIEN. Any of the Borrower's other property in which the Lender
has a security interest to secure payment of any other debt, whether absolute,
contingent, direct or indirect, including the Borrower's guaranties of the
debts of others, also secures payment of and is part of the Collateral for the
Credit Facility.
6.0 AFFIRMATIVE COVENANTS. So long as any debt remains outstanding under
the Credit Facility, the Borrower shall:
6.1 INSURANCE. Maintain insurance with financially sound and reputable
insurers covering Borrower's properties and business against those casualties
and contingencies and in the types and amounts as are in accordance with sound
business and industry practices.
6.2 EXISTENCE. Maintain its existence and business operations as
presently in effect in accordance with all applicable laws and regulations, pay
all debts and obligations when due under normal terms, and pay on or before
their due date, all taxes, assessments, fees and other governmental monetary
obligations, except as they may be contested in good faith if they have been
properly reflected on Borrower's books and, at the Lender's request, adequate
funds or security has been reserved to insure payment.
6.3 FINANCIAL RECORDS. Maintain proper books and records of account, in
accordance with generally accepted accounting principles where applicable, and
consistent with financial statements previously submitted to the Lender.
2
<PAGE> 3
6.4 COLLATERAL AUDITS. Permit the Lender or its agents to perform annual
field audits of the Collateral. The Lender shall retain the right to inspect
the Collateral and business records related to it at such times and at such
intervals as the Lender may reasonably require.
6.5 FINANCIAL REPORTS. Furnish to the Lender whatever information,
books and records the Lender may reasonably request, including at a minimum:
A. Within 30 days after and as of the end of each calendar month, the
internally prepared financial statements of the Borrower, including Borrower's
balance sheet and statement of income and cash flow.
B. Within 120 days after and as of the end of each calendar year,
detailed audited financial statements of Borrower including Borrower's balance
sheet and statements of income, cash flow and retained earnings;
C. Within 15 days after and as of the end of each calendar month, the
following, each certified as correct by Borrower:
(a) a list of accounts receivable, aged from date of invoice;
(b) a list of accounts payable, aged from date of receipt;
(c) an inventory listing; and
(d) a status report on each drug being developed by Borrower.
D. Within 30 days after and as of the end of each calendar quarter, a
certification from an authorized officer of Borrower that Borrower is in
compliance with the covenants set forth in this Agreement.
6.6 GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. Prepare all accounting
records and financial reports and calculate Tangible Net Worth and Leverage
Ratio (as those terms are hereinafter defined) and all other ratios in
accordance with generally accepted accounting principles consistently applied
throughout all accounting periods.
6.7 NOTICE OF CHANGES. Promptly notify Lender in writing of any change
of its officers, directors or key employees; change of location of Borrower's
principal offices; change of Borrower's name; any sale or purchase not in the
regular course of Borrower's business or assets; or any other material change
in the business or financial affairs of Borrower.
6.8 CHANGES IN STATUS OF COLLATERAL. Promptly notify Lender if any lien
shall be filed against the Collateral.
6.9 CHATTEL PAPER, INSTRUMENTS, ETC. Evidence chattel paper,
instruments, drafts, notes, acceptances and other documents which constitute
Collateral on forms satisfactory to Lender, and promptly mark all such forms of
Collateral to indicate conspicuously Lender's interest and immediately deliver
them to Lender.
7.0 NEGATIVE COVENANTS.
7.1 GAAP. Unless otherwise noted, the financial requirements set forth
in this Section will be computed in accordance with generally accepted
accounting principles applied on a basis consistent with financial statements
previously submitted by the Borrower to the Lender.
7.2 COVENANTS. Without the written consent of the Lender, so long as any
debt remains outstanding under the Credit Facility the Borrower will not:
A. DIVIDENDS. Acquire or retire any of its shares of capital stock,
or declare or pay dividends or make any other distributions upon any of
its shares of capital stock.
B. DEBT. Incur, or permit to remain outstanding, debt for borrowed
money or installment obligations, except debt reflected in the latest
financial statements of the Borrower furnished to the Lender prior to
execution of this Agreement and not to be paid with proceeds of borrowings
under the Credit Facility. For the purpose of this covenant, the sale of
any account receivable is the incurring debt for borrowed money.
C. GUARANTIES. Guarantee or otherwise become or remain secondarily
liable on the undertaking of another, except for endorsement of drafts for
deposit and collection in the ordinary course of business.
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D. LIENS. Create or permit to exist any lien on any part of
Borrower's property, except: liens on Borrower's real property, if any;
existing liens disclosed to the Lender; liens to the Lender; liens
incurred in the ordinary course of business securing current nondelinquent
liabilities for taxes, worker's compensation, unemployment insurance,
social security and pension liabilities; and liens for taxes being
contested in good faith.
E. ADVANCES AND INVESTMENTS. Purchase or acquire any securities of,
or make any loans or advances to or investments in, any person, firm or
corporation, except obligations of the United States Government, open
market commercial paper rated one of the top two ratings by a rating
agency of recognized standing, or certificates of deposit in insured
financial institutions.
F. USE OF PROCEEDS. Use, or permit any proceeds of the Credit
Facility to be used, directly or indirectly, for any purpose other than
as permitted by this Agreement.
G. CHANGE OF NAME OR LOCATION. Without at least 30 days prior
written notice to Bank, change its name, its principal office, its office
where its records concerning receivables are kept or the location of any
of its assets from those set forth on Schedule (except the shipment or
temporary storage of inventory in the ordinary and usual course of
Borrower's business).
H. TANGIBLE NET WORTH. Permit its Tangible Net Worth (as herein
defined) to be less than $400,000.00, as determined by Borrower's
quarterly financial statements. "Tangible Net Worth" shall mean net worth
plus Subordinated Debt (as defined herein) less the sum of intangible
assets, including pre-paid expenses, non-compete agreements, unamortized
financing charges, goodwill, patents, copyrights, mailing lists, catalogs,
trademarks, organizational expenses, and all other intangibles.
"Subordinated Debt" shall mean indebtedness of Borrower other than to Bank
fully subordinated in right of payment to Bank in manner and by agreement
satisfactory to Bank.
I. LEVERAGE RATIO. Permit its Leverage Ratio (as herein defined) to
exceed 4.0, as determined by Borrower's quarterly financial statements.
"Leverage Ratio" shall mean Borrower's total liabilities less Subordinated
Debt divided by Tangible Net Worth.
J. CAPITAL EXPENDITURES. Permit its capital expenditures,
including, without limitation, amounts financed under capitalized leases
to exceed $100,000 in the aggregate in any given fiscal year.
8.0 REPRESENTATIONS BY BORROWER. Borrower represents that (a) the
execution and delivery of this Agreement and the Note, and the performance of
the obligations they impose, do not violate any law, conflict with any
agreement by which Borrower is bound, or require the consent or approval of
any governmental authority or other third party; (b) this Agreement and the
Note are valid and binding agreements, enforceable according to their terms;
and (c) all balance sheets, profit and loss statements, and other financial
statements furnished to the Lender are accurate and fairly reflect the
financial condition of the organizations and persons to which they apply on
their effective dates, including contingent liabilities of every type, which
financial condition has not changed materially and adversely since those dates.
Borrower further represents that: (x) it is duly organized, existing and in
good standing pursuant to the laws under which it is organized; and (y) the
execution and delivery of this Agreement and the Note and the performance of
the obligations they impose (i) are within its powers, (ii) have been duly
authorized by all necessary action of its governing body, and (iii) do not
contravene the terms of its articles of incorporation or organization, its
by-laws, or any partnership, operating or other agreement governing its
affairs.
9.0 DEFAULT/ACCELERATION.
9.1 EVENTS OF DEFAULT/ACCELERATION. If any of the following events occur
(each, an "Event of Default"), the Credit Facility shall terminate and all
borrowings under them shall become due immediately, without notice, at the
Lender's option:
A. The Borrower fails to pay when due any amount payable under the Credit
Facility or under any agreement or instrument evidencing debt to any
creditor;
B. The Borrower (a) fails to observe or perform any other material term
of this Agreement, Related Documents or the Note; (b) makes any materially
incorrect or misleading representation, warranty or certificate to the Lender;
(c) makes any materially incorrect or misleading representation in any
financial statement or other information delivered to the Lender; or (d)
defaults under the terms of any agreement or instrument relating to any debt
for borrowed money (other than borrowings under the Credit Facility) such that
the creditor declares the debt due before its maturity;
C. There is a default under the terms of any loan agreement, security
agreement, Note or Related Document or any other document executed as part of
the Credit Facility;
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<PAGE> 5
D. The Borrower becomes insolvent or unable to pay Borrower's debts as
they become due;
E. The Borrower (a) makes an assignment for the benefit of creditors; (b)
consents to the appointment of a custodian, receiver or trustee for Borrower or
for a substantial part of Borrower's assets; or (c) commences any proceeding
under any bankruptcy, reorganization, liquidation or similar laws of any
jurisdiction;
F. A custodian, receiver, or trustee is appointed for the Borrower or for
a substantial part of Borrower's assets without Borrower's consent and is not
removed within 30 days after the appointment;
G. Proceedings are commenced against the Borrower, or any attachment,
levy or garnishment is issued against any property of the Borrower;
H. Any judgment is entered against the Borrower, or any attachment, levy
or garnishment is issued against any property of the Borrower;
I. The Borrower (a) is dissolved, (b) merges or consolidates with any
third party, (c) issues, sells or otherwise disposes (other than pursuant to
any existing stock option plan or bonus arrangement) of any shares of its
capital stock or other securities, or rights, warrants or options to purchase
or acquire those shares or securities, (d) leases, sells or otherwise conveys
a material part of its assets or business outside the ordinary course of
business, (e) licenses any of its patents, technology or know-how to any third
party, (f) leases, purchases, or otherwise acquires a material part of the
assets of any other corporation or business entity, except in the ordinary
course of business, or (g) agrees to do any of the foregoing.
J. There is a substantial change in the existing or prospective financial
condition of the Borrower which the Lender in good faith determines to be
materially adverse; or
K. The Lender in good faith deems itself insecure.
9.2 REMEDIES. If the borrowings under the Credit Facility are not paid
at maturity, whether by acceleration or otherwise, the Lender shall have all of
the rights and remedies provided by any law or agreement. Any requirement of
reasonable notice shall be met if the Lender sends the notice to the Borrower
at least seven (7) days prior to the date of sale, disposition or other event
giving rise to the required notice. The Lender is authorized to cause all or
any part of the Collateral to be transferred to or registered in its name or in
the name of any other person or business entity, with or without designating
the capacity of that nominee. The Borrower is liable for any deficiency
remaining after disposition of any Collateral. The Borrower is liable to the
Lender for all reasonable costs and expenses of every kind incurred in the
making or collection of the Credit Facility, including without limitation
reasonable attorney's fees and court costs (whether attributable to the
Lender's counsel). These costs and expenses include without limitation any
costs or expenses incurred by the Lender in any bankruptcy, reorganization,
insolvency or other similar proceeding.
10.0 MISCELLANEOUS.
10.1 Notice from one party to another relating to this Agreement is
effective if made in writing (including telecommunications) and delivered to
the recipient's address, telex number of fax number set forth under its name
below by any of the following means: (a) hand delivery, (b) registered or
certified mail, postage prepaid, with return receipt requested, (c) first class
or express mail, postage prepaid, (d) Federal Express or like overnight courier
service, or (e) fax, telex or other wire transmission with request for
assurance of receipt in a manner typical with respect to communications of that
type. Notice made in accordance with this section is deemed delivered on
receipt if delivered by hand or wire transmission, three business days after
mailing by first class, registered or certified mail, or one business day after
mailing or deposit with an overnight courier service.
10.2 No delay on the part of the Lender in the exercise of any right or
remedy waives that right or remedy. No single or partial exercise by the
Lender of any right or remedy precludes any other future exercise of it or the
exercise of any other right or remedy. No waiver or indulgence by the Lender
of any default is effective unless it is in writing and signed by the Lender,
nor shall a waiver on one occasion bar or waive that right on any future
occasion.
10.3 This Agreement, the Related Documents, the Note, and any other
related loan documents embody the entire agreement and understanding between
the Borrower and the Lender and supersede all prior agreements and
understandings relating to their subject matter. If any one or more of the
obligations of the Borrower under this agreement, Related Documents or the Note
is invalid, illegal or unenforceable in any jurisdiction the validity, legality
and enforceability of the remaining obligations of the Borrower shall not in
any way be affected or impaired, and the invalidity, illegality or
unenforceability in one jurisdiction shall not affect the validity, legality or
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<PAGE> 6
enforceability of the obligations of the Borrower under this agreement, Related
Documents or the Note in any other jurisdiction.
10.4 This Agreement is delivered in the State of Illinois and governed by
Illinois law. This Agreement binds the Borrower and Borrower's successors,
and benefits the Lender, its successors and assigns.
10.5 Section headings are for convenience of reference only and do not
affect the interpretation of this agreement.
11.0 WAIVER OF JURY TRIAL. THE LENDER AND THE BORROWER, AFTER CONSULTING
OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN
ANY LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED
INSTRUMENT OR AGREEMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT, OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN), OR ACTIONS OF EITHER OF THEM. NEITHER THE LENDER NOR THE BORROWER
SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY ACTION IN WHICH A
JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN
MODIFIED IN ANY RESPECT OR RELINQUISHED BY EITHER THE LENDER OR THE BORROWER
EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY BOTH OF THEM.
Executed by the parties as of this 30th day of September, 1998.
LENDER: BORROWER:
THE JOHN N. KAPOOR TRUST NEOPHARM, INC.
By:________________________________ By:_________________________________
James M. Hussey,
President and Chief Executive Officer
Title: Trustee
ADDRESS FOR NOTICES: ADDRESS FOR NOTICES:
225 East Deerpath Road 100 Corporate North, Suite 215
Suite 250 Banncokburn, Illinois 60015
Lake Forest, Illinois 60045
ATTN: John N. Kapoor Fax/Telex No: (847) 295-8854
Fax/Telex No: (847) 295-8665
<PAGE> 7
EXHIBIT A
- -------------------------------------------------------------------------------
BUSINESS LOAN NOTE
- -------------------------------------------------------------------------------
Due OCTOBER 1, 2001 $3,000,000.00
Date: SEPTEMBER 30, 1998
PROMISE TO PAY: On or before OCTOBER 1, 2001, for value received, the
UNDERSIGNED, NEOPHARM, INC., A DELAWARE CORPORATION (the "Borrower") promises
to pay to THE JOHN N. KAPOOR TRUST, DTD. 9/20/89 (the "Lender") or order, at
the Lender's main office at 225 Eat Deerpath Road, Suite 250, Lake Forest,
Illinois 60045, the sum of THREE MILLION DOLLARS ($3,000,000.00), or such
lesser sum as is indicated by the Lender's records, plus interest computed on
the basis of the actual number of days elapsed in a year of 360 days at the
rate of:
2.0% (two hundred basis points) over the "Prime Rate: announced from time
to time by The Northern Trust Company of Chicago (the "Bank") as its
"prime rate", which rate, however, may not be the lowest rate of
interest charged by the Bank to its customers, (the "Note Rate") and a
rate of 5% (five hundred basis points) above the Note Rate on overdue
principal from the date when due to be paid (the "Default Rate").
In no event shall the interest rate exceed the maximum rate allowed by law; any
interest payment which would for any reason be unlawful under applicable law
shall be applied to principal.
All amounts hereunder shall be due and payable by Borrower on the earlier of
(i) October 1, 2001, (ii) the date upon which Borrower shall complete a public
or private offering, or series of related offerings, of its equity or debt
securities, which, in the aggregate, results in net proceeds to the Borrower of
more than $3,000,000.00, (iii) upon an Event of Default, or (iv) such earlier
or later date as the parties shall agree.
CREDIT FACILITY: The Lender has approved a credit facility to the Borrower in a
principal amount not to exceed the face amount of this Note. The credit
facility is in the form of advances made from time to time by the Lender to the
Borrower. This Note evidences the Borrower's obligation to repay those
advances. The aggregate principal amount of debt evidenced by this Note is the
amount reflected from time to time in the records of the Lender but shall not
exceed the face amount of this Note. UNTIL MATURITY, THE BORROWER MAY BORROW
AND PAY DOWN BUT MAY NOT REBORROW UNDER THIS NOTE.
LINE OF CREDIT: This Note evidences a debt under the terms of a Line of Credit
Agreement between the Lender and the Borrower dated September 30, 1998 and any
amendments.
LENDER'S RIGHT OF SETOFF: The Lender has the right at any time to apply its
own debt or liability to the Borrower or to any other party liable on this Note
in whole or partial payment of this Note or other present or future liabilities
of the Borrower to the Lender, without any requirement of mutual maturity.
BUSINESS LOAN: The Borrower acknowledges and agrees (i) that this Note
evidences a business loan for the purpose of financing a commercial enterprise
carried on for the purpose of investment or profit under 815 ILCS 205/4 and is
not subject to any usury law or limitation of the State of Illinois, and (ii)
the obligation evidenced by this Note is an exempt transaction under the
Federal Truth-in-Lending Act, 15 U.S.C., Section 1601 et seq.
SECURITY: To secure the payment of this Note and any other present or future
liability of the Borrower to the Lender, whether several, joint, or joint and
several, the Borrower pledges and grants to the Lender a continuing security
interest in the following described property and all of its additions,
substitutions, increments, proceeds and products, whether now owned or later
acquired (the "Collateral"):
1. All securities and other property of the Borrower in the custody,
possession or control of the Lender;
2. All property or securities declared or acknowledged to constitute
security for any past, present or future liability of the Borrower to
Lender;
3. The following additional property of the Borrower: Accounts, chattel
paper, general intangibles and inventory and contract rights.
REPRESENTATIONS BY BORROWER: The Borrower represents that: (A) the execution
and delivery of this Note and the performance of the obligations it imposes do
not violate any law, conflict with any agreement by which it is bound, or
require the consent or approval of any governmental authority or other third
party; (B) this Note is a valid and binding agreement, enforceable according to
its terms; and (C) all balance sheets, profit and loss statements, and other
financial statements furnished to the Lender are accurate and fairly reflect
the financial condition of the organizations and persons to which they apply on
their effective dates, including contingent liabilities of every type, which
financial condition has not changed materially and adversely since those dates.
The Borrower further represents that: (X) it is duly organized, existing and
in good standing pursuant to the laws under which it is organized; and (Y) the
execution and delivery of this Note and the performance of the obligations it
imposes (i) are within its powers and have been duly authorized by all
necessary action of its governing body, and (ii) do not contravene the terms of
its articles of incorporation or organization, its by-laws, or any partnership,
operating or other agreement governing its affairs.
WAIVER OF JURY TRIAL: The Lender and the Borrower, after consulting or having
had the opportunity to consult with counsel, knowingly, voluntarily and
intentionally waive any right either of them may have to a trial by jury in any
litigation based upon or arising out of this Note or any related instrument or
agreement, or any of the transactions contemplated by this Note, or any course
of conduct, dealing, statements (whether oral or written), or actions of either
of them. Neither the Lender nor the Borrower shall seek to consolidate, by
counterclaim or otherwise, any action in which a jury trial has been waived with
any other action in which a jury trial cannot be or has not been waived. These
provisions shall not be deemed to have been modified in any respect or
relinquished by either the Lender or the Borrower except by a written instrument
executed by both of them.
Address: ____________________________ BORROWER: NEOPHARM, INC.
______________________________ By: ______________________________
______________________________
Printed Name Title
Address: ____________________________ By: ______________________________
______________________________ ______________________________
Printed Name Title
<PAGE> 8
ADDITIONAL TERMS
EVENTS OF DEFAULT/ACCELERATION: If any of the following events occurs this Note
shall become due immediately, without notice, at the Lender's option:
1. The Borrower fails to pay when due any amount payable under this Note or
under any agreement or instrument evidencing debt to any creditor.
2. The Borrower (a) fails to observe or perform any other term of this Note;
(b) makes any materially incorrect or misleading representation, warranty,
or certificate to the Lender; (c) makes any materially incorrect or
misleading representation in any financial statement or other information
delivered to the Lender; or (d) defaults under the terms of any agreement or
instrument relating to any debt for borrowed money (other than the debt
evidenced by this Note) such that the creditor declares the debt due before
its maturity.
3. There is a default under the terms of any loan agreement, mortgage, security
agreement, or any other document executed as part of the loan evidenced by
this Note, or any guaranty of the loan evidenced by this Note becomes
unenforceable in whole or in part, or any guarantor fails to promptly
perform under its guaranty.
4. The Borrower becomes insolvent or unable to pay its debts as they become
due.
5. The Borrower (a) makes an assignment for the benefit of creditors; (b)
consents to the appointment of a custodian, receiver, or trustee for itself
or for a substantial part of its assets; or (c) commences any proceeding
under any Bankruptcy, reorganization, liquidation, insolvency or similar
laws of any jurisdiction.
6. A custodian, receiver, or trustee is appointed for the Borrower or for a
substantial part of its assets without its consent and is not removed within
60 days after the appointment.
7. Proceedings are commenced against the Borrower under any Bankruptcy,
reorganization, liquidation, or similar laws of any jurisdiction, and they
remain undismissed for 60 days after commencement; or the Borrower consents
to the commencement of those proceedings.
8. Any judgment is entered against the Borrower, or any attachment, levy, or
garnishment is issued against any property of the Borrower.
9. The Borrower (a) is dissolved, (b) merges or consolidates with any third
party, (c) issues, sells or otherwise disposes (other than pursuant to any
existing employee stock option plan or bonus arrangement) of any shares of
its capital stock or other securities or rights, warrants or options to
purchase or acquire those shares or securities, (d) leases, sells or
otherwise conveys a material part of its assets or business outside the
ordinary course of its business, (e) licenses any of its patents, technology
or know-how to any third party, (f) leases, purchases, or otherwise acquires
a material part of the assets of any other business entity, except in the
ordinary course of its business, or (g) agrees to do any of the foregoing
(notwithstanding the foregoing, any subsidiary may merge or consolidate with
any other subsidiary, or with the Borrower, so long as the Borrower is the
survivor).
10.There is a substantial change in the existing or prospective financial
condition of the Borrower which the Lender in good faith determines to be
materially adverse.
11.The Lender in good faith deems itself insecure.
REMEDIES: If this Note is not paid at maturity, whether by demand,
acceleration or otherwise, the Lender shall have all of the rights and remedies
provided by any law or agreement. Any requirement of reasonable notice is met
if the Lender sends the notice to the Borrower at least seven (7) days prior to
the date of sale, disposition or other event giving rise to the required
notice. The Lender is authorized to cause all or any part of the Collateral to
be transferred to or registered in its name or in the name of any other person
or business entity, with or without designating the capacity of that nominee.
The Borrower is liable for any deficiency remaining after disposition of any
Collateral. The Borrower is liable to the Lender for all reasonable costs and
expenses of every kind incurred in the making or collection of this Note,
including without limitation reasonable attorneys' fees and court costs. These
costs and expenses include without limitation any costs or expenses incurred by
the Lender in any Bankruptcy, reorganization, insolvency or other similar
proceeding.
RELATED DOCUMENTS: The terms of any loan agreement, mortgage, security
agreement, pledge agreement or any other document executed as part of the loan
evidenced by this Note are incorporated by reference and made part of this
Note.
WAIVER: Each endorser and any other party liable on this Note severally waives
demand, presentment, notice of dishonor and protest, and consents to any
extension or postponement of time of its payment without limit as to the number
or period, to any substitution, exchange or release of all or any part of the
Collateral, to the addition of any party, and to the release or discharge of,
or suspension of any rights and remedies against, any person who may be liable
for the payment of this Note. No delay on the part of the Lender in the
exercise of any right or remedy waives that right or remedy. No single or
partial exercise by the Lender of any right or remedy precludes any other
future exercise of it or the exercise of any other right or remedy. No waiver
or indulgence by the Lender of any default is effective unless it is in writing
and signed by the Lender, nor does a waiver on one occasion bar or waive that
right on any future occasion.
PREPAYMENT: The Borrower may prepay all or any part of the principal balance
of this Note plus all interest and costs owing at the time of prepayment, at
any time and from time to time
MISCELLANEOUS: This Note binds the Borrower and its successors, and benefits
the Lender, its successors and assigns. Any reference to the Lender includes
any holder of this Note. This Note is deemed to be delivered in the State of
Illinois and governed by Illinois law. Section headings are for convenience of
reference only and do not affect the interpretation of this Note. This Note
and any related loan documents embody the entire agreement between the Borrower
and the Lender regarding the terms of the loan evidenced by this Note and
supersede all oral statements and prior writings relating to that loan.
<PAGE> 9
EXHIBIT B
CONTINUING SECURITY AGREEMENT
NAME OF BORROWER: NeoPharm, Inc., a Delaware corporation (the
"Borrower").
BORROWER'S ADDRESS:: 100 Corporate North, Suite 215, Bannockburn, Illinois
60015.
GRANT OF SECURITY INTEREST: The Borrower grants to the John N. Kapoor
Trust dtd. 9/20/89, the secured party, whose principal address is 225 E.
Deerpath, Suite 250, Lake Forest, Illinois 60045 (the "Lender"), under that
certain Line of Credit Agreement, dated as of September 30, 1998, by and
between Borrower and the Lender (the "Credit Agreement"), a continuing security
interest in the Collateral listed below, to secure the payment and performance
of:
All of the Borrower's debt pursuant to the (i) Credit Agreement; and (ii)
the Business Loan Note of even date herewith executed in favor of the
Lender.
Debt shall include each and every debt, liability and obligation of every
type and description now owed or arising at a later time, whether direct or
indirect, joint, several, or joint and several and whether or not of the same
type or class as presently outstanding, which shall collectively be referred to
as "Liabilities". Liabilities shall also include all interest, costs, expenses
and reasonable attorneys' fees accruing to or incurred by the Lender in
collecting the Liabilities or in the protection, maintenance or liquidation of
the Collateral.
COLLATERAL:
* Accounts; Chattel Paper; * Equipment
General Intangibles;
Instruments; * Deposit Accounts
* Inventory
DESCRIPTION OF COLLATERAL: The Collateral covered by this Agreement is
all of the Borrower's property indicated above and defined below, present and
future, including, but not limited to, any items listed on any schedule or list
attached. Also included are all proceeds, including but not limited to stock
rights, subscription rights, dividends, stock dividends, stock splits, or
liquidating dividends, and all cash, accounts, chattel paper and general
intangibles arising from the sale, rent, lease, casualty loss or other
disposition of the Collateral, and any Collateral returned to, repossessed by
or stopped in transit by the Borrower. Also included are the Borrower's books
and records which reflect the Collateral. Where the Collateral is in the
possession of the Lender, the Borrower agrees to deliver to the Lender any
property which represents an increase in the Collateral or profits or proceeds
of the Collateral.
1. "Accounts; Chattel Paper; General Intangibles; Instruments;"
consist of accounts, chattel paper, general intangibles, instruments,
and documents, as those terms are defined in the Illinois Uniform
Commercial Code ("UCC"). Also included is any right to a refund of
taxes paid at any time to any governmental entity. Also included are
letters of credit, and drafts under them, given in support of
Accounts; Chattel Paper; General Intangibles. The Borrower warrants
that its chief executive office is at the address shown above.
2. "Inventory" consists of all property held at any location by or
for the Borrower for sale, rent, or lease, or furnished or to be
furnished by the Borrower under any contract of service, or raw
materials or work in process and their products, or materials used or
consumed in its business, and includes containers and shelving useful
for storing.
<PAGE> 10
3. "Equipment" consists of any goods at any time acquired, owned or held by
the Borrower at any location primarily for use in its business, including
but not limited to machinery, fixtures, furniture, furnishings and
vehicles, and any accessions, parts, attachments, accessories, tools,
dies, additions, substitutions, replacements and appurtenances to them or
intended for use with them. Without limiting the security interest
granted, the Borrower's Equipment is presently located at 100 Corporate
North, Suite 215, Bannockburn, Illinois 60015.
4. "Deposit Account" consists of all demand, time, savings, passbook or like
accounts maintained with a bank, savings and loan association, credit
union or like organization, other than an account evidenced by a
certificate of deposit.
REPRESENTATIONS: Borrower represents that to the best of its knowledge:
(a) the execution and delivery of this Agreement and the performance of the
obligations it imposes do not violate any law, do not conflict with any
agreement by which it is bound, and do not require the consent or approval of
any governmental authority or any third party; (b) this Agreement is a valid
and binding agreement, enforceable according to its terms; and (c) all balance
sheets, profit and loss statements, and other financial statements furnished to
the Lender (other than projections and estimates) are accurate and fairly
reflect the financial condition of the organizations and persons to which they
apply on their effective dates, including contingent liabilities of every type,
which financial condition has not changed materially and adversely since those
dates. Borrower further represents that: (a) it is duly organized, existing
and in good standing under the laws where it is organized; and (b) the
execution and delivery of this Agreement and the performance of the obligations
it imposes (i) are within its powers and have been duly authorized by all
necessary action of its governing body; and (ii) do not contravene the terms of
its articles of incorporation or organization, its by-laws, or any agreement
governing its affairs.
WARRANTIES & COVENANTS: The Borrower warrants and covenants to the Lender
that:
1. It will pay its Liabilities to the Lender secured by this Agreement;
2. It is or will become the owner of the Collateral free from any liens,
encumbrances or security interests, except for this security interest and
existing liens disclosed to and accepted by the Lender in writing and will
defend the Collateral against all claims and demands of all persons at any
time claiming any interest in it;
3. It will keep the Collateral free of liens, encumbrances and other
security interests, except for this security interest, maintain it in good
repair, not use it illegally and exhibit it to the Lender on demand;
4. If requested to do so by Lender, the Borrower, at its own expense, will
maintain comprehensive casualty insurance on the Collateral against such
risks, in such amounts, with such deductibles and with such companies as
may be reasonably satisfactory to the Lender. Any such insurance policy
shall contain a lender's loss payable endorsement reasonably satisfactory
to the Lender and a prohibition against cancellation or amendment of the
policy or removal of the Lender as loss payee without at least 30 day's
prior written notice to the Lender. In all events, the amounts of such
insurance coverages shall conform to prudent business practices and shall
be in such minimum amounts that the Borrower will not be deemed a
co-insurer. The policies, or certificates evidencing them, shall, if the
Lender so requests, be deposited with the Lender;
2
<PAGE> 11
5. It will not sell or offer to sell or otherwise transfer the Collateral or
change the location of the Collateral, without the written consent of the
Lender, except sales of inventory in the ordinary course of business and
sales of worn out or obsolete Equipment;
6. It will pay promptly when due all taxes and assessments upon the
Collateral, or for its use or operation, except for taxes or assessments
being contested in good faith by appropriate proceedings and for which
adequate reserves in accordance with generally accepted accounting
principles shall have been set aside on the Borrower's books;
7. No financing statement covering all or any part of the Collateral or any
proceeds is on file in any public office, unless the Lender has approved
that filing, and at the Lender's request, or the filing evidences a lien
or security interest permitted under the Credit Agreement, the Borrower
will execute one or more financing statements in form satisfactory to the
Lender and will pay the cost of filing them in all public offices where
filing is reasonably deemed by the Lender to be necessary or desirable;
8. It will immediately notify the Lender in writing of any change in its
name, its business organization, or its chief executive office, and of
any additional places of business;
9. It will provide any information that the Lender may reasonably request
and will permit the Lender, upon prior notice, to inspect and copy its
books and records during normal business hours.
ACCOUNTS; CHATTEL PAPER; GENERAL INTANGIBLES; INSTRUMENTS: The Borrower
acknowledges that the Collateral includes the Borrower's "Accounts, Chattel
Paper, General Intangibles, Instruments" and until the Lender gives notice to
the Borrower to the contrary (as provided below), the Borrower will, in the
usual course of its business and at its own expense, on the Lender's behalf but
not as the Lender's agent, demand and receive and use its best efforts to
collect all moneys due or to become due. Until the Lender gives notice to
Borrower to the contrary after the Borrower is in Default, it may use the funds
collected in its business. Upon notice from the Lender after Default, the
Borrower agrees that all sums of money it receives on account of or in payment
or settlement of the Accounts, Chattel Paper, General Intangibles, Instruments
shall be held by it as trustee for the Lender without commingling with any of
its funds, and shall immediately be delivered to the Lender with endorsement to
the Lender's order of any check or similar instrument. It is agreed that, at
any time the Lender so elects after notice and Default by Borrower, it shall be
entitled, in its own name or in the name of the Borrower or otherwise, but at
the expense and cost of the Borrower, to collect, demand, receive, sue for or
compromise any and all Accounts, Chattel Paper, General Intangibles and
Instruments, and to give good and sufficient releases, to endorse any checks,
drafts or other orders for the payment of money payable to the Borrower and, in
its discretion, to file any claims or take any action or proceeding which the
Lender may deem necessary or advisable. It is expressly understood and agreed,
however, that the Lender shall not be required or obligated in any manner to
make any demand or to make any inquiry as to the nature or sufficiency of any
payment received by it or to present or file any claim or take any other action
to collect or enforce the payment of any amounts which may have been assigned
to it or to which it may be entitled at any time or times. All notices
required in this paragraph will be immediately effective when sent. The
Borrower appoints the Lender or the Lender's designee as the Borrower's
attorney-in-fact to do all things after a Default by Borrower with reference to
the Collateral as provided for in this section including without limitation (1)
to notify the post office authorities to change the Borrower's mailing address
to one designated by the Lender, (2) to receive, open and dispose of mail
addressed to the Borrower, (3) to sign the Borrower's name on any invoice or
bill of lading relating to any Collateral, on assignments and verifications of
account and on notices to the Borrower's customers, and (4) to do all things
necessary to carry out this Agreement. The Borrower ratifies and approves all
acts of the
3
<PAGE> 12
Lender as attorney-in-fact. The Lender shall be liable for its negligence or
misconduct, other than an act or omission made in good faith, or error of
judgment or mistake of fact or law; provided, however, that in such case Lender
shall only be liable for Borrower's actual damages and in no event shall Lender
have any liability to Borrower for any indirect, special, incidental,
consequential or punitive damages. This power being coupled with an interest
is irrevocable until the Liabilities have been fully satisfied.
The Lender shall have the right now, and at any time in the future after a
Default by Borrower in its sole and absolute discretion, without notice to the
Borrower, to (a) prepare, file and sign the Borrower's name on any proof of
claim in bankruptcy or similar document against any owner of the Collateral and
(b) prepare, file and sign the Borrower's name on any notice of lien,
assignment or satisfaction of lien or similar document in connection with the
Collateral.
PLEDGE: (a) Upon written notice to or the consent of the Borrower and only
upon Default, the Lender may (i) take any action it chooses against Borrower,
against any other collateral for the Debt, or against any other person liable
for the Debt; (ii) release Borrower or any other person liable for the Debt;
release any collateral for the Debt, and neglect to perfect any interest in any
such collateral; (iii) forbear or agree to forbear from exercising any rights
or remedies, including any right of setoff, that it has against the Borrower,
any other person liable for the Debt, or any other collateral for the Debt,
(iv) renew, extend, modify or amend any Liability, and deal with Borrower or
any other person, liable for the Debt as it chooses; (b) None of the
Borrower's obligations under this Agreement shall be affected by (i) any act or
omission of the Lender; (ii) the voluntary or involuntary liquidation, sale or
other disposition of all or substantially all of the assets of Borrower; (iii)
any receivership, insolvency, bankruptcy, reorganization or other similar
proceedings affecting Borrower or any of its assets; or (iv) any change in the
composition or structure of Borrower, including a merger or consolidation with
any other entity; (c) The Lender's rights under this section and this Agreement
are unconditional and absolute; (d) If any payment to the Lender on any of the
Liabilities are wholly or partially invalidated, set aside, declared fraudulent
or required to be repaid to the Borrower or anyone representing the Borrower or
the Borrower's creditors under any bankruptcy or insolvency act or code, under
any state or federal law, or under common law or equitable principles, then
this Agreement shall remain in full force and effect or be reinstated, as the
case may be, until payment in full to the Lender of the repaid amounts, and of
the Liabilities. If this Agreement must be reinstated, the Borrower agrees to
execute and deliver to the Lender new agreements and financing statements, if
necessary, in form and substance acceptable to the Lender, covering the
Collateral.
DEFAULT/REMEDIES: If the Borrower fails to pay any of the Liabilities
when due (subject to applicable grace or cure periods), or if a default by
anyone occurs under the terms of any agreement related to any of the
Liabilities (subject to applicable grace or cure period), or if the Borrower
fails to observe or perform any term of this Agreement or if any representation
or warranty contained in this Agreement is untrue (a "Default"), then the
Lender shall have the rights and remedies provided by law or this Agreement,
including but not limited to the right to require the Borrower to assemble the
Collateral and make it available to the Lender at a place to be designated by
the Lender which is reasonably convenient to both parties, the right to take
possession of the Collateral with or without demand, and the right to sell and
dispose of it and distribute the proceeds according to law. In connection with
the right of the Lender to take possession of the Collateral, the Lender may
take possession of any other items of property in or on the Collateral at the
time of taking possession, and hold them for the Borrower without liability on
the part of the Lender. If there is any statutory requirement for notice, that
requirement shall be met if the Lender sends notice to the Borrower at least
seven (7) days prior to the date of sale, disposition or other event giving
rise to the required notice. The Borrower is liable for any deficiency
remaining after disposition of the Collateral.
4
<PAGE> 13
MISCELLANEOUS:
1. Where the Collateral is located at, used in or attached to a facility
leased by the Borrower, the Borrower will obtain from the lessor a consent
to the granting of this security interest and a subordination of the
lessor's interest in any of the collateral, in form acceptable to the
Lender.
2. At its option the Lender may, but shall be under no duty or obligation
to, discharge taxes, liens, security interests or other encumbrances at
any time levied or placed on the Collateral, pay for insurance on the
Collateral, and pay for the maintenance and preservation of the
Collateral, in each case, in the event Borrower fails to do so within the
time provided hereunder, and the Borrower agrees to reimburse the Lender
on demand for any payment made or expense incurred by the Lender, with
interest at the highest rate permitted under any of the instruments
evidencing the Liabilities.
3. No delay on the part of the Lender in the exercise of any right or remedy
waives that right or remedy, no single or partial exercise by the Lender
of any right or remedy precludes any other exercise of it or the exercise
of any other right or remedy, and no waiver or indulgence by the Lender of
any default is effective unless it is in writing and signed by the Lender,
nor does a waiver on one occasion waive that right on any future occasion.
4. If any provision of this Agreement is invalid, it shall be ineffective
only to the extent of its invalidity, and the remaining provisions shall
be valid and effective.
5. Notice from one party to another relating to this Agreement shall be
deemed effective if made in writing (including telecommunications) and
delivered to the recipient's address, telex number or fax number by any of
the following means: (a) hand delivery, (b) registered or certified mail,
postage prepaid, with return receipt requested, (c) first class or express
mail, postage prepaid, (d) Federal Express, Purolator Courier or like
overnight courier service or (e) fax, telex or other wire transmission
with request for assurance of receipt in a manner typical with respect to
communications of that type. Notice made in accordance with this section
is deemed delivered on receipt if delivered by hand or wire transmission,
on the third business day after mailing by first class, registered or
certified mail, or on the next business day after mailing or deposit with
an overnight courier service.
6. All rights of the Lender benefit the Lender's successors and assigns; and
all obligations of the Borrower bind the Borrower's heirs, executors,
administrators, successors and assigns.
7. A carbon, photographic or other reproduction of this Agreement is
sufficient, and can be filed as a financing statement. The Lender is
irrevocably appointed the Borrower's attorney-in-fact to execute any
financing statement on Borrower's behalf covering the Collateral.
8. The terms and provisions of this Agreement are governed by Illinois law.
9. This Agreement and the documents executed in connection herewith together
constitute the entire agreement between the parties hereto with respect to
the transactions contemplated hereby and thereby. All prior negotiations,
discussions and agreements by and among the parties which are not
reflected in the above-described agreements and documents are merged into
said agreements and documents and have no further force and effect.
5
<PAGE> 14
WAIVER OF JURY TRIAL: THE LENDER AND THE BORROWER, AFTER CONSULTING OR
HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE ANY RIGHT EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY
LITIGATION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY RELATED
INSTRUMENT OR AGREEMENT, OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT, OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN), OR ACTIONS OF EITHER OF THEM. NEITHER THE LENDER NOR THE BORROWER
SHALL SEEK TO CONSOLIDATE, BY COUNTERCLAIM OR OTHERWISE, ANY ACTION IN WHICH A
JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED. THESE PROVISIONS SHALL NOT BE DEEMED TO HAVE BEEN
MODIFIED IN ANY RESPECT OR RELINQUISHED BY EITHER THE LENDER OR THE BORROWER
EXCEPT BY A WRITTEN INSTRUMENT EXECUTED BY BOTH OF THEM.
Dated: September 30, 1998
NEOPHARM, INC.
By:
-----------------------
Title:
---------------------
6
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 755,324
<SECURITIES> 0
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<CURRENT-ASSETS> 800,423
<PP&E> 158,689
<DEPRECIATION> 51,639
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<BONDS> 0
0
0
<COMMON> 1,758
<OTHER-SE> 595,519
<TOTAL-LIABILITY-AND-EQUITY> 907,473
<SALES> 0
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<INCOME-PRETAX> (698,132)
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<INCOME-CONTINUING> (698,132)
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