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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
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Commission File Number 33-90516
NEOPHARM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 51-0327886
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
225 EAST DEERPATH
SUITE 250
LAKE FOREST, ILLINOIS 60045
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(847) 295-8678
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.000429 par value
---------------------------------
(Title of class)
Warrants to purchase shares of Common Stock, $0.000429 par value
----------------------------------------------------------------
(Title of class)
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 No X .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ].
The aggregate market value of the Common Stock, par value $0.000429 per share,
(based on the closing price of such shares on the NASDAQ small cap on April
25, 1996 was $46,266,041. As of April 25, 1996 there were 4,023,134 shares of
Common Stock outstanding.
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FORM 10-K TABLE OF CONTENTS
Part I Page
----
Item 1. Business........................................................................ 3
Item 2. Properties...................................................................... 12
Item 3. Legal Proceedings............................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............................. 12
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters.......... 12
Item 6. Selected Financial Data........................................................ 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 15
Item 8. Financial Statements and Supplementary Date...................................... 17
Item 9. Disagreements on Accounting and Financial Disclosures........................... 17
Part III
Item 10. Directors and Executive Officers of the Registrant............................. 18
Item 11. Executive compensation ........................................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 23
Item 13. Certain Relationships and Related Transactions................................. 25
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 26
Signatures.............................................................................. 27
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PART I
ITEM 1. BUSINESS
THE COMPANY
NeoPharm is a pharmaceutical company engaged in the research and development
of drugs for the diagnosis and treatment of various forms of cancer. Phase II
clinical trials have been completed by various parties under the sponsorship of
the National Cancer Institute (the "NCI"), a unit of the National Institutes of
Health, with respect to the Company's two primary drugs, BUdR (Broxuridine) and
IUdR (Idoxuridine). In clinical trials involving brain cancer patients,
patients receiving BUdR together with radiation therapy exhibited increased
survival times as compared to patients receiving radiation therapy alone.
Preliminary results of additional studies indicate that BUdR and IUdR may
enhance the effectiveness of radiation therapy for other cancers, including
cervical and gynecological cancers, soft tissue sarcomas, and head and neck
cancers. BUdR and IUdR are also being used for diagnostic applications as
indicators of cancer cell proliferation activity. The Company anticipates
filing new drug applications ("NDA") with the United States Food and Drug
Administration ("FDA") for BUdR in a diagnostic application, for IUdR in a
diagnostic application and for BUdR in the treatment of brain cancer in the
future.
The Company's BUdR and IUdR products are the subject of a Cooperative
Research and Development Agreement ("CRADA") with the NCI. The CRADA provides
the Company with exclusive access to all clinical data compiled in BUdR and
IUdR studies conducted by various parties under the sponsorship of the NCI,
involving more than 6,000 patients for diagnostic applications and 1,500
patients for therapeutic applications. Under the CRADA, NCI has agreed to
provide the Company with exclusive access to all clinical data for the
compounds from clinical trials sponsored by the NCI during the term of the
CRADA pursuant to the CRADA Research Plan.
The incorporation of BUdR and IUdR into the DNA of actively dividing cancer
cells weakens the DNA molecules in the cancerous cells, and renders them more
sensitive to the lethal effects of radiation. These drugs, when coupled with
radiation therapy, may therefore be a more effective treatment for certain
forms of cancer than radiation therapy alone. In addition to their therapeutic
applications, BUdR and IUdR administered in smaller doses have been used for
diagnostic applications as indicators of cellular proliferation activity.
Following the administration of BUdR and IUdR, biopsies of the tumor are taken
and treated with specific monoclonal antibodies to highlight the presence of
BUdR or IUdR in the cells, and the actively dividing cells can then be
identified and counted. Clinical trials involving diagnostic use of BUdR and
IUdR have indicated that this cell tumor behavior information provided by BUdR
and IUdR can assist the oncologist in selecting appropriate therapeutic
regimens and enable better monitoring of the effectiveness of the chosen
therapy.
The Company also has developed proprietary liposome products (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. Unlike other liposome-encapsulated
chemotherapeutic drugs, the Company believes its liposomes overcome the effects
of MDR (multiple drug resistance), which is a common phenomenon in
approximately 300,000 cancer patients each year. The Company has conducted one
Phase II efficacy study of its liposome-encapsulated doxorubicin ("LED")
product involving approximately 20 patients with breast cancer, in which 45% of
the patients showed either a partial (minimum 50% shrinkage of the tumor) or
complete (100% shrinkage of the tumor) response, as compared to a reported 22%
partial or complete response observed with free doxorubicin in other studies.
The study also demonstrated a significant reduction in side effects. In
addition, the Company has developed a synthetically derived lipid source for
making its liposomes, and plans to initiate Phase I/II clinical trials using
the synthetically derived formulation in 1996. During 1995 and the first
quarter of 1996, the Company's liposome products were the subject of license
and sponsored research agreements
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with Georgetown University ("Georgetown"). Under these agreements, the Company
was obligated to fund liposome related research activities at Georgetown in
return for exclusive licenses to its liposome products then under development,
and a right of first refusal to license additional liposome products developed
by Georgetown. As of April 27, 1996 the Company's obligation to fund further
supportive research under these agreements has ended.
The Company does not intend to acquire or establish its own dedicated
manufacturing facilities for the foreseeable future. The Company's
manufacturing strategy is to develop manufacturing relationships with
established pharmaceutical manufacturers for production of BUdR and IUdR as
well as its liposome products. The Company's primary market in the United
States consists of approximately 3,500 oncologists, most of whom are affiliated
with major cancer treatment centers. The Company believes it will be able to
address this market with a direct sales force of relatively modest size. The
Company intends to enter into collaborative arrangements with other companies
to market its products elsewhere in the world. To date, the Company has been
engaged primarily in research and development of its proposed products. The
Company currently has no marketing or sales staff and, to date, has conducted
its activities through consultants and at university research facilities. The
Company will need to hire additional personnel and gain access to marketing and
sales resources in order to continue the development and commercialization of
its products.
NeoPharm, Inc. was incorporated under the name OncoMed, Inc. in June
1990, and changed its name to NeoPharm, Inc. in March 1995. The Company's
principal offices are located at 225 East Deerpath, suite 250, Lake Forest,
Illinois 60045, and its telephone number is (847) 295-8678.
NEOPHARM PRODUCTS
The Company has two primary areas of product focus, its BUdR and IUdR
products and its proprietary liposome products. The Company is developing BUdR
and IUdR for use as radiation sensitizers to improve the effectiveness of
radiation therapy for certain types of cancers and as diagnostic agents in
cancer therapy. The Company is also developing liposome encapsulated
chemotherapeutic agents, including liposome encapsulated doxorubicin and
liposome encapsulated vincristine. The Company has also acquired rights to
liposome encapsulated taxol and liposome encapsulated antisense
oligodeoxynucleotides.
All of the products currently being developed by the Company will require
approval by the FDA before they can be sold commercially in the United States.
This approval process is rigorous and time consuming. The products must be
shown to be effective in preclinical studies involving animal models and must
be shown to have acceptable levels of toxicity. The products are then subjected
to controlled clinical trials involving hundreds of patients in order to prove
safety and efficacy. These clinical trials are typically divided into Phase I
and II trials in which the safety and appropriate therapeutic dose are
determined, followed by Phase III trials, in which the efficacy is confirmed in
larger numbers of patients. BUdR and IUdR, which the Company is focusing on for
development of its initial products, have been shown to be safe and effective
in Phase I and Phase II clinical trials. BUdR and IUdR are currently undergoing
Phase III clinical trials. See "Government Regulation" below.
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The table below sets forth the Company's principal products under
development, the primary indications for these products and the development
status for each product.
NEOPHARM PRODUCT SUMMARY
PRODUCT CANCER INDICATION CLINICAL STATUS
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BUDR/IUDR THERAPEUTIC
PRODUCTS
BUdR . . . . . . . . . . . Malignant gliomas Phase III
(brain cancer)
IUdR . . . . . . . . . . . Soft tissue sarcoma Phase II
IUdR . . . . . . . . . . . Renal and Pancreatic Phase II
cancers
BUdR . . . . . . . . . . . Gynecological Phase I/II
malignancies
BUDR/IUDR DIAGNOSTIC
PRODUCTS
BUdR . . . . . . . . . . . Diagnostic Phase III
IUdR . . . . . . . . . . . Diagnostic Phase III
LIPOSOME PRODUCTS
LED . . . . . . . . . . . . Breast Phase II
LED . . . . . . . . . . . . Kaposi's Sarcoma Phase I/II
LED . . . . . . . . . . . . Hematological Phase II
LEVCR . . . . . . . . . . . Hematological, Colon Preclinical
LET . . . . . . . . . . . . Breast, Ovary Preclinical
LE-AON . . . . . . . . . . Lung, Breast, Colon, Preclinical
Gastrointestinal
There can be no assurance that any of the Company's products will receive
necessary regulatory approvals, be successfully commercialized and achieve
market acceptance, or that any products commercialized by the Company will not
be rendered obsolete by other developments in the field of cancer treatment.
BUDR AND IUDR PRODUCTS
The first commercial products for the Company are expected to be BUdR and
IUdR. Under the sponsorship of the National Cancer Institute ("NCI"), a unit of
the National Institutes of Health, these compounds have been evaluated as
agents for improving the effectiveness of cancer therapy in academic and
clinical studies for nearly 30 years, and the first IND application for BUdR
and IUdR was filed with the FDA in 1964. During the course of clinical
evaluation of these compounds, approximately 7,500 patients have been studied
under NCI-approved and sponsored clinical protocols. Recent advancements in
radiation therapy and cancer diagnostic techniques have increased the potential
utility of BUdR and IUdR as therapeutic and diagnostic agents in cancer
therapy. As a result of these advancements, in the early 1990s the NCI
determined that BUdR and IUdR should be made available on a commercial basis.
NCI chose NeoPharm as its development partner to bring these products to
market. As a result, a Cooperative Research and Development Agreement ("CRADA")
has been signed between NeoPharm and NCI. Under the terms of the CRADA,
NeoPharm has exclusive rights to the data generated with BUdR and IUdR by NCI
for certain indications contained in the CRADA including tumors metastatic to
the brain, astrocytomas, gastrointestinal cancers, colon cancer, pancreatic
cancer, lung cancer, soft tissue sarcomas, head and neck cancer and leukemia.
The CRADA provides that the Company may sponsor and help support clinical
studies, pay for the cost of producing BUdR and IUdR used in clinical trials
and, to the extent supported by clinical results, file appropriate NDAs with
the FDA. The term of the CRADA extends through May 1, 1997, although the
agreement may be terminated by either party without cause upon 60 days notice;
provided that in the event of such termination all clinical trials and
protocols that have been scheduled, initiated, or otherwise included under the
CRADA prior to the notification of termination shall be completed unless
otherwise mutually agreed. All provisions of the CRADA shall continue in effect
for such clinical trials and protocols. Although BUdR and IUdR are not covered
by patents or patent applications, the Company believes that its exclusive
access to the clinical data collected by NCI and its
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investigators and its other rights under the CRADA represent a significant
competitive advantage for the Company in the development and eventual
commercialization of BUdR and IUdR. There can be no assurance that the CRADA
will remain in effect or that the collaboration provided for in the CRADA will
be successfully completed. See "Collaborative Relationships, Licenses and
Commercialization Strategy", below.
LIPOSOME PRODUCTS
Liposomes are spheres of subcellular size composed primarily of
phospholipids, certain of which are the primary components of living cell
membranes, and can be made to contain and deliver drugs. This membrane
encapsulation feature of liposomes enables the entrapped drug to be circulated
in the bloodstream in higher concentrations for longer periods of time than the
free drug. When certain drugs, including chemotherapeutic agents, are
administered in conjunction with liposomes, they have been shown to produce
fewer and less severe local and systemic side effects. Although liposomes have
been investigated and used for many years as drug delivery systems, the
difficulty in producing liposomes on a large scale, as well as the limited
shelf life of many liposomes, have limited their use in clinical settings.
Unlike other liposomes-encapsulated chemotherapeutic drugs, the Company
believes its liposomes overcome the effects of MDR (multiple drug resistance),
which occurs in many chemotherapeutic regimens. In addition, these liposomes
are easy to prepare at the clinical site. The Company's formulation is based
on a lipid, cardiolipin, that is found in cardiac tissue. In addition, the
Company has developed a synthetically derived cardiolipin, which it believes
will provide a reliable lipid source for making the Company's liposomes to be
used in upcoming clinical trials.
COLLABORATIVE RELATIONSHIPS, LICENSES AND COMMERCIALIZATION STRATEGY
The Company has entered into a CRADA with the NCI and has licensed certain
technology relating to its liposome products from Georgetown. Dr. Aquilur
Rahman, the Company's Chief Scientific Officer, is an Adjunct Professor of
Pathology and Pharmacology at Georgetown. The principal terms of the NCI CRADA
and the license and sponsored research agreements with Georgetown are
summarized below.
NCI CRADA. The Company has entered into a CRADA with the National Cancer
Institute giving the Company the exclusive right to develop and commercialize
BUdR and IUdR for use as diagnostic and therapeutic agents in the treatment of
cancer. Under the CRADA, the Company is responsible for the co- development
with the NCI of clinical trials and for obtaining regulatory approvals for BUdR
and IUdR. NCI will provide NeoPharm with exclusive access to all clinical data
for the compounds from clinical trials sponsored by NCI during the term of the
CRADA pursuant to the CRADA Research Plan. NeoPharm has the right to use all
such data for the purpose of obtaining regulatory approval for the compounds.
NeoPharm is responsible for the preparation and submission of NDAs for the
compounds and for supplying the BUdR and IUdR to be used in clinical trials.
NCI has agreed, during the term of the CRADA, to refrain from assisting any
other party in the development and commercialization of BUdR and IUdR; however,
either the Company or the NCI may independently initiate clinical trials
involving BUdR or IUdR that are not part of the research plan or clinical trial
program under the CRADA. BUdR and IUdR are currently not the subject of any
patent or patent application; however, in the event any NCI personnel develop
any patentable inventions within the scope of the CRADA, NCI will offer
NeoPharm a first option to a license to such inventions on industry standard
terms. The term of the CRADA extends through May 1, 1997, although the
agreement may be terminated by either party upon 60 days' notice; provided that
in the event of such termination all clinical trials and protocols that have
been scheduled, initiated, or otherwise included under the CRADA prior to the
notification of termination shall be completed unless otherwise mutually
agreed. All provisions of the CRADA shall continue in effect for such clinical
trials and protocols. In addition, should NeoPharm fail to prepare and submit
an NDA to the FDA within 18 months from the time the data are known to
demonstrate reproducible results that would be sufficient to support an NDA,
the NCI may terminate the CRADA but only if the Company fails to exercise
reasonable diligence in pursuit of an NDA. The Company's preclinical and
clinical research and development activities under the
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CRADA are conducted pursuant to guidelines established by a Steering Committee
of three voting members from the NCI and three voting members from the Company.
In the event the Steering Committee cannot reach agreement on an issue related
to the CRADA, then the matter will be submitted to Dr. John Kapoor (or another
individual designated by the Company) and the Director of the Division of
Cancer Treatment at the NCI. If the matter cannot then be resolved, the
Director of the NCI shall propose a resolution in writing. If NeoPharm elects
not to accept the proposed resolution, either party may terminate the CRADA or
make a new proposal for resolution of the matter. The Company has assumed
responsibility for satisfying the supply requirements of BUdR and IUdR for
conducting clinical trials. During 1994, the Company reimbursed NCI $45,000 for
prior product production costs. The Company will also provide $120,000 per year
for reasonable and necessary expenses incurred by the NCI in carrying out its
responsibilities under the CRADA. Any excess funds not used by the NCI for
incurred expenses will be refunded to the Company at the termination of the
agreement. The Company is further obliged under the CRADA to provide sufficient
staff to meet its obligations under the CRADA. Pursuant to the CRADA, the NCI
will refrain from assisting any other party other than the Company in
commercializing BUdR/IUdR during the term of the CRADA. The Company may license
any drug developed under the CRADA not made solely by NeoPharm's employees for
which a patent or patent application is filed. The terms of the license for
such jointly developed drugs will, according to the CRADA, reflect relative
contributions of the parties to the invention, the risks incurred by the
Company, and the costs of subsequent research and development needed to bring
the invention to the marketplace. If NeoPharm does not accept the NIH proposals
on the license terms, the NIH will be free to license such inventions to third
parties.
Because BUdR and IUdR are not covered by patents or patent applications, the
Company's exclusive access to the clinical data collected by NCI and its
investigators and its other rights under the CRADA represent the principal
competitive advantage for the Company in the development and eventual
commercialization of BUdR and IUdR. The NCI may publish summary data from the
clinical trials under the CRADA in its annual reports, which do not include
individual patient data. Furthermore, the collaborative nature of the Company's
relationship with the NCI is of significant importance for conduct of clinical
trials and to assist the Company in gaining acceptance of its products among
oncologists. Accordingly, termination of the CRADA would be materially adverse
to the Company's BUdR and IUdR program, could require curtailment or
termination of such program and could therefore have a material adverse effect
on the Company's business, financial condition and results of operations.
Georgetown University. The Company previously entered into license and
sponsored research agreements with Georgetown University relating to LED,
LEVCR, LET and LE-AON. Under these agreements, the Company was obligated to
sponsor certain research activities at Georgetown relating to
liposome-encapsulated chemotherapeutic agents. As of April 27, 1996 the
obligation to fund further supportive research ended. The research was
previously conducted in the laboratory of Dr. Aquilur Rahman, the Company's
Chief Scientific Officer and an Adjunct Professor at Georgetown University.
Under the agreements with Georgetown, and in return for the sponsorship of this
supportive research, the Company has exclusive licenses to manufacture and sell
LED, LEVCR, LET and LE-AON. The Company also had a right of first refusal to
obtain exclusive licenses to new liposome-encapsulated anticancer agents
developed in Dr. Rahman's laboratory under the license and sponsored research
agreement with Georgetown University. The Company will also be obligated to pay
Georgetown royalties on commercial sales of the liposome products. In addition,
the Company will be obligated to make certain advance royalty payments to
Georgetown, which payments will be credited against future royalties payable
under the Company's agreements with Georgetown. In the event the Company is
unable to successfully commercialize its liposome products, it would be unable
to recoup these advance royalty payments. The licenses are generally not
terminable by Georgetown, except in the event of a default by the Company. Any
such default and resulting termination of the licenses would be materially
adverse to the Company's liposome program, could require curtailment or
termination of such program and could therefore have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's strategy for future development and commercialization of
therapeutics will involve, where appropriate, the establishment of
collaborative relationships with pharmaceutical industry partners.
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The Company intends to seek collaborative relationships in certain targeted
development areas, particularly in situations where the Company believes that
the clinical testing, marketing, manufacturing and other resources of
pharmaceutical collaborators will enable it to more effectively access
particular product or geographic markets. There can be no assurance that any
products which are developed by the Company and for which the Company obtains
regulatory approvals could be manufactured at a cost or in quantities required
to make them commercially viable. The Company's inability to contract, on
acceptable terms and with qualified suppliers, for the manufacture of any
products which it develops, or delays or difficulties in its relationships with
manufacturers, would have a material adverse effect on the Company.
MARKETING AND SALES
The treatment of cancer is a highly specialized activity in which the
treating oncologists tend to be concentrated in major medical centers. The
Company's marketing strategy is designed to enable the Company to operate with
a relatively small direct sales force in the United States. As products receive
regulatory approval, the Company plans to develop a sales force of modest size
to service the over 3,500 practicing oncologists in the United States. The
Company intends to seek collaborative agreements with other companies to market
the products elsewhere in the world.
The marketing and sale of the Company's BUdR and IUdR will be subject to
certain requirements imposed pursuant to the CRADA. These include requirements
that the products not be sold at prices that may be deemed to be excessive.
MANUFACTURING
The Company does not intend to acquire or establish its own dedicated
manufacturing facilities for the foreseeable future. Rather, the Company's
manufacturing strategy will be to develop manufacturing relationships with
established pharmaceutical manufacturers for production of BUdR and IUdR as
well as its liposomal products.
There are a number of FDA approved suppliers of raw materials used in the
Company's products in existence. There are also a number of facilities with FDA
Good Manufacturing Practice approval for contract manufacturing of the
Company's proposed products. The Company has a source for the manufacture of
BUdR and IUdR and is in the process of arranging for sources for the
manufacture of certain of its planned liposomal products. The Company believes
that, in the event of the termination of its existing sources for product
supplies and manufacture, the Company will be able to enter into agreements
with other suppliers and/or manufacturers on similar terms. There can be no
assurance that there will be manufacturing capacity available to the Company at
the time the Company is ready to manufacture its products.
PATENTS AND PROPRIETARY RIGHTS
It will be the Company's policy to, where possible, file patent applications
to protect technology, inventions and improvements that are important to the
development of its business. Under its agreements with Georgetown University,
the Company has licensed rights to three United States patents and two pending
United States patent applications relating to its liposome products under
development. BUdR and IUdR are, however, not currently the subject of patents
or patent applications, and the Company does not expect to obtain patent
protection for its BUdR and IUdR products. The Company's principal advantage
with respect to the development and planned commercialization of BUdR and IUdR
is its exclusive access under the CRADA to NCI's clinical data regarding the
compounds.
The patent position of participants in the pharmaceutical field generally is
highly uncertain, involves complex legal and factual questions, and has
recently been the subject of much litigation. There can be no assurance that
any patent applications relating to the Company's potential products or
processes will result in patents being issued, or that the resulting patents,
if any, will provide protection against competitors who
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successfully challenge the Company's patents, obtain patents that may have an
adverse effect on the Company's ability to conduct business, or are able to
circumvent the Company's patent position. It is possible that other parties
have conducted or are conducting research and could make discoveries of
compounds or processes that would precede any discoveries made by the Company,
which could prevent the Company from obtaining patent protection for these
discoveries. Finally, there can be no assurance that others will not
independently develop pharmaceutical products similar to or obsoleting those
that the Company is planning to develop, or duplicate any of the Company's
products.
The Company's competitive position is also dependent upon unpatented trade
secrets. In an effort to protect its trade secrets, the Company has a policy of
requiring its employees, Scientific Advisory Board members, consultants and
advisors to execute proprietary information and invention assignment agreements
upon commencement of employment or consulting relationships with the Company.
These agreements provide that all confidential information of the Company
developed or made known to the individual during the course of their
relationship with the Company must be kept confidential, except in specified
circumstances. There can be no assurance, however, that these agreements will
provide meaningful protection for the Company's trade secrets or other
proprietary information in the event of unauthorized use or disclosure of
confidential information. Invention assignment agreements executed by
Scientific Advisory Board members, consultants and advisors may conflict with,
or be subject to, the rights of third parties with whom such individuals have
employment or consulting relationships. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets, that such trade secrets will not be disclosed or that the Company can
effectively protect its rights to unpatented trade secrets.
The Company may be required to obtain licenses to patents or proprietary
rights of others. No assurance can be given that any licenses required under
any such patents or proprietary rights would be made available on terms
acceptable to the Company, or at all. If the Company does not obtain such
licenses, it could encounter delays in product market introductions while it
attempts to design around such patents, or could find that the development,
manufacture or sale of products requiring such licenses could be foreclosed.
Litigation may be necessary to defend against or assert such claims of
infringement, to enforce patents issued to the Company, to protect trade
secrets or know-how owned by the Company, or to determine the scope and
validity of the proprietary rights of others. In addition, interference
proceedings declared by the United States Patent and Trademark Office may be
necessary to determine the priority of inventions with respect to patent
applications of the Company or its licensors. Litigation or interference
proceedings could result in substantial costs to and diversion of effort by,
and may have a material adverse impact on, the Company. In addition, there can
be no assurance that these efforts by the Company will be successful.
GOVERNMENT REGULATION
Introduction. Regulation by governmental authorities in the United States
and foreign countries is a significant factor in the development, manufacture
and marketing of the Company's proposed products and in its ongoing research
and product development activities. The nature and extent to which such
regulation will apply to the Company will vary depending on the nature of any
products which may be developed by the Company. It is anticipated that all of
the Company's products will require regulatory approval by governmental
agencies prior to commercialization. In particular, human therapeutic and some
diagnostic products are subject to rigorous preclinical and clinical testing
and other approval procedures of the FDA and similar regulatory authorities in
foreign countries. Various Federal statutes and regulations also govern or
influence testing, manufacturing, safety, labeling, storage and record-keeping
related to such products and their marketing. The process of obtaining these
approvals and the subsequent compliance with appropriate Federal statutes and
regulations require the expenditure of substantial time and financial
resources. Any failure by the Company or its collaborators to obtain, or any
delay in obtaining, regulatory approval could adversely affect the marketing of
any products developed by the Company, its ability to receive product revenues
and its liquidity and capital resources.
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FDA Approval Process. Prior to commencement of clinical studies involving
human beings, preclinical testing of new pharmaceutical products is generally
conducted on animals in the laboratory to evaluate the potential efficacy and
the safety of the product. The results of these studies are submitted to the
FDA as a part of an investigational new drug ("IND") application, which must
become effective before clinical testing in humans can begin. Typically,
clinical evaluation involves a time consuming and costly three-phase process.
In Phase I, clinical trials are conducted with a small number of subjects to
determine the early safety profile, the pattern of drug distribution and
metabolism. In Phase II, clinical trials are conducted with groups of patients
afflicted with a specific disease in order to determine preliminary efficacy,
optimal dosages and expanded evidence of safety. In Phase III, large-scale,
multi-center, comparative trials are conducted with patients afflicted with a
target disease in order to provide enough data to demonstrate the efficacy and
safety required by the FDA. The FDA closely monitors the progress of each of
the three phases of clinical testing and may, at its discretion, re-evaluate,
alter, suspend or terminate the testing based upon the data which have been
accumulated to that point and its assessment of the risk/benefit ratio to the
patient.
The results of the preclinical and clinical testing on a nonbiologic drug and
certain diagnostic drugs are submitted to the FDA in the form of a new drug
application ("NDA") for approval to commence commercial sales. In responding to
an NDA, the FDA may grant marketing approval, request additional information or
deny the application if the FDA determines that the application does not
satisfy its regulatory approval criteria. There can be no assurance that
approvals will be granted on a timely basis, if at all. Similar procedures are
in place in countries outside the United States.
In 1988, the FDA issued "fast-track" regulations intended to accelerate the
approval process for the development, evaluation and marketing of new
therapeutic and diagnostic products used to treat life-threatening and severely
debilitating illnesses, especially those for which no satisfactory alternative
therapies exist. "Fast-track" designation affords the Company early interaction
with the FDA in terms of protocol design and permits, although it does not
require the FDA to grant approval after completion of Phase II clinical trials
(although the FDA may require subsequent Phase III clinical trials or even
post-approval Phase IV efficacy studies). The Company believes that a number of
its product candidates may fall under these regulations, but there can be no
assurance that any of the Company's products will receive this or other similar
regulatory treatment.
In late 1992, legislation imposing FDA user fees on drug manufacturers was
enacted. Such fees will be required for each commercial marketing drug
application submitted by the Company for FDA approval, and annual product and
establishment fees will also be imposed upon approval. The revenues raised from
these fees are earmarked specifically to increase the resources of the FDA, and
by doing so, to increase the speed with which the FDA reviews and approves drug
marketing applications. Currently, the user fee for an NDA is approximately
$150,000, and the statute provides for periodic fee increases. The statute
currently provides small companies (defined as companies with less than 500
employees that are not marketing a prescription drug product) with a reduction
in the initial application fee and contains limited provisions for fee waivers.
The Company is unable to predict the impact of the current user fee
legislation, as well as possible future changes in the law, upon its business.
Waxman-Hatch Act. The Drug Price Competition and Patent Restoration Act of
1984, also known as the Waxman-Hatch Act, contains provisions pertaining to
marketing exclusivity from generic competition for most non-biological drugs
and patent restoration for most pharmaceutical products. These patent
provisions will not be applicable to BUdR and IUdR because such compounds are
not patented. A five-year marketing exclusivity period is provided for new
chemical entities, and a three-year marketing exclusivity period is provided
for approved drugs for which new clinical investigations are essential to the
receipt of FDA approval to market the product. For purposes of the Waxman-Hatch
Act, a new chemical entity is defined as a drug product that contains an active
moiety not previously approved by the FDA for marketing. Accordingly, the
Company believes that BUdR and IUdR would qualify as new chemical entities
under the Waxman-Hatch Act. If the Company were to obtain FDA approval to
market BUdR or IUdR, for a period of five years after such approval, no company
could copy the approved product and
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obtain approval of a competitive version. The five year exclusivity period
would not prevent a competitive product from being marketed based upon new
preclinical and clinical studies conducted by the competitor. In the event that
the Company receives approval of NDAs for BUdR and IUdR, there can, however, be
no assurance that the Company would receive any or all of the benefits provided
by the Waxman-Hatch Act as currently in effect.
Orphan Drug Act. Under the Orphan Drug Act, the FDA may designate drug
products as orphan drugs if there is no reasonable expectation of recovery of
the costs of research and development from sales in the United States or if
such drugs are intended to treat a rare disease or condition, which is defined
as a disease or condition that affects less than 200,000 persons in the United
States. If certain conditions are met, designation as an orphan drug confers
upon the sponsor marketing exclusivity for seven years following FDA approval
of the product, meaning that the FDA cannot approve another version of the
"same" product for the same use during such seven year period. The market
exclusivity provision does not, however, prevent the FDA from approving a
different orphan drug for the same use or the same orphan drug for a different
use. Although the Company received a letter from the FDA stating that BUdR
qualifies for orphan drug designation as a radiation sensitizer in the
treatment of primary brain tumors, there is no assurance that any of the
Company's products will ultimately receive orphan drug designation or approval,
or that the benefits currently provided by such designations or approvals will
not hereafter be amended or eliminated. The Orphan Drug Act has been
controversial, and many legislative proposals have from time to time been
introduced in Congress to modify various aspects of the Orphan Drug Act,
particularly the market exclusivity provisions. There can be no assurance that
new legislation will not be introduced in the future that may adversely impact
the availability or attractiveness of orphan drug status for any of the
Company's products.
Other Regulations. The Company is also subject to various Federal, state and
local laws, regulations and recommendations relating to safe working
conditions, laboratory manufacturing practices and the use and disposal of
hazardous or potentially hazardous substances, including radioactive compounds
and infectious disease agents, used in connection with the Company's research
work. The extent of government regulation which might result from future
legislation or administrative action cannot be predicted accurately.
PRODUCT LIABILITY AND INSURANCE
The Company's business exposes it to potential product liability risks which
are inherent in the testing, manufacturing and marketing of human therapeutic
products. The Company does not currently have any product liability insurance.
Although the Company plans to obtain product liability insurance, there can be
no assurance that it will be able to obtain or maintain such insurance on
acceptable terms or that any insurance obtained will provide adequate coverage
against potential liabilities. Claims or losses in excess of any liability
insurance coverage obtained by the Company could have a material adverse effect
on the business, financial condition or results of operations of the Company.
COMPETITION
Competition in the discovery and development of methods for treating cancer
is intense. Numerous pharmaceutical, biotechnology and medical companies and
academic and research institutions in the United States and elsewhere are
engaged in the discovery, development, marketing and sale of products for the
treatment of cancer. These include surgical approaches, new pharmaceutical
products and new biologically derived products. The Company expects to
encounter significant competition for the principal pharmaceutical products it
plans to develop. Companies that complete clinical trials, obtain regulatory
approvals and commence commercial sales of their products before their
competitors may achieve a significant competitive advantage. A number of
pharmaceutical companies are developing new products for the treatment of the
same diseases being targeted by the Company. In some instances, the Company's
competitors already have products in clinical trials. In addition, certain
pharmaceutical companies are
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12
currently marketing drugs for the treatment of the same diseases being targeted
by the Company, and may also be developing new drugs to address these
disorders.
The Company believes that its competitive success will be based on its
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other protection for its products, obtain required regulatory approvals, obtain
orphan drug status for certain products and manufacture and successfully market
its products either independently or through outside parties. Many of the
Company's competitors have substantially greater financial, clinical testing,
regulatory compliance, manufacturing, marketing, human and other resources. In
addition, the Company will continue to seek licenses with respect to key
technologies related to its fields of interest and may face competition with
respect to such efforts.
HUMAN RESOURCES
As of April 25, 1996, the Company had one full time employee, and two
part-time employees, all of whom are officers. The Company currently has
consulting agreements with 8 consultants, holding either Ph.D. or M.D. degrees.
None of the Company's consultants are represented by a collective bargaining
arrangement, and the Company believes its relationship with its consultants is
satisfactory. The Company intends to continue to retain consultants and to
add personnel in as the business strategy is implemented.
SCIENTIFIC ADVISORY BOARD
The Company has assembled a six-member Scientific Advisory Board. The members
of the Scientific Advisory Board together provide expertise in areas of
scientific and medical interest to the Company. The Company has entered into
agreements with the Scientific Advisors providing that all inventions made by
the Advisors when working for the Company will belong to the Company; however,
most of the members of the Company's Scientific Advisory Board are employed on
a full-time basis by academic or research institutions. The members of the
Scientific Advisory Board are permitted to share information among themselves
regarding the projects that they are working on with the Company. The Company
granted options to acquire an aggregate of 25,000 shares its Common Stock to
members of the Scientific Advisory Board, and pays a retainer to compensate its
Scientific Advisory Board members.
ITEM 2. PROPERTIES
The Company's administrative offices are located in 4470 square feet of
leased office space in Lake Forest, Illinois. This leased space is provided to
the Company as a part of a consulting agreement with EJ Financial.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation or other legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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Since January 25, 1996, the Common Stock has been quoted on The NASDAQ
Stock Market's Small Cap Issues under the trading symbol. Since trading
opened on January 25, 1996, the stock has been a high of $17 and a low of
$4.50. As of April 25, 1996, there were 19 holders of record of the Common
Stock, and the Company estimates that as of such date there were more than 300
beneficial holders of the Common Stock. The Company has never paid a cash
dividend on its Common Stock and has no present intention of paying cash
dividends in the foreseeable future. Any determination in the future to pay
dividends will depend on the Company's financial condition, capital
requirements, results of operations, contractual limitations and other factors
deemed relevant by the Board of Directors.
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ITEM 6. SELECTED FINANCIAL DATA
JUNE 15, 1990
(INCEPTION) TO
YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1995
------- ------ ------- -------- ------- ------------
(UNAUDITED) (UNAUDITED)
Statement of
Operations
Data:
Revenues .......... $0 $0 $0 $0 $0 $0
Operating
expenses:
Research
and
development........ 342,923 366,845 232,736 813,761 1,068,683 2,963,208
General
and
administrative .... 93,871 151,415 174,598 107,286 244,901 819,442
- - - -------------- ------ ------- ------- ------- ------- -------
Loss
from
operations......... (436,794) (518,260) (407,334) (921,047) (1,313,584 (3,782,650)
Interest
expense.......... (31,977) (49,702) (85,089) (162,620) (356,043) (688,241)
-------- -------- -------- --------- --------- ---------
Net loss
before
income
taxes.......... (468,771) (567,962) (492,423) (1,083,667) (1,669,627) (4,470,891)
Income tax
expense.......... 0 0 0 0 0 0
- - - - - -
Net loss........... $(468,771) $(567,962) $(492,423) $(1,083,667) $(1,669,627) $(4,470,891)
========= ========== ========== =========== =========== ===========
Pro forma
net loss
per
share(1)......... $(0.57)
======
Shares used
to compute
pro forma
net loss
per
share(1)......... 2,561,989
=========
DECEMBER 31, 1995
-----------------------
DECEMBER 31,
----------------------------------------- AS
1991 1992 1993 1994 ACTUAL ADJUSTED(2)
---- --------- --------- --------- ----------- ---------
Balance Sheet Data: (Unaudited)
Cash . . . . . . . . . $1,335 $318 $3,514 $9,205 $671 $6,655,074
Working capital (deficit) (89,123) (337,035) (768,423) (2,137,037) (4,553,057) 5,808,594
Total assets . . . . . 21,317 14,895 13,175 112,988 495,891 6,663,858
Line of credit with bank 0 0 0 656,452 2,007,652 0
Loan payable to principal
stockholder . . . . . 564,300 998,300 1,312,568 1,500,000 1,500,000 0
Deficit accumulated
during the
development stage . . (657,212) (1,225,174) (1,717,597) (2,801,264) (4,470,891) 0
Total stockholders'
equity (deficit). . . . (617,970) (1,160,932) (1,628,355) (2,691,773) (4,361,382) 5,817,378
- - - ----------
(1) See Note 2 of Notes to Financial Statements for an explanation of pro
forma net loss and shares used to compute pro forma net loss per share.
(2) Adjusted to give effect to the receipt of the net proceeds of the Offering
at the initial public offering price of $7.00 per Share and $.10 per
Warrant (after deducting $ 1,110,175 in expenses and underwriting discounts
payable by the Company in connection with the Offering), the
reclassification of the accumulated deficit to additional paid-in capital
as the result of the termination of the Company's S Corporation status, the
conversion of the $1,500,000 loan and $523,385 of accrued interest payable
at November 30, 1995 to a trust, the sole beneficiary of which is Dr. John
N. Kapoor, the chairman of the Company, pursuant to the June 18, 1990 note
issued to the trust (the "Loan Repayment Note") into 287,004 shares of
Common Stock and 143,502 Warrants, and to reflect the retirement of the
bank line of credit which had a balance of $2,007,652 at December 31, 1995.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since the Company's inception in June 1990, NeoPharm has devoted its
resources primarily to fund its research and product development programs. The
Company has been unprofitable since inception and has had no revenues from the
sale of products or other sources, and does not expect revenues in the near
future. The Company expects to continue to incur losses as it expands its
research and development activities and sponsorship of clinical trials. As of
December 31, 1995, the Company's accumulated deficit was $4.5 million.
RESULTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
The Company had no revenues during the three fiscal years ended December 31,
1995. The Company incurred research and development expenses of approximately
$1,069,000 in 1995, as compared to $814,000 in 1994 and $233,000 in 1993. The
increase in 1995 research and development expenses is primarily due to
acceleration of gathering and analyzing clinical data relating to BUdR and
IUdR. The increase in 1994 is primarily due to sponsored research initiated at
Georgetown, spending to support clinical trials and payments associated with
gathering and analyzing clinical data relating to BUdR and IUdR. 1995 and 1994
expenses include payments made by the Company to Georgetown and the NCI
pursuant to the Company's license and sponsored research agreements with
Georgetown and its CRADA with the NCI. The Company expects research and
development spending to increase over the next several years. See "Item 1-
Business -- Collaborative Relationships, Licenses and Commercialization
Strategy."
General and administrative expenses increased to approximately $245,000 in
1995 from $107,000 for the same period of 1994. The increase was due primarily
to professional fees on general corporate matters and consulting fees due to EJ
Financial Enterprises, Inc. ("EJ Financial"), a health care consulting and
investment company, accrued during 1995. General and administrative expenses
decreased to approximately $107,000 in 1994 from $175,000 in 1993. This
decrease was mainly due to the Company's efforts to better control its
expenditures. Because the majority of the Company's research and development
efforts are being conducted in university laboratories and at clinical sites,
the Company concluded that a separate administrative facility was no longer
necessary. Accordingly, the Company closed its Rockville, Maryland office in
1993. The Company expects to lease laboratory facilities in the Chicago,
Illinois area during 1996 and to hire additional personnel. The Company will
also incur salaries for key management personnel as well as expenses to support
corporate development activities and costs resulting from becoming a public
company. From its inception through June 30, 1994, the Company accrued
management services charges to EJ Financial of $25,000 per year. These charges
were not paid, but were instead treated as contributions to capital by the John
N. Kapoor Trust, the sole beneficiary of which is Dr. John Kapoor, the sole
stockholder of EJ Financial and the chairman of the Company. Effective July 1,
1994, EJ Financial increased its management services charge to $125,000 per
year plus expenses incurred. The increased charges, which the Company believes
are reasonable and reflect the cost of the services provided, reflect the
increased need for EJ Financial's services in connection with operation as a
publicly-held company. The management services agreement with EJ Financial
expires in 1997. As a result of these factors, the Company expects general and
administrative expenses to increase in the future. See "Item 13-Certain
Relationships and Related Transactions" and Note 7 of Notes to the Financial
Statements attached as Exhibit 1.
Interest expense increased to approximately $356,000 in 1995 from $163,000
in 1994 and $85,000 in 1993. These increases were due to additional borrowings
on debt, owed to the Company's principal stockholder and Harris Bank and Trust
N.A., under the Company's bank line of credit. The increase in
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16
1995 is due in part to the delay in the completion of the Offering until the
first month in 1996. The proceeds of borrowings were used to fund the Company's
operations during the period from 1993 to 1995. The Company's principal
stockholder subsequently converted the principal of and accrued interest on the
loan into shares of Common Stock and Warrants at $7.00 per share, the initial
public offering price. In addition, a portion of the proceeds from the Offering
were used to repay the outstanding balance under the bank line of credit. See
"Item 13-Certain Relationships and Related Transactions" and Note 3 of Notes to
the Financial Statements.
Inception to December 31, 1995
The Company was taxed as an S corporation from inception through October 11,
1995 when the S corporation status was voluntarily terminated. Because the
Company was taxed as an S Corporation, all of its net losses from inception
through October 11, 1995 were passed through to its stockholders. Accordingly,
the Company did not accumulate operating loss carryforwards prior to October
11, 1995. The Company uses the cash method to report tax losses. Due to the use
of this method, the Company had tax expenses of approximately $437,000 at
December 31, 1995, to be reported in future periods. The Company has commenced
accruing net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through borrowings
from its principal stockholder and under its bank line of credit, which is
guaranteed by the Company's principal stockholder. At December 31, 1995, the
Company had an outstanding principal balance of approximately $3.5 million
under its debt financing arrangements. Of this amount, $1.5 million consisted
of borrowings from the Company's principal stockholder and the remainder
consisted of borrowings under the Company's bank line of credit. Borrowings
under the stockholder loan bear interest at a rate equal to the lesser of 10%
or the prime rate of Northern Trust Bank. Principal payments not paid when due
are subject to additional interest at the rate of 15%. Approximately $193,000
of additional interest has been accrued through December 31, 1995. Borrowings
under the bank line of credit have accrued interest at the prime rate of Harris
Bank & Trust N.A., and such bank line of credit is payable upon demand and not
on a revolving credit basis (that is, payments made on the line of credit by
the Company are not available to be borrowed again by the Company). Because the
Company has financed operations through debt financing, the Company has
typically maintained minimal cash balances.
The Company's assets at December 31, 1995 increased to approximately $496,000
from $113,000 at December 31, 1994, principally due to $486,436 of deferred
offering costs relating to its initial public offering (the "Offering"). The
classification of these costs as an asset is in conformity with generally
accepted accounting principles. Since these costs directly relate to the
Offering, they should not be expensed when incurred. The costs were treated as
a deferred cost and reflected on the balance sheet as an asset until the
Offering was closed on January 30, 1996. Deferred offering costs will be
offset against the net proceeds from the Offering.
The Company's liabilities at December 31, 1995 increased to approximately
$4.9 million from $2.8 million at December 31, 1994. This increase is due to
additional accrued expenses and borrowings under the Company's debt financing
arrangements. These funds were used primarily for research and development
costs incurred during the year.
The Company expects its cash requirements to increase significantly in future
periods. In May 1995, the Company agreed to fund ongoing research at Georgetown
through April 1996 for approximately $258,000. In addition, under the CRADA the
Company is committed to pay NCI clinical trial costs of $120,000 per year as
well as the cost to supply the BUdR and IUdR to be used in clinical trials. The
Company may incur additional costs in supporting its agreements with NCI, as
well as the continuation of its own research and development efforts. In the
future, the Company will require funds for building a sales and marketing
organization and development of distribution channels.
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Based on its currently planned research and product development programs, the
Company anticipates that the net proceeds of the initial public offering and
interest income earned thereon should be adequate to satisfy its capital and
operational requirements for approximately 12 months. The net proceeds from the
Offering were $8,662,092, including exercise of the Underwriters'
over-allotment option. The Company's cash requirements may vary materially from
those now planned because of results of research and development, results of
clinical testing, relationships with possible strategic partners, changes in
the focus and direction of the Company's research and development programs,
competitive and technological advances, the FDA regulatory process and other
factors. The Company has not yet submitted an NDA or received FDA approval for
any of its products, and the Company has not realized any operating revenues.
The Company's cumulative loss is approximately $4.5 million as of December 31,
1995.
The Company anticipates filing NDAs with the FDA for BUdR and IUdR for
diagnostic and therapeutic applications for various cancers during 1996 and
1997. See "Item - 1 Business -- NeoPharm Products -- NeoPharm Product Summary."
All of the products currently being developed by the Company will require
approval by the FDA before they can be sold commercially in the United States.
The results of the preclinical and clinical testing on a nonbiologic drug and
certain diagnostic drugs are submitted to the FDA in the form of an NDA for
approval to commence commercial sales. In responding to an NDA, the FDA may
grant marketing approval, request additional information or deny the
application if the FDA determines that the application does not satisfy its
regulatory approval criteria.
The Company may seek to satisfy its future funding requirements through
public or private offerings of securities, with collaborative or other
arrangements with corporate partners or from other sources. Additional
financing may not be available when needed or on terms acceptable to the
Company. If adequate financing is not available, the Company may be required to
delay, scale back or eliminate certain of its research and development
programs, to relinquish rights to certain of its technologies, therapeutic and
diagnostic agents, product candidates or products, or to license third parties
to commercialize products or technologies that the Company would otherwise seek
to develop itself.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements and Supplementary Data are incorporated herein by
reference to the Company's Financial Statements included as Exhibit 1. The
information is contained as follows:
PAGE
----
Report of Arthur Andersen LLP, Independent Public
Accountants . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets . . . . . . . . . . . . . . . . . . F-3
Statements of Operations . . . . . . . . . . . . . F-4
Statements of Stockholders' Equity (Deficit) . . . F-5
Statements of Cash Flows . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
NAME AGE POSITION POSITION HELD SINCE
---- --- -------- -------------------
John N. Kapoor, Ph.D.(2) . . . . . 52 Director, Chairman of the Board 1990
Aquilur Rahman, Ph.D.(1) . . . . . 53 Director, Chief Scientific Officer 1990
Anatoly Dritschilo, M.D.(2). . . . . 51 Director 1990
William C. Govier, M.D., Ph.D.(1). . 59 President, Chief Executive Officer, and 1993
Director
Mahendra G. Shah, Ph.D . . . . . . 51 Vice President, Corporate and Business 1991
Development
David E. Riggs . . . . . . . . . . 43 Chief Financial Officer 1995
- - - ----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
All directors hold office until the next annual meeting of the stockholders
and until their successors are duly elected. Officers are appointed to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
John N. Kapoor, Ph.D., Chairman of the Board of Directors, has been a
director of the Company since July 1990. Prior to forming the Company, Dr.
Kapoor formed EJ Financial Enterprises, Inc., a health care consulting and
investment company, in March 1990, of which Dr. Kapoor is currently President.
Dr. Kapoor is presently Chairman and Chief Executive Officer of Option Care,
Inc., an outpatient and home infusion health care company; Chairman of Unimed
Pharmaceuticals, Inc., a developer and marketer of pharmaceuticals for cancer,
endocrine disorders and infectious diseases; and Chairman of Akorn, Inc., a
manufacturer, distributor, and marketer of generic ophthalmic products. Dr.
Kapoor received his Ph.D. in medicinal chemistry from the State University of
New York in 1970 and a B.S. in pharmacy from Bombay University in India.
Aquilur Rahman, Ph.D., joined the Company as Chief Scientific Officer and as
a member of the Board of Directors in July 1990. Dr. Rahman is an adjunct
professor of pathology and pharmacology at Georgetown University and has more
than 15 years of research experience in developing methods of chemotherapy
treatment for cancer. Dr. Rahman received his Masters of Science in
Biochemistry from the University of Dacca (Bangladesh) in 1964 and his Ph.D. in
Pharmaceutics from the University of Strathclyde (Glasgow, U.K.) in 1972.
Anatoly Dritschilo, M.D., joined the Company as a Member of the Board of
Directors in July 1990. Since August 1979, Dr. Dritschilo has been Chairman of
the Department of Radiation Medicine and Medical Director of the Georgetown
University Medical Center in Washington, D.C. Dr. Dritschilo received his B.S.
in Chemical Engineering from the University of Pennsylvania, his M.S. in
Engineering in 1969 from Newark College of Engineering, and his M.D. in 1973
from the College of Medicine of New Jersey.
William C. Govier, M.D., Ph.D., joined the Company in December 1993 as its
President, Chief Executive Officer, and a member of the Board of Directors. Dr.
Govier was a founder of Aegis Technology, Inc., a developer of pharmaceuticals
for pulmonary disease therapy, and has been its President since June 1990.
Prior to that time, Dr. Govier was Executive Vice President and Director of
Research and Medical Affairs at Medco Research, Inc., a developer of drugs
aimed at treating heart diseases. Dr. Govier received a B.A. in Chemistry and
Biology in 1957 from Kalamazoo College, an M.D. in 1961 from McGill University
in Montreal, Quebec, Canada, and a Ph.D. in Pharmacology in 1965 from the
University of
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Mississippi. From 1963 to 1968 he was a faculty member at the University of
Mississippi, University of Texas Southwestern Medical School and Oxford
University in England. From 1968 to 1970 Dr. Govier was associated with the
Experimental Therapeutics Branch of the National Heart Institute, National
Institutes of Health. Since that time, he has held management positions with
major pharmaceutical companies, including Executive Director of Biological
Research with CIBA-Geigy; Director of Pharmaceutical Research and Director of
Medical Research with Lederle Laboratories, Division of American Cyanamid; and
Director, Pharmaceuticals Research and Development Division of E.I. DuPont de
Nemours & Co.
Mahendra G. Shah, Ph.D., has served as Vice President of Corporate and
Business Development since October 1991. Dr. Shah is also a Vice President of
EJ Financial Enterprises, Inc., a position he has held since October 1991.
Prior to joining the Company, Dr. Shah was the Senior Director of New Business
Development with Fujisawa USA from January 1987 to October 1991. Dr. Shah
received his M.S. in 1978 and Ph.D. in 1984 in Industrial Pharmacy from St.
John's University and an M.S. in 1969 and a B.S. in 1967 in Pharmaceutical
Chemistry from Gujarat University in India.
David E. Riggs has served as Chief Financial Officer since November 1995. Mr.
Riggs is Senior Vice President, Chief Financial Officer, Secretary and
Treasurer of Unimed Pharmaceuticals, Inc., a developer and marketer of
pharmaceuticals for cancer, endocrine disorders and infectious diseases, since
October 1994, and Vice President, Chief Financial Officer, Secretary and
Treasurer of Unimed since May 1992. Prior to joining Unimed, Mr. Riggs was
Chief Financial Officer of VideoCart, Inc., a micro-marketing media company, a
company sold by Information Resources Inc., a market research company, from
April 1990 to August 1991. Prior to working for VideoCart, Mr. Riggs held
various positions from April 1986 until April 1990 with Fujisawa USA, serving
finally as Treasurer. Mr. Riggs received a B.S. in accounting from the
University of Illinois in 1979 and an M.B.A. from DePaul University in 1984.
Mr. Riggs is a Certified Public Accountant.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes the compensation for services to the
Company for the fiscal year ended December 31, 1995, of the Chief Executive
Officer. No executive officer of the Company had total salary and bonus in
excess of $100,000 in 1995:
Summary Compensation Table
Long-term Compensation
----------------------
Annual Compensation Awards
----------------------------------------------------- ----------------------
Other Annual Securities
Name and Principal Position Year Salary($) Bonus($) Compensation($) Underlying Options(#)
---- --------- -------- ------------------ ----------------------
William C. Govier, President
and Chief Executive Officer 1995 0 0 0 0
1994 0 0 0 0
1993 0 0 0 0
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DIRECTOR COMPENSATION
Directors are not paid any compensation for attendance at directors' meetings
or for attending or participating in any committee. Directors are reimbursed
for reasonable out-of-pocket expenses incurred in connection with attendance at
such meetings. Non-employee directors are eligible to participate in the
Company's 1995 Director Option Plan. See "Employee Benefit Plans -- 1995
Director Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of Messrs. Kapoor and
Dritschilo.
INCENTIVE STOCK OPTION PLAN
In January 1995, the Board of Directors (the "Board") and the stockholders of
the Company approved the 1995 Stock Option Plan (the "Plan"). The Plan provides
for the granting to employees (including officers and employee directors) of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and the granting to employees (including
officers, employees, directors, and consultants) of nonstatutory stock options.
The purpose of the Plan is to attract and retain the best available personnel
to the Company and to encourage stock ownership by employees, officers,
directors and consultants of the Company to give them a greater personal stake
in the success of the Company. A total of 450,000 shares of Common Stock were
reserved for issuance under the Plan.
The Plan is currently administered by the Board of Directors, which
determines the terms of the options granted under the Plan, including the
exercise price, number of shares subject to the option and the exercisability
thereof. Generally, options granted to employees and consultants under the
Plan vest and become exercisable at a rate of 2.08% of the shares subject to
the option per month but may not be exercised prior to one (1) year from the
commencement of employment or the consultant relationship, but the Board of
Directors of the Company has the discretion to determine the vesting of shares
subject to each option. The terms of incentive stock options and nonstatutory
stock options granted under the Plan may not exceed ten (10) years. The term of
incentive stock options and nonstatutory stock options granted to an optionee
who, at the time of grant, owns stock representing more than 10% of the
Company's outstanding capital stock may not exceed five (5) years. No option
granted under the Plan may be transferred by the optionee other than by will or
the laws of descent or distribution and each option may be exercised, during
the lifetime of the optionee, only by such optionee. In the event of a merger
of the Company with or into another corporation or a sale of substantially all
of the Company's assets, each option will be assumed or an equivalent option
substituted by the successor corporation.
In the event any change is made in the Company's capitalization (other than
the one for 1.28681 reverse stock split effected on October 4, 1995), such as a
stock split or stock dividend, which results in a greater or lesser number of
shares of Common Stock of the Company, appropriate adjustment shall be made in
the option price and in the number of shares subject to the options. In the
event of the proposed dissolution or liquidation of the Company, to the extent
that an option has not been previously exercised, it will terminate immediately
prior to the consummation of such proposed action. In the event of the merger
or sale of substantially all of the assets of the Company, all outstanding
options shall be assumed or substituted by the successor corporation, or if
they are not assumed or substituted, they shall become fully vested unless the
Board of Directors determines otherwise.
The exercise price of all incentive stock options granted under the Plan must
be at least equal to the fair market value of the shares of Common Stock on the
date of grant. With respect to any participant who owns stock possessing more
than 10% of the voting rights of the Company's outstanding capital stock, the
20
21
exercise price of any incentive stock option granted must equal at least 110%
of the fair market value on the date of grant. No incentive stock options may
be granted to a participant, that, when aggregated with all other incentive
stock options granted to such participant would have an aggregate fair market
value in excess of $100,000 becoming exercisable in any calendar year. The
exercise price of all nonstatutory stock options granted under the Plan is
determined by the Administrator but cannot be less than 85% of fair market
value on the date of grant. No options have been granted to date at prices less
than 100% of the fair market value on the date of grant.
In 1995, options to acquire 247,000 shares were granted under the Plan. The
exercise price for all such option grants will be equal to the initial public
offering price. No stock options nor SAR's were granted to named executives
during 1995.
1995 DIRECTOR OPTION PLAN
The 1995 Director Option Plan (the "Director Plan") was adopted by the
Company's Board of Directors in January 1995 and approved by the Company's
stockholders in January 1995. The Director Plan provides for the grant of
nonstatutory stock options to non-employee directors of the Company who are not
stockholders holding more than 5% of the Company's outstanding Common Stock
("Outside Directors") pursuant to an automatic, non-discretionary grant
mechanism providing for a total of 50,000 shares of Common Stock. Currently one
director is eligible to participate in the Director Plan in 1995.
The exercise price of options granted to Outside Directors must be 100% of
the fair market value of the Company's Common Stock on the date of grant. The
consideration for exercising options granted to Outside Directors may only
consist of cash, check, previously owned shares of the Company's Common Stock
or cashless exercise. Options granted to the Outside Directors have a five (5)
year term, or shorter upon termination of their tenure as a director. Options
granted to the Outside Directors vest at the rate of 25% of the shares subject
to the option one year from the date of grant and 6.25% of the shares subject
to the option at the end of each full quarter thereafter.
The Director Plan provides that each director who is an Outside Director on
the date on which the Director Plan becomes effective will automatically be
granted an option to purchase 1,000 shares of Common Stock of the Company. Each
future Outside Director automatically will be granted an option to purchase
1,000 shares of Common Stock of the Company upon his or her initial election as
a director. Subsequently, each Outside Director will be granted an additional
option to purchase 500 shares of Common Stock on January 1 of each year
thereafter (if, on such date, he or she has served as a director for at least
six (6) months), so long as he or she remains an Outside Director. No option
granted under the Plan may be transferred by the optionee other than by will or
the laws of descent or distribution and each option may be exercised, during
the lifetime of the optionee, only by such optionee.
In the event any change is made in the Company's capitalization (other than
the one for 1.28681 reverse stock split effected on October 4, 1995), such as a
stock split or stock dividend, which results in a greater or lesser number of
shares of Common Stock of the Company, appropriate adjustment shall be made in
the option price and in the number of shares subject to the options. In the
event of the proposed dissolution or liquidation of the Company, to the extent
that an option has not been previously exercised, it will terminate immediately
prior to the consummation of such proposed action. In the event of the merger
or sale of substantially all of the assets of the Company, all outstanding
options shall be assumed or substituted by the successor corporation, or if
they are not assumed or substituted, they shall become fully vested unless the
Board of Directors determines otherwise.
The Board of Directors may amend the Director Plan at any time or may
terminate it without approval of the stockholders. However, no such action by
the Board of Directors may unilaterally alter or impair any option previously
granted under the Director Plan without the consent of the optionee. In any
event, the Director Plan will terminate in January 2005.
21
22
1990 STOCK OPTION PLAN
The 1990 Stock Option Plan (the "1990 Plan") was terminated by the Company in
January 1995. Upon termination of the 1990 Plan, there were 12,433 shares
subject to options outstanding under such plan. The weighted average exercise
price of such outstanding options is $.04 per share. Options for 8,547 shares
are currently exercisable, and options for 3,886 shares are exercisable upon
the filing with the FDA of the Company's first NDA.
22
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 25, 1996 for (i) each
director, (ii) all of the Company's directors and executive officers as a group
and (iii) each person known to the Company to be the beneficial owner of more
than 5% of the Company's Common Stock. Except as otherwise indicated, based on
information furnished by the beneficial owners of the Common Stock listed
below, the Company believes that such owners have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.
PERCENTAGE OF
VOTING STOCK
NUMBER OF BENEFICIALLY OWNED
SHARES --------------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
--------------------------------- ------------ -------------- ----------------
John N. Kapoor Trust . . . . . 617,808(1) 26.29% 22.69%(2)
John N. Kapoor, Trustee
225 East Deerpath
Suite 250
Lake Forest, IL 60045
Aquilur Rahman . . . . . . . . 466,270 19.84% 12.60%
225 East Deerpath
Suite 250
Lake Forest, IL 60045
Anatoly Dritschilo . . . . . . 116,568 4.96% 3.15%
225 East Deerpath
Suite 250
Lake Forest, IL 60045
William C. Govier . . . . . . . 116,567* 4.96% 3.15%
225 East Deerpath
Suite 250
Lake Forest, IL 60045
Mahendra G. Shah . . . . . . . 67,741(3) 2.85% 1.82%
225 East Deerpath
Suite 250
Lake Forest, IL 60045
David E. Riggs . . . . . . . . 50,000(4) 2.08% 1.33%
225 East Deerpath
Suite 250
Lake Forest, IL 60045
All officers and directors as a
group (6 persons) . . . . . . . 1,434,954(1)(5) 59.17% 42.39%(3)(4)(5)
- - - ----------
* As of December 31, 1995 35,618 of Dr. Govier's shares are subject to a
Stock Repurchase Agreement.
(1) Does not include the 287,004 shares of Common Stock, or 143,502 shares of
Common Stock that may be acquired upon exercise of 143,502 Warrants
issuable to the John N. Kapoor Trust upon conversion of the $1,500,000 loan
and $523,385 of accrued interest thereon payable pursuant to the Loan
Repayment Note (based upon interest accruing through November 30, 1995).
Dr. John N. Kapoor disclaims beneficial ownership of 777,117 shares of
Common Stock held by the John N. Kapoor 1994-A Annuity Trust, 38,856 shares
of Common Stock held by the Christina Grace Kapoor Trust, 38,856 shares of
Common Stock held by the Jonathan Nath Kapoor Trust, 38,856 shares of
Common Stock held by the Olivia Jane Kapoor Trust, and 38,856 shares of
Common Stock held by the Jules Alexander Kapoor Trust.
(2) Includes the 287,004 shares of Common Stock the John N. Kapoor Trust may
acquire upon conversion of the outstanding principal and accrued interest
on the Loan Repayment Note, but does not include 143,502 shares of Common
Stock that may be acquired at a price of $9.80 per share commencing upon
exercise on or after January 25, 1997 of 143,502 Warrants issuable to the
John N. Kapoor Trust
23
24
upon conversion of the $1,500,000 loan and $523,385 of accrued interest
thereon payable pursuant to the Loan Repayment Note (based upon interest
accruing through November 30, 1995). See "Risk Factors -- Litigation
Involving Company's Chairman."
(3) Includes an option immediately exercisable for 25,000 shares of Common
Stock. Dr. Mahendra G. Shah disclaims beneficial ownership of 7,771 shares
of Common Stock held by Nrupal Shah, 7,771 shares of Common Stock held by
Shaily Shah, and 23,312 shares of Common Stock held by Indira Shah.
(4) Includes an option immediately exercisable for 50,000 shares of Common
Stock.
(5) Does not include shares held by family members of officers and directors
over which shares such officers and directors disclaim beneficial
ownership.
24
25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Aquilur Rahman, the Company's Chief Scientific Officer and member of the
Board of Directors, was until April 1, 1996 employed by Georgetown University
on a full -time basis, an entity with which the Company had entered into
license and sponsored research agreements. See "Item 1 -
Business--Collaborative Relationships, Licenses and Commercialization
Strategy."
A trust of which Dr. John N. Kapoor, Chairman of the Board of the Company, is
the sole beneficiary has loaned the Company $1,500,000 pursuant to a Loan
Repayment Note dated June 18, 1990. The amount outstanding on such Loan
Repayment Note as of December 31, 1995 was $1,500,000 in principal amount and
$545,379 in interest. Funds borrowed under the Loan Repayment Note incur
interest at the lesser of 10% per annum or the prime rate, plus, if the Company
is in default under the Loan Repayment Note, an additional 15% per annum
accrues on the Loan Repayment Note from the date of default until the Loan
Repayment Note is paid. The Company has been in default under the Loan
Repayment Note since June 18, 1992. No payments have been made on the Loan
Repayment Note. The Company is accruing interest at 15% per annum on the
principal balances that are past due. The principal and accrued interest to
November 30, 1995 under this Loan Repayment Note will convert into Common Stock
and Warrants at the initial public offering price, and $54,834 in remaining
unpaid interest accruing from November 30, 1995 through the date of the closing
of the Offering was paid by the Company in cash, subsequent to year-end. An
aggregate of 287,004 shares of Common Stock and 143,502 Warrants were issued
upon conversion of the outstanding $1,500,000 in principal and $523,385 of
accrued interest debt.
The Company's President and Chief Executive Officer ("CEO"), William C.
Govier, has served as a consultant to the Company on clinical trials and NDA
filing matters, both individually and as a consultant with Aegis Technology,
Inc. ("Aegis"), an entity co-founded by Govier. As the Company's President and
CEO, Govier received options in December 1993, to purchase 116,567 shares of
Company stock at the fair market value on the date of grant, which were
subsequently exercised. His colleague and co-founder of Aegis received options
in December 1993 to purchase 7,771 shares of Company stock at the fair market
value on the date of grant, of which 3,885 options were 100% vested and 3,886
options vest upon future performance of services. The Company has expensed
approximately $442,000 since inception through December 31, 1995, related to
work performed and expenses incurred by Govier, his colleague and Aegis. During
1994 and 1993, the Company expensed approximately $104,000 and $3,600 were
expensed.
On July 1, 1994, the Company entered into a Consulting Agreement with EJ
Financial Enterprises, Inc. ("EJ Financial"). The Consulting Agreement
provides that the Company will pay EJ Financial $125,000 per year (paid
quarterly) for certain business and financial services, including having
certain officers of EJ Financial serve as officers of the Company. Dr. John
Kapoor, the Company's Chairman of the Board is the president and a director of
EJ Financial. Dr. Mahendra Shah, Vice President of the Company, is also a Vice
President of EJ Financial. The Company believes that the charges provided for
in the Agreement are reasonable and reflect the cost of the services provided.
These charges reflect the increased need for EJ Financial's services in
connection with future operation of NeoPharm as a publicly-held company. The
management services agreement with EJ Financial expires in 1997.
In connection with the Offering, the Company has adopted a policy whereby any
further transactions between the Company and its officers, directors, principal
stockholders and any affiliates of the foregoing persons will be on terms no
less favorable to the Company than could reasonably be obtained in arm's length
transactions with independent third parties, and that any such transactions
also be approved by a majority of the Company's disinterested outside
directors.
During 1995, John N. Kapoor extended his personal guarantee of a $1 million
Harris Bank and Trust Company line of credit, and guaranteed a $1.5 million
increase to the line. This line of credit was closed as of February 19, 1996.
25
26
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
3.1 Certificate of Incorporation, as amended
filed with the Commission as Exhibit 3.1
to the Company's Registration Statement
on Form S-1 (File No. 33-90516), is
incorporated by reference.
3.2 Bylaws of the Registrant, as amended
filed with the Commission as Exhibit 3.2
to the Company's Registration Statement
on Form S-1 (File No. 33- 90516), is
incorporated by reference.
4.1 Specimen Common Stock Certificate filed
with the Commission as Exhibit 4.1 to the
Company's Registration Statement on Form
S-1 (File No. 33- 90516), is incorporated
by reference.
4.2 Specimen Warrant Certificate filed with
the Commission as Exhibit 4.2 to the
Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated
by reference.
4.3 Form of Representative's Warrant
Agreement between the Registrant and the
Representative, including form of
Representative's Warrant filed with the
Commission as Exhibit 4.3 to the
Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated
by reference.
4.4 Form of Warrant Agreement between the
Registrant, the Representative and Harris
Trust and Savings Bank, including form of
Warrant filed with the Commission as
Exhibit 4.4 to the Company's Registration
Statement on Form S-1 (File No.
33-90516), is incorporated by reference.
10.1 1995 Stock Option Plan, with forms of
Incentive and Nonstatutory Stock Option
Agreements filed with the Commission as
Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (File
No. 33-90516), is incorporated by
reference.
10.2 1995 Director Option Plan, with form of
Director Stock Option Agreement filed
with the Commission as Exhibit 10.2 to
the Company's Registration Statement on
Form S-1 (File No. 33-90516), is
incorporated by reference.
10.3 Form of Director and Officer
Indemnification Agreement. filed with the
Commission as Exhibit 10.3to the
Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated
by reference.
10.4 Cooperative Research and Development
Agreement between the Company and the
National Cancer Institute dated September
13, 1993 filed with the Commission as
Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (File
No. 33-90516), is incorporated by
reference.
10.5 License Agreement between the Company and
Georgetown University dated July, 1990
filed with the Commission as Exhibit 10.5
to the Company's Registration Statement
on Form S-1 (File No. 33-90516), is
incorporated by reference.
10.6 License Agreement between the Company and
Georgetown University dated April 18,
1994 filed with the Commission as Exhibit
10.6 to the Company's Registration
Statement on Form S-1 (File No.
33-90516), is incorporated by reference.
10.7 Loan Repayment Note, dated June 18, 1990,
by and between the Company and the John
N. Kapoor Trust filed with the
Commission as Exhibit 10.7 to the
Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated
by reference.
10.8 Consulting Agreement, dated July 1, 1994,
by and between the Company and EJ
Financial Services, Inc. filed with the
Commission as Exhibit 10.8 to the
Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated
by reference.
10.9 Stock Repurchase Agreement, dated
November 17, 1994, between the Company
and William C. Govier filed with the
Commission as Exhibit 10.9 to the
Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated
by reference.
10.10 Harris Bank and Trust Company Loan
Agreement dated March 16, 1995, as
amended on October 5, 1995. filed with
the Commission as Exhibit 10.10 to the
Company's Registration Statement on Form
S-1 (File No. 33-90516), is incorporated
by reference.
11.1 Calculation of Earnings Per Share.
- - - -----------
(b) Financial Statements
(1) Financial Statements
The financial statements filed as part of this Registration Statement are
listed in the Index to Financial Statements of the Company on Page F-1.
26
27
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) 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, ON THE 25TH DAY OF
APRIL, 1996.
NEOPHARM, INC.
By: /s/ WILLIAM C. GOVIER
----------------------------------------
William C. Govier,
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
ANNUAL REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN N. KAPOOR Director, Chairman of the May 7, 1996
-----------------------------
John N. Kapoor Board
/s/ AQUILUR RAHMAN Director, Chief May 7, 1996
-----------------------------
Aquilur Rahman Scientific
Officer
/s/ ANATOLY DRITSCHILO Director May 7, 1996
-----------------------------
Anatoly Dritschilo
/s/ WILLIAM C. GOVIER Director, President, and May 7, 1996
-----------------------------
William C. Govier Chief Executive Officer
(Principal Executive
Officer)
/s/ DAVID E. RIGGS Chief Financial Officer May 7, 1996
-----------------------------
David E. Riggs (Principal Financial
Officer and Principal
Accounting Officer)
27
28
INDEX TO FINANCIAL STATEMENTS
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
PAGE
----
Report of Arthur Andersen LLP, Independent Public F-2
Accountants . . . . . . . . . . . . . . . . . . . .
Balance Sheets . . . . . . . . . . . . . . . . . . F-3
Statements of Operations . . . . . . . . . . . . . F-4
Statements of Stockholders' Equity (Deficit) . . . F-5
Statements of Cash Flows . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . F-7
F-1
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Stockholders of NeoPharm, Inc.:
We have audited the accompanying balance sheets of NeoPharm, Inc. (a Delaware
corporation in the development stage) as of December 31, 1994 and 1995, and the
related statements of operations, stockholders' equity (deficit) and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of NeoPharm, Inc. as of December
31, 1994 and 1995, and the results of its operations and cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 12, 1996
F-2
30
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
DECEMBER 31,
------------------------------------------
PRO FORMA
1994 1995 1995 (NOTE 2)
---------- ------------ ---------------
(UNAUDITED)
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . 9,205 671 671
----- --- ---
Equipment and Furniture:
Equipment . . . . . . . . . . . . . . . . . . . 18,162 18,745 18,745
Furniture . . . . . . . . . . . . . . . . . . . 10,587 10,587 10,587
Less accumulated depreciation . . . . . . . . . (14,766) (20,548) (20,548)
-------- -------- --------
Total equipment and furniture, net . . . 13,983 8,784 8,784
------ ----- -----
Deferred offering costs (Note 2) . . . . . . . . 88,690 486,436 486,436
------ ------- -------
Organizational costs, net of accumulated
amortization of $9,990, $11,100 and
$11,100, respectively . . . . . . . . . . . . . 1,110 -- --
----- -- --
Total assets . . . . . . . . . . . . . . $112,988 $495,891 $495,891
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities:
Interest payable to principal stockholder . . $313,550 $545,379 $21,994
Obligations under research agreements (Note
6) . . . . . . . . . . . . . . . . . . . . 31,956 34,447 34,447
Due to related parties (Note 7) . . . . . . . 122,167 337,740 337,740
Professional fees . . . . . . . . . . . . . . 174,204 325,277 325,277
Other . . . . . . . . . . . . . . . . . . . . 6,432 106,788 106,788
Current portion of loan payable to principal
stockholder . . . . . . . . . . . . . . . . . 841,481 1,196,445 --
Line of credit with bank (Note 3) . . . . . . . 656,452 2,007,652 2,007,652
------- --------- ---------
Total current liabilities . . . . . . . 2,146,242 4,553,728 2,833,898
--------- --------- ---------
Long-term obligations:
Loan payable to principal stockholder, net of
current portion (Note 3) . . . . . . . . . . 658,519 303,555 --
------- ------- --
Commitments and contingencies:
Stockholders' equity (deficit):
Common stock, $.000429 par value;
2,331,349, 15,000,000 and 15,000,000 shares
authorized: 2,331,349, 2,350,000 and
2,637,004 shares issued and outstanding,
respectively . . . . . . . . . . . . . . . . 1,000 1,008 1,131
Additional paid-in capital . . . . . . . . . . 108,491 108,491 (2,339,138)
Deficit accumulated during the development
stage . . . . . . . . . . . . . . . . . . . . (2,801,264) (4,470,891) --
----------- ----------- --
Total stockholders' equity (deficit) . . (2,691,773) (4,361,392) (2,338,007)
----------- ----------- -----------
Total liabilities and stockholders'
equity (deficit) . . . . . . . . . . . $112,988 $495,891 $495,891
======== ======== ========
The accompanying notes are an integral part of these balance sheets.
F-3
31
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
INCEPTION
FOR THE YEARS ENDED (JUNE 15, 1990)
DECEMBER 31, THROUGH ,
--------------------------------------- DECEMBER 31,
1993 1994 1995 1995
----------- ------------ ------------- ----------
Revenues . . . . . . . $-- $-- $-- $--
Expenses:
Research and
development . . . . 232,736 813,761 1,068,683 2,963,208
General and
administrative . . 174,598 107,286 244,901 819,442
Interest expense . . 85,089 162,620 356,043 688,241
------ ------- ------- -------
Total expenses . . 492,423 1,083,667 1,669,627 4,470,891
------- --------- --------- ---------
Net loss . . . . . . . $(492,423) $(1,083,667 $(1,669,627) $(4,470,891
========== =========== ============ ===========
Pro forma net loss per
share (Note 2) . . . . . . $(.057)
=======
Shares used in computing
pro forma net loss per
share (Note 2) . . . . . . 2,561,989
==========
The accompanying notes are an integral part of these statements.
F-4
32
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (JUNE 15, 1990)
THROUGH DECEMBER 31, 1995
DEFICIT
COMMON STOCK ACCUMULATED
------------ ADDITIONAL DURING TOTAL
PAR PAID-IN DEVELOPMENT STOCKHOLDERS'
SHARES VALUE CAPITAL STAGE EQUITY (DEFICIT)
------------- ---------- ---------- ------------ ----------------
Balance at inception, June 15, 1990 . . . . . -- $-- $-- $-- $--
Initial issuance of stock for cash on June 21,
1990 ($.000429 per share) . . . . . . . . . . 1,631,944 700 -- -- 700
Services contributed to Company by related
party (Note 7) . . . . . . . . . . . . . . . -- -- 13,542 -- 13,542
Net loss . . . . . . . . . . . . . . . . . . -- -- -- (188,441) (188,441)
-- -- -- ---------- ---------
Balance at December 31, 1990 . . . . . . . . 1,631,944 700 13,542 (188,441) (174,199)
--------- --- ------ ---------- ---------
Services contributed to Company by related -- -- 25,000 -- 25,000
party . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . -- -- -- (468,771) (468,771)
-- -- -- ---------- ---------
Balance at December 31, 1991 . . . . . . . . 1,631,944 700 38,542 (657,212) (617,970)
--------- --- ------ ---------- ---------
Services contributed to Company by related -- -- 25,000 -- 25,000
party . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . -- -- -- (567,962) (567,962)
-- -- -- ---------- ---------
Balance at December 31, 1992 . . . . . . . . 1,631,944 700 63,542 (1,225,174) (1,160,932)
--------- --- ------ ---------- -----------
Services contributed to Company by related -- -- 25,000 -- 25,000
party . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . -- -- -- (492,423) (492,423)
-- -- -- ---------- ---------
Balance at December 31, 1993 . . . . . . . . 1,631,944 700 88,542 (1,717,597) (1,628,355)
--------- --- ------ ----------- -----------
Issuance of stock pursuant to exercise of
options,
November 1994 ($.000429 per share) . . . . 582,838 250 -- -- 250
Issuance of stock pursuant to exercise of
options,
November 1994 ($.06434 per share) . . . . . 116,567 50 7,449 -- 7,499
Services contributed to Company by related -- -- 12,500 -- 12,500
party . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . -- -- -- (1,083,667) (1,083,667)
-- -- -- ----------- -----------
Balance at December 31, 1994 . . . . . . . . 2,331,349 1,000 108,491 (2,801,264) (2,691,773)
--------- ----- ------- ----------- -----------
Issuance of stock pursuant to exercise of
options,
January 1995 ($.000429 per share) 18,651 8 -- -- 8
(unaudited) . . . . . . . . . . . . . . . . .
Net loss (unaudited) . . . . . . . . . . . . -- -- -- (1,669,627) (1,669,627)
-- -- -- ----------- -----------
Balance at December 31, 1995 (unaudited) . . 2,350,000 1,008 108,491 (4,470,891) (4,361,392)
--------- ----- ------- ----------- -----------
Pro forma adjustments (Note 2):
Conversion of interest and loan payable to
principal
stockholder into common stock (unaudited) . 287,004 123 2,023,262 -- 2,023,385
Reclassification of the deficit accumulated as
the result of the termination of the Company's
S Corporation status (unaudited) . . . . . . -- -- (4,470,891) 4,470,891 --
-- -- ----------- --------- --
Pro forma balance at December 31, 1995
(unaudited) . . . . . . . . . . . . . . . . . 2,637,004 $1,131 $(2,339,138) $-- $(2,338,007)
========= ====== =========== === ============
The accompanying notes are an integral part of these statements.
F-5
33
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
For the Years Ended Inception
December 31, (June 15, 1990)
------------------------------------------------------- through
1993 1994 1995 December 31, 1995
---- ---- ---- -----------------
Cash flows used in operating
activities:
Net loss............................ $(492,423) $(1,083,667) $(1,669,627) $(4,470,891)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation and amortization...... 4,537 6,774 6,892 32,347
Gain on disposal of equipment
and furniture..................... (408) -- -- (408)
Services contributed (non-cash)
by related party (Note 7)......... 25,000 12,500 -- 101,042
Changes in assets and liabilities:
(Increase) decrease in other
assets............................ 2,632 (88,640) (397,746) (497,536)
Increase in accounts payable and
accrued liabilities............... 151,435 319,347 701,322 1,349,631
------- ------- ------- ----------
Net cash used in operating
activities...................... (309,227) (833,686) (1,359,159) (3,485,815)
--------- --------- ----------- -----------
Cash flows used in investing
activities:
Purchase of equipment and
furniture.......................... (2,655) (12,256) (583) (30,433)
Proceeds from disposal of
equipment and furniture............ 810 -- -- 810
--- -- -- ---
Net cash used in investing
activities...................... (1,845) (12,256) (583) (29,623)
------- -------- ----- --------
Cash flows from financing
activites:
Proceeds from loan payable to
principal stockholder.............. 314,268 187,432 -- 1,500,000
Advance on line of credit............ -- 656,452 1,351,200 2,007,652
Proceeds from issuance of common
stock.............................. -- 7,749 8 8,457
-- ----- - -----
Net cash provided by
financing activities........... 314,268 851,633 1,351,208 3,516,109
------- ------- --------- ---------
Net increase (decrease) in cash...... 3,196 5,691 (8,534) 671
Cash, beginning of period............ 318 3,514 9,205 ---
--- ----- ----- ---
Cash, end of period.................. $ 3,514 $ 9,205 $671 $671
========= =========== ==== ====
Supplemental disclosure of cash paid
for:
Interest............................. -- 13,791 113,846 127,637
Income taxes......................... -- -- -- --
Supplemental disclosure of non--cash transactions:
The Company received management services from a related party (Note 7) of
$25,000 and $12,500 in 1993 and 1994, respectively, which were recorded as
additional capital contributions.
The accompanying notes are an integral part of these statements.
F-6
34
NEOPHARM, INC.
(A DELAWARE CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND BUSINESS:
NeoPharm, Inc. (the "Company"), a Delaware corporation in the development
stage, was incorporated on June 15, 1990, under the name of OncoMed, Inc. In
March 1995, the Company changed its name to NeoPharm, Inc. The Company is
developing products to provide therapeutic and diagnostic benefits in the
treatment of various forms of cancer. The Company has two products which are
the subject of a Cooperative Research and Development Agreement ("CRADA") with
the National Cancer Institute ("NCI"), a unit of the National Institutes of
Health. The Company also has rights to products developed under license and
sponsored research agreements with Georgetown University ("Georgetown").
The Company is in the development stage which requires substantial capital
for research, product development and market development activities. The
Company has not yet initiated marketing of a commercial product. The Company's
proposed products are in various stages of clinical trials, but the Company has
not yet filed an NDA. These and other proposed products will require clinical
testing, regulatory approval and substantial additional investment prior to
commercialization. The future success of the Company is dependent on its
ability to obtain additional working capital to develop, manufacture and market
its products and, ultimately, upon its ability to attain future profitable
operations. There can be no assurance that the Company will be able to obtain
necessary financing or regulatory approvals to be able to successfully develop,
manufacture and market its products, or attain successful future operations.
Accordingly, the predictability of the Company's future success is uncertain.
The Company's rights to its products are subject to the terms of its
agreements with NCI and Georgetown. Termination of either, or both, of these
agreements would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, uncertainty exists
as to the Company's ability to protect its rights to patents and its
proprietary information. There can also be no assurance that research and
discoveries by others will not render some or all of the Company's programs or
products noncompetitive or obsolete. Nor can there be any assurance that
unforeseen problems will not develop with the Company's technologies or
applications, or that the Company will be able to address successfully
technological challenges it encounters in its research and development
programs. Although the Company plans to obtain product liability insurance, it
currently does not have any nor is there any assurance that it will be able to
attain or maintain such insurance on acceptable terms or with adequate coverage
against potential liabilities.
2. SIGNIFICANT ACCOUNTING POLICIES:
RESEARCH AND DEVELOPMENT
Research and development costs are expensed when incurred. These costs
include, among other things, consulting fees and costs reimbursed to Georgetown
pursuant to the agreements as described in Note 6. Payments related to the
acquisition of technology rights, for which development work is in process, are
expensed and considered a component of research and development costs. The
Company also allocates indirect costs, consisting primarily of operational
costs for administering research and development activities, to research and
development expenses.
EQUIPMENT AND FURNITURE
F-7
35
Equipment and furniture are recorded at cost and are depreciated using an
accelerated method over the estimated useful economic lives of the assets
involved. The estimated useful lives employed in computing depreciation are
five years for computer equipment and seven years for furniture. Maintenance
and repairs that do not extend the life of assets are charged to expense when
incurred.
DEFERRED OFFERING COSTS
Deferred offering costs represent costs incurred directly related to the
initial public offering. Upon completion of the offering, these costs will be
offset against the proceeds of the offering.
MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from those estimates.
PRO FORMA FINANCIAL INFORMATION
Pro forma financial information is presented to reflect the impact of the
conversion of the loan and interest payable to the principal stockholder into
equity of the Company at the offering. Pro forma net loss differs from net loss
due to the reduction of interest expense resulting from the assumed conversion
of the $1,500,000 loan payable to the principal stockholder into equity. The
interest expense reduction was $209,835 for the year ended December 31, 1995.
Pro forma net loss per share is computed using the weighted average number of
common shares outstanding during the period, retroactively adjusted for the
one-for-1.28681 reverse stock split effected in October 1995 (See Note 8). The
calculation of the shares used in computing pro forma loss per share assumes
the conversion of the $1,500,000 loan payable to the principal stockholder
outstanding at December 31, 1995 into 212,766 shares of common stock. This
conversion is assumed to have occurred at the beginning of the period. During
all periods presented, outstanding options have been excluded from the
computation as their effect was antidilutive. There were no option grants
during the 12-month period prior to the proposed offering at prices below the
expected initial public offering price. All stock issuances during the 12-month
period prior to the proposed offering were pursuant to the exercise of options
previously granted.
Supplementary pro forma loss per share for the year ended December 31, 1995
(based on the weighted average number of common shares outstanding during the
respective periods, assuming the conversion of the loan payable to the
principal stockholder and the retirement of the line of credit with the bank
occurred at the beginning of the period or the issue date, if later) was
$(0.49).
Pro forma information in the accompanying balance sheet reflects the
reclassification of the accumulated deficit to additional paid-in capital as a
result of the termination of the Company's S Corporation status in connection
with the proposed initial public offering, and the conversion of the $1,500,000
loan and $523,385 of accrued interest payable at December 31, 1995 to a trust,
the sole beneficiary of which is Dr. John N. Kapoor, the Chairman of the
Company, into 287,004 shares of common stock and 143,502 warrants.
3. DEBT:
On June 18, 1990, the Company executed a loan agreement with Dr. John N.
Kapoor, its principal stockholder. The loan agreement allows the Company to
borrow up to $1,500,000. Funds borrowed under the agreement incur interest at
the lesser of 10% or the prime rate as determined by the Northern Trust
F-8
36
Bank. The Company has borrowed funds up to the maximum of $1,500,000 at
December 31, 1995 and December 31, 1994.
Interest on borrowed funds accrues until the second anniversary of the
funding. Thereafter, principal and interest are to be repaid in 12 quarterly
installments. Any principal payment not paid within 5 days of the date when due
is subject to additional interest of 15% per annum.
From June 1990 through April 1994, the Company financed its operations by
borrowing under this loan agreement. No payments of interest or principal were
made during this period. Subsequent to year-end, in accordance with the
agreement between the principal stockholder and the Company, with the
completion of the proposed offering, the principal stockholder converted the
outstanding loan balance, plus accrued interest through November 30, 1995, into
shares of the Company's common stock and common stock purchase warrants at a
per share conversion price equal to the offering price, $7.00 per share, $.10
per warrant. The Company issued 287,004 shares and 143,502 warrants.
In July 1994, the Company obtained a line of credit from Harris Bank. Maximum
borrowings under this line were $1,000,000 and were subject to interest at the
prime rate (8.5% at December 31, 1994, which is also the weighted average
interest rate on all short term borrowings at December 31, 1994). In March
1995, the Company increased the Harris Bank line of credit from $1,000,000 to
$2,500,000. The line was subject to interest at the prime rate (8.5% at
December 31, 1995, which is also the weighted average interest rate on all
short term borrowings). Funds were drawn on the line for any corporate
purposes. Amounts borrowed were payable on demand.
The Harris Bank line of credit was personally guaranteed by Dr. Kapoor, the
principal stockholder. The Company owed approximately $2,008,000 and $656,000
in principal under this agreement as of December 31, 1995 and December 31,
1994, respectively. The unused portion of the line of credit was approximately
$492,000 and $344,000 at December 31, 1995 and December 31, 1994, respectively.
On January 31, 1996, the Company remitted principal of $2,007,652 and
interest of $136,750 representing payment in full of the outstanding obligation
under the line of credit.
4. OPTIONS AND STOCK REPURCHASE AGREEMENTS
OPTION AGREEMENTS
The Company adopted a stock plan in 1990. The Company granted options under
the plan to purchase 730,489 shares. The options have an exercise price of
$0.000429 per share with the exception of options to purchase 124,338 shares
issued in December 1993, which have an exercise price of $.06434 per share.
Effective January 1995, this plan has been terminated. No additional grants
will be made under this plan.
Included in the grants described above are options to purchase 147,652 shares
granted to non-employees. The Company accounts for these options using a fair
value method with the fair value of these options determined at the date of
issuance. The Company has deemed the fair value for these options at their
respective issuance dates to be nominal. Thus, no expense for these option
grants has been recorded by the Company.
F-9
37
A summary of stock option activity is as follows:
OPTIONS OUTSTANDING
------------------------------
NUMBER OF EXERCISE PRICE
GRANT/EXERCISE DATE SHARES PER SHARE
------------------- ------ ---------
Grants:
June 18, 1990................... 466,270 $.000429
September 20, 1990.............. 3,108 .000429
September 21, 1990.............. 116,568 .000429
October 19, 1990................ 3,108 .000429
October 31, 1990................ 3,108 .000429
October 19, 1992................ 4,663 .000429
October 21, 1992................ 4,663 .000429
November 20, 1992............... 4,663 .000429
December 1, 1993................ 124,338 .06434
------- ------
Balance at December 31, 1993 730,489 $.000429-$.06434
Exercise:
November 17, 1994 -- issued..... (699,405) $.000429-$.06434
November 17, 1994 -- issued
Jan. 1995..................... (18,651) $.000429
-------- --------
Balance at December 31,
1994............................ 12,433 $.000429-$.06434
February 15,
1995............................ 142,000 $7.00
May 15,
1995............................ 5,000 7.00
September 11,
1995............................ 50,000 7.00
November 22,
1995............................ 50,000 7.00
------ --------------------
Balance at December 31, 1995 259,433 $00429,$.06434,$7.00
------- ====================
On January 25, 1995, the board of directors approved the NeoPharm, Inc. 1995
Stock Option Plan (the "Plan"), which provides for the grant of up to 450,000
options to acquire the Company's common stock. The option prices shall be not
less than 85 percent of the fair market value of the stock as determined by the
Administrator pursuant to the Plan. The board also approved the NeoPharm, Inc.
1995 Director Option Plan, which provides for the grant of up to 50,000 options
to acquire the Company's common stock. The option prices shall be the fair
market value on the date of grant.
STOCK REPURCHASE AGREEMENT
In December 1993, the Company granted an option to purchase 116,567 shares of
its common stock to William C. Govier, President and Chief Executive Officer
(See Note 7). The option had an exercise price of $.06434 per share and a three
year monthly vesting schedule. On November 17, 1994, the Company agreed to
allow Govier to exercise the option for all 116,567 shares in exchange for
Govier agreeing to a Stock Repurchase Agreement. The Company has an option to
repurchase the unreleased shares at $.06434 per share. The shares are released
from the repurchase agreement one thirty-sixth ( 1/36) per month starting from
December 1, 1993. As of December 31, 1995 and December 31, 1994, 35,618 and
74,473 shares, respectively, are still subject to the terms of this repurchase
agreement.
5. FEDERAL INCOME TAXES:
The Company elected "S" Corporation status at inception. Losses incurred to
date have been reported on the stockholders' tax returns and are not available
to the Company as a net operating loss carryforward. During 1994, the Company
adopted Statement of Financial Accounting Standards No. 109 ("FAS 109"),
"Accounting for Income Taxes." The Company reports certain income and expense
items for income tax purposes on a basis different from that reflected in the
accompanying financial statements. The principal differences are due to
accruals which are accounted for on a cash basis for income tax purposes. The
Company voluntarily terminated its S Corporation election on October 11, 1995.
The Company has future tax deductions of approximately $383,000 and $437,000 as
of December 31, 1994 and December 31, 1995, respectively, that have previously
been expensed for financial reporting purposes. In accordance with the
F-10
38
provisions of FAS 109, the Company will record a 100% valuation reserve for the
deferred tax asset related to the future tax expenses.
6. COMMITMENTS AND CONTINGENCIES:
LICENSE AND RESEARCH AGREEMENTS
From time to time the Company enters into license and research agreements
with third parties. At December 31, 1995, the Company has three agreements in
effect as described below.
NATIONAL CANCER INSTITUTE
The Company has entered into an agreement ("CRADA") with NCI. Pursuant to the
agreement, the Company has committed to commercialize certain products received
from NCI. The Company has agreed to provide product to support NCI sponsored
clinical trials and will use its best efforts to file a New Drug Application
("NDA") with the Food and Drug Administration ("FDA"). NCI has agreed to
collaborate on the clinical development of the products and to provide access
to the data necessary to obtain pharmaceutic regulatory approval.
During the years ended December 31, 1995 and 1994, the Company paid and
expensed approximately $87,000 and $153,000, respectively, for product used in
clinical trials. During 1994, the Company paid approximately $162,000 for
current and prior product used in clinical trials. The Company expensed, as
research and development costs, $45,000 in 1993 and $117,000 in 1994. In
addition, the Company is committed to pay NCI $120,000 per year for reasonable
and necessary expenses incurred by NCI in carrying out NCI's responsibilities
under the CRADA. During 1995 and 1994, the Company expensed, as research and
development costs, and paid $120,000 to NCI for these expenses. NCI is required
to provide the Company an accounting of the use of funds. Any amounts not
expended at the end of the agreement (May 1997) are refundable to the Company.
The CRADA will expire on May 1, 1997, if not earlier terminated. It may be
terminated by mutual consent of NCI and the Company. Either Party may terminate
if the other Party breaches a material term or condition and such breach is not
cured within a certain period of time. Also, either Party may unilaterally
terminate by giving 60 days notice. If unilaterally terminated by either party,
all provisions of the CRADA shall continue in full force and effect during the
completion of all clinical trials and clinical protocols included under the
CRADA prior to the date of notification of intent to terminate. In such
situation, the Company retains the rights to data from clinical trials
conducted prior to, or in progress, at the time of the termination.
GEORGETOWN UNIVERSITY
The Company has entered into two license and research agreements with
Georgetown whereby the Company has obtained an exclusive worldwide license to
use certain technology. In exchange for the grant of these exclusive licenses,
the Company will pay Georgetown, beginning with the first commercial sale of a
product incorporating the licensed technologies, a royalty on net sales by the
Company of products incorporating any of such technologies. The royalty will be
payable for the life of the related patents.
During the years ended December 31, 1995 and 1994, the Company paid and
expensed approximately $277,000 and $229,000, respectively, pursuant to the
license and research agreements. No amounts were expensed under this agreement
in 1993.
OTHER
F-11
39
The Company has entered into consulting arrangements with members of its
Scientific Advisory Board who are also employed on a full-time basis by
academic or research institutions. Since inception through December 31, 1995,
members of the Scientific Advisory Board have been issued options (see Note 4)
to purchase an aggregate 43,313 shares of Company stock at the fair market
value at the date of grant which vest over the consulting period. Additionally,
the Scientific Advisory Board members have received aggregate payments of
approximately $50,000 since the inception of these consulting arrangements for
work performed and expenses incurred through December 31, 1995.
The Company is not a party to any litigation or other legal proceedings.
7. TRANSACTIONS WITH RELATED PARTIES
The Company receives management services from EJ Financial Enterprises, Inc.
("EJ Financial"), a healthcare consulting and investment firm in which Dr.
Kapoor is the principal stockholder. From inception through June 30, 1994, EJ
Financial has charged the Company $25,000 per year for services provided plus
actual expenses incurred. Through June 30, 1994, no payment for these services
was made, but rather has been treated as additional capital contributions by
Dr. Kapoor in the accompanying statements of stockholders' equity (deficit).
Effective July 1, 1994, EJ Financial increased its charge for management
services provided to $125,000 per year plus actual expenses. The agreement,
which expires June 30, 1997, reflects an increase in the research and
development activity of the Company, the increased need for EJ Financial's
services and future operations as a public company. Charges are allocated to
the Company based on estimated time spent by EJ Financial personnel on the
Company's affairs. Management believes that the cost for management services
allocated to the Company represents the cost of the services provided and that
they are reasonable. Since inception through December 31, 1995, the Company has
expensed approximately $187,500 for management services and $174,000 as
reimbursement of actual expenses incurred by EJ Financial that directly related
to the Company.
The Company's Chief Scientific Officer, Dr. Aquilur Rahman, is employed on a
full-time basis by Georgetown with which the Company has entered into license
and sponsored research agreements for product research and development (see
Note 6). During 1995 and 1994, the Company expensed approximately $347,000 and
$302,000 related to work performed and expenses incurred by Georgetown and Dr.
Rahman. Since inception through December 31, 1995, the Company has expensed
approximately $1,542,000. Additionally, Dr. Rahman received options in June
1990 (See Note 4) to purchase 466,270 shares of Company stock at the fair
market value on the date of the grant of the options.
The Company's President and Chief Executive Officer ("CEO"), William C.
Govier, has served as a consultant to the Company on clinical trials and NDA
filing matters, both individually and as a consultant with Aegis Technology,
Inc. ("Aegis"), an entity co-founded by Govier. As the Company's President and
CEO, Govier received options in December 1993, to purchase 116,567 shares of
Company stock at the fair market value on the date of grant, which were
subsequently exercised (See Note 4). His colleague and co-founder of Aegis
received options in December 1993 (see Note 4) to purchase 7,771 shares of
Company stock at the fair market value on the date of grant, of which 3,885
options were 100% vested and 3,886 options vest upon future performance of
services. The Company has expensed approximately $442,000 since inception
through December 31, 1995, related to work performed and expenses incurred by
Govier, his colleague and Aegis. During 1994 and 1993, the Company expensed
approximately $104,000 and $3,600 were expensed.
As discussed in Note 3, the Company has a financing arrangement with its
principal stockholder.
Included as accrued expenses in the accompanying balance sheet is an accrual
for management services and expense reimbursement due to EJ Financial of
$206,366 and $62,500 at December 31, 1995 and 1994, respectively. Also,
included as accrued expenses is an accrual for consulting services and expenses
due to Dr. Rahman of $69,205 and 41,667, and due to Govier's colleague of
$62,169 and $18,000 at December 31, 1995 and 1994, respectively.
F-12
40
8. STOCKHOLDERS' EQUITY
In January 1995, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of common stock to 15,000,000 shares.
In October 1995, the Company amended its Certificate of Incorporation to
convert each 1.28681 shares of outstanding Common Stock into one share of
Common Stock and to restate the par value of the Common Stock from $0.000333
per share to $0.000429 per share. The reverse stock split has been reflected
retroactively in these financial statements for all periods presented.
9. SUBSEQUENT EVENT -- INITIAL PUBLIC OFFERING
On January 30, 1996 the Company completed a public offering of newly issued
1,350,000 shares of common stock and 675,000 warrants for proceeds of
approximately $8,435,000, net of expenses. On March 8, 1996 the Company issued
36,130 shares of common stock and 18,565 warrants related to the underwriter's
over-allotment option for proceeds of approximately $267,000, net of expenses.
The Company plans to use the proceeds for research and development, repayment
of bank debt, sales and marketing, working capital and general corporate
purposes (including payment of certain interest accrued on the Chairman's
loan).
PRO FORMA BALANCE SHEET
DECEMBER 31,
1995
AS
ADJUSTED
(UNAUDITED)
Balance Sheet Data:
Cash........................ $6,655,074
Working capital
(deficit)................... 5,808,594
Total assets................ 6,663,858
Line of credit with bank.... 0
Loan payable to
principal
stockholder............... 0
Deficit accumulated
during the
development stage......... 0
Total stockholders'
equity
(deficit)................. 5,817,378
F-13