-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UFWF9oMhjofZZNKzhWppxerFeWvSHvBf9UHb8/vHDkllVhEYIgPRm/GmBfzhJvtQ dwiDSpLsrmY1dkEF1iWGcQ== 0000927356-97-000358.txt : 19970401 0000927356-97-000358.hdr.sgml : 19970401 ACCESSION NUMBER: 0000927356-97-000358 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAPRO BIOTHERAPEUTICS INC CENTRAL INDEX KEY: 0000891504 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 841187753 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-24320 FILM NUMBER: 97571376 BUSINESS ADDRESS: STREET 1: 6304 SPINE RD STREET 2: UNIT A CITY: BOULDER STATE: CO ZIP: 80301 BUSINESS PHONE: 3035303891 MAIL ADDRESS: STREET 1: 6304 SPINE RD STREET 2: UNIT A CITY: BOULDER STATE: CO ZIP: 80301 10-K 1 FORM 10-K 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 for the Year Ended December 31, 1996, or: Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from to Commission File Number 0-24320 NaPRO BIOTHERAPEUTICS, INC. Incorporated in Delaware IRS ID No. 84-1187753 6304 Spine Road, Unit A Boulder, Colorado 80301 (303) 530-3891 Securities registered pursuant to Section 12(b) of the Act: none Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0075 par value; Preferred Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of the Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ---------- The aggregate market value of the voting stock held by non-affiliates of the registrant was $93,507,156 as of March 21, 1997. The number of shares outstanding of each of the registrant's classes of common stock, as of March 21, 1997: Common Stock 11,767,251 Nonvoting Common Stock 595,000 Incorporated by reference in Part III of this report is the information contained in the NaPro Proxy Statement for the 1997 annual meeting of stockholders, which will be filed with the SEC within 120 days after December 31, 1996. Part I Item 1. Business General NaPro BioTherapeutics, Inc. ("NaPro" or "the Company") is a natural product pharmaceutical company which is focusing primarily on the development, manufacture and commercialization of paclitaxel, a naturally-occurring anti- cancer agent found in certain species of yew (Taxus) trees. The Company's paclitaxel is referred to herein as "NBT Paclitaxel." The market for paclitaxel is dominated by Bristol-Myers Squibb Company ("BMS"). BMS has publicly announced that worldwide sales of their formulation of paclitaxel were approximately $580 million in 1995 and $813 million in 1996. BMS's paclitaxel is the only United States Food and Drug Administration ("FDA") approved formulation of paclitaxel, which approval is for the treatment of refractory (non-responsive) breast and ovarian cancers. NaPro believes that by combining its proprietary extraction, isolation and purification ("EIP/TM") manufacturing technology, the renewable sources of Taxus biomass being developed by NaPro, and its long-term, exclusive agreements with two major international pharmaceutical companies, NaPro will be positioned to participate significantly in the worldwide paclitaxel market. There can be no assurance, however, that NBT Paclitaxel will prove safe and effective, meet applicable standards necessary for regulatory approvals, or be successfully marketed. To advance the development and commercialization of NBT Paclitaxel, NaPro has entered into 20-year, exclusive agreements with each of F.H. Faulding & Co., Ltd. ("Faulding") and Baker Norton Pharmaceuticals, a subsidiary of IVAX Corporation ("IVAX" and together with Faulding, the "Strategic Partners") for the clinical development, sales, marketing and distribution of NBT Paclitaxel. Under the agreements, Faulding's territory includes Australia, New Zealand and much of southeast Asia, and IVAX's territory includes much of the rest of the world including North America, Europe and Japan. Faulding, Australia's largest domestic pharmaceutical company, had 1996 sales of approximately $1.2 billion, and IVAX, a diversified international healthcare company, also had 1996 sales of approximately $1.2 billion. The Strategic Partners have agreed to fund and undertake the clinical trials required in order to obtain regulatory approvals for the commercialization of NBT Paclitaxel in their respective territories. NaPro is responsible for supplying the Strategic Partners with NBT Paclitaxel for all of their clinical and -2- commercial requirements. Under the terms of each agreement, IVAX and Faulding pay a fixed price for NBT Paclitaxel for non-commercial sales. For NBT Paclitaxel sold commercially, Faulding pays NaPro a substantial share of gross revenue. For IVAX's commercial sales, IVAX has agreed to pay NaPro on a cost plus basis for NaPro's manufacture of NBT Paclitaxel and in addition to pay NaPro a substantial share of IVAX's NBT Paclitaxel profit. Faulding obtained regulatory approval and began marketing NBT Paclitaxel as a generic pharmaceutical in Australia in January 1995 for the treatment of refractory breast and ovarian cancers and is seeking approval to sell NBT Paclitaxel in other countries in its defined territory. IVAX filed an investigational new drug exemption ("IND") application for NBT Paclitaxel with the FDA in June 1994. IVAX has completed the treatment phase of the Phase II/III clinical trials with NBT Paclitaxel for three therapeutic indications including refractory breast and ovarian cancers and Kaposi's Sarcoma and submitted a new drug application ("NDA") to the FDA for Kaposi's Sarcoma on March 31, 1997. There can be no assurance, however, as to whether IVAX will be successful in obtaining any necessary regulatory approvals or successfully market NBT Paclitaxel even if approval is obtained. NaPro's EIP/TM technology is designed to allow the extraction, isolation and purification of paclitaxel and other taxanes (compounds structurally similar to paclitaxel that can be synthesized into paclitaxel) from renewable sources of biomass such as needles and limbstock harvested from ornamental yew bushes. In order to have access to a more stable and reliable source of Taxus biomass for use in the production of NBT Paclitaxel, NaPro has entered into agreements with Pacific Biotechnologies, Inc. ("PBI"), a subsidiary of Pacific Regeneration Technologies, Inc., one of Canada's largest reforestation companies (the "PBI Agreement"), and Zelenka Nursery, Inc. ("Zelenka"), one of the largest horticulture companies in the United States (the "Zelenka Agreement"), each to grow cloned ornamental yew bushes on a large scale. NaPro intends to supplement its supply of biomass obtained from PBI and Zelenka by entering into additional agreements with commercial growers of ornamental yew bushes. NaPro is currently constructing a large scale commercial EIP/TM manufacturing facility with planned capacity to meet the forecasted commercial needs of the Strategic Partners through 1999. In addition, in order to increase production yields of NBT Paclitaxel and lower its cost of manufacture, NaPro is developing a semi- synthetic process for manufacturing NBT Paclitaxel from certain other taxanes contained in renewable biomass sources. Paclitaxel Overview Cancer is the second leading cause of death in the United States with over one million new cases diagnosed each year. Cancer is generally treated by surgery, radiation or chemotherapy or a combination of these therapies. Paclitaxel, approved less than four years ago, has become the largest selling of the class of cancer chemotherapy drugs known as cytotoxic agents. Paclitaxel is a natural product that was recognized by the National Cancer Institute (the "NCI") in 1963 as showing cytotoxic activity against leukemia cells and inhibitory activity against a variety of tumors. Over the next two decades, researchers working under grants from the NCI conducted studies to determine paclitaxel's structure and its mechanism of action. The NCI studies indicated that paclitaxel inhibits the normal action of microtubules in cancer cell division. Microtubules, located in the cytoplasm of cells, play a vital role in cellular division. Paclitaxel promotes microtubule assembly and blocks normal microtubule disassembly in cells, thereby inhibiting cell division and inducing death of cancer cells. This cytoplasmic mechanism of action contrasts with the nuclear mechanism of action of the majority of cytotoxic drugs which kill the cell by attacking nuclear components such as DNA or RNA. -3- In June 1991, the NCI formalized a Collaborative Research and Development Agreement for development of paclitaxel with BMS, the world's largest oncology company. BMS assumed development of paclitaxel which included completion of the necessary clinical trials and manufacturing scale-up. In June 1992, BMS submitted an NDA to the FDA. BMS received approval for the sale of paclitaxel as a treatment for refractory ovarian cancer in December 1992 and approval for the sale of paclitaxel as a treatment for refractory breast cancer in April 1994. BMS has publicly announced that their formulation of paclitaxel has achieved world-wide commercial sales of approximately $813 million in 1996. Paclitaxel is one of a family of compounds, commonly referred to as taxanes, which share a hydrocarbon ring (diterpene) structure. Taxanes are found naturally in many parts of various species of yew trees and bushes. The concentration of taxanes in yew trees and bushes is very small, generally much less than 500 parts per million, and accordingly, the process of extracting taxanes from yew biomass is complicated and challenging. To arrive at a final stage paclitaxel product for use in clinical trials and for commercialization, several production approaches can be utilized. NaPro believes the two most prevalent processes used today are conventional extraction and semi-synthesis. In extraction, the manufacturing process must be designed to extract, isolate and purify paclitaxel from yew biomass leaving behind other components, including non-paclitaxel taxanes. The extraction, isolation and purification processes, however, are complicated since there are over 100 different taxanes present in yew biomass. In a semi-synthesis process, the initial extraction, isolation and purification is similar to that of the conventional extraction process, except that the process not only isolates paclitaxel, but also isolates and subsequently converts through chemical synthesis certain other taxanes (which are otherwise considered waste byproducts) into paclitaxel, thereby increasing the yield of paclitaxel from the same biomass source. The final product of either method must have levels of impurity at or below acceptable regulatory standards. Historically, the wild Pacific yew tree has been the primary source of yew biomass. Most species of Taxus, including the wild Pacific yew, grow slowly, requiring a number of years to reach harvestable size. As a result of its slow growing pattern, wild Taxus is generally found in old growth forests, frequently the habitat of endangered species, including the spotted owl. Biomass from the wild Pacific yew tree has historically been obtained from the bark, which generally requires destroying the tree. As a result, there has been a considerable amount of public debate and controversy in the United States and other countries by environmental groups and others regarding the harvesting of bark from the wild tree. NaPro halted harvesting bark from wild Pacific yew trees in 1994. See "Corporate Strategy" and "Biomass; Manufacturing." Other companies have developed taxane analogues which are similar, but not chemically identical, to paclitaxel. For example, Rhone-Poulenc Rorer, Inc., ("RPR"), a large international pharmaceutical company, has developed docetaxel, one such taxane analog, which is being marketed in various parts of the world under the trademark Taxotere/R. Taxotere/R has a different toxicity profile from paclitaxel and has side effects not observed with paclitaxel. In May 1996, the FDA approved Taxotere/R for treatment of anthracycline-resistant breast cancer in patients without impaired liver function. Clinical Status of NBT Paclitaxel Pursuant to the agreements between NaPro and the Strategic Partners, the Strategic Partners have primary responsibility for designing and conducting clinical trials and for pursuing regulatory approval of NBT Paclitaxel throughout the world. NaPro has primary responsibility for carrying out the procedures for regulatory approval relating to NaPro's manufacturing processes. NaPro has filed confidential Drug Master Files ("DMF") and other information containing certain of NaPro's proprietary manufacturing processes relating -4- to the manufacture of NBT Paclitaxel with regulatory agencies in the United States, Australia, Canada and Europe. In addition, NaPro performed the toxicological and preclinical characterization necessary for an IND for extracted paclitaxel. Existing regulatory approvals and statutes have a direct impact on the clinical and marketing strategy being pursued by NaPro and its Strategic Partners. In December 1992, BMS obtained NDA approval in the United States for its paclitaxel compound. Under the Waxman-Hatch Act, a non-patented drug such as paclitaxel which first gains approval through an NDA process is granted a five year period of marketing exclusivity which prevents submission by another party of an Abbreviated New Drug Application ("ANDA") for generic substitutes until such period of exclusivity expires. The exclusivity period in the United States expires in December 1997. The FDA will accept and review, however, an NDA submitted by another party during this period of exclusivity. A comparable statute to the Waxman-Hatch Act exists in Europe, although the related period of exclusivity is generally ten years. For these reasons, IVAX has submitted an NDA for NBT Paclitaxel. See "Government Regulation and Product Approvals." IVAX. IVAX is currently pursuing a strategy to obtain NDA approval of NBT Paclitaxel in the United States for the treatment of refractory breast and ovarian cancers and Kaposi's Sarkoma. IVAX filed an IND with the FDA in June 1994. In October 1994, IVAX initiated its Phase I clinical trials of NBT Paclitaxel in the United States and in May 1995 initiated Phase II/III clinical trials. IVAX has substantially completed Phase II/III studies using NBT Paclitaxel in three indications, including refractory breast and ovarian cancers. IVAX submitted an NDA for NBT Paclitaxel for Kaposi's Sarkoma on March 31, 1997. There can be no assurance that NBT Paclitaxel will prove safe and effective, meet applicable regulatory standards or be successfully marketed. Faulding. In January 1995, Faulding received regulatory approval from the Australian Therapeutic Goods Administration ("TGA") to market ANZATAX/TM (Faulding's brand name for NBT Paclitaxel) in Australia for the treatment of refractory breast and ovarian cancers. Under Australian law there is no exclusivity period comparable to that provided by the Waxman-Hatch Act, and, therefore, approval of a generic substitute was possible without the need for additional clinical trials. Faulding did, however, conduct clinical investigations with ANZATAX/TM (Faulding's brand name for NBT paclitaxel) in order to support marketing in Australia and to support applications for regulatory approval in other countries. NaPro and Faulding have obtained regulatory approval from the TGA for NaPro to supply NBT Paclitaxel to Faulding from either its Canadian or United States manufacturing facilities. Faulding is also engaged in ongoing clinical research with NBT Paclitaxel with the goal of improving the effectiveness of combination therapies utilizing NBT Paclitaxel and expanding the number of disease indications treatable with NBT Paclitaxel. Faulding has filed dossiers with certificates of free sale and requested marketing approval in various territories including Hong Kong, Cyprus, Egypt, Oman, Turkey, Kuwait, Saudi Arabia, Malaysia, Thailand, Indonesia and the Philippines. There can be no assurance, however, that Faulding will receive approval in any of these territories or will successfully market NBT Paclitaxel, even if such approvals are received. NaPro plans to submit a DMF in support of a Supplemental NDA "SNDA" for NBT Paclitaxel manufactured through a semi-synthesis process. An SNDA cannot be filed until such time, if ever, as an NDA is approved for NBT Paclitaxel. Based on the SNDA approval process for BMS, NaPro believes additional toxicological and stability data may be required prior to submission of an SNDA for manufacturing NBT Paclitaxel through a semi-synthesis process. It is not anticipated that an SNDA could be filed before 1999, since an approved NDA will need to exist before an SNDA can be submitted. The requirements for an SNDA have not been discussed with the FDA and, therefore, are uncertain. As such, -5- there can be no assurance that the semi-synthetic process being developed by NaPro will receive regulatory approval. See "Government Regulation and Product Approvals." Biomass; Manufacturing Biomass. Paclitaxel and other taxanes necessary for the production of NBT Paclitaxel are present in many parts of various species of yew trees and bushes. NaPro's EIP/TM technology is designed to allow extraction and purification of paclitaxel and other taxanes, which can be synthesized into paclitaxel, from renewable sources of biomass such as needles and limbstock harvested from ornamental yew trees and bushes. In order to have access to a stable long-term supply of biomass for use in the production of NBT Paclitaxel, NaPro entered into the PBI Agreement in 1993 and the Zelenka Agreement in 1996 and may enter into additional agreements to purchase biomass and mature yew bushes from commercial growers. NaPro believes that the plantations being developed under these agreements will produce adequate biomass to support the commercial requirements of the Strategic Partners for the foreseeable future. By planting and propagating a reliable and renewable homogeneous biomass source, NaPro believes that it may be able to reduce its raw material cost, while at the same time allowing it to increase the yield of NBT Paclitaxel. NaPro made its first small scale harvest pursuant to the PBI Agreement in the first quarter of 1996 and pursuant to the Zelenka Agreement in the second quarter of 1996. There can be no assurance that the use of the ornamental yew bushes and the use of needles and limbstock of such bushes will be approved by the FDA for use in manufacturing NBT Paclitaxel or that current sources of biomass will be sufficient to meet NaPro's needs. Manufacturing. Crude paclitaxel is extracted from cultivated yew bushes by third party extractors and delivered to NaPro's manufacturing facilities in Boulder, Colorado and British Columbia, Canada. At these two facilities, the impure paclitaxel is isolated and purified and the resulting active drug substance is delivered to Faulding's final fill and finish facility in Australia where NBT Paclitaxel is formulated by Faulding for final packaging for the Strategic Partners. On a combined basis, NaPro believes these facilities would have adequate capacity to meet clinical and commercial demand through the launch of commercial sales of NBT Paclitaxel in the United States. Each of NaPro's small scale manufacturing facilities has been inspected by the TGA and approved for the commercial production of NBT Paclitaxel for sale in Australia. NaPro plans to seek FDA approval of its manufacturing processes, which utilize non-bark sources of biomass obtained from the needles and limbstock of ornamental yew trees and bushes. NaPro has manufactured a number of lots of paclitaxel using its new process including the use of needles and limbstock from its plantations, and has submitted data from these lots in the initial NDA filing. There can be no assurance that such regulatory approval will be obtained. NaPro is currently constructing a large scale commercial manufacturing facility, which is being built in Boulder, Colorado. NaPro expects to substantially complete construction and validation of this facility in 1997. The NDA submission established NaPro's pilot scale facility as the initial manufacturing site. The large scale commercial facility has been submitted in the NDA as an alternate facility, requiring NaPro to prepare two manufacturing facilities for inspection and inclusion in the NDA. NaPro anticipates the large scale commercial facility and processes intended to be used for commercial launch of NBT Paclitaxel in the United States will be inspected by the FDA upon completion of validation, but prior to approval of the NDA for NBT Paclitaxel . -6- There can be no assurance that NaPro will succeed in adapting its EIP/TM technology for large scale commercial manufacturing, that the facility will be completed or validated within the time periods indicated, that such facility and manufacturing processes will receive necessary regulatory approvals or, even if approved, will be capable of producing NBT Paclitaxel in the quantities necessary to satisfy the requirements of the Strategic Partners. NaPro currently contracts with a third party for small-to-mid-scale extraction of paclitaxel. In order for NaPro to meet the expected increase in demand for NBT Paclitaxel once commercialized, NaPro must either contract out part of its extraction requirements or build a large scale commercial extraction facility. There can be no assurance that a third party contract for such large scale extraction can be obtained on commercially reasonable terms or that a large scale extraction facility can be constructed in a timely fashion and receive the necessary regulatory approvals. The failure of NaPro to secure a large scale commercial extraction contract or to construct a regulatory-approved large scale commercial extraction facility on a timely basis may have a material adverse effect on NaPro. In order to increase its manufacturing capacity, NaPro is also developing, and has applied for patent protection for, a semi-synthesis process for manufacturing NBT Paclitaxel from certain other taxanes contained in renewable biomass sources. Semi-synthesis manufacturing initially involves extraction of paclitaxel and other taxanes from yew sources. Unlike extraction, however, which attempts to isolate and purify only paclitaxel, semi-synthesis isolates and purifies certain additional taxanes. Through a chemical synthesis process, these other taxanes are converted into paclitaxel. Accordingly, since both paclitaxel and other taxanes are used in semi-synthesis, NaPro expects to be able to increase the paclitaxel yield from its biomass sources using a semi- synthesis process. The use of semi-synthesis will require receipt of additional regulatory approvals, of which there can be no assurance. Strategic Alliances NaPro has formed strategic alliances through long-term exclusive agreements with each of Faulding and IVAX. Pursuant to such arrangements, each Strategic Partner has agreed to fund and, with NaPro's input, undertake the clinical trials required to obtain regulatory approvals for commercializing NBT Paclitaxel in their respective territories. NaPro is responsible for supplying the Strategic Partners with NBT Paclitaxel for clinical trials and commercial purposes and each Strategic Partner is required to purchase all of its paclitaxel requirements from NaPro. Under the terms of each agreement, IVAX and Faulding pay a fixed price for NBT Paclitaxel for non-commercial sales. For NBT Paclitaxel sold commercially, Faulding pays NaPro a substantial share of gross revenue. For IVAX's commercial sales, IVAX will pay NaPro on a cost plus basis for NaPro's manufacture of NBT Paclitaxel and in addition will pay NaPro a substantial share of IVAX's NBT Paclitaxel profit (as determined in accordance with the IVAX Agreement (as defined herein)). NaPro believes that through its agreements with Faulding and IVAX, it will be able to take advantage of their resources, including expertise in clinical testing and sales, marketing and distribution. As a result of these strategic alliances, NaPro believes it may be able to compete more effectively with BMS, RPR, generic drug manufacturers and other companies, research organizations and academic institutions that are developing paclitaxel and are attempting to develop new and advanced forms of anti-cancer drugs. There can be no assurance, however, that the Strategic Partners will succeed in obtaining the necessary regulatory approvals to market NBT Paclitaxel in the United States or elsewhere or that they will market NBT Paclitaxel successfully. Faulding. Faulding, Australia's largest domestic pharmaceutical company with 1996 sales of approximately $1.2 billion, actively markets anti-cancer pharmaceuticals and other health care products in Australia, Southeast Asia and other countries throughout the world. In 1992, NaPro originally entered into a development and marketing agreement (the "Faulding Agreement") with Faulding. The Faulding -7- Agreement, as amended and restated, has an initial term of 20 years and will continue thereafter from year to year unless terminated in writing by either party. The Faulding Agreement grants Faulding the exclusive right to develop and market NBT Paclitaxel in ten countries, including Australia, New Zealand and much of Southeast Asia (the "Faulding Territory"). The Faulding Agreement also grants Faulding the non-exclusive right to sell NBT Paclitaxel in certain countries in the Middle East. Pursuant to the Faulding Agreement, Faulding is required to purchase all of its requirements of paclitaxel from NaPro, except in certain circumstances where NaPro is unable to supply Faulding's requirements. In a March 1995 amendment to the Faulding Agreement, Faulding agreed to convert certain prepaid product sales and deferred revenue aggregating $1.1 million, which would have become due in 1995 and 1996, into a note in the aggregate principal amount of $1.2 million, which matures in 1997. The terms of the note provide that NaPro will pay interest quarterly on amounts which would have been payable to Faulding had the conversion not occurred, at an annual rate of 9%. Faulding may terminate the Faulding Agreement: (i) upon the reorganization or insolvency of NaPro; (ii) if Faulding becomes controlled by a pharmaceutical company that sells paclitaxel in the Faulding territory; (iii) if NaPro becomes controlled by IVAX or BMS; (iv) if NaPro is purchased by a pharmaceutical company which sells paclitaxel in the Faulding territory and that company refuses to be bound by the terms of the Faulding Agreement; or (v) if NaPro is unable to meet the paclitaxel supply requirements of Faulding. NaPro may terminate the Faulding Agreement: (i) upon the reorganization or insolvency of Faulding; or (ii) in certain circumstances, upon a change in control of Faulding. NaPro is required to indemnify Faulding pursuant to the Faulding Agreement for any defect in the NBT Paclitaxel that is shipped to Faulding and for uncured breaches of NaPro's warranties or obligations under the Faulding Agreement. Faulding is required to indemnify NaPro against all losses (i) resulting from a defect in a product containing NBT Paclitaxel manufactured by Faulding except where such defect is the fault of NaPro, (ii) resulting from a product containing NBT Paclitaxel formulated, stored, handled, promoted, distributed, registered or sold by Faulding and (iii) for uncured breaches of Faulding's representations and warranties under the Faulding Agreement. In connection with NaPro's initial public offering, completed August 1, 1994, Faulding purchased 400,000 shares of NaPro's Nonvoting Common Stock and 400,000 warrants to purchase Nonvoting Common Stock. In 1996 Faulding exercised 200,000 of the warrants. IVAX. IVAX, a diversified international health care company with 1996 sales of approximately $1.2 billion, is engaged in the research, development, manufacture and sale of branded and generic pharmaceuticals and other related health care and personal products and specialty chemicals. In 1993, NaPro entered into a development and marketing agreement (the "IVAX Agreement") with IVAX, through IVAX's subsidiary, Baker Norton Pharmaceuticals ("BNP"). The IVAX Agreement has an initial term of 20 years and will continue thereafter from year to year unless terminated in writing by either party. The IVAX Agreement grants IVAX the exclusive right to develop and market NBT Paclitaxel in the United States and in every country outside the Faulding Territory except for the Vatican City, China, the former Soviet Union and the Middle East where such right is non-exclusive. Pursuant to the IVAX Agreement, IVAX is required to purchase all of its requirements of paclitaxel from NaPro except in certain circumstances where NaPro is unable to supply IVAX's requirements. Either IVAX or NaPro may terminate the IVAX Agreement if the other party materially breaches the -8- agreement under certain circumstances. In addition, IVAX may terminate the IVAX Agreement if NaPro fails to meet the paclitaxel supply requirements of IVAX for a continuing three year period. Under certain circumstances, IVAX may obtain certain manufacturing information from NaPro and have NBT Paclitaxel manufactured by third parties. NaPro is required to indemnify IVAX pursuant to the IVAX Agreement for any defect in the NBT Paclitaxel that is shipped to IVAX, for certain claims of patent or trade secret infringement relating to the manufacture, composition, or sale of NBT Paclitaxel supplied to IVAX and for uncured breaches of certain of NaPro's representations and warranties under the IVAX Agreement. IVAX is required to indemnify NaPro against all losses (i) resulting from a defect in a product containing NBT Paclitaxel manufactured by IVAX, (ii) resulting from a product containing NBT Paclitaxel formulated, stored, handled, promoted, distributed, registered or sold by IVAX, to the extent the defect is caused by IVAX, and (iii) for uncured breaches of IVAX's representations and warranties under the IVAX agreement. IVAX, through its subsidiary D&N Holding Company ("D&N"), currently owns 1,126,398 shares of NaPro's common stock (the "Common Stock"). See "Security Ownership of Certain Beneficial Owners and Management." Marketing and Sales Marketing and sales of NBT Paclitaxel will be conducted by the Strategic Partners. NaPro has no sales force and has only limited marketing capabilities and has no present intention to establish a sales or marketing force. NaPro expects that sales to the Strategic Partners will account for substantially all of NaPro's revenue for the foreseeable future. As a result, the loss of either Strategic Partner as a customer, in the absence of a comparable alternative strategic alliance arrangement, may have a material adverse effect on NaPro. See "Strategic Alliances." Competition The biopharmaceutical industry is an expanding and rapidly changing industry characterized by intense competition for financing, executive talent, intellectual property and product sales. NaPro competes with all entities developing and producing therapeutic agents for cancer treatment. The success of competitors in entering the market for paclitaxel may reduce NaPro's potential market share and reduce the price of NBT Paclitaxel, each of which could have a material adverse effect on NaPro. In addition, regulatory approval and marketing are being handled exclusively by the Strategic Partners. Although NaPro believes the Strategic Partners have capable clinical and marketing abilities, there can be no assurance that the Strategic Partners will be capable or effective in gaining regulatory approval on a timely basis, if at all, or competing on a global basis with existing or new competitors. BMS, the world's largest oncology company, is already marketing paclitaxel commercially in the United States, Australia, Canada, Europe and certain other territories. In addition, RPR has developed a proprietary analog of paclitaxel, docetaxel, which is marketed under the trademark Taxotere/R. Taxotere/R has a microtubule binding mechanism of action similar to that of paclitaxel. Taxotere/R is approved in the United States, European Community, Australia, Canada and a number of other countries. Taxotere/R is approved in the United States for treatment of anthracycline-resistant breast cancer in patients without impaired liver function. Treatment with Taxotere/R, however, may cause certain side effects not observed with paclitaxel. It is anticipated, however, that Taxotere/R may compete with paclitaxel, and thereby reduce overall paclitaxel sales. Furthermore, upon expiration in December 1997 of the five-year marketing protection from generic competition currently provided to BMS's formulation of paclitaxel by the Waxman-Hatch Act, NaPro may -9- be subject to competition from generic paclitaxel manufacturers. In Europe, a similar exclusivity period will end in most cases 10 years after BMS' initial approval. NaPro is aware of several pharmaceutical companies which have stated that they are in the process of developing generic paclitaxel in the United States, Canada, Mexico and Europe. Finally, academic and research organizations and pharmaceutical and biotechnology companies are pursuing, among other things, genetically engineered drugs, chemical synthesis and cell-tissue culture which may compete with NaPro's products or technology. In addition, certain companies are pursuing the production of paclitaxel and other taxanes from natural product extraction techniques. Many of NaPro's competitors, most notably BMS and RPR, have substantially greater capital resources, research and development capabilities, manufacturing and marketing resources, and experience than NaPro. NaPro expects BMS to compete intensely to maintain its dominance of the paclitaxel market, including through pursuit of an aggressive patent strategy. NaPro's competitors may succeed in developing products that are more effective or less costly than any that may be developed by NaPro, or that gain regulatory approval prior to NaPro's products. Many companies and research institutions are also seeking means to obtain paclitaxel and taxanes from non-bark renewable biomass components of yew trees and other sources in order to increase paclitaxel yields, avoid environmental concerns and reduce the cost of biomass. In addition, NaPro is aware of several potential competitors that have developed and patented or are developing various processes for producing paclitaxel and paclitaxel-related substances semi-synthetically, which may result in a low- cost, pure paclitaxel. The discovery by a third party of a cost-effective means to fully synthesize paclitaxel in commercial quantities or the manufacture of taxane derivatives or analogs that are more efficacious than paclitaxel in treating cancer could have a material adverse effect on NaPro. Patents and Proprietary Technology NaPro's success depends, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of third parties. Where appropriate, NaPro seeks protection of its proprietary technology by applying for patents in the United States and abroad. NaPro owns three issued United States patents and has several United States patent applications pending. NaPro has filed patent applications in certain other areas of the world and expects to make additional filings as it believes appropriate. In addition, NaPro has obtained licenses from third parties to use their proprietary technology, for which patent applications have been filed in the United States and in certain other areas of the world. There can be no assurance that either NaPro's or its licensors' existing patent applications will become issued patents or that, if issued, the coverage claimed in the applications will not be significantly reduced prior to issuance or, that NaPro will be able to obtain any necessary or desired additional licenses to patents or technologies of others or that NaPro will be able to develop its own additional patentable technologies. In addition, there can be no assurance that any future patents issued to NaPro, if any, will provide it with competitive advantages or that products or processes covered by such patents will not be challenged as infringing upon the patents or proprietary rights of others or that any such patents will not be invalidated, or that the patents or proprietary rights of others will not have a material adverse effect on the ability of NaPro to do business. Patent applications in the United States are maintained in secrecy until patents are issued and patent applications in certain other countries generally are not published until more than 18 months after they are filed. In addition, publication of scientific or patent literature often lags behind actual discoveries. As a result, NaPro cannot be certain it or any of its licensors was the first creator of inventions covered by NaPro's or its licensors' pending patent applications or that NaPro or its licensors were the first to file such applications. Furthermore, there can be no assurance that others will not independently develop similar technology or, if patents are issued to NaPro, that others will not design technology to circumvent NaPro's patents or proprietary rights. -10- Much of NaPro's proprietary technology, including much of its EIP/TM technology, is not protected by patents and is held by NaPro as trade secrets. NaPro's success will depend in part on its ability to protect the trade secrets relating to extracting, isolating and purifying paclitaxel as well as to other technology. NaPro relies on proprietary know-how and confidential information and employs various methods, such as entering into confidentiality and non- compete agreements with its current employees and with third parties to whom it divulges proprietary information, to protect the processes, concepts, ideas and documentation associated with its technologies, including its paclitaxel production process. Such methods may afford incomplete protection and there can be no assurance that NaPro will be able to adequately protect its trade secrets or that other companies will not acquire information which NaPro considers to be proprietary. In addition, if NaPro is unable to fulfill its contractual obligations to IVAX relating to its supply of NBT Paclitaxel, NaPro may, under certain circumstances, be contractually obligated to disclose proprietary manufacturing information to IVAX. The inability to maintain its trade secrets for its exclusive use could have a material adverse effect on NaPro. The patent position of pharmaceutical companies generally is highly uncertain and involves complex legal and factual questions. Paclitaxel is an unpatentable, naturally-occurring compound. Various compositions containing paclitaxel, and also various processes and other technologies, however, including those relating to extracting paclitaxel and preparing the drug for finished formulation, are or may be patented. In addition, certain methods of administering paclitaxel are or may be patented. Certain of these patents are owned or controlled by BMS and RPR, two of NaPro's primary competitors. NaPro is aware of competitors and potential competitors who are pursuing patent protection for various aspects of the extraction, preparation, administration and production of natural and semi-synthetic paclitaxel. In the event that NaPro's technology, products or activities are deemed to infringe upon the rights of others, NaPro could be subject to damages or enjoined from using such technology, or NaPro could be required to obtain licenses to utilize such technology. No assurance can be given that any such licenses would be made available on terms acceptable to NaPro, or at all. If NaPro were unable to obtain such licenses or was enjoined from using its technology, it could encounter significant delays in product market introductions while it attempted to design around the patents or rights infringed upon, or could find the development, manufacture or sale of products to be foreclosed, any of which may have a material adverse effect on NaPro. In addition, NaPro could experience a loss of revenue and may incur substantial cost in defending itself and indemnifying the Strategic Partners in patent infringement or proprietary rights violation actions brought against it or either of the Strategic Partners. NaPro could also incur substantial cost in the event it finds it necessary to assert claims against third parties to prevent the infringement of its patents and proprietary rights by others. Participation in such infringement proceedings could have a material adverse effect on NaPro, even if the eventual outcome were favorable. See "Strategic Alliances," and "Australian Petty Patents." Australian Petty Patents In September 1993 and August 1994, BMS received two Australian petty patents claiming certain methods of administering paclitaxel. Australian petty patents have a maximum term of six years, are allowed to contain only three claims (one independent and two dependent) and are granted on the basis of a prior art search which is significantly more limited in scope than the searches done prior to issuance of standard patents. Following publication of these patents, Faulding instituted legal action to revoke these patents on the grounds that the patent claims are invalid and that the subject matter claimed in the patents was already known prior to the claimed date of invention. In February 1995, BMS brought legal action against Faulding, based upon these patent claims, seeking an injunction against Faulding to prevent Faulding from marketing NBT Paclitaxel pursuant to Faulding's generic approval. In March 1995, the Australian court denied BMS's request to enjoin Faulding from marketing NBT Paclitaxel. NaPro believes, based on communications with Faulding, that BMS's claims will likely be resolved in conjunction with Faulding's -11- revocation action in 1997. No assurance can be given, however, that BMS will not obtain an injunction against Faulding which could prevent Faulding from marketing NBT Paclitaxel in Australia. If Faulding were prevented from marketing NBT Paclitaxel in Australia pursuant to its generic approval, Faulding would be unable to market NBT Paclitaxel for commercial sale in Australia until such time as Faulding obtains its own non-generic approval which will require substantial clinical trials and regulatory approval. There can be no assurances, however, that Faulding would be able to obtain its own non-generic approval in such circumstances. If BMS is successful in enforcing its patent claims against Faulding such that Faulding is unable to sell NBT Paclitaxel in Australia, NaPro's business, financial condition and results of operations could be materially and adversely affected. See "Patents and Proprietary Technology," and "Strategic Alliances." Government Regulation and Product Approvals The production and marketing of NBT Paclitaxel and NaPro's research and development activities are subject to extensive regulation by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to FDA regulation. The Federal Food, Drug and Cosmetic Act ("FDC Act"), and the regulations promulgated thereunder, and other federal and state statutes and regulations govern, among other things, the testing, manufacture, quality, safety, efficacy, labeling, storage, advertising and promotion of pharmaceutical products. Product development within this regulatory framework takes a number of years and involves the expenditure of substantial resources. The marketing of drugs in the United States may not begin without FDA approval. The steps required before a pharmaceutical product may be marketed in the United States include: (i) preclinical laboratory tests, animal pharmacology, toxicology studies and formulation studies; (ii) the submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials commence; (iii) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug; (iv) the submission of an NDA to the FDA; and (v) FDA approval of the NDA prior to any commercial sale or shipment of the drug. In addition to safety and efficacy requirements, the FDA requires the applicant to demonstrate to the FDA's satisfaction that it can manufacture the drug in compliance with the FDA's current Good Manufacturing Practices ("cGMP") regulations. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with the FDA. Domestic drug manufacturing establishments are subject to regular inspections by the FDA and must comply with cGMP regulations. To supply products for use in the United States, foreign manufacturing establishments must comply with cGMP regulations and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in their home countries under reciprocal agreements with the FDA. Preclinical studies include the laboratory evaluation of in vitro and in vivo cytotoxicity, pharmacology, product chemistry and formulation, as well as animal studies to assess the potential safety and activity of the product. Compounds must be formulated according to cGMP, and preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding good laboratory practices. The results of the preclinical tests are submitted to the FDA as part of an IND and are reviewed by the FDA prior to the commencement of human clinical trials. The data in an IND consists of animal data on safety, possibly human data from a related use, and chemistry, formulation and manufacturing data. If the FDA objects, the study may not commence. There can be no assurance that submission of an IND will result in FDA authorization to commence clinical trials. Clinical trials involve the administration of the investigational new drug to patients under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with good clinical practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety -12- and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Each clinical study must be conducted under the auspices of an Institutional Review Board ("IRB") at the institution at which the study will be conducted. The IRB will consider, among other things, the safety of human subjects and the possible liability of the institution. The company sponsoring the trials is required to select qualified investigators to supervise the administration of the drug and to ensure that the trials are adequately monitored in accordance with FDA regulations. Clinical trials typically are conducted in three sequential phases, which may overlap. In Phase I, the initial introduction of the drug into healthy subjects, the drug is tested for safety (adverse effects), dosage tolerance, metabolism, distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II involves studies in a limited patient population to: (i) determine the efficacy of the drug for specific, targeted indications; (ii) determine dosage tolerance and optimal dosage; and (iii) identify possible adverse effects and safety risks. When a compound is found likely to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to evaluate further clinical efficacy and to test further for safety within an expanded patient population at geographically dispersed clinical study sites. Clinical trials require substantial time and effort. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specific time period, if at all. Furthermore, although certain clinical trials have been completed to date, NaPro, the Strategic Partners or the FDA may modify, suspend or terminate clinical trials at any time if they feel that the subjects or patients are being exposed to an unacceptable health risk. The results of the pharmaceutical development, preclinical studies and clinical studies are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment of the drug. An NDA is a systematic compilation of data, analysis and conclusions on a new drug product based on studies conducted under an IND. The NDA testing and approval process requires substantial time and effort, and there can be no assurance that approval will be granted on a timely basis, if at all. The FDA may refuse to approve an NDA if the FDA does not view the NDA as containing adequate evidence of the safety and efficacy of the drug, or if other applicable regulatory criteria are not satisfied. In addition, the FDA may require additional testing or information, or require post-marketing testing and surveillance. Notwithstanding the submission of complete data, the FDA may ultimately decide that the application does not satisfy its criteria for approval. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which the drug may be marketed. Finally, product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur following initial marketing or if previously unknown information demonstrates a lack of safety or effectiveness. Following an approved NDA, an SNDA may be submitted to the FDA which requests a change in the existing approval. An SNDA can be for changes in manufacturing, quality control or clinical data or for changes in product labeling such as indications or warnings. Manufacturers of drugs sold in the United States are required to satisfy the FDA that their manufacturing facilities and processes adhere to applicable standards for cGMP and to engage in extensive record keeping and reporting. Thus, even if regulatory approval for NBT Paclitaxel is granted, NaPro's current and any future facilities will be subject to periodic review and inspections by the FDA or the analogous regulatory authorities of other countries for compliance with cGMP or similar foreign regulatory standards. Compliance with cGMP regulations requires substantial time, attention and financial resources. Following inspections of NaPro's United States and Canadian manufacturing facilities by a cGMP Auditor of the Australian TGA, the TGA issued approvals to NaPro as an Australian cGMP compliant paclitaxel manufacturer. NaPro's facilities, however, have not been inspected by the FDA for regulatory compliance purposes. There can be no assurance that the FDA or foreign regulatory authorities other than the TGA will find NaPro's current facilities or facilities being constructed to be in compliance with United States cGMP regulations or analogous foreign standards. Subsequent discovery of previously unknown problems -13- with a product or NaPro's manufacturing facilities may result in restrictions, including withdrawal of the product from the market. Failure to comply with the applicable regulatory requirements by either NaPro or its Strategic Partners could, among other things, result in criminal prosecution and fines, product recalls, product seizures and operating restrictions. NaPro has met with the FDA to discuss technical issues associated with the its DMF in support of the approval of its bulk drug product as part of IVAX's NDA. In these meetings, NaPro learned that the pilot scale facility, which manufactured the drug used in the IVAX clinical trials, needed to be inspected for approval in the initial NDA. The scaled-up commercial facility will be submitted in the NDA as an alternate facility. This has resulted in requiring NaPro to prepare two "commercial" facilities for FDA approval, which was not anticipated and requires the expenditure of more resources than originally planned. The biomass strategy employing plantation-grown ornamental yews was also discussed with the FDA. NaPro believes that the necessary technical and environmental requirements for approval will be met in the DMF in support of the NDA. NaPro is also subject to United States laws and regulations applicable to exporting drugs. On April 26, 1996, the export provisions in the FDC Act were amended in Chapter 1A of Title II, Supplemental Appropriations For The Fiscal Year Ending September 30, 1996, in the "FDA Export Reform and Enhancement Act of 1996" to authorize the export of a drug before marketing approval is obtained in the United States, to any country, if the drug (a) complies with the laws of the importing country, and (b) has valid marketing authorization by the appropriate authority in a country listed by the statute, one of which is Australia. NaPro has received valid marketing authorization from Australia. Thus, if the other statutory conditions are met, NaPro believes that future exports from the United States of NBT Paclitaxel labeled in accordance with the laws of Australia and, for countries other than Australia, of the importing country, should be permissible without an FDA permit or other FDA approval although no assurance can be given. NaPro is also subject to, among others, the regulations of Canada, the Province of British Columbia, the United States Environmental Protection Agency, the Department of Interior (United States Fish and Wildlife Services and the Bureau of Land Management), the Department of Agriculture (United States Forest Service) and other countries and regulatory agencies. Pursuant to the National Environmental Policy Act, certain United States agencies have prepared an Environmental Impact Statement that addresses the impact of harvesting wild Pacific yew trees, including cutting down wild Pacific yew trees on federally- managed land. NaPro is also subject to federal, state and local laws and regulations governing the use and disposal of hazardous materials as well as regulations imposed by the Occupational Safety and Health Administration governing worker safety. There can be no assurance that NaPro is at all times in complete compliance with all such requirements. NaPro has made and will continue to make expenditures to comply with environmental requirements. Compliance with these regulations is time-consuming and expensive. The failure to comply with these regulations, however, could have a material adverse effect on NaPro's business, financial condition and results of operations. The adoption by federal, state or local governments of significant new laws or regulations or a change in the interpretation or implementation of existing laws or regulations relating to environmental or other regulatory matters could increase the cost of producing products, delay regulatory approval or otherwise adversely affect NaPro's ability to produce or sell NBT Paclitaxel or other products. Adverse governmental regulations which might arise from future legislative or administrative regulations or other actions cannot be predicted. In addition, NaPro's activities have been opposed by the Oregon Natural Resources Council ("ONRC") because of their concern over wild Pacific yew in old growth forests. The ONRC and the FDA have reached an agreement on the National Environmental Policy Act ("NEPA") requirements for NDAs, ANDAs and INDs involving more than 200 patients involving paclitaxel from Pacific yew trees. The agreement provides that an applicant shall include an Environmental Assessment -14- ("EA") which will identify all sources of Pacific yew which are expected to be harvested in connection with the manufacture of paclitaxel relating to the application. The FDA is to subject such EAs to the NEPA process and shall complete and issue a Finding of No Significant Impact ("FONSI"), or an Environmental Impact Statement ("EIS") and Record of Decision (ROD) as required by NEPA before approving any NDA or ANDA involving paclitaxel derived from or otherwise involving the Pacific yew tree. Because NaPro relies on plantation- grown ornamental yews, and it will not harvest any Pacific yew trees to manufacture paclitaxel for a marketed product, it believes that the ONRC-FDA agreement requirements will be met in the NDA and DMF and that these requirements will not jeopardize the NDA approval. Even though NaPro no longer harvests biomass from the bark of the wild Pacific yew, there can be no assurance that the ONRC and other environmental activist groups will not oppose other activities of NaPro, which may have the effect of delaying or halting production of NBT Paclitaxel, each of which could have a material adverse effect on NaPro's business, financial condition and results of operations. Outside the United States, NaPro's ability to market a product is contingent upon receiving a marketing authorization from the appropriate regulatory authority. This foreign regulatory approval process includes all of the risks associated with FDA approval set forth above. NaPro has filed confidential DMFs and other documents containing certain of NaPro's proprietary manufacturing processes with regulatory agencies in the United States, Australia, Canada and Europe, relating to NaPro's manufacture of NBT Paclitaxel. Faulding, referring to NaPro's Australian DMF, has received marketing approval in Australia for NBT Paclitaxel for treating refractory ovarian and breast cancers. Additionally, Faulding has completed clinical trials with NBT Paclitaxel in Australia, which may form the basis for applications for further marketing approvals in Australia and other countries where Faulding has the right to market NBT Paclitaxel. Faulding is also engaged in ongoing clinical research with NBT Paclitaxel with the goal of improving the effectiveness of paclitaxel treatment in combination therapies and expanding the number of disease indications treatable with paclitaxel. There can be no assurance that Faulding's efforts to expand the use of NBT Paclitaxel will be successful. IVAX, using NaPro's United States DMF, filed an IND with the FDA in June 1994 relating to NBT Paclitaxel and began its Phase I clinical trials relating to NBT Paclitaxel in the United States in October 1994. IVAX began Phase II/III clinical trials in May 1995. Based upon communications from IVAX, it is estimated that IVAX will file a NDA seeking commercial approval to sell NBT Paclitaxel in the United States in 1997. No assurance can be given, however, that NBT Paclitaxel will prove to be safe and effective in clinical trials, that IVAX will file the NDA within the time period indicated, or that IVAX will complete any clinical trials or obtain regulatory approvals for NBT Paclitaxel in a timely manner, or at all, to market NBT Paclitaxel in the United States or other countries. Research and Development During the years ended December 31, 1994, 1995 and 1996, NaPro spent approximately $3.9 million, $4.6 million and $6.8 million, respectively, on Company sponsored research and development activities and to produce NBT Paclitaxel sold to its Strategic Partners. Research and development is expected to remain a significant cost component of NaPro's business. In the short term, research and development is expected to concentrate primarily on: (i) improving paclitaxel yield and reducing production cost; (ii) developing NaPro's semi- synthesis process for paclitaxel production; and (iii) improving the yields of NaPro's production methodology for processing needles and limbstock. NaPro will focus its internal efforts on process development and plans to contract out research considered essential but for which it lacks facilities or staff. NaPro also intends to engage in early stage research and development to identify other potential natural product pharmaceuticals. -15- Foreign and Domestic Operations; Export Sales The following table sets forth, for the past three fiscal years revenue, profitability (operating loss),and identifiable assets attributable to NaPro's U.S. and foreign operations (amounts in thousand dollars):
Year Ended December 31 --------------------------- 1994 1995 1996 ------- ------- ------- Sales to Unaffiliated Customers United States $ 854 $ 2,054 $ 1,692 Foreign 148 569 1,781 ------- ------- ------- Total Sales (1) 1,002 2,623 3,473 Operating Loss United States (5,914) (3,851) (6,719) Foreign (68) (433) (384) Identifiable Assets United States 4,304 5,133 20,198 Foreign 672 6,820 4,823
- -------------------- (1) Includes export sales of $1,392 in 1995 and $2,509 in 1996. There were no export sales in 1994. Foreign sales include sales of product manufactured and shipped from NaPro Canada, NaPro's Canadian subsidiary. Such products sold by NaPro Canada to NaPro are then re-sold to Faulding for use outside the United States. Such "exported" products never physically enter the United States. Sales of NBT Paclitaxel into foreign markets accounted for approximately 75% of NaPro's revenue for the year ended December 31, 1995 and 72% of NaPro's revenue for the year ended December 31, 1996. NaPro anticipates that a significant portion of its revenue will continue to be derived from sales of its products in foreign markets until such time, if ever, as IVAX receives approval for commercial sale of NBT Paclitaxel in the United States. A substantial portion of NaPro's revenues and operations will thus continue to be subject to the risks associated with foreign business, including economic or political instability, shipping delays, fluctuations in foreign currency exchange rates and various trade restrictions, all of which could have a significant impact on NaPro's ability to deliver products on a competitive and timely basis. Future imposition of, or significant increases in, the level of customs duties, export quotas, drug regulatory restrictions or other regulatory or trade restrictions could have an adverse effect on NaPro. Employees As of March 21, 1997, NaPro had 114 full-time and three part-time employees, of whom nine hold Ph.D. or M.D. degrees. Three employees were engaged in biological and clinical research, 18 in chemical research, 21 in quality control/quality assurance, 51 in manufacturing and 21 in general administration and finance. NaPro believes that its relations with its employees are good. Special Note Regarding Forward-looking Statements Certain statements under the captions "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of NaPro, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, the following: general economic and business conditions; competition; technological advances; ability to obtain rights to technology; ability to obtain and enforce patents; ability to commercialize and manufacture products; ability to obtain raw materials; results of clinical studies; results of research and development activities; business abilities and judgment of personnel; availability of qualified personnel; changes in, or failure to comply with, governmental regulations; ability to obtain adequate financing in the future; the ability of NaPro's strategic partners to perform their obligations under existing agreements with NaPro; and other factors referenced in this Report and in NaPro's August 1, 1996 Prospectus. -16- Item 2. Properties NaPro leases approximately 54,000 square feet of space in Boulder, Colorado, which is used for research and development and will be used for commercial-scale manufacturing upon completion of improvements and installation and validation of equipment. This facility is also used for NaPro's executive offices and warehousing of raw materials and equipment. NaPro leases an additional 5,900 square feet of space in Boulder which is used for research and development and small scale manufacturing. NaPro leases a facility of approximately 3,400 square feet in British Columbia, Canada which is used for manufacturing. NaPro leases an additional 10,090 square foot facility in British Columbia, Canada which the Company intends to sublease to a third party. NaPro has an option to purchase 7.3 acres of land in Longmont, Colorado as a potential site on which to build a manufacturing facility and has until May 6, 1997, to exercise this option. Item 3. Legal Proceedings NaPro is not currently engaged in any material legal proceedings. See "Patents and Proprietary Technology" and "Australian Petty Patents." Item 4. Matters Submitted to Stockholders' Vote No matters were submitted to a vote of NaPro's security holders during the quarter ended December 1996. -17- Part II Item 5. Market Information and Related Stockholder Matters Market Information NaPro's Common Stock is traded in the Nasdaq National Market under the symbol "NPRO." The following table sets forth, for the fiscal periods indicated, the high and low sale prices for the Common Stock.
High Low 1995 First Quarter $ 6 5/8 $ 6 Second Quarter 10 1/8 6 1/8 Third Quarter 12 3/4 9 3/8 Fourth Quarter 12 1/8 8 7/8 1996 First Quarter $13 3/8 $ 8 7/8 Second Quarter 17 1/4 11 1/8 Third Quarter 15 1/4 8 5/8 Fourth Quarter 11 3/4 7 1/8
Stockholders As of December 31, 1996 there were approximately 138 stockholders of record of NaPro's Common Stock. Dividends To date, NaPro has not paid any dividends on the Common Stock. NaPro intends to retain future earnings, if any, to finance the operation and expansion of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future, if at all. -18- Item 6. Selected Financial Data The selected financial data presented below for each year in the five years ended December 31, 1996, are derived from NaPro's financial statements, which have been audited by Ernst & Young LLP, independent auditors, and are qualified by reference to such Financial Statements and Notes thereto. The data presented below should be read in conjunction with the consolidated financial statements at December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this Report.
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1992 1993 1994 1995 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------------------------ Statement of Operations Data: - ------------------------------------------------------------------------------------------------------------------------------------ Revenue: - ------------------------------------------------------------------------------------------------------------------------------------ Sales of products $ 363 $ 1,248 $ 1,002 $ 2,623 $ 3,473 - ------------------------------------------------------------------------------------------------------------------------------------ Other 202 1 5 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 565 1,249 1,007 2,623 3,473 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Expense: - ------------------------------------------------------------------------------------------------------------------------------------ Research, development and cost of products sold 1,670 3,505 2,707 4,325 6,837 - ------------------------------------------------------------------------------------------------------------------------------------ General and administrative 1,215 2,690 2,044 2,310 3,739 - ------------------------------------------------------------------------------------------------------------------------------------ Faulding royalty - - 1,000 - - - ------------------------------------------------------------------------------------------------------------------------------------ Plantation cost - 7 1,238 272 - - ------------------------------------------------------------------------------------------------------------------------------------ Total operating expense 2,885 6,202 6,989 6,907 10,576 - ------------------------------------------------------------------------------------------------------------------------------------ Operating loss (2,320) (4,953) (5,982) (4,284) (7,103) - ------------------------------------------------------------------------------------------------------------------------------------ Other income (expense): - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income 24 79 188 373 651 - ------------------------------------------------------------------------------------------------------------------------------------ Interest and other expense - (34) (340) (160) (373) - ------------------------------------------------------------------------------------------------------------------------------------ Loss before extraordinary item (2,296) (4,908) (6,134) (4,071) (6,825) - ------------------------------------------------------------------------------------------------------------------------------------ Loss on early extinguishment of debt - - (512) - - - ------------------------------------------------------------------------------------------------------------------------------------ Net loss $(2,296) $(4,908) $(6,646) $(4,071) $(6,825) - ------------------------------------------------------------------------------------------------------------------------------------ Loss per share: - ------------------------------------------------------------------------------------------------------------------------------------ Before extraordinary item $(0.38) $(0.79) $(0.91) $(0.51) $(0.68) - ------------------------------------------------------------------------------------------------------------------------------------ Extraordinary item - - (0.08) - - - ------------------------------------------------------------------------------------------------------------------------------------ Net loss $(0.38) $(0.79) $(0.99) $(0.51) $(0.68) - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding 6,103 6,201 6,761 7,973 9,973 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1992 1993 1994 1995 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) - ------------------------------------------------------------------------------------------------------------------------------------ Balance Sheet Data: - ------------------------------------------------------------------------------------------------------------------------------------ Cash, cash equivalents and short-term securities $ 86 $ 18 $1,400 $7,800 $14,767 - ------------------------------------------------------------------------------------------------------------------------------------ Working capital (26) (435) 3,169 8,453 14,224 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets 918 2,120 4,976 11,953 25,021 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term obligations, net of current maturities 709 1,435 1,273 1,618 751 - ------------------------------------------------------------------------------------------------------------------------------------ Minority interest - - - 3,715 3,715 - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated deficit (3,075) (7,983) (14,629) (18,700) (25,525) - ------------------------------------------------------------------------------------------------------------------------------------ Stockholder's equity (deficit) (190) (944) 3,037 5,424 16,569 - ------------------------------------------------------------------------------------------------------------------------------------
-19- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis provides information which NaPro's management believes is relevant to an assessment and understanding of NaPro's results of operations. This discussion should be read in conjunction with the Financial Statements and Notes included elsewhere in this Report. Special Note: Certain statements set forth below constitute "forward-looking statements" within the meaning of the Reform Act. See "Business--Special Note Regarding Forward-Looking Statements" for additional factors relating to such statements. General NaPro has devoted its efforts primarily to the development and implementation of its EIP/TM/ technology for producing NBT paclitaxel. NaPro is currently dependent exclusively on sales of NBT paclitaxel for revenue. Through December 31, 1996, NaPro's production of NBT paclitaxel was limited primarily to research and pilot-scale production, and much of NaPro's product sales were for use in clinical trials and for research and development purposes. Accordingly, NaPro has generated only limited revenue from such activities and has incurred significant operating losses, including operating losses of approximately $6 million, $4.3 million and $7.1 million for the years ended December 31, 1994, 1995 and 1996, respectively, resulting in an accumulated deficit of $25.5 million as of December 31, 1996. NaPro expects that it will continue to have a high level of operating expense and will be required to make significant up- front expenditures in connection with its biomass procurement, product development and research-and-development activities. NaPro anticipates that operating losses will continue until such time, if ever, as NaPro is able to generate sufficient revenue to support its operations. NaPro believes that its ability to generate such revenue depends primarily on the ability of its Strategic Partners to obtain regulatory approval in the U.S. for the commercial sale of NBT paclitaxel, on NaPro's ability to obtain regulatory approval for its manufacturing facilities and on NaPro's ability to construct manufacturing facilities that produce quantities of NBT Paclitaxel sufficient to supply the Strategic Partners' requirements for commercial sales. Moreover, NaPro's future growth and profitability will depend on the success of the Strategic Partners in fostering acceptance in the oncological market for NBT paclitaxel as a preferred form of chemotherapy to be used alone or in combination with other chemotherapeutic agents. In January 1995, Faulding received approval to market NBT paclitaxel commercially in Australia under their trade name ANZATAX/TM. Although NaPro's revenue has increased as a result of this approval, NaPro does not currently expect to reach profitability for the year ending December 31, 1997. The ability of Faulding to continue to market NBT paclitaxel in Australia pursuant to Faulding's marketing approval and the success of these marketing efforts will continue to have a significant effect on NaPro's revenue and profitability. In June 1996 NaPro completed the call of 2,070,000 redeemable warrants, issuing 630,620 shares of Common Stock with the receipt of cash in the amount of $3.1 million pursuant to cash exercise elections of 630,620 redeemable warrants, and issuing 1,007,102 shares of Common Stock pursuant to Cash-less exercise elections of 1,438,720 redeemable warrants. In August 1996, NaPro closed a public offering of 1.79 million shares of its Common Stock, which resulted in net proceeds of $13.8 million to the Company. The proceeds of this offering are being used to establish and upgrade manufacturing facilities and to fund NaPro's operations, capital expenditures, additional plantation development and general corporate purposes. Results of Operations NaPro was in the development stage through December 31, 1994. Comparison of operations between years and historical trends does not necessarily indicate future trends and operating results of NaPro. -20- Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Revenue. - --------------------------------------------------------------------- Revenue increased $900,000 to $3.5 million for 1996 from $2.6 million for 1995. Through December 31, 1995, the majority of product sales had been for use in clinical trials and for research and development purposes. Such sales are unpredictable by nature. Although initial commercial sales commenced in January 1995, and increased in 1996, NaPro expects these sales to be unpredictable until such time as the markets of the Strategic Partners have been established and proven. Research, Development and Cost of Products Sold. Research, development and cost of products sold increased $2.5 million to $6.8 million for 1996 from $4.3 million for 1995. The increase was due primarily to an increase in the level of process development and research, including higher production cost due to higher production volume. NaPro's production process is not distinct from its research and development processes. Accordingly, the cost of products sold is included with NaPro's research and development expense. General and Administrative Expense. General and administrative expense (G&A) increased $1.4 million to $3.7 million for 1996 from $2.3 million for 1995. This increase was due primarily to an increase in facility cost and an increase in administrative and support staff. Plantation Fees. Plantation fees decreased from $300,000 in 1995 to zero, reflecting the completion of research related to plantation development as of December 31, 1995. In 1996, NaPro began capitalizing plantation expenditures incurred prior to the first commercial harvest and depletes such cost over the remaining life of the plantation contract using the units-of-production method. Interest Income. Interest income increased $300,000 to $700,000 for 1996 from $400,000 for 1995. This increase was the result of larger free cash balances associated with the completion of NaPro's offering of Common Stock in August 1996 and its warrant call completed in June 1996 (see Liquidity and Capital Resources). Interest and Other Expense. Interest and other expense increased $300,000 to $400,000 for 1996 from $100,000 for 1995. The increase was attributable to interest on increased borrowings on the equipment lease line and note payable to Faulding (see Liquidity and Capital Resources). Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Revenue. - --------------------------------------------------------------------- Revenue increased $1.6 million to $2.6 million for 1995 from $1 million for 1994. The increase was attributable primarily to the timing of product deliveries to the Strategic Partners, as well as changes in pricing associated with commercial sales of NBT paclitaxel in Australia. Research, Development and Cost of Products Sold. Research, development and cost of products sold increased $1.6 million to $4.3 million for 1995 from $2.7 million for 1994. The increase was due primarily to an increase in the level of process development and research, including higher production cost due to higher production volume. General and Administrative Expense. G&A increased $300,000 to $2.3 million for 1995 from $2 million for 1994. The increase was due primarily to an increase in administrative and related support staff. Faulding Royalty Expense and Plantation Fees. Plantation fees decreased $900,000 to $300,000 for 1995 from $1.2 million for 1994. Higher fees during 1994 reflected the additional expense of establishing the plantation as opposed to ongoing maintenance in 1995 (see Note 8 to the Financial Statements). The $1 -21- million 1994 Faulding royalty expense was a one-time charge. Interest Income. Interest income increased $200,000 to $400,000 for 1995 from $200,000 for 1994. This increase was the result of larger free cash balances. Interest and Other Expense. Interest and other expense decreased $200,000 to $100,000 for 1995 from $300,000 for 1994. The decrease was the result of the absence of interest on bridge loans which were paid off in 1994. Liquidity and Capital Resources NaPro's capital requirements have been and will continue to be significant. As of December 31, 1996, NaPro had a working capital balance of $14.2 million. This compared to a working capital balance of $8.5 million as of December 31, 1995. To date, the funding of NaPro's capital requirements has been dependent primarily on net proceeds of public offerings of its common stock of approximately $21.1 million, on private placements of its equity securities of approximately $22.8 million, on the exercise of warrants and options of $4.3 million, and on capital leases, loans and advances from its stockholders and the Strategic Partners. Working Capital and Cash Flow Cash and cash equivalents increased $2.4 million - ----------------------------- to $9.5 million for the year ended December 31, 1996 from $7.1 million at December 31, 1995. Net cash provided by 1996 financing activity was partially offset by $6.5 million used in operating activities, by capital expenditures of $4.9 million and net purchases of investments of $4.9 million. Cash and cash equivalents increased $6.2 million to $7.1 million at December 31, 1995 from $900,000 at December 31, 1994. Net cash provided by 1995 financing activity was partially offset by cash used in operations of $3 million, by capital expenditures of $ 1.2 million and net purchases of investments of $100,000. Inventory increased $1.1 million to $2.3 million in the year ended December 31, 1996 from $1.2 million at December 31, 1995. The amount of product held as finished goods equivalents in work-in-progress inventories as well as finished goods inventories is dependent on a number of factors, including the shipping requirements of the Strategic Partners and NaPro's production planning for meeting those needs. Inventory balances may vary significantly during product development and launch periods. NaPro may make significant biomass investments during 1997. Capital Expenditures NaPro expended $4.9 million and $1.2 million, - -------------------- respectively, during 1996 and 1995 for capital projects. These expenditures primarily included plantation cost, initial work on a new large scale commercial EIP/TM/ manufacturing facility in Boulder, and expansion and improvement to NaPro's Boulder laboratories and facilities. In 1997, NaPro expects to invest capital in property, plant and equipment, primarily to expand its plantation operations, to complete the large scale commercial EIP/TM/ manufacturing facility in Boulder and to upgrade and expand its extraction manufacturing capabilities. NaPro anticipates a significant increase in capital expenditures and operations in 1997 in anticipation of possible NDA approval. Therefore, NaPro plans to obtain additional capital during the year. If NaPro is not successful in attracting capital, it will need to significantly reduce the scope of capital expenditures and operations. The amount and timing of future capital expenditures will depend upon numerous factors, including the progress of NaPro's research and development programs, the magnitude and scope of these activities, the cost of preparing, filing, prosecuting, maintaining and enforcing patent claims and other intellectual property rights, competing technological and marketing developments, changes in or terminations of -22- existing strategic partnerships, the establishment of additional strategic relationships and the cost of manufacturing scale-up. NaPro may seek additional long-term financing to fund capital expenditures should such financing become available on terms acceptable to NaPro. Net Operating Loss Carryforwards As of December 31, 1996, NaPro had net - -------------------------------- operating loss carryforwards for income tax purposes of approximately $22 million to offset future taxable income. Under Section 382 of the Internal Revenue Code of 1986, as amended, the utilization of net operating loss carryforwards is limited after an ownership change, as defined in such Section 382, to an annual amount equal to the value of the loss corporation's outstanding stock immediately before the date of the ownership change multiplied by the federal long-term tax-exempt rate in effect during the month the ownership change occurred. Such an ownership change occurred in September 1993. As a result, NaPro will be subject to an annual limitation on the use of its net operating losses. This limitation only affects net operating losses incurred up to the ownership change and does not reduce the total amount of net operating loss which may be taken, but rather limits the amount which may be used during a particular year. Therefore, in the event NaPro achieves profitability, such limitation would have the effect of increasing NaPro's tax liability and reducing the net income and available cash resources of NaPro if the taxable income during a year exceeded the allowable loss carried forward to that year. -23- Item 8. Financial Statements and Supplementary Data The information required by this item begins at Page F-1. Item 9. Changes in and Disagreements with Accountants None Part III Item 10. Directors and Executive Officers The information concerning NaPro's directors and executive officers is incorporated by reference to the section entitled "Election of Directors" in the Company's definition Proxy Statement with respect to the Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement"). Item 11. Executive Compensation The section labeled "Executive Compensation" appearing in NaPro's Proxy Statement is incorporated herein by reference, except for such information as need not be incorporated by reference under rules promulgated by the Securities and Exchange Commission. Item 12. Security Ownership of Certain Beneficial Owners and Management The section labeled "Security Ownership of Directors and Executive Officers and Certain Beneficial Owners" appearing in NaPro's Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The section labeled "Certain Relationships and related Transactions" appearing in NaPro's Proxy Statement is incorporated herein by reference. -24- Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Financial Statements The Financial Statement Index is found on Page F-1. Financial Statement Schedules All schedules are omitted because they are not applicable or not required or because the information is included in the consolidated financial statements or the notes thereto. Exhibits and Reports on Form 8-K NaPro filed a November 8, 1996, Current Report Form 8-K reporting the adoption of a Stockholder Rights Plan. Exhibit Number Description of Exhibit - ----- ---------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended August 2, 1996. 3.2 Certificate of Designation for Convertible Preferred Stock, Series A. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q filed with the Commission for the quarter ended June 30, 1995 (File No. 0-24320). 3.3 Certificate of Designation for Series B Junior Participating Preferred Stock. Incorporated herein by reference from the Company's November 8, 1996 Current Report Form 8-K (File No. 0-24320). 3.4 Bylaws of the Company. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.1 Common Stock Certificate. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.2 Underwriter's Warrant Agreement. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.3 Warrant Agreement. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.4 Warrant Certificate. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.5 The Certificate of Incorporation and Bylaws of the Company are included as Exhibits 3.1 through 3.4. 10.1* Company's 1993 Stock Option Plan. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.2* Company's 1994 Long-Term Performance Incentive Plan, as amended July 30, 1996. 10.3 Common Stock Warrant dated as of June 7, 1993 between the Company and Broadmark Capital Corporation. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.4 Stock Purchase Warrant dated as of June 7, 1993 between the Company and Arthur D. Harrison. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.5 Stock Purchase Warrant dated as of June 7, 1993 between the Company and D&N Holding Company. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, -25- filed with the Commission on July 24, 1994 (File No. 33-78016). 10.6 Stock Purchase Warrant dated as of June 7, 1993 between the Company and Kirkland & Ellis. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.7 Stock Purchase Warrant dated as of December 15, 1992 between the Company and Kirkland & Ellis. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.8 Stock Purchase Warrant dated as of June 3, 1992 between the Company and Herbert L Lucas. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.9 Stock Purchase Warrant dated as of June 3, 1992 between the Company and H.J. Meyers & Co., Inc. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.10 Stock Purchase Warrant dated as of June 3, 1992 between the Company and Freshman, Marantz, Orlanski, Cooper, and Klein 1993 Investments. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.11 Stock Purchase Warrant dated as of April 30, 1993 between the Company and Pacific Regeneration Technologies, Inc. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.12 Registration Agreement dated as of June 7, 1993 by and among the Company, D&N Holding Company, Sterling K. Ainsworth, Patricia A. Pilia, Leonard P. Shaykin, and Lawrence Helson. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.13 Amended and Restated Stockholders Agreement dated as of May 31, 1994 by and among the Company, D&N Holding Company, Sterling K. Ainsworth, Patricia A. Pilia, Leonard P. Shaykin, and Lawrence Helson. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.14 Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993 and amended and restated as of May 31, 1994 between the Company and Leonard P. Shaykin. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.15* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993 and amended and restated as of May 31, 1994 between the Company and Sterling K. Ainsworth. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.16* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993 and amended and restated as of May 31, 1994 between the Company and Patricia A. Pilia. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.17* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993 and amended and restated as of May 31, 1994 between the Company and Lawrence Helson. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.18* Company's Stock Option Agreement with Sterling K. Ainsworth. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.19* Company's Stock Option Agreement with Patricia A. Pilia. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.20 Services and Supply Agreement dated as of December 1, 1993 between the Company and Pacific -26- BioTechnologies Inc. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.21 Subscription Agreement dated as of April 29, 1993 between the Company and Pacific Regeneration Technologies. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.22 Amended and Restated Master Agreement dated as of January 19, 1994 between the Company and F.H. Faulding & Co., Ltd. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.23 Amendment No. 1 To Amended and Restated Master Agreement Dated January 19, 1994, executed as of March 23, 1995. Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-24320). 10.24 Agreement dated as of June 7, 1993 between the Company and Baker Norton Pharmaceuticals, Inc. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.25 Lease dated February 28, 1995 between the Company and the Mutual Life of Canada. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.26 Subscription Agreement and Investment Letter between the Company and NaPro BioTherapeutics (Canada), Inc. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.27 Put/Call Agreement dated July 12, 1995 between the Company and the Purchasers of Series A Preferred Shares of NaPro BioTherapeutics (Canada) Inc. Incorporated herein by reference from the Company's Quarterly Report on Form 10- Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.28 Side Letter dated July 21, 1995 to Put/Call Agreement. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.29 Engagement Letter dated February 16, 1995 between the Company and Capital West Partners. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.30 Subscription Agreement between the Company and the purchasers of Convertible Preferred Stock, Series A, of the Company. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.31 Purchase Agreement between the Company and certain purchasers of Preferred Shares of NaPro BioTherapeutics (Canada) Inc. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.32 Purchase Agreement between the Company and BPI Capital Management Corporation as to Preferred Shares of NaPro BioTherapeutics (Canada) Inc. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.33 Lease between the Company and Gunbarrel Facility L.L.C. dated October 16, 1995. Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-24320). 10.34 First Amendment to Lease November 27, 1995, between the Company and Gunbarrel Facility L.L.C. Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-24320). 10.35 Agreement between the Company and Pacific BioTechnologies Inc. dated March 29, 1996. Incorporated herein by reference from the Company's Annual Report on Form10-K for the year ended December 31, 1995 (File No. 0-24320). 10.36 Culture Agreement dated March 1, 1996 between Zelenka Nursey, Inc. ("Zelenka") and the Company. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company filed with the Commission on August 1, 1996 (File No. 333-3051). 10.37 Agreement for Sale, Harvest and Storage of Nursey Stock dated May 1, 1996 between Zelenka -27- and the Company. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company filed with the Commission on August 1, 1996 (File No. 333-3051). 10.38 Culture Agreement dated as of March 1, 1997 between Zelenka and the Company. The Company is filing with the Commission a Confidential Treatment Request with respect to this agreement, and accordingly, certain language has been redacted. 10.39 Lease Agreement dated as of March 1, 1997 between Zelenka and the Company. The Company is filing with the Commission a Confidential Treatment Request with respect to this agreement, and accordingly, certain language has been redacted. 10.40 Agreement for Sale, Harvest and Storage of Nursey Stock dated as of March 1, 1997 between Zelenka and the Company. The Company is filling with the Commission a Confidential Treatment Request with respect to this agreement, and accordingly, certain language has been redacted. 21.1 List of Subsidiaries. Incorporated herein by reference from the Registration Statement of the Company on Form S-1, filed with the Commission on May 20, 1996 (File No. 33-78016). 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Powers of Attorney 27.1 Financial Data Schedule. *A management compensation plan. -28- Signatures Pursuant to Section 13 of the Securities Exchange Act of 1934, NaPro caused this report to be signed on its behalf.
NAPRO BIOTHERAPEUTICS, INC. /s/ Sterling K. Ainsworth Sterling K. Ainsworth, Ph.D President, Chief March 31, 1997 Executive Officer; Director Pursuant to the Exchange Act, this report has been signed on behalf of NaPro and in the capacities indicated. * Chairman of the Board of March 31, 1997 Leonard P. Shaykin Directors /s/ Sterling K. Ainsworth President, Chief March 31, 1997 Sterling K. Ainsworth, Ph.D Executive Officer; Director /s/ Gordon H. Link, Jr. Vice President, Chief March 31, 1997 Gordon H. Link, Jr Financial Officer (Principal Financial Officer) /s/ Robert L. Poley Controller March 31, 1997 Robert L. Poley (Principal Accounting Officer) * Director March 31, 1997 E. Garrett Bewkes, Jr. * Director March 31, 1997 Vaughn D. Bryson * Director March 31, 1997 Philip Frost, M.D. * Director March 31, 1997 Arthur H. Hayes, Jr., M.D. * Director March 31, 1997 Mark B. Hacken * Director March 31, 1997 Richard C. Pfenniger, Jr. /s/ Patricia A. Pilia Director March 31, 1997 Patricia A. Pilia, Ph.D
*By:/s/ Gordon H. Link, Jr Gordon H. Link, Jr., Attorney in Fact -29- NaPro BioTherapeutics, Inc. and Subsidiaries Financial Statements Years ended December 31, 1994, 1995 and 1996
Index to Financial Statements Report of Independent Auditors......................................... F-2 Audited Consolidated Financial Statements Consolidated Balance Sheet............................................. F-3 Consolidated Statement of Operations................................... F-5 Consolidated Statement of Stockholders' Equity......................... F-6 Consolidated Statement of Cash Flows................................... F-8 Notes to Consolidated Financial Statements............................ F-10
Report of Independent Auditors The Board of Directors and Stockholders NaPro BioTherapeutics, Inc. We have audited the accompanying consolidated balance sheet of NaPro BioTherapeutics, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NaPro BioTherapeutics, Inc. and subsidiary at December 31, 1995 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Denver, Colorado January 26, 1997 F-2 NaPro BioTherapeutics, Inc. and Subsidiaries Consolidated Balance Sheet
December 31 1995 1996 ----------- ------------ Assets Current assets: Cash and cash equivalents $ 7,133,000 $9,531,000 Securities available for sale - 2,669,000 Securities held to maturity 667,000 2,567,000 Accounts receivable 326,000 662,000 Inventory: Raw materials 287,000 495,000 Work-in-process 433,000 449,000 Finished goods 492,000 1,337,000 ----------- ------------ 1,212,000 2,281,000 Prepaid expenses and other 311,000 500,000 ----------- ------------ Total current assets 9,649,000 18,210,000 Property and equipment, at cost (Note 4): Plantation cost - 1,923,000 Laboratory equipment 1,359,000 2,086,000 Leasehold improvements 508,000 1,151,000 Office equipment and other 230,000 559,000 Construction in progress 407,000 1,645,000 ----------- ------------ 2,504,000 7,364,000 Accumulated depreciation 722,000 1,352,000 ----------- ------------ Property and equipment, net 1,782,000 6,012,000 Restricted cash 124,000 415,000 Receivable from related parties 18,000 18,000 Other assets 380,000 366,000 ----------- ------------ Total assets $11,953,000 $ 25,021,000 =========== ============
F-3 NaPro BioTherapeutics, Inc. and Subsidiaries Consolidated Balance Sheet (continued)
December 31 1995 1996 ---- ---- Liabilities and stockholders' equity Current liabilities: Accounts payable $ 663,000 $ 1,763,000 Accrued payroll and payroll taxes 338,000 519,000 Capital lease obligations--current (Note 4) 105,000 444,000 Notes payable--current (Note 3) 39,000 1,225,000 Deferred revenue 51,000 35,000 ------------ ------------ Total current liabilities 1,196,000 3,986,000 Capital lease obligations--long term (Note 4) 299,000 751,000 Notes payable--long term (Note 3) 1,150,000 - Compensation due to officers and directors 169,000 - Commitments and contingencies (Notes 1 and 9) Minority interest (Note 6) 3,715,000 3,715,000 Stockholders' equity (Note 6): Preferred stock, $.001 par value: Authorized shares - 2,000,000 Series A: Issued and outstanding shares - 125,000 in 1995 and 1996 (preference in liquidation $1,000,000) - - Nonvoting common stock, convertible on disposi- tion into voting common stock, $.0075 par value: Authorized shares - 1,000,000 Issued and outstanding shares - 400,000 in 1995 and 595,000 in 1996 3,000 4,000 Common stock, $.0075 par value: Authorized shares - 19,000,000 Issued shares - 8,525,265 in 1995 and 11,986,089 in 1996 64,000 89,000 Additional paid-in capital 26,675,000 44,670,000 Unearned compensation (9,000) - Notes receivable from stockholders (925,000) (985,000) Deficit (18,700,000) (25,525,000) Treasury stock - 144,288 shares in 1995 and 1996 (1,684,000) (1,684,000) ------------ ------------ Total stockholders' equity 5,424,000 16,569,000 ------------ ------------ Total liabilities and stockholders' equity $ 11,953,000 $ 25,021,000 ============ ============
See accompanying notes. F-4 Napro BioTherapeutics, Inc. and Subsidiaries Consolidated Statement of Operations
Year ended December 31 1994 1995 1996 ---- ---- ---- Revenue: Sales of products $ 1,002,000 $ 2,623,000 $ 3,473,000 Other 5,000 - - ----------- ----------- ------------ 1,007,000 2,623,000 3,473,000 Expense: Research, development and cost of products sold 2,707,000 4,325,000 6,837,000 General and administrative 2,044,000 2,310,000 3,739,000 Faulding royalty (Note 6) 1,000,000 - - Plantation fees (Note 8) 1,238,000 272,000 - ----------- ----------- ------------ 6,989,000 6,907,000 10,576,000 ----------- ----------- ------------ Operating loss (5,982,000) (4,284,000) ( 7,103,000) Other income (expense): Interest income 188,000 373,000 651,000 Interest and other expense (340,000) (160,000) (373,000) ----------- ----------- ------------ Loss before extraordinary item (6,134,000) (4,071,000) (6,825,000) Loss on early extinguishment of debt (Note 6) (512,000) - - ----------- ----------- ------------ Net loss $(6,646,000) $(4,071,000) $ (6,825,000) =========== =========== ============ Net loss per share: Before extraordinary item $ (0.91) $(0.51) $(0.68) Extraordinary item (0.08) - - ----------- ----------- ------------ Net loss $ (0.99) $(0.51) $(0.68) =========== =========== ============ Weighted average shares outstanding 6,761,081 7,972,537 9,973,325 =========== =========== ============
See accompanying notes. F-5 NaPro BioTherapeutics, Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity Years ended December 31, 1994, 1995 and 1996
Series A Nonvoting Additional Preferred Common Common Paid-in Unearned Stock Stock Stock Capital Compensation ------------------------------------------------------------------------ Balance at December 31, 1993 $ -- $ -- $42,000 $ 9,942,000 $(589,000) Issuance of 265,000 shares of common stock at $2.40 per share in exchange for cash, net of offering cost of $87,000 -- -- 2,000 547,000 -- Issuance of 16,667 common stock warrants at $.01 per share in exchange for consulting services -- -- -- 42,000 -- Issuance of 33,333 common stock warrants at $1.125 per share in exchange for employment services -- -- -- 40,000 -- Issuance of 1,800,000 shares of common stock at $5.00 per share and 2,070,000 warrants at $0.10 per warrant for cash, net of offering cost of $1,184,000 -- -- 14,000 7,339,000 -- Issuance of 400,000 shares of nonvoting common stock at $5.00 per share for cash and warrants to purchase 400,000 shares of nonvoting common stock at $.10 per warrant -- 3,000 -- 2,037,000 -- Exercise of 30,667 common stock warrants for cash, at prices ranging from $.10 to $2.40 per share -- -- -- 34,000 -- Issuance of 28,615 shares of common stock at $5.00 per share in exchange for notes payable -- -- -- 143,000 -- Amortization of unearned compensation -- -- -- -- 559,000 Interest receivable on officers' notes -- -- -- -- -- Net loss -- -- -- -- -- ------------------------------------------------------------------------ Balance as of December 31, 1994 -- 3,000 58,000 20,124,000 (30,000) Issuance of 1,364,263 shares of preferred stock at $8.00 per share, net of offering cost of $846,000 (725,513 shares in minority interest) 1,000 -- -- 4,267,000 -- Notes Receivable From Treasury Stockholders Deficit Stock Total ------------------------------------------------------------------------ Balance at December 31, 1993 $(2,356,000) $ (7,983,000) $ - $ (944,000) Issuance of 265,000 shares of common stock at $2.40 per share in exchange for cash, net of offering cost of $87,000 -- -- - 549,000 Issuance of 16,667 common stock warrants at $.01 per share in exchange for consulting services -- -- - 42,000 Issuance of 33,333 common stock warrants at $1.125 per share in exchange for employment services -- -- - 40,000 Issuance of 1,800,000 shares of common stock at $5.00 per share and 2,070,000 warrants at $0.10 per warrant for cash, net of offering cost of $1,184,000 -- -- - 7,353,000 Issuance of 400,000 shares of nonvoting common stock at $5.00 per share for cash and warrants to purchase 400,000 shares of nonvoting common stock at $.10 per warrant -- -- - 2,040,000 Exercise of 30,667 common stock warrants for cash, at prices ranging from $.10 to $2.40 per share -- -- - 34,000 Issuance of 28,615 shares of common stock at $5.00 per share in exchange for notes payable -- -- - 143,000 Amortization of unearned compensation -- -- - 559,000 Interest receivable on officers' notes (133,000) -- - (133,000) Net loss -- (6,646,000) - (6,646,000) ------------------------------------------------------------------------ Balance as of December 31, 1994 (2,489,000) (14,629,000) - 3,037,000 Issuance of 1,364,263 shares of preferred stock at $8.00 per share, net of offering cost of $846,000 (725,513 shares in minority interest) -- -- - 4,268,000
F-6 NaPro BioTherapeutics, Inc. and Subsidiaries Consolidated Statement of Stockholders, Equity Years ended December 31, 1994, 1995 and 1996 (continued)
Series A Nonvoting Additional Preferred Common Common Paid-in Unearned Stock Stock Stock Capital Compensation ------------------------------------------------------------------------ Conversion of 513,750 shares of preferred stock into 513,750 shares of common stock and exchange of 266,421 shares of subsidiary's preferred stock for 266,421 shares of common stock $(1,000) $ -- $ 6,000 $ 2,238,000 $ -- Exercise of 31,651 stock options at prices ranging from $.75 per share to $2.40 per share -- -- -- 46,000 -- Repurchase of 144,288 shares of common stock at $11.675 per share in exchange for cancellation of indebtedness -- -- -- -- -- Interest receivable on officers' notes -- -- -- -- -- Amortization of unearned compensation -- -- -- -- 21,000 Net loss -- -- -- -- -- ------------------------------------------------------------------------ Balance at December 31, 1995 -- 3,000 64,000 26,675,000 (9,000) Exercise of warrants for 200,000 shares of nonvoting common stock -- 1,000 -- 999,000 -- Exercise of 21,418 stock options at prices ranging from $ .75 per share to $6.57 per share -- -- -- 66,000 -- Exercise of warrants for 1,640,389 shares of common stock at prices ranging from $5.00 per share to $9.37 per share net of offering cost of $ 37,000 -- -- 12,000 3,129,000 -- Issuance of 1,790,000 shares of common stock at $8.75 per share net of offering cost of $1,876,000 -- -- 13,000 13,773,000 -- Contribution of 4,017 shares of common stock at $7.00 per share to retirement plan -- -- -- 28,000 -- Interest receivable on officers' notes -- -- -- -- -- Amortization of unearned compensation -- -- -- -- 9,000 Conversion of 5,000 shares of nonvoting common stock to 5,000 shares of common stock -- -- -- -- -- Net loss -- -- -- -- -- ------------------------------------------------------------------------ Balance at December 31, 1996 $ -- $4,000 $89,000 $44,670,000 $ -- ======================================================================== Notes Receivable From Treasury Stockholders Deficit Stock Total ------------------------------------------------------------------------ Conversion of 513,750 shares of preferred stock into 513,750 shares of common stock and exchange of 266,421 shares of subsidiary's preferred stock for 266,421 shares of common stock $ -- $ -- $ -- $ 2,243,000 Exercise of 31,651 stock options at prices ranging from $.75 per share to $2.40 per share -- -- -- 46,000 Repurchase of 144,288 shares of common stock at $11.675 per share in exchange for cancellation of indebtedness 1,684,000 -- (1,684,000) -- Interest receivable on officers' notes (120,000) -- -- (120,000) Amortization of unearned compensation -- -- -- 21,000 Net loss -- (4,071,000) -- (4,071,000) ------------------------------------------------------------------------ Balance at December 31, 1995 (925,000) (18,700,000) (1,684,000) 5,424,000 Exercise of warrants for 200,000 shares of nonvoting common stock -- -- -- 1,000,000 Exercise of 21,418 stock options at prices ranging from $ .75 per share to $6.57 per share -- -- -- 66,000 Exercise of warrants for 1,640,389 shares of common stock at prices ranging from $5.00 per share to $9.37 per share net of offering cost of $ 37,000 -- -- -- 3,141,000 Issuance of 1,790,000 shares of common stock at $8.75 per share net of offering cost of $1,876,000 -- -- -- 13,786,000 Contribution of 4,017 shares of common stock at $7.00 per share to retirement plan -- -- -- 28,000 Interest receivable on officers' notes (60,000) -- -- (60,000) Amortization of unearned compensation -- -- -- 9,000 Conversion of 5,000 shares of nonvoting common stock to 5,000 shares of common stock -- -- -- -- Net loss -- (6,825,000) -- (6,825,000) ------------------------------------------------------------------------ Balance at December 31, 1996 $ (985,000) $(25,525,000) $(1,684,000) $ 16,569,000 ========================================================================
See accompanying notes. F-7 NaPro BioTherapeutics, Inc. and Subsidiaries Consolidated Statement of Cash Flows
Year ended December 31 1994 1995 1996 ---- ---- ---- Operating activities Net loss $(6,646,000) $(4,071,000) $(6,825,000) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 474,000 270,000 669,000 Employee termination expense 82,000 - - Compensation for common stock and options 555,000 21,000 37,000 Loss on retirement of assets 335,000 163,000 28,000 Loss on early extinguishment of debt 512,000 - - Changes in operating assets and liabilities: Accounts receivable 115,000 (177,000) (336,000) Inventory (706,000) 216,000 (1,069,000) Prepaid expenses and other current assets (887,000) 116,000 (235,000) Accounts payable (736,000) 245,000 1,100,000 Accrued liabilities (48,000) 226,000 181,000 Deferred revenue (300,000) 15,000 (16,000) ----------- ---------- ---------- Net cash used by operating activities (7,250,000) (2,976,000) (6,466,000) Investing activities Additions to property and equipment (573,000) (1,209,000) (4,894,000) Purchase of securities - available for sale (2,932,000) (5,895,000) (3,439,000) Purchase of securities - held to maturity - (667,000) (2,462,000) Proceeds from securities available for sale 2,436,000 6,451,000 750,000 Proceeds from securities held to maturity - - 167,000 Transfer of restricted cash - (124,000) 124,000 ----------- ----------- ----------- Net cash used by investing activities (1,069,000) (1,444,000) (9,754,000) Financing activities Increase in deferred revenue--long term 350,000 - - Proceeds from notes payable and capital lease 1,571,000 640,000 1,349,000 Payments under notes payable and capital leases (2,155,000) (251,000) (555,000) Payment for compensation due officers - - (169,000) Proceeds from sale of common and preferred stock 10,698,000 5,156,000 19,906,000 Proceeds from sale of preferred stock by subsidiary - 5,959,000 - Offering cost of common and preferred stock (1,271,000) (843,000) (1,913,000) ----------- ----------- ----------- Net cash provided by financing activities 9,193,000 10,661,000 18,618,000 ----------- ----------- ----------- Net increase in cash and cash equivalents 874,000 6,241,000 2,398,000 Cash and cash equivalents at beginning of year 18,000 892,000 7,133,000 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 892,000 $ 7,133,000 $ 9,531,000 =========== =========== ===========
F-8 NaPro BioTherapeutics, Inc. and Subsidiaries Consolidated Statement of Cash Flows (continued)
Year ended December 31 1994 1995 1996 ---- ---- ---- Supplemental schedule of noncash investing and financing activities Notes and related interest receivable from stockholders $133,000 $ 120,000 $ 60,000 Repayment of notes receivable from stockholders through transfer of treasury stock to the Company - 1,684,000 - Conversion of deferred revenue to long-term debt - 1,100,000 - Conversion of preferred shares of subsidiary to common shares of Parent - 2,243,000 - Reclassification of securities held to maturity, to restricted cash - - 415,000
See accompanying notes. F-9 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) December 31, 1996 1. Basis of Presentation and Summary of Significant Accounting Policies Organization NaPro BioTherapeutics, Inc. ("NaPro" or "the Company") was originally incorporated in 1991 as a Washington corporation. In September 1993, NaPro merged into a wholly-owned subsidiary, a Delaware corporation. In November 1994, NaPro formed a subsidiary, NaPro BioTherapeutics (Canada), Inc., of which the Company owns 87.3% of the voting rights. In February 1996 NaPro formed a wholly owned subsidiary, NaPro BioTherapeutics (Ireland) Limited. Basis of Presentation The accompanying financial statements include the consolidated financial position, consolidated results of operations and consolidated cash flows of the Company and its subsidiaries. All transactions have been accounted for at historical cost. All balances and transactions between these entities have been eliminated in the accompanying financial statements. Description of Business NaPro focuses on the development, manufacture and commercialization of natural product pharmaceuticals, particularly paclitaxel (referred to in some scientific and medical literature as "taxol"*), a naturally occurring cancer-fighting compound found in certain species of yew (Taxus) trees. NaPro anticipates a significant increase in capital expenditures and operations in 1997. To fund such activity, it plans to obtain significant amounts of new capital during the year. If NaPro is not successful in attracting capital, it will need to significantly reduce the scope of such activity. - ------------- *TAXOL(R) is a registered trademark of Bristol-Myers Squibb Company (Bristol- Myers Squibb) for an anticancer pharmaceutical preparation containing paclitaxel. F-10 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Cash Equivalents, Securities Available for Sale and Securities Held to Maturity NaPro considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Securities available for sale are investment-grade securities and are carried at fair value. Such securities available for sale include $1,311,000 which mature in 1998. The remainder mature in 1997. Securities held to maturity are investment grade securities and are carried at amortized cost. Revenue Recognition Revenue from product sales is recognized at the time of shipment. NaPro's production process is not distinct from its research and development processes. Accordingly, the cost of products sold is included with NaPro's research and development expense. Licensing fees and other revenue are recognized in accordance with the terms of the applicable agreements. Payments received in advance under these agreements are recorded as deferred revenue until earned. Fair Value of Financial Instruments The carrying values of cash and cash equivalents, securities, accounts receivable and payable, notes payable and capital lease obligations approximate fair value. Inventory Inventory is stated at the lower of cost (first-in, first-out method) or market. Research and Development NaPro expenses research and development cost as it is incurred. Plantation Cost In 1996 NaPro determined the cultivation of renewable sources of biomass to be used in the manufacture of paclitaxel is a technically feasible business strategy. Prior to 1996 plantation expenditures were expensed as research and development and were separately reported on the statement of operations. In 1996 NaPro began capitalizing plantation expenditures incurred prior to the first commercial harvest and depletes such cost over the remaining life of the plantation contract using the units-of-production method. Plantation expenditures include the acquisition cost of trees and bushes and the related cost of planting and growing. F-11 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Depreciation and Amortization Depreciation of property and equipment, including that recorded under capital leases, is computed on the straight-line method over estimated useful lives generally between three and seven years. Leasehold improvements are amortized over the lesser of estimated useful lives or the lease term. Depreciation and amortization expense is allocated to either general and administrative or research and development expense, depending on the use of the related property and equipment. Net Loss Per Share Net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation as their effect is antidilutive. Long-Lived Assets Effective January 1996, NaPro adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("Statement 121"), which requires impairment losses to be recorded on long-lived assets used in operations when indications of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The adoption of Statement 121 had no significant impact on the financial statements. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates and assumptions. Actual results could vary from the estimates used. Reclassifications Certain reclassifications have been made to the 1994 and 1995 financial statements to conform with the 1996 financial statement presentation. F-12 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Basis of Presentation and Summary of Significant Accounting Policies (continued) Foreign and Domestic Operations and Export Sales; Significant Customers Domestic and foreign financial information is as follows:
United Total Year States Canada Eliminations Company ---- ------ ------ ------------ ------- Net sales to affiliated and unaffiliated customers 1994 $1,002,000 $ 148,000 $ (148,000) $1,002,000 1995 2,623,000 569,000 (569,000) 2,623,000 1996 3,473,000 1,781,000 (1,781,000) 3,473,000 Operating loss 1994 5,914,000 68,000 -- 5,982,000 1995 3,851,000 433,000 -- 4,284,000 1996 6,719,000 384,000 -- 7,103,000 Identifiable assets December 31, 1995 9,226,000 6,820,000 (4,093,000) 11,953,000 1996 22,587,000 4,823,000 (2,389,000) 25,021,000
Substantially all of NaPro's accounts receivable at December 31, 1995 and 1996 were from F.H. Faulding & Co., Limited ("Faulding") (see Note 8). NaPro is dependent on sales to its two development and marketing partners, Faulding and the Baker Norton subsidiary of IVAX Corporation ("IVAX") (see Note 8), and does not require collateral to secure accounts receivable from these partners. Sales to these partners as a percent of total sales were as follows:
1994 1995 1996 ---- ---- ---- Faulding 15% 75% 72% IVAX 71% 22% 25%
2. Other Related Party Transactions In conjunction with employment, NaPro agreed to loan an officer up to $20,000. In January 1994, $18,000 was advanced under this agreement and remains outstanding at December 31, 1996. NaPro recorded $707,000, $589,000 and $882,000 in 1994, 1995 and 1996, respectively, in sales to IVAX, a marketing and development partner which owned 14.3%, 13.2% and 9.4% of NaPro's outstanding shares of common stock (see Notes 1 and 8) at December 31, 1994, 1995 and 1996, respectively. F-13 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Other Related Party Transactions (continued) In August 1995, NaPro repurchased 144,288 shares of its common stock from executive officers in exchange for the cancellation of certain indebtedness owed by such officers of $1,684,000 to NaPro. Included in the canceled indebtedness was $193,000 of accrued interest (see Notes 6 and 11). 3. Notes Payable In 1992, 1993 and 1994, Faulding made advance payments to NaPro totaling $1,100,000. In March 1995, NaPro and Faulding finalized an agreement to convert the advance payments into a note payable with a face value of $1,200,000, due in June 1997. The $100,000 original issue discount is being amortized over the life of the note and has a remaining balance of $16,000 at December 31, 1996. The portion of the note on which interest accrues at the rate of 9% increases over time as deliveries of product are made to Faulding. At December 31, 1996, interest accrued on $1,000,000 of the principal balance. Notes payable consist of the following:
December 31 1995 1996 ---- ---- Note payable to Faulding, net of unamortized original issue discount, due in June 1997, interest at 9% accruing on $1,000,000, payable quarterly $1,150,000 $1,184,000 Note payable, due in March 1997, interest at 5.74%, accruing monthly - 41,000 Note payable, paid in March 1996. 39,000 - ---------- ---------- 1,189,000 1,225,000 Less amounts currently payable 39,000 1,225,000 ---------- ---------- Notes payable-long term $1,150,000 $ - ========== ==========
Interest paid approximated interest expense for the year ended December 31, 1994. For the years ended December 31, 1995 and 1996, interest paid was $70,000 and $197,000 respectively. F-14 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Capital Lease Obligations NaPro's property held under capital leases consisted of the following, which is included in property and equipment:
December 31 1995 1996 ---- ---- Office equipment $ 73,000 $ 321,000 Laboratory equipment 356,000 792,000 --------- ---------- 429,000 1,113,000 Less accumulated depreciation 96,000 287,000 --------- ---------- $ 333,000 $ 826,000 ========= ==========
At December 31, 1996, minimum payments under capital lease obligations were: 1997 $ 618,000 1998 580,000 1999 185,000 ---------- Net minimum lease payments 1,383,000 Less amount representing interest 188,000 ---------- Present value of minimum lease payments 1,195,000 Less current portion 444,000 ---------- $ 751,000 ==========
NaPro has entered into an irrevocable standby letter of credit agreement with a financial institution to support a capital lease agreement for up to $500,000 at an interest rate of prime plus 2%. As of December 31, 1996, no funds have been drawn on the letter of credit. NaPro is required to maintain certificates of deposit for 33% of the remaining principal outstanding under capital lease obligations ($415,000 at December 31, 1996) as collateral as long as a letter of credit is outstanding. Such pledged amounts are classified as restricted cash in the accompanying consolidated balance sheet. F-15 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Income Taxes As of December 31, 1996, NaPro had net operating loss carryforwards for income tax purposes of $21,968,000 and research and development credits of $209,000 to offset future taxable income in the United States, expiring as follows:
Net Research and Operating Development Losses Credits --------- ------------ 2006 $ 282,000 $ - 2007 1,826,000 52,000 2008 3,328,000 54,000 2009 4,600,000 38,000 2010 5,144,000 15,000 2011 6,788,000 50,000 ----------- -------- $21,968,000 $209,000 =========== ========
The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit carryforwards if there has been a "change of ownership" as described in Section 382 of the Internal Revenue Code. Such a change of ownership may limit the Company's utilization of its net operating loss and tax credit carryforwards, and could be triggered by sales of securities by the Company or its stockholders. In Canada, NaPro has net operating loss carryforwards of approximately US$354,000, expiring in 2002 and 2003. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of NaPro's deferred tax liabilities and assets with respect to United States taxing authorities are as follows: F-16 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Income Taxes (continued)
December 31 1995 1996 ---- ---- Deferred tax liabilities: Stock option compensation $ - $ 97,000 Other 42,000 47,000 ----------- ---------- Total deferred tax liabilities 42,000 144,000 Deferred tax assets: Tax net operating loss carryforward 5,735,000 8,238,000 Deferred compensation 64,000 - Amortization 262,000 248,000 Research and development credits 159,000 209,000 Excess of book over tax depreciation 72,000 64,000 Other 133,000 124,000 ----------- ---------- Total deferred tax assets 6,425,000 8,883,000 Valuation allowance (6,383,000) 8,739,000 ----------- ---------- Net deferred tax assets 42,000 144,000 ----------- ---------- $ - $ - =========== ==========
Significant components of NaPro's deferred tax assets with respect to Canadian taxing authorities are as follows:
December 31 1995 1996 ---- ---- Deferred tax assets: Excess of book over tax depreciation $ 26,000 $ 54,000 Valuation allowance (26,000) (54,000) -------- -------- $ - $ - ======== ========
6. Stockholders' Equity In March 1994, NaPro effected a 1-for-7.5 reverse stock split by exchanging each 7.5 shares of common stock for 1 share of $.0075 par value common stock, and adjusted its authorized capital stock to 20,000,000 shares of $.0075 par value common stock, and 2,000,000 shares of $.001 par value preferred stock. In July 1994, NaPro adjusted its authorized capital stock to 19,000,000 shares of $.0075 par value common stock, 1,000,000 shares of $.0075 par value nonvoting common stock, and 2,000,000 shares of $.001 par value preferred stock. The Subscription Agreement and Executive Agreements In June 1993, NaPro entered into a Subscription Agreement (the "Subscription Agreement") with IVAX pursuant to which the Company sold 1,106,398 shares of F-17 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Stockholders' Equity (continued) NaPro's common stock and a warrant to acquire an additional 111,111 shares of common stock for $3,000,000 in cash. The warrant was exercisable immediately at a nominal price, and expires in June 2003 (see Note 8). In connection with the Subscription Agreement, NaPro entered into Employment and Executive Stock Agreements (the "Executive Agreements"), pursuant to which the Company sold 1,526,814 shares of the Company's common stock at $1.50 per share to certain officers in exchange for cash and promissory notes in the aggregate amount of $2,289,000. The notes are secured by the common stock and accrue interest at the greater of the prime rate minus 1% and the applicable federal rate. The initial term of the Executive Agreements is five years. If an officer's employment is terminated during the initial term of the Executive Agreement, the shares held by that officer are subject to repurchase by NaPro at its election. The repurchase price is defined by the Executive Agreements, but in no case will be less than the original cost of the shares. The notes receivable and related accrued interest are recorded as a separate reduction of stockholders' equity. In August 1995, NaPro repurchased 144,288 shares of common stock from certain of these officers in cancellation of $1,684,000 of this indebtedness (see Notes 2 and 11). The Subscription Agreement and Executive Agreements are subject to a Stockholders Agreement which includes provisions regarding certain matters including the composition of the Board of Directors, restrictions on the sale, transfer or other disposition of shares sold in connection with these agreements, and NaPro's first offer right for voluntary election to purchase all of the shares held by these stockholders. Bridge Financing and Extraordinary Loss Resulting from Extinguishment In April 1994, NaPro completed the sale (the "Bridge Financing") to private investors of 26.5 units (the "Units"), each Unit consisting of: (i) 10,000 shares of common stock and (ii) an unsecured 9% nonnegotiable convertible promissory note in the principal amount of $50,000, due on the earlier of the consummation of NaPro's initial public offering or March 31, 1995, unless converted, at the option of the holder, into shares of common stock upon the consummation of the NaPro's initial public offering, at a rate equal to $5.00 per share of common stock (a "Bridge Note"). The purchase price per Unit was $50,000. NaPro received gross proceeds of $1,325,000 with respect to the sale of such Units. After the payment of $133,000 in placement fees to the underwriter who acted as placement agent for NaPro with respect to the sale of such Units, and other offering expenses of approximately $75,000, NaPro received net proceeds of approximately $1,117,000 from the sale of the Units. The Bridge Financing resulted in NaPro's issuance of a total of $1,325,000 principal amount of Bridge Notes and 265,000 shares of common stock. Upon closing of NaPro's initial public offering, $1,185,000 in principal amount of Bridge Notes was paid in cash and $140,000 was converted to 28,615 shares of common stock. The repayment of the Bridge Notes prior to their one-year stated maturity resulted in a $512,000 extraordinary loss. F-18 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Stockholders' Equity (continued) Initial Public Offering of Common Stock and Redeemable Warrants In August 1994, NaPro completed an initial public offering of its common stock and redeemable warrants to purchase common stock (the "IPO"). The offering consisted of 1,800,000 shares of common stock and redeemable warrants to purchase 2,070,000 shares of common stock (including 270,000 redeemable warrants to purchase common stock issued in connection with the underwriter's overallotment). The common stock and warrants were purchased separately and were separately transferable. Each warrant entitled the registered holder thereof to purchase one share of common stock at a price of $5.00, subject to adjustment in certain circumstances, for a period of three years, commencing February 1, 1995. The net proceeds of the offering to NaPro were $7,353,000 (after deduction of the underwriting discount and expenses of the offering). In connection with the completion of the IPO, the Bridge Notes and certain notes payable to IVAX Corporation and another shareholder, as well as certain officer salaries which had been deferred since September 1993 in order to preserve cash, were paid. In addition, the normal vesting of stock sold in conjunction with the Executive Agreements was accelerated as a result of completion of the IPO, resulting in a charge, during 1994, of $308,000 to general and administrative expense. In June 1996 NaPro completed the call of the 2,070,000 redeemable warrants, issuing 630,620 shares of common stock with the receipt of cash in the amount of $3,116,000 (net of offering cost of $37,000) pursuant to Cash exercise elections of redeemable warrants, and issuing 1,007,102 shares of common stock pursuant to Cash-less exercise elections of 1,438,720 redeemable warrants. Faulding Private Placement and Elimination of the Faulding Royalty Contemporaneously with consummation of the IPO, NaPro sold to Faulding in a private transaction (the "Faulding Private Placement") 400,000 shares of NaPro's nonvoting common stock (the "Nonvoting Common") at a price of $5.00 per share, the initial public offering price per share in the IPO, and 400,000 warrants (the "Faulding Warrants") to purchase an additional 400,000 shares of Nonvoting Common at a price of $.10 per warrant, the initial public offering price per warrant. In 1996 Faulding exercised 200,000 of the warrants. Shares of Nonvoting Common will automatically convert to common stock (with full voting rights), on a share-for-share basis, upon Faulding's disposition thereof. The Nonvoting Common and the Faulding Warrants are identical in all respects to the common stock and warrants which were sold in the IPO, except that, other than in limited circumstances, Faulding, as the holder, has no voting rights with respect to the Nonvoting Common, and the Faulding Warrants are exercisable for Nonvoting Common instead of common stock until Faulding's disposition thereof. The proceeds from issuance of the Nonvoting Common and Faulding Warrants were as follows: $1,000,000 was applied directly to eliminate NaPro's liability to Faulding resulting from Faulding's royalty rights under the Faulding Agreement (the "Faulding Royalty") and cash of $1,040,000 was F-19 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Stockholders' Equity (continued) received by NaPro. Under the Faulding Royalty, NaPro would have been obligated to pay Faulding 4% of NaPro's sales price on the first 100,000 grams of paclitaxel it sold to third parties for commercial use. The cost of eliminating the Faulding Royalty was expensed, and was separately reflected in the statement of operations for the year ended December 31, 1994. Preferred Stock Private Placement In July 1995, NaPro closed a private placement of 638,750 shares of Convertible Preferred Stock, Series A (the "US Preferred") of NaPro BioTherapeutics, Inc., for net proceeds of $4,268,000. In July and August 1995, NaPro closed a private placement of 725,513 shares of Exchangeable Preferred Stock, Series A (the "Canadian Preferred") of NaPro's Canadian subsidiary, NaPro BioTherapeutics (Canada), Inc. ("NaPro Canada"), for net proceeds of $5,959,000. The U.S. Preferred has a liquidation preference of $8.00 per share and is immediately convertible into common stock of NaPro on a share-for-share basis at the option of the holder. The U.S. Preferred may be redeemed by NaPro at its liquidation value beginning one year after issuance if the average trading price for the NaPro common stock over a 20 trading day period has equaled or exceeded $16.00 and beginning three years after issuance if such trading price has equaled or exceeded $10.00. Holders may elect to convert their U.S. Preferred into common stock of NaPro at any time prior to 15 business days before the date fixed for redemption. The U.S. Preferred also may be redeemed at any time after September 30, 2000 at the option of the holder. NaPro may elect to pay the redemption price by issuing its common stock valued at 95% of its then market price. The U.S. Preferred has one vote per share. The Canadian Preferred has a liquidation preference of CD$11.00 per share and may be exchanged for common stock of NaPro on a share-for-share basis at any time after December 1, 1995. NaPro has the option to acquire the Canadian Preferred at its liquidation value beginning one year after issuance if the average trading price for the NaPro common stock over a 20 trading day period has equaled or exceeded the equivalent of CD$22.00 and beginning three years after issuance if such trading price has equaled or exceeded the equivalent of CD$13.75. Holders may elect to exchange their Canadian Preferred for common stock of NaPro at any time prior to 15 business days prior to the date fixed for NaPro to acquire the shares under the foregoing option. Holders have the option to require NaPro to purchase the Canadian Preferred for its liquidation preference at any time after September 30, 2000. NaPro may elect to pay the purchase price of the Canadian Preferred by issuing its common stock valued at 95% of its then market price. The Canadian Preferred is entitled to one vote per share in NaPro Canada. F-20 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Stockholders' Equity (continued) At December 31, 1996, a total of 513,750 shares of the U.S. Preferred had been converted into 513,750 shares of common stock of NaPro and 266,421 shares of the Canadian Preferred had been exchanged for 266,421 shares of common stock of NaPro. NaPro registered under the Securities Act of 1933 the resale of shares of its common stock issued upon conversion of the U.S. Preferred or exchange of the Canadian Preferred. Neither the U.S. Preferred nor the Canadian Preferred has any dividend requirement. Public Offering of Common Stock In August 1996 NaPro closed a public offering of 1,790,000 shares of its common stock, including 190,000 shares issued to cover over allotments, which resulted in net proceeds of $13,786,000 to the Company. Stockholder Rights Plan In November 1996, NaPro adopted a Stockholder Rights Plan and distributed a dividend of one Right to purchase one one-hundredth of a share of a new series of junior participating preferred stock for each share of NaPro common stock. The objective of the Rights Plan is to secure for stockholders the long term value of their investment and to protect stockholders from coercive takeover attempts by strongly encouraging anyone seeking to acquire NaPro to negotiate with its Board of Directors. The adoption of the Rights Plan was not in response to any hostile takeover proposal or any other recent events. The Rights trade with common stock as a unit unless the Rights become exercisable upon the occurrence of certain triggering events relating to the acquisition of 20% or more of common stock. In certain events after the Rights become exercisable they will entitle each holder, other than the acquiror, to purchase, at the Rights' then current exercise price (currently set at $60), a number of shares of common stock having market value of twice the Right's exercise price or a number of the acquiring company's common shares having a market value at the time of twice the Rights' exercise price. For example, in the event of an acquisition of greater than 20% of the Company's stock without approval of the NaPro Board of Directors, the Company's stockholders (other than the 20% acquiror) would have the right to purchase $120 worth of stock for $60. A stockholder would have one such right for each share of stock held at the time the rights become exercisable. NaPro may amend the Rights except in certain limited respects or redeem the Rights at $0.01 per Right, in each case at any time prior to the Rights becoming exercisable. The Rights will expire on November 8, 2006. F-21 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Common Stock Warrants and Options Common Stock Warrants NaPro has granted warrants to purchase shares of its common stock. The following summarizes warrant activity:
Exercise Expiration Warrants Price Dates -------- ----- ----- Outstanding at December 31, 1994 2,610,446 $0.075-$9.37 1996-2004 Granted - Exercised --------- Outstanding at December 31, 1995 2,610,446 $0.075-$9.37 1997-2004 Granted - Exercised 2,072,007 $5.00-$9.37 1996-1998 --------- Outstanding at December 31, 1996 538,439 $0.075-$7.50 1997-2004 =========
Nonplan Stock Options In November 1990, Pacific Biotechnology, Inc. ("PB"), one of the Company's predecessors, granted options to purchase 613,333 shares (reduced to 199,233.6 shares in September 1991) of its common stock to two officers. The exercise price is $.1875 per share and the options are fully exercisable during the period from January 1, 1992 to December 31, 1999. In December 1991, when NaPro acquired all of the outstanding common stock of PB, all options to purchase PB common stock were exchanged for options to purchase 159,467 shares of NaPro's common stock under the same terms as the PB options. In January 1994, the Company granted to the four outside directors of the Company 27,000 nonplan options to purchase shares of common stock which are immediately exercisable at a price of $2.40 and which expire in January 2004. The 1993 Stock Option Plan During 1993, the Board of Directors adopted the NaPro BioTherapeutics, Inc. 1993 Stock Option Plan (the "Plan") to provide stock options to employees and other individuals as determined by the Board of Directors. The Plan provides for option grants designated as either nonqualified or incentive stock options. The Plan provides for the issuance of up to 146,667 shares of NaPro's common stock. The initial term of the Plan is ten years, and the maximum option exercise period shall be no more than ten years from the date of grant. The term of options for 667 or more shares is eight years, and the term of options for fewer than 667 shares is five years. Options for 667 shares or more vest 25% after each anniversary date of the grant, and options for fewer than 667 shares vest 50% after each anniversary date of the grant. The exercise price for stock options issued under the Plan is equal to the fair market value of NaPro's common stock. F-22 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Common Stock Warrants and Options (continued) 1994 Long-Term Performance Incentive Plan In July 1994, NaPro's stockholders approved the 1994 Long-Term Performance Incentive Plan (the "Incentive Plan"). An aggregate of 375,000 shares were authorized for issuance under the Incentive Plan, increased to 875,000 shares with stockholders' approval in July 1996. The Incentive Plan provides for granting to employees and other key individuals who perform services for NaPro ("Participants") the following types of incentive awards: stock options, stock appreciation rights ("SARs"), restricted stock, performance units, performance grants and other types of awards that the Compensation Committee deems to be consistent with the purposes of the Incentive Plan. In addition, each person who is not an employee of NaPro or one of its subsidiaries and who is elected or re-elected as a director of NaPro by the stockholders at any annual meeting of stockholders commencing with the 1994 annual meeting, and, if first elected or appointed other than at an annual meeting, upon such election or appointment, will receive, as of the business day following the date of each such election or appointment, a nonqualified option to purchase 5,000 shares of the Company's common stock. In July 1996 the stockholders increased this option provision from 5,000 to 10,000 shares. The following summarizes stock option activity and balances:
Weighted Average Stock Exercise Exercise Options Price Price ------- ----- ----- Outstanding at December 31, 1994 364,134 $.19 - 6.00 Granted 241,792 6.25 - 11.75 Canceled (6,667) 2.40 Exercised (31,652) .75 - 2.40 -------- Outstanding at December 31, 1995 567,607 .19 - 11.75 Granted 440,700 7.13 - 11.13 $8.28 Canceled (5,500) 6.00 - 10.13 8.57 Exercised (21,418) .75 - 6.57 3.11 -------- Outstanding at December 31, 1996 981,389 .19 - 11.75 6.55 ========
The weighted-average fair value of options granted during 1996 was $4.94. Exercisable shares at December 31, 1996 were 353,613 with a weighted-average exercise price of $3.56. The weighted-average remaining contractual life of the outstanding options was 8.2 years. F-23 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Common Stock Warrants and Options (continued) In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, Accounting and Disclosure of Stock-Based Compensation ("Statement 123"). Statement 123 is applicable to fiscal years beginning after December 15, 1995 and gives the option to either follow fair value accounting or to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25"), and related interpretations. NaPro has elected to continue to follow APB No. 25 and related interpretations in accounting for its employee stock options. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1995 and 1996 respectively: risk-free interest rate range of 5.64% to 6.89%; no expected dividend; volatility factor of .58; and an estimated expected life range of four to six years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows:
1995 1996 ---- ---- Pro forma net loss $(4,183,000) $(7,610,000) ============ ============ Pro forma loss per share $ (0.52) $ (0.76) ============ ============
Statement 123 is applicable only to options granted subsequent to December 31, 1994. Because options vest over periods of up to four years, the pro forma effect of the Statement will not be fully reflected until 1998. F-24 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Strategic Alliances NaPro has entered into strategic alliances with two pharmaceutical companies, Faulding and IVAX, that have the capabilities to obtain commercial approval for NaPro's paclitaxel and to establish NaPro's paclitaxel as a major product in the market. These strategic partners have assumed responsibility for funding the cost of all aspects of the required clinical and regulatory processes in their respective markets, procedures that would be too costly for NaPro to undertake. The Faulding Agreement In 1992, NaPro entered into an initial 20 year exclusive agreement with Faulding, which was amended in June 1993, January 1994 and March 1995 (the "Faulding Agreement"), to develop and market paclitaxel in ten countries, including Australia, New Zealand, and much of Southeast Asia. The Faulding Agreement also grants Faulding the nonexclusive right to sell paclitaxel supplied by NaPro in certain countries in the Middle East. Pursuant to the Faulding Agreement, Faulding paid NaPro a $200,000 licensing fee and also provided NaPro $1,100,000 of advances. These amounts were converted into notes payable upon the delivery by NaPro of the corresponding value of paclitaxel (see Note 3). The Faulding Agreement provides that NaPro shall supply all of Faulding's requirements for paclitaxel. NaPro is paid a fixed sum for paclitaxel supplied for noncommercial uses, and a fixed percentage of Faulding's original sales price for paclitaxel supplied for commercial use. In addition, pursuant to the original Faulding Agreement, NaPro would have been obligated to pay Faulding a royalty of up to 4% on the first 100,000 grams of paclitaxel sold to third parties for commercial use. However, in 1994, NaPro exercised its right to eliminate this royalty under the Faulding Agreement by paying Faulding $1 million (see Notes 3 and 6). The IVAX Agreement In June 1993, NaPro entered into an initial 20 year exclusive agreement with IVAX to develop and market paclitaxel in the United States, Europe, Japan and the rest of the world not covered by the Faulding Agreement, with the exception of the former Soviet Union countries, China, certain countries in the Middle East, and the Vatican, territories to which IVAX has nonexclusive rights. Simultaneously with entering into the IVAX Agreement, IVAX made a $3 million equity investment in NaPro for 19.8% of NaPro's then outstanding common stock (see Note 6). The IVAX Agreement provides that NaPro shall supply all of IVAX's requirements for paclitaxel. NaPro is paid a fixed sum for paclitaxel supplied for noncommercial uses, and a manufacturing payment plus a percentage of IVAX's sales profit (as defined by the agreement) for paclitaxel sold for commercial uses. F-25 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Strategic Alliances (continued) The PBI Agreement In March 1994, NaPro entered into a ten-year initial-term contract with Pacific Biotechnol ogies, Inc. ("PBI"), a subsidiary of PRT, one of the largest reforestation companies in Canada (the "PBI Agreement"). Under the PBI Agreement, PBI is planting and maintaining a plantation of yew trees and bushes designed to provide NaPro with a long-term renewable supply of Taxus biomass. Pursuant to such agreement, NaPro is obligated to pay PBI an annual fee equal to its cost in performing its obligations under the agreement plus overhead and a specified profit. NaPro applied $1,500,000 of the net proceeds of its August 1994 initial public offering to prepay in full, at a discount, all fees, interest thereon, and all other amounts accrued through December 31, 1995. 9. Commitments and Contingencies Operating Leases NaPro has executed noncancelable operating lease agreements for office, research and production facilities. As of December 31, 1996, future minimum lease payments under noncancelable operating lease agreements are as follows: 1997 $ 554,000 1998 499,000 1999 511,000 2000 438,000 ---------- Total $2,002,000 ==========
Rent expense for the years ended December 31, 1994, 1995 and 1996 amounted to $146,000, $262,000 and $564,000, respectively. Intellectual Property Contingency NaPro's intellectual property is a key asset. NaPro's intellectual property rights are subject to legal challenge. Such rights are uncertain and involve complex legal and factual questions for which important legal principles are largely unresolved. A number of other entities have developed technologies that may be related to NaPro's technology. Many of these entities are larger and have significantly greater resources than NaPro. Some of the technologies may conflict with NaPro's technologies, and therefore increase the potential of legal challenge. F-26 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Commitments and Contingencies (continued) NaPro relies on trade secret protection for its confidential and proprietary information. There can be no assurance that competitors or potential competitors of NaPro will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to NaPro's trade secrets or disclose such technology, or that NaPro can meaningfully protect its trade secrets. Faulding - Bristol-Myers Squibb Litigation NaPro's customer, Faulding, distributes a paclitaxel-based drug in Australia. Faulding's main competitor in the Australian market, Bristol-Myers Squibb, has brought legal action against Faulding on the basis of infringement of certain Bristol-Myers Squibb patents, which Faulding is claiming are invalid in a separate suit. Based upon its review of the prior art and its discussions with Faulding, NaPro management believes the Bristol-Myers Squibb action will be successfully resisted. Uncertainty Over the Selling Price Under the Faulding Agreement Under the Faulding Agreement (see Note 8), NaPro is paid a fixed sum for paclitaxel supplied for noncommercial uses, and a fixed percentage of Faulding's sales price for paclitaxel supplied for commercial use. NaPro recognizes the corresponding revenue at the time of shipment of paclitaxel to Faulding, based upon the intended use indicated by Faulding on its purchase orders. However, Faulding may or may not use the paclitaxel in accordance with the original intent indicated on its purchase orders. Additionally, Faulding's actual selling price may differ from the amounts originally budgeted and indicated to NaPro. On or about April 30, 1997, Faulding will communicate to NaPro the final amount of sales, and an adjustment will be calculated, which may either increase or decrease NaPro's revenue from sales of products to Faulding for 1996 and 1997. Raw Materials Purchase Commitments NaPro has committed to purchase approximately $1,500,000 of raw materials in 1997. 10. Retirement Plan During 1996 NaPro adopted a defined contribution retirement plan for its employees established in accordance with the provisions of Internal Revenue Code section 401(k) (the "Plan"). Employees over the age of 17 are eligible to participate in the Plan on the first day of the month immediately following the completion of six months of continuous service or 1,000 hours of service during a 12 continuous month period. Participants may contribute up to 15% of their pay to the Plan. NaPro may make additional contributions to the Plan on behalf of the participants in the form of cash or in shares of F-27 NaPro BioTherapeutics, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. Retirement Plan (continued) NaPro's common stock. In 1996, NaPro elected to match 50% of the first $2,000 in contributions of each participating employee as of December 31, 1996 with NaPro common stock totaling $28,000. 11. Subsequent Event Related Party Transaction In January 1997 NaPro repurchased 74,550 shares of its common stock from a NaPro executive officer in exchange for the cancellation of indebtedness (including accrued interest of $192,000) owed by the officer to NaPro of $990,000. F-28 Exhibit Index Exhibit Number Description of Exhibit - ----- ---------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended August 2, 1996. 3.2 Certificate of Designation for Convertible Preferred Stock, Series A. Incorporated herein by reference from the Company's Quarterly Report on Form10-Q filed with the Commission for the quarter ended June 30, 1995 (File No. 0-24320). 3.3 Certificate of Designation for Series B Junior Participating Preferred Stock. Incorporated herein by reference from the Company's November 8, 1996 Current Report Form 8-K (File No. 0-24320). 3.4 Bylaws of the Company. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.1 Common Stock Certificate. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.2 Underwriter's Warrant Agreement. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.3 Warrant Agreement. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.4 Warrant Certificate. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 4.5 The Certificate of Incorporation and Bylaws of the Company are included as Exhibits 3.1 through 3.4. 10.1* Company's 1993 Stock Option Plan. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.2* Company's 1994 Long-Term Performance Incentive Plan, as amended July 30, 1996. 10.3 Common Stock Warrant dated as of June 7, 1993 between the Company and Broadmark Capital Corporation. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.4 Stock Purchase Warrant dated as of June 7, 1993 between the Company and Arthur D. Harrison. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.5 Stock Purchase Warrant dated as of June 7, 1993 between the Company and D&N Holding Company. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.6 Stock Purchase Warrant dated as of June 7, 1993 between the Company and Kirkland & Ellis. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.7 Stock Purchase Warrant dated as of December 15, 1992 between the Company and Kirkland & Ellis. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.8 Stock Purchase Warrant dated as of June 3, 1992 between the Company and Herbert L Lucas. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.9 Stock Purchase Warrant dated as of June 3, 1992 between the Company and H.J. Meyers & Co., Inc. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.10 Stock Purchase Warrant dated as of June 3, 1992 between the Company and Freshman, Marantz, Orlanski, Cooper, and Klein 1993 Investments. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.11 Stock Purchase Warrant dated as of April 30, 1993 between the Company and Pacific Regeneration Technologies, Inc. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.12 Registration Agreement dated as of June 7, 1993 by and among the Company, D&N Holding Company, Sterling K. Ainsworth, Patricia A. Pilia, Leonard P. Shaykin, and Lawrence Helson. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.13 Amended and Restated Stockholders Agreement dated as of May 31, 1994 by and among the Company, D&N Holding Company, Sterling K. Ainsworth, Patricia A. Pilia, Leonard P. Shaykin, and Lawrence Helson. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.14 Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993 and amended and restated as of May 31, 1994 between the Company and Leonard P. Shaykin. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.15* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993 and amended and restated as of May 31, 1994 between the Company and Sterling K. Ainsworth. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.16* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993 and amended and restated as of May 31, 1994 between the Company and Patricia A. Pilia. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.17* Amended and Restated Employment and Executive Stock Agreement dated as of June 7, 1993 and amended and restated as of May 31, 1994 between the Company and Lawrence Helson. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.18* Company's Stock Option Agreement with Sterling K. Ainsworth. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.19* Company's Stock Option Agreement with Patricia A. Pilia. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33- 78016). 10.20 Services and Supply Agreement dated as of December 1, 1993 between the Company and Pacific 2 BioTechnologies Inc. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.21 Subscription Agreement dated as of April 29, 1993 between the Company and Pacific Regeneration Technologies. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.22 Amended and Restated Master Agreement dated as of January 19, 1994 between the Company and F.H. Faulding & Co., Ltd. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33- 78016). 10.23 Amendment No. 1 To Amended and Restated Master Agreement Dated January 19, 1994, executed as of March 23, 1995. Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 0-24320). 10.24 Agreement dated as of June 7, 1993 between the Company and Baker Norton Pharmaceuticals, Inc. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company, filed with the Commission on July 24, 1994 (File No. 33-78016). 10.25 Lease dated February 28, 1995 between the Company and the Mutual Life of Canada. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.26 Subscription Agreement and Investment Letter between the Company and NaPro BioTherapeutics (Canada), Inc. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.27 Put/Call Agreement dated July 12, 1995 between the Company and the Purchasers of Series A Preferred Shares of NaPro BioTherapeutics (Canada) Inc. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.28 Side Letter dated July 21, 1995 to Put/Call Agreement. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.29 Engagement Letter dated February 16, 1995 between the Company and Capital West Partners. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.30 Subscription Agreement between the Company and the purchasers of Convertible Preferred Stock, Series A, of the Company. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.31 Purchase Agreement between the Company and certain purchasers of Preferred Shares of NaPro BioTherapeutics (Canada) Inc. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0-24320). 10.32 Purchase Agreement between the Company and BPI Capital Management Corporation as to Preferred Shares of NaPro BioTherapeutics (Canada) Inc. Incorporated herein by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 (File No. 0- 24320). 10.33 Lease between the Company and Gunbarrel Facility L.L.C. dated October 16, 1995. Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0- 24320). 10.34 First Amendment to Lease November 27, 1995, between the Company and Gunbarrel Facility L.L.C. Incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 0-24320). 10.35 Agreement between the Company and Pacific BioTechnologies Inc. dated March 29, 1996. Incorporated herein by reference from the Company's Annual Report on Form10-K for the year ended December 31, 1995 (File No. 0-24320). 10.36 Culture Agreement dated March 1, 1996 between Zelenka Nursey, Inc. ("Zelenka") and the Company. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company filed with the Commission on August 1, 1996 (File No. 333-3051). 10.37 Agreement for Sale, Harvest and Storage of Nursey Stock dated May 1, 1996 between Zelenka 3 and the Company. Incorporated herein by reference from the Registration Statement on Form S-1 of the Company filed with the Commission on August 1, 1996 (File No. 333-3051). 10.38 Culture Agreement dated as of March 1, 1997 between Zelenka and the Company. The Company is filing with the Commission a Confidential Treatment Request with respect to this agreement, and accordingly, certain language has been redacted. 10.39 Lease Agreement dated as of March 1, 1997 between Zelenka and the Company. The Company is filing with the Commission a Confidential Treatment Request with respect to this agreement, and accordingly, certain language has been redacted. 10.40 Agreement for Sale, Harvest and Storage of Nursey Stock dated as of March 1, 1997 between Zelenka and the Company. The Company is filling with the Commission a Confidential Treatment Request with respect to this agreement, and accordingly, certain language has been redacted. 21.1 List of Subsidiaries. Incorporated herein by reference from the Registration Statement of the Company on Form S-1, filed with the Commission on May 20, 1996 (File No. 33-78016). 23.1 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Powers of Attorney 27.1 Financial Data Schedule. *A management compensation plan. 4 EX-3.1 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NAPRO BIOTHERAPEUTICS, INC. (as amended through August 2, 1996) ARTICLE ONE ----------- The name of the corporation is NaPro BioTherapeutics, Inc. (the "Corporation"). ARTICLE TWO ----------- The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, County of New Castle, Wilmington, Delaware, 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE THREE ------------- The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE FOUR ------------ I. AUTHORIZED SHARES ----------------- The total number of shares of stock which the Corporation has authority to issue is 22,000,000 shares, 19,000,000 of which shall be Common Stock, with a par value of $.0075 per share, 1,000,000 of which shall be Nonvoting Common Stock, with a par value of $.0075 per share and 2,000,000 of which shall be Preferred Stock, with a par value of $.001 per share. II. COMMON STOCK AND NONVOTING COMMON STOCK --------------------------------------- Except as otherwise provided in this Section II or as otherwise required by applicable law, all shares of Common Stock and Nonvoting Common Stock shall be identical in all respects and shall entitle the holders thereof to the same rights and privileges, subject to the same qualifications, limitations, and restrictions. Part 1. Voting Rights. ------------- Except as otherwise provided by the General Corporation Law of the State of Delaware, by this Certificate of Incorporation or any amendments thereto or by resolutions 1 adopted by the Board of Directors providing for the issuance of Preferred Stock, the holders of Common Stock shall be entitled to one vote per share on all matters to be voted on by the Corporation's stockholders, and the holders of Nonvoting Common Stock shall have no right to vote on any matters to be voted on by the Corporation's stockholders; provided, that the holders of the Nonvoting Common Stock shall have the right to vote as a separate class on any merger or consolidation of the Corporation with or into another entity or entities, or any recapitalization or reorganization, in which shares of Nonvoting Common Stock would receive or be exchanged for consideration different on a per share basis from the consideration received with respect to or in exchange for shares of Common Stock or would otherwise be treated differently from shares of Common Stock, except that shares of Nonvoting Common Stock may, without such a separate class vote, receive or be exchanged for non-voting securities which are otherwise identical on a per share basis in amount and form to the voting securities received with respect to or in exchange for the Common Stock so long as (i) such non-voting securities are convertible into voting securities on the same terms as the Nonvoting Common Stock is convertible into Common Stock and (ii) all other consideration is equal on a per share basis. Part 2. Dividends. --------- As and when dividends are declared or paid thereon, whether in cash, property, or securities of the Corporation, the holders of Common Stock and the holders of Nonvoting Common Stock shall be entitled to participate in such dividends ratably on a per share basis; provided, that (i) if dividends are declared which are payable in shares of Common Stock or Nonvoting Common Stock, then dividends shall be declared which are payable at the same rate on both classes of stock, the dividends payable in shares of Common Stock shall be payable to holders of Common Stock, and the dividends payable in shares of Nonvoting Common Stock shall be payable to holders of Nonvoting Common Stock and (ii) if the dividends consist of other voting securities of the Corporation, the Corporation shall make available to each holder of Nonvoting Common Stock, at such holder's request, dividends consisting of non-voting securities of the Corporation which are otherwise identical to such voting securities and which are convertible into or exchangeable for such voting securities on the same terms as the Nonvoting Common Stock is convertible into the Common Stock. The rights of the holders of Common Stock and Nonvoting Common Stock to receive dividends are subject to the provisions of any series of Preferred Stock which may at the time be outstanding. Part 3. Liquidation. ----------- Except as otherwise provided by applicable law, or by any amendments to this Amended and Restated Certificate of Incorporation, in the event of any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, after payment shall have been made, or set apart for such payment, to the holders, if any, of Preferred Stock at the time outstanding of the full amounts to which they shall be entitled, the holders of Common Stock and the holders of Nonvoting Common Stock, to the exclusion of holders, if any, of Preferred Stock at the time outstanding, shall be entitled to share, ratably according to the number of shares of -2- Common Stock and Nonvoting Common Stock held by them, in all remaining assets of the Corporation available for distribution to its stockholders. Part 4. Conversion. ---------- 4A. Conversion of Nonvoting Common Stock. ------------------------------------ Upon the occurrence of any sale, gift or any other transfer or disposition (each, a "Transfer") of shares of Nonvoting Common by the original holder thereof, such shares of Nonvoting Common Stock shall be converted into the same number of shares of Common Stock as the number of shares of Nonvoting Common Stock being transferred and the person or person sin whose name(s) any certificate(s) for shares of Common Stock are to be issued upon such conversion shall be deemed to have become the holder(s) of record of the shares of Common Stock represented thereby. 4B. Conversion Procedure. -------------------- (i) Each conversion of shares of Nonvoting Common Stock into shares of Common Stock pursuant to a Transfer shall be effected by the surrender of the certificate or certificates representing the shares to be converted to the Corporation's transfer agent at any time during normal business hours (or to the Company if at the time the Company has no independent transfer agent), together with a written notice certified by the original holder and the transferee of such Nonvoting Common Stock being Transferred stating that such shares, or a stated number of shares, Nonvoting Common Stock represented by such certificate or certificates have been Transferred. Each conversion shall be deemed to have been effected as of the close of business on the date on which such certificate or certificates have been surrendered and such notice has been received, and at such time the rights of the holder of the Transferred Nonvoting Common Stock as such shall cease and the person or persons in whose name or names the certificate or certificates for shares of Common Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Common Stock represented thereby. (ii) Promptly after the surrender of such certificates and the receipt of the written notice pursuant to paragraph (i) above, the Corporation shall issue and deliver in accordance with the surrendering holder's instructions (a) the certificate or certificates for the Common Stock issuable upon such conversion and (b) a certificate representing any Nonvoting Common stock which was represented by the certificate or certificates surrendered to the Corporation in connection with such conversion but which was not Transferred and thus not converted. (iii) The issuance of certificates for Common Stock upon conversion of Nonvoting Common Stock will be made without charge to the holders of such shares for any issuance tax in respect thereof or other cost incurred by the -3- Corporation in connection with such conversion and the related issuance of Common Stock. (iv) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of issuance upon the conversion of the Nonvoting Common Stock, such number of shares of Common Stock as may be issuable upon the conversion of all outstanding shares of Nonvoting Common Stock. All shares of Common Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable, and free from all taxes, liens, and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which will be immediately transmitted by the Corporation upon issuance). (v) The Corporation shall not close its books against the transfer of Nonvoting Common Stock or of Common Stock issued or issuable upon conversion of Common Stock in any manner which would interfere with the timely conversion of Nonvoting Common Stock. (vi) If the Corporation in any manner subdivides or combines the outstanding shares of Common Stock of Nonvoting Common Stock, then the outstanding shares of the other of such classes of stock shall at the same time be proportionately subdivided or combined in a similar manner. 4C. Amendment and Waiver. -------------------- No amendment or waiver of any provision of this Section II shall be effective without the prior approval of the holders of a majority of the then outstanding shares of Nonvoting Common Stock voting as a separate class. III. PREFERRED STOCK --------------- The Board of Directors of the Corporation (the "Board of Directors") is expressly authorized, at any time and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series with such designations, preferences and relative, participating, optional or other special rights, and such qualifications, limitations or restrictions thereof, as shall be expressed in the resolution or resolutions providing for the issuance thereof adopted by the Board of Directors (a "Preferred Stock Designation") and as are not inconsistent with this Certificate of Incorporation or any amendment hereto, and as may be permitted by the General Corporation Law of the State of Delaware. Except as otherwise expressly required by law and except for such voting powers as may be stated in the Preferred Stock Designation relating to any -4- series of Preferred Stock (a "Preferred Stock Designation"), the holders of any such series shall have no voting power whatsoever. ARTICLE FIVE ------------ The Corporation is to have perpetual existence. ARTICLE SIX ----------- The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: (a) The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. At the 1996 annual meeting of stockholders, Class I directors shall be elected for a one- year term, Class II directors for a two-year term and Class III directors for a three-Year term. At each succeeding annual meeting of stockholders beginning in 1997, successors to the class of directors whose term expires at such annual meeting shall be elected to a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class who is elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of such class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. (b) Except for any directors who may be elected under specified circumstances set forth in a Preferred Stock Designation by the holders, if any, of any class or series of Preferred Stock then existing, the exact number of directors of the Corporation shall be determined from time to time by resolution of the Board of Directors. (c) Except as may be otherwise provided pursuant to Part II of Article Four of the Certificate of Incorporation of the Corporation in connection with rights to elect additional directors under specified circumstances which may be granted to the holders of any class or series of preferred stock, any director or the entire Board of Directors may be removed only for cause by the affirmative vote of the holders of at least 80% of the voting power of all of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. (d) The Board of Directors is expressly authorized to make, alter, amend, change, add to or repeal the Bylaws of the Corporation. Notwithstanding anything contained in this Certificate of Incorporation or Bylaws of the Corporation to the contrary, the stockholders of the Corporation, at a duly called annual or special meeting of stockholders, may not take any -5- action to alter, amend, repeal or adopt any provision inconsistent with paragraphs 2, 3, 4 and 6 of the Bylaws of the Corporation without the affirmative vote of the holders of at least 80% of the voting power of all of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. (e) The Corporation shall indemnify, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as amended from time to time, all persons whom it may indemnify pursuant thereto. The personal liability of a director or officer of the Corporation to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director or officer shall be limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as it now exists or may hereafter be amended. Any repeal or modification of this paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification. (f) In addition to the power and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the General Corporation Law of the State of Delaware, this Certificate of Incorporation and any Bylaws adopted by the stockholders; provided, however, that no Bylaws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such Bylaws had not been adopted. (g) Notwithstanding Section 228(a) of the General Corporation Law of the State of Delaware, no action shall be taken by the stockholders of the Corporation by written consent in lieu of any annual or special meeting of the stockholders. ARTICLE SEVEN ------------- Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. Election of directors need not be by written ballot unless the Bylaws of the Corporation so provide. ARTICLE EIGHT ------------- The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed herein and by the laws of the State of Delaware, and all rights conferred upon stockholders herein are granted subject to this reservation. -6- ARTICLE NINE ------------ Notwithstanding anything contained in this Certificate of Incorporation to the contrary, Article Six hereof shall not be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of at least 80% of the voting power of all of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of at least 80% of the voting power of all of the capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend, repeal or adopt any provision inconsistent with this Article Nine. -7- EX-10.2 3 COMPANY'S 1994 LONG-TERM PERFOR. INCENTIVE PLAN Exhibit 10.2 NAPRO BIOTHERAPEUTICS, INC. 1994 Long-Term Performance Incentive Plan 1. Purpose. The purpose of the 1994 Long-Term Performance Incentive Plan of NaPro BioTherapeutics, Inc. (the "Plan") is to advance the interests of NaPro BioTherapeutics, Inc., a Delaware corporation (the "Company"), and its stockholders by providing incentives to certain employees of the Company and to certain other key individuals who perform services for the Company, including those who contribute significantly to the strategic and long-term performance objectives and growth of the Company. In the case of options granted to the Company's non-employee directors, the Plan is intended to more closely align the interests of such directors with the Company's stockholders. 2. Administration. The Plan shall be administered solely by the Board of Directors (the "Board") of the Company or, if the Board shall so designate, by a committee of the Board that shall be comprised of not fewer than two directors (the "Committee"); provided that if at any time Rule 16b-3 or any successor rule ("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 162(m) of the Internal Revenue Code of 1986, as amended, or any successor statutory provision thereto (the "Code"), and any implementing regulations (and any successor provisions thereof), so permit without adversely affecting the ability of the Plan to comply with the conditions for exemption from Section 16 of the Exchange Act (or any successor provision) provided by Rule 16b-3 and the exemption from the limitations on the deductibility of certain executive compensation provided by Section 162(m), the Committee may delegate the administration of the Plan in whole or in part, on such terms and conditions, to such other person or persons as it may determine in its discretion. References to the Committee hereunder shall include the Board where appropriate. The membership of the Committee or such successor committee shall be constituted so as to comply at all times with the applicable requirements of Rule 16b-3 and Section 162(m). No member of the Committee shall have within one year prior to his appointment received awards under the Plan ("Awards") or under any other plan, program or arrangement of the Company or any of its affiliates if such receipt would cause such member to cease to be a "disinterested person" under Rule 16b-3; provided that if at any time Rule 16b-3 so permits without adversely affecting the ability of the Plan to comply with the conditions for exemption from Section 16 of the Exchange Act (or any successor provision) provided by Rule 16b-3, one or more members of the Committee may cease to be a "disinterested person." The Committee has all the powers vested in it by the terms of the Plan set forth herein, such powers to include exclusive authority (except as may be delegated as permitted herein) (i) to select the employees and other key individuals to be granted Awards under the Plan, (ii) to determine the type, size and terms of the Award to be made to each individual selected, subject to the limitations set forth in Paragraph 4(b), (iii) to modify the terms of any Award that has been granted, (iv) to determine the time when Awards will be granted, (v) to establish performance objectives, (vi) to make any adjustments necessary or desirable as a result of the granting of Awards to eligible individuals located outside the United States and (vii) to prescribe the form of the instruments embodying Awards made under the Plan; provided, however, that the terms of the formula plan set forth in Paragraph 9 shall not be subject to the discretion of the Committee. The Committee is authorized (A) to interpret the Plan and the Awards granted under the Plan, (B) to establish, amend and rescind any rules and regulations relating to the Plan, and (C) to make any other determinations which it deems necessary or desirable for the administration of the Plan. The Committee (or its delegate as permitted herein) may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent the Committee deems necessary or desirable to carry it into effect. Any decision of the Committee (or its delegate as permitted herein) in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. The Committee may act only by a majority of its members in office, except that the members thereof may authorize any one or more of their members or any officer of the Company to execute and deliver documents or to take any other ministerial action on behalf of the Committee with respect to Awards made or to be made to Plan participants. No member of the Committee and no officer of the Company shall be liable for anything done or omitted to be done by him, by any other member of the Committee or by any officer of the Company in connection with the performance of duties under the Plan, except for his own willful misconduct or as expressly provided by statute. Determinations to be made by the Committee under the Plan may be made by its delegates as permitted herein. 3. Eligibility. Consistent with the purposes of the Plan, the Committee shall have exclusive power (except as may be delegated as permitted herein) to select the key employees and other key individuals performing services for the Company and any of its subsidiaries who may participate in the Plan and be granted Awards under the Plan. Eligible individuals may be selected individually or by groups or categories, as determined by the Committee in its discretion. No non-employee director of the Company shall be eligible to receive an Award under the Plan, except pursuant to the formula plan set forth in Paragraph 9. 4. Awards under the Plan. (a) Types of Awards. Awards under the Plan may include, but need not be limited to, one or more of the following types, either alone or in any combination thereof: (i) "Stock Options," (ii) "Stock Appreciation Rights," (iii) "Restricted Stock," (iv) "Performance Grants" and (v) any other type of Award deemed by the Committee in its discretion to be consistent with the purposes of the Plan (including, but not limited to, Awards of or options or similar rights granted with respect to unbundled stock units or components thereof, and Awards to be made to participants who are foreign nationals or are employed or performing services outside the United States). Stock Options, which include "Nonqualified Stock Options" (which may be awarded to participants or sold at a price determined by the Committee ("Purchased Options")) and "Incentive Stock Options" or combinations thereof, are rights to purchase common shares of the Company having a par value of $.0075 per share and stock of any other class into which such shares may thereafter be changed (the "Common Shares"). Nonqualified Stock Options and Incentive Stock Options are subject to the terms, conditions and restrictions specified in Paragraph 5. Stock Appreciation Rights are rights to receive (without payment to the Company) cash, Common Shares, other Company securities (which may include, but need not be limited to, unbundled stock units or components thereof, debentures, preferred stock, warrants, securities convertible into Common Shares or other property ("Other Company Securities")) or property, or other forms of payment, or any combination thereof, as determined by the Committee, based on the increase in the value of the number of Common Shares specified in the Stock Appreciation Right. Stock Appreciation Rights are subject to the terms, conditions and restrictions specified in Paragraph 6. Shares of Restricted Stock are Common Shares which are issued subject to certain restrictions pursuant to Paragraph 7. Performance Grants are contingent awards subject to the terms, conditions and restrictions described in Paragraph 8, pursuant to which the participant may become entitled to receive cash, Common Shares, Other Company Securities or property, or other forms of payment, or any combination thereof, as determined by the Committee. (b) Maximum Number of Shares that May be Issued. There may be issued under the Plan (as Restricted Stock, in payment of Performance Grants, pursuant to the exercise of Stock Options or Stock Appreciation Rights, or in payment of or pursuant to the exercise of such other Awards as the Committee, in its discretion, may determine) an aggregate of not more than 875,000 Common Shares, subject to adjustment as provided in Paragraph 15, of which 180,000 shall be available for grant pursuant to the formula plan set forth in Paragraph 9. The maximum number of underlying Common Shares which any participant may be granted under Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Grants or any other Award in any one taxable year of the Company shall not exceed 200,000 Common Shares. Common Shares issued pursuant to the Plan may be either authorized but unissued shares, treasury shares, reacquired shares, or any combination thereof. If any Common Shares issued as Restricted Stock or otherwise subject to repurchase or forfeiture rights are reacquired by the Company pursuant to such rights, or if any Award is canceled, terminates or expires unexercised, any Common Shares that would otherwise have been issuable pursuant thereto will be available for issuance under new Awards. (c) Rights with respect to Common Shares and Other Securities. (i) Unless otherwise determined by the Committee in its discretion, a participant to whom an Award of Restricted Stock has been made (and any person succeeding to such a participant's rights pursuant to the Plan) shall have, after issuance of a certificate for the number of Common Shares awarded and prior to the expiration of the Restricted Period (as hereinafter defined), ownership of such Common Shares, including the right to vote the same and to receive dividends or other distributions made or paid with respect to such Common Shares (provided that such Common Shares, and any new, additional or different shares, or Other Company Securities or property, or other forms of consideration which the participant may be entitled to receive with respect to such Common Shares as a result of a stock split, stock dividend or any other change in the corporation or capital structure of the Company, shall be subject to the restrictions hereinafter described as determined by the Committee in its discretion), subject, however, to the options, restrictions and limitations imposed thereon pursuant to the Plan. Notwithstanding the foregoing, a participant with whom an Award agreement is made to issue Common Shares in the future, shall have no rights as a stockholder with respect to Common Shares related to such agreement until issuance of a certificate to him. (ii) Unless otherwise determined by the Committee in its discretion, a participant to whom a grant of Stock Options, Stock Appreciation Rights, Performance Grants or any other Award is made (and any person succeeding to such a participant's rights pursuant to the Plan) shall have no rights as a stockholder with respect to any Common Shares or as a holder with respect to other securities, if any, issuable pursuant to any such Award until the date of the issuance of a stock certificate to him for such Common Shares or other instrument of ownership, if any. Except as provided in Paragraph 15, no adjustment shall be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, securities, other property or other forms of consideration, or any combination thereof) for which the record date is prior to the date such stock certificate or other instrument of ownership, if any, is issued. 5. Stock Options. The Committee may grant or sell Stock Options either alone, or in conjunction with Stock Appreciation Rights, Performance Grants or other Awards, either at the time of grant or by amendment thereafter; provided that an Incentive Stock Option may be granted only to an eligible employee of the Company or any parent or subsidiary corporation. Each Stock Option (referred to herein as an "Option") granted or sold under the Plan shall be evidenced by an instrument in such form as the Committee shall prescribe from time to time in accordance with the Plan and shall comply with the following terms and conditions, and with such other terms and conditions, including, but not limited to, restrictions upon the Option or the Common Shares issuable upon exercise thereof, as the Committee, in its discretion, shall establish: (a) Subject to the terms of options granted pursuant to the formula plan set forth in Paragraph 9, the option price may be equal to or greater than the fair market value of the Common Shares subject to such Option at the time the Option is granted, as determined by the Committee, but in no event may such option price be less than the fair market value of the underlying Common Shares at the time the Option is granted; provided, however, that in the case of an Incentive Stock Option granted to an employee who owns stock representing more than ten percent of the voting power of all classes of stock of the Company or any parent or subsidiary (a "Ten Percent Employee"), such option price shall not be less than 110% of such fair market value at the time the Option is granted. (b) Subject to the per participant limitation set forth in Paragraph 4(b) and the formula plan set forth in Paragraph 9, the Committee shall determine the number of Common Shares to be subject to each Option. The number of Common Shares subject to an outstanding Option may be reduced on a share-for-share or other appropriate basis, as determined by the Committee, to the extent that Common Shares under such Option are used to calculate the cash, Common Shares, Other Company Securities or property, or other forms of payment, or any combination thereof, received pursuant to exercise of a Stock Appreciation Right attached to such Option, or to the extent that any other Award granted in conjunction with such Option is paid. (c) The Option may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, and shall be exercisable during the grantee's lifetime only by him. Unless the Committee determines otherwise, the Option shall not be exercisable for at least six months after the date of grant, unless the grantee ceases employment or performance of services before the expiration of such six- month period by reason of his disability as defined in Paragraph 13 or his death. (d) The Option shall not be exercisable: (i) in the case of any Incentive Stock Option granted to a Ten Percent Employee, after the expiration of five years from the date it is granted, and, in the case of any other Option, after the expiration of ten years from the date it is granted. Subject to the terms of the formula plan set forth in Paragraph 9, any Option may be exercised during such period only at such time or times and in such installments as the Committee may establish; (ii) unless payment in full is made for the shares being acquired thereunder at the time of exercise; such payment shall be made in such form (including, but not limited to, cash, Common Shares, or the surrender of another outstanding Award under the Plan, or any combination thereof) as the Committee may determine in its discretion; and (iii) unless the person exercising the Option has been, at all times during the period beginning with the date of the grant of the Option and ending on the date of such exercise, employed by or otherwise preforming services for the Company, or a corporation, or a parent or subsidiary of a corporation, substituting or assuming the Option in a transaction to which Section 424(a) of the Code is applicable, except that (A) if an employee of the Company or a person performing services for the Company other than as a director shall cease such employment or performance of services (other than by a termination or removal for cause) while holding an Option which has not expired and has not been fully exercised, such person, at any time within 90 days (or such period determined by the Committee) after the date he ceased such employment or performance of services (but in no event after the Option has expired), may exercise the Option with respect to any shares as to which he could have exercised the Option on the date he ceased such employment or performance of services, or with respect to such greater number of shares as determined by the Committee; or (B) if a non-employee director of the Company shall resign or shall otherwise be removed (other than a removal for cause) while holding an Option which has not expired and has not been fully exercised, such non-employee director, at any time within three years (or such period determined by the Committee) after the date he ceased to be a director (but in no event after the Option has expired), may exercise the Option with respect to any shares as to which he could have exercised the Option on the date he ceased to be a director, or with respect to such greater number of shares as determined by the Committee; or (C) if such person shall cease such employment or performance of services by reason of his disability as defined in Paragraph 13 or early, normal or deferred retirement under an approved retirement program of the Company (or such other plan or arrangement as may be approved by the Committee, in its discretion, for this purpose) while holding an Option which has not expired and has not been fully exercised, such person, at any time within three years (or such period determined by the Committee) after the date he ceased such employment or performance of services (but in no event after the Option has expired), may exercise the Option with respect to any shares as to which he could have exercised the Option on the date he ceased such employment or performance of services, or with respect to such greater number of shares as determined by the Committee; in the event that such a disabled person, within three years following termination of employment, resumes his employment or performance of services for the Company: (i) such person may exercise such Option with respect to all shares underlying such Option as originally granted; provided that, to the extent that any of such shares were not exercisable at the time of such person's termination of employment or performance of services by reason of disability, such person may exercise such Option with respect to such unexercisable shares only in accordance with a revised vesting schedule as determined by the Committee and (ii) the expiration date of such Option shall be automatically extended by a period of time equal to the period commencing on the date that such person's employment or performance of services for the Company was terminated by reason of disability and ending on the date such person resumed employment or performance of services for the Company; provided that, notwithstanding the foregoing, the expiration date of any Incentive Stock Option shall not in any case be so extended; or (D) if any person to whom an Option has been granted shall die holding an Option which has not expired and has not been fully exercised, his executors, administrators, heirs or distributees, as the case may be, may, at any time within one year (or such other period determined by the Committee) after the date of death (but in no event after the Option has expired), exercise the Option with respect to any shares as to which the decedent could have exercised the Option at the time of his death, or with respect to such greater number of shares as determined by the Committee. (e) In the case of an Incentive Stock Option, the amount of the aggregate fair market value of Common Shares (determined at the time of grant of the Option pursuant to subparagraph 5(a) of the Plan) with respect to which incentive stock options are exercisable for the first time by an employee during any calendar year (under all such plans of his employer corporation and its parent and subsidiary corporations) shall not exceed $100,000. (f) It is the intent of the Company that Nonqualified Stock Options granted under the Plan not be classified as Incentive Stock Options, that the Incentive Stock Options granted under the Plan be consistent with and contain or be deemed to contain all provisions required under Section 422 and the other appropriate provisions of the Code and any implementing regulations (and any successor provisions thereof), and that any ambiguities in construction shall be interpreted in order to effectuate such intent. (g) A Purchased Option may contain such additional terms not inconsistent with this Plan, including, but not limited to, the circumstances under which the purchase price of such Purchased Option may be returned to the optionee, as the Committee may determine in its sole discretion. 6. Stock Appreciation Rights. The Committee may grant Stock Appreciation Rights either alone, or in conjunction with Stock Options, Performance Grants or other Awards, either at the time of grant or by amendment thereafter. Each Award of Stock Appreciation Rights granted under the Plan shall be evidenced by an instrument in such form as the Committee shall prescribe from time to time in accordance with the Plan and shall comply with the following terms and conditions, and with such other terms and conditions, including, but not limited to, restrictions upon the Award of Stock Appreciation Rights or the Common Shares issuable upon exercise thereof, as the Committee, in its discretion, shall establish: (a) Subject to the per participant limitation set forth in Paragraph 4(b), the Committee shall determine the number of Common Shares to be subject to each Award of Stock Appreciation Rights. The number of Common Shares subject to an outstanding Award of Stock Appreciation Rights may be reduced on a share-for- share or other appropriate basis, as determined by the Committee, to the extent that Common Shares under such Award of Stock Appreciation Rights are used to calculate the cash, Common Shares, Other Company Securities or property, or other forms of payment, or any combination thereof, received pursuant to exercise of an Option attached to such Award of Stock Appreciation Rights, or to the extent that any other Award granted in conjunction with such Award of Stock Appreciation Rights is paid. (b) The Award of Stock Appreciation Rights may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, and shall be exercisable during the grantee's lifetime only by him. Unless the Committee determines otherwise, the Award of Stock Appreciation Rights shall not be exercisable for at least six months after the date of grant, unless the grantee ceases employment or performance of services before the expiration of such six-month period by reason of his disability as defined in Paragraph 13 or his death. (c) The Award of Stock Appreciation Rights shall not be exercisable: (i) in the case of any Award of Stock Appreciation Rights which is attached to an Incentive Stock Option granted to a Ten Percent Employee, after the expiration of five years from the date it is granted, and, in the case of any other Award of Stock Appreciation Rights, after the expiration of ten years from the date it is granted. Any Award of Stock Appreciation Rights may be exercised during such period only at such time or times and in such installments as the Committee may establish; (ii) unless the Option or other Award to which the Award of Stock Appreciation Rights is attached is at the time exercisable; and (iii) unless the person exercising the Award of Stock Appreciation Rights has been, at all times during the period beginning with the date of the grant thereof and ending on the date of such exercise, employed by or otherwise performing services for the Company, except that (A) if such person shall cease such employment or performance of services by reason of his disability as defined in Paragraph 13 or early, normal or deferred retirement under an approved retirement program of the Company (or such other plan or arrangement as may be approved by the Committee, in its discretion, for this purpose) while holding an Award of Stock Appreciation Rights which has not expired and has not been fully exercised, such person may, at any time within three years (or such other period determined by the Committee) after the date he ceased such employment or performance of services (but in no event after the Award of Stock Appreciation Rights has expired), exercise the Award of Stock Appreciation Rights with respect to any shares as to which he could have exercised the Award of Stock Appreciation Rights on the date he ceased such employment or performance of services, or with respect to such greater number of shares as determined by the Committee; or (B) if any person to whom an Award of Stock Appreciation Rights has been granted shall die holding an Award of Stock Appreciation Rights which has not expired and has not been fully exercised, his executors, administrators, heirs or distributees, as the case may be, may at any time within one year (or such other period determined by the Committee) after the date of death (but in no event after the Award of Stock Appreciation Rights has expired), exercise the Award of Stock Appreciation Rights with respect to any shares as to which the decedent could have exercised the Award of Stock Appreciation Rights at the time of his death, or with respect to such greater number of shares as determined by the Committee. (d) An Award of Stock Appreciation Rights shall entitle the holder (or any person entitled to act under the provisions of subparagraph 6(c)(iii)(B) hereof) to exercise such Award or to surrender unexercised the Option (or other Award) to which the Stock Appreciation Right is attached (or any portion of such Option or other Award) to the Company and to receive from the Company in exchange thereof, without payment to the Company, that number of Common Shares having an aggregate value equal to (or, in the discretion of the Committee, less than) the excess of the fair market value of one share, at the time of such exercise, over the exercise price (or Option Price, as the case may be), times the number of shares subject to the Award or the Option (or other Award), or portion thereof, which is so exercised or surrendered, as the case may be. The Committee shall be entitled in its discretion to elect to settle the obligation arising out of the exercise of a Stock Appreciation Right by the payment of cash or Other Company Securities or property, or other forms of payment, or any combination thereof, as determined by the Committee, equal to the aggregate value of the Common Shares it would otherwise be obligated to deliver. Any such election by the Committee shall be made as soon as practicable after the receipt by the Committee of written notice of the exercise of the Stock Appreciation Right. The value of a Common Share, Other Company Securities or property, or other forms of payment determined by the Committee for this purpose shall be the fair market value thereof on the last business day next preceding the date of the election to exercise the Stock Appreciation Right, unless the Committee, in its discretion, determines otherwise. (e) A Stock Appreciation Right may provide that it shall be deemed to have been exercised at the close of business on the business day preceding the expiration date of the Stock Appreciation Right or of the related Option (or other Award), or such other date as specified by the Committee, if at such time such Stock Appreciation Right has a positive value. Such deemed exercise shall be settled or paid in the same manner as a regular exercise thereof as provided in subparagraph 6(d) hereof. (f) No fractional shares may be delivered under this Paragraph 6, but in lieu thereof a cash or other adjustment shall be made as determined by the Committee in its discretion. 7. Restricted Stock. Each Award of Restricted Stock under the Plan shall be evidenced by an instrument in such form as the Committee shall prescribe from time to time in accordance with the Plan and shall comply with the following terms and conditions, and with such other terms and conditions as the Committee, in its discretion, shall establish: (a) Subject to the per participant limitation set forth in Paragraph 4(b), the Committee shall determine the number of Common Shares to be issued to a participant pursuant to the Award, and the extent, if any, to which they shall be issued in exchange for cash, other consideration, or both. (b) Restricted Stock awarded to a participant in accordance with the Award shall be subject to the following restrictions until the expiration of such period as the Committee shall determine, from the date on which the Award is granted (the "Restricted Period"): (i) a participant to whom an award of Restricted Stock is made shall be issued, but shall not be entitled to, the delivery of a stock certificate, (ii) the Restricted Stock shall not be transferable prior to the end of the Restricted Period, (iii) the Restricted Stock shall be forfeited and the stock certificate shall be returned to the Company and all rights of the holder of such Restricted Stock to such shares and as a shareholder shall terminate without further obligation on the part of the Company if the participant's continuous employment or performance of services for the Company shall terminate for any reason prior to the end of the Restricted Period, except as otherwise provided in subparagraph 7(c), and (iv) such other restrictions as determined by the Committee in its discretion. (c) If a participant who has been in continuous employment or performance of services for the Company since the date on which a Restricted Stock Award was granted to him shall, while in such employment or performance of services, die, or terminate such employment or performance of services by reason of disability as defined in Paragraph 13 or by reason of early, normal or deferred retirement under an approved retirement program of the Company (or such other plan or arrangement as may be approved by the Committee in its discretion, for this purpose) and any of such events shall occur after the date on which the Award was granted to him and prior to the end of the Restricted Period of such Award, the Committee may determine to cancel any and all restrictions on any or all of the Common Shares subject to such Award. 8. Performance Grants. The Award of the Performance Grant ("Performance Grant") to a participant will entitle him to receive a specified amount determined by the Committee (the "Actual Value"), if the terms and conditions specified herein and in the Award are satisfied. Each Award of a Performance Grant shall be subject to the following terms and conditions, and to such other terms and conditions, including, but not limited to, restrictions upon any cash, Common Shares, Other Company Securities or property, or other forms of payment, or any combination thereof, issued in respect of the Performance Grant, as the Committee, in its discretion, shall establish, and shall be embodied in an instrument in such form and substance as is determined by the Committee: (a) Subject to the per participant limitation set forth in Paragraph 4(b), the Committee shall determine the value or range of values of a Performance Grant to be awarded to each participant selected for an Award and whether or not such a Performance Grant is granted in conjunction with an Award of Options, Stock Appreciation Rights, Restricted Stock or other Award, or any combination thereof, under the Plan (which may include, but need not be limited to, deferred Awards) concurrently or subsequently, granted to the participant (the "Associated Award"). As determined by the Committee, the maximum value of each Performance Grant (the "Maximum Value") shall be: (i) an amount fixed by the Committee at the time the Award is made or amended thereafter, (ii) an amount which varies from time to time based in whole or in part on the then current value of the Common Shares, Other Company Securities or property, or other securities or property, or any combination thereof or (iii) an amount that is determinable from criteria specified by the Committee. Performance Grants may be issued in different classes or series having different names, terms and conditions. In the case of a Performance Grant awarded in conjunction with an Associated Award, the Performance Grant may be reduced on an appropriate basis to the extent that the Associated Award has been exercised, paid to or otherwise received by the participant, as determined by the Committee. (b) The award period ("Award Period") related to any Performance Grant shall be a period determined by the Committee. At the time each Award is made, the Committee shall establish performance objectives to be attained within the Award Period as the means of determining the Actual Value of such a Performance Grant. The performance objectives shall be based on such measure or measures of performance, which may include, but need not be limited to, the performance of the participant, the Company, one or more of its subsidiaries or one or more of their divisions or units, or any combination of the foregoing, as the Committee shall determine, and may be applied on an absolute basis or be relative to industry or other indices, or any combination thereof. The Actual Value of a Performance Grant shall be equal to its Maximum Value only if the performance objectives are attained in full, but the Committee shall specify the manner in which the Actual Value of Performance Grants shall be determined if the performance objectives are met in part. Such performance measures, the Actual Value or the Maximum Value, or any combination thereof, may be adjusted in any manner by the Committee in its discretion at any time and from time to time during or as soon as practicable after the Award Period, if it determines that such performance measures, the Actual Value or the Maximum Value, or any combination thereof, are not appropriate under the circumstances. (c) The rights of a participant in Performance Grants awarded to him shall be provisional and may be canceled or paid in whole or in part, all as determined by the Committee, if the participant's continuous employment or performance of services for the Company shall terminate for any reason prior to the end of the Award Period. (d) The Committee shall determine whether the conditions of subparagraph 8(b) or 8(c) hereof have been met and, if so, shall ascertain the Actual Value of the Performance Grants. If the Performance Grants have no Actual Value, the Award and such Performance Grants shall be deemed to have been canceled and the Associated Award, if any, may be canceled or permitted to continue in effect in accordance with its terms. If the Performance Grants have any Actual Value and: (i) were not awarded in conjunction with an Associated Award, the Committee shall cause an amount equal to the Actual Value of the Performance Grants earned by the participant to be paid to him or his beneficiary as provided below; or (ii) were awarded in conjunction with an Associated Award, the Committee shall determine, in accordance with criteria specified by the Committee (A) to cancel the Performance Grants, in which event no amount in respect thereof shall be paid to the participant or his beneficiary, and the Associated Award may be permitted to continue in effect in accordance with its terms, (B) to pay the Actual Value of the Performance Grants to the participant or his beneficiary as provided below, in which event the Associated Award may be canceled or (C) to pay to the participant or his beneficiary as provided below, the Actual Value of only a portion of the Performance Grants, in which event all or a portion of the Associated Award may be permitted to continue in effect in accordance with its terms or be canceled, as determined by the Committee. Such determination by the Committee shall be made as promptly as practicable following the end of the Award Period or upon the earlier termination of employment or performance of services, or at such other time or times as the Committee shall determine, and shall be made pursuant to criteria specified by the Committee. Payment of any amount in respect of the Performance Grants which the Committee determines to pay as provided above shall be made by the Company as promptly as practicable after the end of the Award Period or at such other time or times as the Committee shall determine, and may be made in cash, Common Shares, Other Company Securities or property, or other forms of payment, or any combination thereof or in such other manner, as determined by the Committee in its discretion. Notwithstanding anything in this Paragraph 8 to the contrary, the Committee may, in its discretion, determine and pay out the Actual Value of the Performance Grants at any time during the Award Period. 9. Formula Plan for Non-Employee Directors. (a) Nonqualified Stock Options covering 10,000 Common Shares shall be automatically granted to each person who is not an employee of the Company or any of its subsidiaries and is (i) elected or re-elected as a director of the Company at an annual meeting of the Company's stockholders or (ii) appointed as a director of the Company in accordance with its Bylaws following an annual meeting (each, an "Eligible Director"), commencing with the Company's 1996 annual meeting of stockholders, on the next business day following each such election, reelection or appointment, as the case may be. (b) Nonqualified Stock Options covering 10,000 Common Shares shall be automatically granted to each Eligible Director who is appointed or reappointed as the chairman of the Audit, Compensation or Strategic Planning Committee of the Board of Directors or any additional permanent committees of the Board of Directors, commencing with the Company's 1996 annual meeting of stockholders, on the next business day following each such appointment or reappointment, as the case may be. (c) Each Nonqualified Stock Option granted to an Eligible Director pursuant to this Paragraph 9 shall (i) have an option price equal to the fair market value of the Common Shares on the date of grant, (ii) become exercisable in full on the first anniversary following the date of grant; provided, however, that a Nonqualified Stock Option granted to an Eligible Director who is appointed to the Board will become exercisable in full on the next business day following the later of (A) the Company's annual meeting of stockholders next following the grant date or (B) six months following the date of grant and (iii) have a term of ten years from the date of grant. As used herein, the term "subsidiary" means any corporation more than 50% of whose voting stock is owned, directly or indirectly, by the Company. 10. Deferral of Compensation. The Committee shall determine whether or not an Award shall be made in conjunction with deferral of the participant's salary, bonus or other compensation, or any combination thereof, and whether or not such deferred amounts may be (i) forfeited to the Company or to other participants or any combination thereof, under certain circumstances (which may include, but need not be limited to, certain types of termination of employment or performance of services for the Company), (ii) subject to increase or decrease in value based upon the attainment of or failure to attain, respectively, certain performance measures and/or (iii) credited with income equivalents (which may include, but need not be limited to, interest, dividends or other rates of return) until the date or dates of payment of the Award, if any. 11. Deferred Payment of Awards. The Committee may specify that the payment of all or any portion of cash, Common Shares, Other Company Securities or property, or any other form of payment, or any combination thereof, under an Award shall be deferred until a later date. Deferrals shall be for such periods or until the occurrence of such events, and upon such terms, as the Committee shall determine in its discretion. Deferred payments of Awards may be made by undertaking to make payment in the future based upon the performance of certain investment equivalents (which may include, but need not be limited to, government securities, Common Shares, other securities, property or consideration, or any combination thereof), together with such additional amounts of income equivalents (which may be compounded and may include, but need not be limited to, interest, dividends or other rates of return or any combination thereof) as may accrue thereon until the date or dates of payment, such investment equivalents and such additional amounts of income equivalents to be determined by the Committee in its discretion. 12. Amendment or Substitution of Awards under the Plan. The terms of any outstanding Award under the Plan may be amended from time to time by the Committee in its discretion in any manner that it deems appropriate (including, but not limited to, acceleration of the date of exercise of any Award and/or payments thereunder); provided that no such amendment shall adversely affect in a material manner any right of a participant under the Award without his written consent, unless the Committee determines in its discretion that there have occurred or are about to occur significant changes in the participant's position, duties or responsibilities, or significant changes in economic, legislative, regulatory, tax, accounting or cost/benefit conditions which are determined by the Committee in its discretion to have or to be expected to have a substantial effect on the performance of the Company, or any subsidiary, affiliate, division or department thereof, on the Plan or on any Award under the Plan. The Committee may, in its discretion, permit holders of Awards under the Plan to surrender outstanding Awards in order to exercise or realize rights under other Awards, or in exchange for the grant of new Awards, or require holders of Awards to surrender outstanding Awards as a condition precedent to the grant of new Awards under the Plan. This Paragraph 12 shall not apply to grants of Nonqualified Stock Options to Eligible Directors pursuant to Paragraph 9. 13. Disability. For the purposes of this Plan, a participant shall be deemed to have terminated his employment or performance of services for the Company and any of its subsidiaries by reason of disability, if the Committee shall determine that the physical or mental condition of the participant by reason of which such employment or performance of services terminated was such at that time as would entitle him to payment of monthly disability benefits under any Company disability plan. If the participant is not eligible for benefits under any disability plan of the Company, he shall be deemed to have terminated such employment or performance of services by reason of disability if the Committee shall determine that his physical or mental condition would entitle him to benefits under any Company disability plan if he were eligible therefor. 14. Termination of a Participant. For all purposes under the Plan, the Committee shall determine whether a participant has terminated employment with, or the performance of services for, the Company. 15. Dilution and Other Adjustments. In the event of any change in the outstanding Common Shares of the Company by reason of any stock split, dividend, split-up, split-off, spin-off, recapitalization, merger, consolidation, rights offering, reorganization, combination or exchange of shares, a sale by the Company of all of its assets, any distribution to stockholders other than a normal cash dividend, or other extraordinary or unusual event, if the Committee shall determine, in its discretion, that such change equitably requires an adjustment in the terms of any Award or the number of Common Shares available for Awards, such adjustment may be made by the Committee and shall be final, conclusive and binding for all purposes of the Plan. In the event of the proposed dissolution or liquidation of the Company, all outstanding Awards shall terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. 16. Change in Control Provisions. (a) Impact of Event. In the event of a "Change in Control" as defined in --------------- Paragraph 16(b) hereof the following acceleration and valuation provisions shall apply: (i) Any Stock Appreciation Rights and any Stock Options awarded under the Plan not previously exercisable shall become fully exercisable. (ii) The restrictions and deferral limitations applicable to any Restricted Stock and other Awards payable in the form of Common Shares, shall lapse and such shares and awards shall be deemed fully vested. (iii) Any outstanding Performance Grants shall be vested and paid out based on the prorated target results for the Award Periods in question, unless the Committee provides prior to any Change in Control for a different payment. (iv) The value of all outstanding Stock Options; Stock Appreciation Rights, Restricted Stock, Performance Grants and any other type of Award payable in the form of Common Shares, in each case to the extent vested, shall, unless otherwise determined by the Committee in its sole discretion at or after grant but prior to any Change in Control, be cashed out on the basis of the "Change in Control Price" as defined in Paragraph 16(c) hereof as of the date such Change in Control is determined to have occurred or such other date as the Committee may determine prior to the Change in Control. (b) Definition of "Change in Control." For purposes of Paragraph 16(a), a ----------------------------------- "Change in Control" means the happening of any of the following: (i) When any "person" as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as amended from time to time), of securities of the Company representing twenty-five percent or more of the combined voting power of the Company's then outstanding securities; (ii) When, during any period of 12 consecutive months during the existence of the Plan, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof, provided, however, that a director who was not a director at the beginning of such 12-month period shall be deemed to have satisfied such 12-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 12-month period) or by prior operation of this Paragraph 16(b)(ii); or (iii) The approval by the stockholders of the Company of a transaction involving the acquisition of the Company by an entity other than the Company or any subsidiary through purchase of assets, by merger, or otherwise. (c) Change in Control Price. For purposes of this Paragraph 16, "Change in ----------------------- Control Price" means the highest price per share paid in any transaction reported on any national securities exchange on which the Company's Common Shares are listed, or paid or offered in any bona fide transaction related to a Change in Control of the Company at any time during the sixty-day period immediately preceding the occurrence of the Change in Control, in each case as determined by the Committee except that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the optionee exercises such Stock Appreciation Rights or, where applicable, the date on which a cashout occurs under Paragraph 16(a)(iv). 17. Designation of Beneficiary by Participant. A participant may name a beneficiary to receive any payment to which he may be entitled in respect of any Award under the Plan in the event of his death, on a written form to be provided by and filed with the Committee, and in a manner determined by the Committee in its discretion. The Committee reserves the right to review and approve beneficiary designations. A participant may change his beneficiary from time to time in the same manner, unless such participant has made an irrevocable designation. Any designation of beneficiary under the Plan (to the extent it is valid and enforceable under applicable law) shall be controlling over any other disposition, testamentary or otherwise, as determined by the Committee in its discretion. If no designated beneficiary survives the participant and is living on the date on which any amount becomes payable to such a participant's beneficiary, such payment will be made to the legal representatives of the participant's estate, and the term "beneficiary" as used in the Plan shall be deemed to include such person or persons. If there are any questions as to the legal right of any beneficiary to receive a distribution under the Plan, the Committee in its discretion may determine that the amount in question be paid to the legal representatives of the estate of the participant, in which event the Company, the Board and the Committee and the members thereof, will have no further liability to anyone with respect to such amount. 18. Financial Assistance. If the Committee determines that such action is advisable, the Company may assist any person to whom an Award has been granted in obtaining financing from the Company (or under any program of the Company approved pursuant to applicable law), or from a bank or other third party, on such terms as are determined by the Committee, and in such amount as is required to accomplish the purposes of the Plan, including, but not limited to, to permit the exercise of an Award, the participation therein, and/or the payment of any taxes in respect thereof. Such assistance may take any form that the Committee deems appropriate, including, but not limited to, a direct loan from the Company, a guarantee of the obligation by the Company, or the maintenance by the Company of deposits with such bank or third party. 19. Miscellaneous Provisions. (a) No employee or other person shall have any claim or right to be granted an Award under the Plan. Determinations made by the Committee under the Plan need not be uniform and may be made selectively among eligible individuals under the Plan, whether or not such eligible individuals are similarly situated. Neither the Plan nor any action taken hereunder shall be construed as giving any employee or other person any right to continue to be employed by or perform services for the Company, and the right to terminate the employment of or performance of services by any participants at any time and for any reason is specifically reserved. (b) No participant or other person shall have any right with respect to the Plan, the Common Shares reserved for issuance under the Plan or in any Award, contingent or otherwise, until written evidence of the Award shall have been delivered to the recipient and all the terms, conditions and provisions of the Plan and the Award applicable to such recipient (and each person claiming under or through him) have been met. (c) Except as may be approved by the Committee where such approval shall not adversely affect compliance of the Plan with Rule 16b-3 under the Exchange Act, a participant's rights and interest under the Plan may not be assigned or transferred, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of a participant's death) including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner, provided, however, that any Option or similar right (including, but not limited to, a Stock Appreciation Right) offered pursuant to the Plan shall not be transferable other than by will or the laws of descent and distribution and shall be exercisable during the participant's lifetime only by him. (d) No Common Shares, Other Company Securities or property, other securities or property, or other forms of payment shall be issued hereunder with respect to any Award unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state, local and foreign legal, securities exchange and other applicable requirements. (e) It is the intent of the Company that the Plan comply in all respects with Rule 16b-3 under the Exchange Act and Section 162(m) of the Code, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that if any provision of the Plan is found not to be in compliance with Rule 16b-3 or Section 162(m), such provision shall be deemed null and void to the extent required to permit the Plan to comply with Rule 16b-3 or Section 162(m), as the case may be. (f) The Company shall have the right to deduct from any payment made under the Plan any federal, state, local or foreign income or other taxes required by law to be withheld with respect to such payment. It shall be a condition to the obligation of the Company to issue Common Shares, Other Company Securities or property, other securities or property, or other forms of payment, or any combination thereof, upon exercise, settlement or payment of any Award under the Plan, that the participant (or any beneficiary or person entitled to act) pay to the Company, upon its demand, such amount as may be required by the Company for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. If the amount requested is not paid, the Company may refuse to issue Common Shares, Other Company Securities or property, other securities or property, or other forms of payment, or any combination thereof. Notwithstanding anything in the Plan to the contrary, the Committee may, in its discretion, permit an eligible participant (or any beneficiary or person entitled to act) to elect to pay a portion or all of the amount requested by the Company for such taxes with respect to such Award, at such time and in such manner as the Committee shall deem to be appropriate (including, but not limited to, by authorizing the Company to withhold, or agreeing to surrender to the Company on or about the date such tax liability is determinable, Common Shares, Other Company Securities or property, other securities or property, or other forms of payment, or any combination thereof, owned by such person or a portion of such forms of payment that would otherwise be distributed, or have been distributed, as the case may be, pursuant to such Award to such person, having a fair market value equal to the amount of such taxes). (g) The expenses of the Plan shall be borne by the Company. (h) The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Award under the Plan, and rights to the payment of Awards shall be no greater than the rights of the Company's general creditors. (i) By accepting any Award or other benefit under the Plan, each participant and each person claiming under or through him shall be conclusively deemed to have indicated his acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board or the Committee or its delegates. (j) Fair market value in relation to Common Shares, Other Company Securities or property, other securities or property or other forms of payment of Awards under the Plan, or any combination thereof, as of any specific time shall mean such value as determined by the Committee in accordance with applicable law. (k) The masculine pronoun includes the feminine and the singular includes the plural wherever appropriate. (l) The appropriate officers of the Company shall cause to be filed any reports, returns or other information regarding Awards hereunder of any Common Shares issued pursuant hereto as may be required by Section 13 or 15(d) of the Exchange Act (or any successor provision) or any other applicable statute, rule or regulation. (m) The validity, construction, interpretation, administration and effect of the Plan, and of its rules and regulations, and rights relating to the Plan and to Awards granted under the Plan, shall be governed by the substantive laws, but not the choice of law rules, of the State of Delaware. 20. Plan Amendment or Suspension. The Plan may be amended or suspended in whole or in part at any time from time to time by the Board, but no amendment shall be effective unless and until the same is approved by stockholders of the Company where the failure to obtain such approval would adversely affect the compliance of the Plan with Rule 16b-3 under the Exchange Act and with other applicable law. No amendment of the Plan shall adversely affect in a material manner any right of any participant with respect to any Award theretofore granted without such participant's written consent, except as permitted under Paragraph 12. The terms of the formula plan set forth in Paragraph 9 relating to the amount, price and timing of grants of Nonqualified Stock Options to Eligible Directors shall not be amended more than once every six months, except to comport with changes in the Code and the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder. 21. Plan Termination. This Plan shall terminate upon the earlier of the following dates or events to occur. (a) upon the adoption of a resolution of the Board terminating the Plan; or (b) ten years from the date the Plan is initially approved and adopted by the stockholders of the Company in accordance with Paragraph 22 hereof, provided, however, that the Board may, prior to the expiration of such ten-year period, extend the term of the Plan for an additional period of up to five years for the grant of Awards other than Incentive Stock Options. No termination of the Plan shall materially alter or impair any of the rights or obligations of any person, without his consent, under any Award theretofore granted under the Plan, except that subsequent to termination of the Plan, the Committee may make amendments permitted under Paragraph 12. 22. Stockholder Adoption. The Plan shall be submitted to the stockholders of the Company, for their approval and adoption in accordance with applicable law and Rule 16b-3 under the Exchange Act and Section 162(m) under the Code. The Plan shall not be effective and no Award shall be made hereunder unless and until the Plan has been so approved and adopted. EX-10.38 4 CULTURE AGREEMENT DATED MARCH 1, 1997 Exhibit 10-38 CULTURE AGREEMENT ----------------- This Agreement is made as of this 1st day of March, 1997 and is between Zelenka Nursery, Inc. of 16127 Winans, Grand Haven, MI 49417 ("Zelenka") and NaPro BioTherapeutics, Inc. of 6304 Spine Road, Unit A, Boulder, CO 80301 ("NaPro") with respect to the culture of certain Taxus Media Hicksii trees. STATEMENT OF BACKGROUND INFORMATION ----------------------------------- A. NaPro has agreed to purchase approximately [TEXT REDACTED] trees from Zelenka pursuant to an Agreement for Sale and Purchase of Nursery Stock effective as of the date of this Agreement, between Zelenka Nursery, Inc. and NaPro BioTherapeutics, Inc. ("Purchase Agreement"). B. NaPro expects to acquire and to deliver to Zelenka approximately [TEXT REDACTED] trees for culture by Zelenka hereunder. C. NaPro desires to lease from Zelenka certain real property on which all of the Zelenka Trees (defined below) and the Non-Zelenka Trees (defined below) will be transplanted and located. NaPro has agreed to lease such real property from Zelenka pursuant to a certain Lease ("Lease") of even date herewith. D. NaPro desires that Zelenka transplant, care for, and culture the Zelenka Trees and the Non-Zelenka Trees, and that Zelenka harvest, cut, store, and ship to NaPro all or certain portions of the Zelenka Trees and the Non- Zelenka Trees, and Zelenka has agreed to do so. E. NaPro has previously purchased certain other Taxus Media Hicksii Trees from Zelenka pursuant to a Purchase Agreement dated May 1, 1996. Zelenka is culturing such trees for NaPro pursuant to a Culture Agreement dated March 1, 1996 and the trees are growing on real property subleased to NaPro by Zelenka pursuant to certain Subleases dated April 1, 1996. All such agreements are collectively referred to herein as the "Spring Agreements". F. The parties desire to set forth the terms of their agreements in this writing. STATEMENT OF AGREEMENT ---------------------- For their mutual convenience and protection, and in consideration of the mutual covenants and benefits contained in this Agreement, the parties agree as follows: SECTION ONE: DEFINITIONS ------------------------ 1.1 Definition of Zelenka Trees. The "ZelenkaTrees" for purposes of --------------------------- this Agreement shall be defined as all of those [TEXT REDACTED] Trees [TEXT REDACTED] and all of those [TEXT REDACTED] Trees [TEXT REDACTED] purchased by NaPro from Zelenka under the Purchase Agreement. 1.2 Definition of Non-Zelenka Trees. The "Non-Zelenka Trees" for purpose ------------------------------- of this Agreement shall be defined as those [TEXT REDACTED] Trees [TEXT REDACTED] owned by and acquired from sources other than Zelenka which are delivered by NaPro to Zelenka for transplantation and culture by Zelenka under this Agreement. 1.3 Definition of Trees. The Zelenka Trees and the Non-Zelenka Trees ------------------- shall be collectively referred to as the "Trees". SECTION TWO: CULTURE OBLIGATIONS --------------------------------- 2.1 Transplanting. During the term of this Agreement, Zelenka agrees to ------------- accept and transplant the Trees pursuant to the instructions of NaPro and pursuant to the schedule described below in paragraph 5.2. 2.2 Transplant, Care and Culture of Trees. During the term of this ------------------------------------- Agreement, Zelenka agrees to transplant, grow, maintain, and care for all of the Trees pursuant to the instructions of NaPro. In the absence of such instructions, Zelenka agrees that its care of the Trees shall be consistent with Zelenka's normal reasonable cultural practices. Zelenka shall bear all costs and expenses in connection with the transplanting, care, and maintenance of the Trees, provided that Zelenka shall be reimbursed for such expenses as provided in below under Section Three. 2.3 Harvesting & Storing. In addition to Zelenka's obligations described -------------------- above in paragraphs 2.1 and 2.2, Zelenka agrees to harvest, cut, place in cold storage, pack, and prepare for shipping any of the Trees or Tree cuttings in accordance with the NaPro specifications attached hereto as Exhibit 2.2 ("NaPro Specifications"). Notwithstanding the foregoing, Zelenka shall not be required to ship any Trees or Tree cuttings to NaPro if NaPro is not current in all of its obligations to Zelenka under the Purchase Agreement, this Agreement, the Lease, and the Spring Agreements. -2- Any schedules for any activities described in this paragraph shall be mutually agreed upon by Zelenka and NaPro. All Trees or Tree cuttings shall be shipped to NaPro FOB Zelenka at NaPro's expense. Further, Zelenka shall not be required to store, after harvest, any Trees or Tree cuttings for a period exceeding six months, and Zelenka shall be entitled to ship to NaPro any Trees or Tree cuttings (in accordance with the NaPro Specifications) as necessary to ensure that such limit is not exceeded, unless the parties have otherwise agreed in writing. SECTION THREE: COMPENSATION AND EXCLUSIVITY -------------------------------------------- 3.1 Compensation. As compensation for its services under this Agreement, ------------ Zelenka shall be entitled to receive [TEXT REDACTED] 3.2 Invoices and Payment. Zelenka shall be entitled to invoice NaPro for -------------------- any sums due hereunder on a monthly basis. Such invoices shall be paid within thirty (30) days of the invoice date and pursuant to Zelenka's other standard terms and conditions, which are attached hereto as Exhibit 3.2 ("Zelenka Terms"). 3.3 Exclusivity. During the term of this Agreement, NaPro agrees that ----------- Zelenka shall be the exclusive provider of all transplanting services, cultural services, all harvesting and cutting services, all storage services, and any other services provided hereunder, with respect to all of the Trees, and that NaPro will not contract or arrange for any other provider of such services with respect to the Trees or the cuttings thereof. NaPro further agrees that all products and materials which may be used in connection with the above-described services shall be purchased and/or acquired exclusively by and through Zelenka under the terms of this Agreement and that NaPro shall not contract or arrange for any such materials or products to be provided by any other person or entity in any other manner. SECTION FOUR: TERM AND TERMINATION ----------------------------------- 4.1 Term. The term of this Agreement shall commence as of the effective ---- date hereof and shall continue through 11:59 p.m. on February 28, 2006, unless earlier terminated by the parties hereunder. 4.2 Extensions of Term. NaPro shall be entitled to renew the term of this ------------------ Agreement, on the same terms and conditions set forth herein, for two separate five year renewal terms; provided, -3- however, that NaPro shall not be entitled to renew this Agreement for any extended term unless NaPro simultaneously renews the Lease for an extended term for the same duration. If NaPro desires to exercise any such option, it shall do so in writing to Zelenka at least 180 days prior to the expiration of the original or extended term. 4.3 Termination. This Agreement may not be terminated by either party ----------- hereto except as provided in this paragraph 4.3. If either party fails to pay any sums due hereunder or any sums due under this Agreement, the Purchase Agreement, the Lease, or the Spring Agreements within five (5) days after such sums are due, or if either party defaults under any of its other obligations under this Agreement, the Purchase Agreement, the Lease, or the Spring Agreements, and such default continues for ten (10) days after written notice thereof, then the non-defaulting party shall be entitled to terminate this Agreement and recover any damages resulting from the breach, in addition to any other legal or contractual remedy available to the non-defaulting party. Further, Zelenka shall be entitled to terminate this Agreement, effective immediately upon written notice to NaPro, if NaPro defaults under any of its obligations under this Agreement, the Culture Agreement, the Lease, or the Spring Agreements more than four (4) times during any twelve (12) month period. 4.4 Obligations Upon Termination. Upon the termination or expiration of ---------------------------- this Agreement, all amounts due to either party under this Agreement shall become due and payable within 10 days following the termination or expiration. SECTION FIVE: LEASE ISSUES --------------------------- 5.1 Lease. As of the effective date of this Agreement, Zelenka and NaPro ----- shall enter into a lease with respect to any real property owned by Zelenka on which the Trees may be located ("Leases"). Such Lease shall be in the form attached hereto as Exhibit 5.1. The Lease shall form a part of this Agreement and any breach of the provisions of the Lease shall be deemed a breach of this Agreement. NaPro's obligations under the Lease and the legal description of the leased premises thereunder shall not be reduced, limited, or changed even if NaPro causes the harvest and/or removal of any or all of the Trees from such leased premises prior to the termination of the Lease. 5.2 Transplanting and Lease. The Lease will initially lease approximately ----------------------- [TEXT REDACTED] acres of Zelenka-owned real property to NaPro. Zelenka and NaPro agree that NaPro will instruct Zelenka to transplant on such real property, on or before June 30, 1997, all -4- of those six year old Trees purchased from Zelenka by NaPro under the Purchase Agreement, as well as a certain number of trees which have not been purchased by NaPro from Zelenka. As of the effective date of this Agreement, the parties do not know whether there will be sufficient space (after the aforementioned transplanting) on such parcel to transplant any of the [TEXT REDACTED] Trees purchased from Zelenka by NaPro under the Purchase Agreement. If there is room to transplant any of the [TEXT REDACTED] Trees, then the parties agree that Zelenka shall transplant, on or before June 30, 1997, as many of the [TEXT REDACTED] Trees as possible on the such parcel. If, however, all of the [TEXT REDACTED] Trees purchased under the Purchase Agreement cannot be transplanted onto the such parcel prior to June 30, 1997, then Zelenka and NaPro agree to use good faith efforts to negotiate a lease, with NaPro as lessee and Zelenka as lessor, pursuant to which NaPro shall lease from Zelenka such real estate as may be necessary for the transplanting, growing, and culturing of such remaining [TEXT REDACTED] trees. Such lease shall: (i) commence after January 1, 1998 and before June 30, 1998 and before the transplanting of any such trees on the land, (ii) expire at 11:59 p.m. on February 28, 2006, (iii) include two five year renewal options subject to the same terms and conditions of the two five year renewal options under the Lease, and (iv) include terms substantially similar to the terms of the Lease. The transplanting of such [TEXT REDACTED] trees shall occur after January 1, 1998 and before June 30, 1998. SECTION SIX: GENERAL TERMS --------------------------- 6.1 Arbitration. Any disagreements or dispute between the parties with ----------- regard to this Culture Agreement shall be resolved exclusively by arbitration which shall be binding upon both of the parties. The arbitration shall be conducted by a panel of three arbitrators under the rules of the American Arbitration Association. One arbitrator shall be selected by Zelenka, one by NaPro, and one by the two selected arbitrators. Any arbitration shall be conducted in Grand Haven, Michigan and the arbitrators shall apply Michigan law. Unless otherwise allocated or assessed by the arbitrators, the parties shall share equally the fees and expenses of the arbitrators. 6.2 Definition of Zelenka's Costs. ----------------------------- a. Zelenka's actual costs and expenses shall be calculated based upon Zelenka's current cost accounting system. Such cost accounting system will base Zelenka's costs and expenses upon, among other things, the number of hours of labor times Zelenka's loaded labor rate, plus any other actual costs incurred by Zelenka such as crate rental, electricity charges, -5- shipping charges, etc. The parties acknowledge and agree that Zelenka's loaded labor rate includes charges for items related to Zelenka's performance under this Agreement such as insurance, irrigation costs (including well drilling and irrigation equipment), acquisition of equipment (including harvesting equipment), and repair and maintenance charges. Such actual costs and expenses shall not include: (i) marketing costs or general administrative costs except to the extent that those costs are part of Zelenka's loaded labor rate, (ii) monthly rental payments due under the Lease, or (iii) those real estate taxes which are Zelenka's responsibility under the Lease. b. NaPro shall have the right to audit Zelenka's books and records pertaining to calculation of Zelenka's costs. Any such inventory shall be conducted at reasonable intervals and at reasonable times, and shall not interfere with the business operations of Zelenka. Furthermore, NaPro agrees to keep confidential and not to disclose to any other party (except to any professional advisors or employees who have a need to know) any information or documents learned or discovered by NaPro in connection with any such audit. If any such audit uncovers overcharges or undercharges, the parties shall attempt to agree upon the amounts of such overcharges or undercharges and pay to one another any such amount as may be necessary to correct the overcharge or undercharge. If the parties cannot agree on any overcharge or undercharge, either party shall be entitled to submit their question to arbitration under paragraph 6.1. If the parties agree or an arbitration determines that Zelenka has overcharged NaPro an amount greater than ten (10%) percent, then Zelenka shall bear the cost of the audit by NaPro and the cost of the arbitration. Otherwise, the cost of the audit and arbitration shall be borne by NaPro. 6.3 Zelenka's Limited Warranty. Zelenka hereby warrants to NaPro that: -------------------------- (i) ninety two percent (92%) or more of the Zelenka Trees transplanted between January 1, 1997 and June 30, 1997 by Zelenka hereunder will be alive as of August 31, 1997, and (ii) 92% or more of the Zelenka Trees transplanted by Zelenka by January 1, 1998 and June 30, 1998 hereunder will be alive as of August 31, 1998. . NaPro or its representatives shall be entitled to inspect all such Zelenka Trees, with a Zelenka representative, at a time mutually agreed on by Zelenka and NaPro within ten (10) days before or after the above-described applicable August 31 date for the purpose of determining the survival rates under this paragraph 6.3. If NaPro notifies Zelenka in writing, on or before the date 10 days after the above- described applicable August 31 date, , that the survival rate of the relevant -6- transplanted Zelenka Trees is less than ninety two percent (92%), then Zelenka shall be required to elect one of the following remedies, in its sole discretion: (1) Zelenka may reimburse NaPro for the purchase price under the Purchase Agreement, for the number of Zelenka Trees purchased by NaPro under the Purchase Agreement multiplied by 92% minus the number of surviving Zelenka Trees, or (2) Zelenka may replace and transplant (at Zelenka's cost) the non- surviving Zelenka Trees with a number of comparable Trees which is equal to the number of Zelenka Trees purchased and paid for by NaPro under the Purchase Agreement multiplied by 92% minus the number of surviving Zelenka Trees. Notwithstanding anything to the contrary in this paragraph 6.3, if NaPro (or its representatives) fails to inspect the Zelenka Trees within 10 days before or after the above-described applicable August 31 date, or if NaPro fails to notify Zelenka in writing on or before the date 10 days after the above- described applicable August 31 date, that the survival rate of the Zelenka Trees is less than 92%, then NaPro shall be deemed to have waived all of its rights under this paragraph 6.3. 6.4 No Warranties. Zelenka offers no warranties or guarantees regarding ------------- any aspect (including survival or viability) of any Non-Zelenka Trees which are transplanted or cultured by Zelenka under the terms of this Agreement. Further, except as otherwise provided in paragraph 6.3, Zelenka offers no warranties or guarantees regarding any aspect (including the survival or viability) of any Zelenka Trees or the Non- Zelenka Trees which are transplanted or cultured under the terms of this Agreement. Without limiting the generality of the foregoing, Zelenka also offers no warrantees or guarantees regarding: (1) the quantity of Tree cuttings which will be harvested, cut, or produced hereunder, or (2) the quality or suitability of the Trees or Tree cuttings for any purpose. Finally, Zelenka offers no warrantees of merchantability or fitness for any particular purpose. 6.5 Force Majeure. Neither party shall be liable to the other in the ------------- event that performance of its obligations hereunder shall be prevented by any cause beyond its reasonable control, including without limitation acts of God, acts of government, accident, fire, flood, natural disaster, delay or destruction of means of transport, or other disaster ("events of force majeure"), but the affected party shall use best efforts to avoid or remove the cause of such nonperformance and shall continue performance hereunder with the utmost dispatch whenever such cause is removed. -7- SECTION SEVEN: MISCELLANEOUS ----------------------------- 7.1 Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the parties hereto and their respective successors and assigns. Neither party shall assign any of their rights, privileges, or obligations under this Agreement without the written consent of the other party, which shall not be unreasonably withheld. 7.2 Notices. All notices, requests, demands, and other communications ------- hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed certified or registered mail, return receipt requested with postage prepaid, to the parties at their addresses on page one of this Agreement. Any party may change its address by providing notice hereunder to all of the other parties. 7.3 Headings. The headings of sections herein and in the exhibits -------- referred to herein are for convenience only and shall not control of effect any meaning or interpretation of any provision of this Agreement. 7.4 Entire Agreement; Modifications. This Agreement contains the ------------------------------- entire agreement among the parties hereto with respect to the transactions contemplated hereby. This Agreement may be modified only by a written agreement signed by all of the parties hereto. 7.5 Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.6 Applicable Law. This Agreement shall be construed and enforced -------------- in accordance with the laws of the State of Michigan. 7.7 Severability. In the event that any of the provisions of this ------------ Agreement shall be held to be invalid or unenforceable, the same shall not affect the validity or enforceability of any other provisions of this Agreement, unless such validity or unenforceability shall materially affect and frustrate the intentions of the parties. 7.8 Time is of the Essence. All of the parties hereto agree and ---------------------- acknowledge that time is of the essence in connection with this Agreement. 7.9 No Waiver. No waiver of any rights of either party hereunder --------- shall be effective against such party unless set forth in writing and signed by such party. Further, no waiver of any right hereunder shall be construed to be a waiver of such right or any other right hereunder or in -8- the future. ZELENKA NURSERY, INC. ------------------------------------- Paul Zelenka Vice President NAPRO BIOTHERAPEUTICS, INC. ------------------------------------- Sterling K. Ainsworth President and Chief Executive Officer A:\Ex10-38Culture.wpd EX-10.39 5 LEASE AGREEMENT DATED MARCH 1, 1997 Exhibit 10.39 LEASE AGREEMENT --------------- This is a Lease, which is effective as of the 1st day of March, 1997. The names and addresses of the parties are as follows:
NAME ADDRESS DESIGNATION - ---- ------- ----------- NaPro Bio Therapeutics, Inc. 6304 Spine Road, Unit A Lessee Boulder, CO 8030l Zelenka Nursery, Inc. 16127 Winans Lessor Grand Haven, MI 49417
BACKGROUND INFORMATION ---------------------- A. Lessor is the owner of a parcel of real property located in Robinson Township, Ottawa County, Michigan, together with certain improvements located thereon. B. Lessee wishes to lease such property, including the improvements, and the Lessor has agreed to lease such property and improvements to the Lessee. C. The Lessee has purchased certain [TEXT REDACTED] Trees and [TEXT REDACTED] Trees from the Lessor pursuant to an Agreement for Sale and Purchase of Nursery Stock dated March 1, 1997 between the parties ("Purchase Agreement"). D. The parties have entered into a Culture Agreement of even date herewith, pursuant to which the Lessor has agreed to transplant and care for the trees purchased under the Purchase Agreement and for certain additional trees. The Culture Agreement requires that the Lessee lease the property described herein from the Lessor for the purpose of transplanting and growing all or certain of such trees thereon. E. The parties acknowledge that their obligations hereunder will commence as soon as the leased premises are needed for the transplanting which will occur (under the Culture Agreement) between January 1, 1997 and June 30, 1997 and that a substantially similar lease for additional real property may be executed by the parties for the purpose of transplanting certain -1- trees (under the Culture Agreement) between January 1, 1998 and June 30, 1998. F. Lessor and Lessee wish to define the terms of their agreement and commit it to writing. AGREEMENT --------- For their mutual convenience and protection, and in consideration of the mutual covenants and benefits contained in this Agreement, the receipt and adequacy of which is hereby acknowledged, Lessor and Lessee mutually agree as follows: SECTION ONE: GENERAL AGREEMENT ------------------------------- 1.1 Leased Premises. Lessor leases to Lessee and Lessee leases from --------------- Lessor, the real property described in Exhibit 1.1 (attached hereto and made a part hereof) together with all improvements located thereon (collectively referred to as the "Premises"). SECTION TWO: TERM ------------------ 2.1 Term. The term of this Lease shall begin immediately and ---- automatically upon the preparation, use, or occupancy of any portion of the Premises for the purpose specified in paragraph 4.1, but no later than June 30, 1997. The parties shall endeavor to execute a written certification specifying such date; however, the parties failure to execute such a certification shall not affect the commencement of the term. The term of this Lease shall expire at 11:59 p.m. on February 28, 2006. The term of this Lease shall also include any extensions of this Lease for any period of time as agreed to by the parties. SECTION THREE: RENTAL ---------------------- 3.1 Rental. The rent for the Premises is [TEXT REDACTED] per acre ------ for each year during the term of this Lease. The parties have agreed that the Premises consists of [TEXT REDACTED] acres, and therefore that (I) the total rent for the Premises for each year of the Lease term is [TEXT REDACTED], and (ii) that the total rent for the Premises for each month of the Lease term is [TEXT REDACTED]. Such monthly rental payment shall be paid in addition to any other sums expressly agreed to be paid by the Lessee under this Lease and shall be payable in advance on the first day of each month during the term of the Lease. If the term of the Lease begins on a date other than the first day of the month, the monthly installments of the rent for the first and last fractional months of the term of this Lease shall be prorated in the proportion that -2- the number of days of Lessee's tenancy bears to thirty (30 days). SECTION FOUR: USE AND COMPLIANCE WITH LAW ------------------------------------------ 4.1 Use. The Lessee shall use the Premises for the purpose of --- transplanting, growing and culturing the Taxus Media Hicksii Trees delivered to the Lessor under the Culture Agreement (which Trees include those Taxus Media Hicksii Trees purchased from Zelenka under the Purchase Agreement and those other Taxus Media Hicksii Trees which have not been purchased from Zelenka but which have been delivered to Zelenka for care under the Culture Agreement). Lessee shall comply with the statutes and regulations of Michigan and of the United States, and any and all ordinances and regulations of any other governmental body having jurisdiction over the Premises. The Lessee shall further comply with all health, fire, and police rules and regulations affecting the Premises. SECTION FIVE: LESSEE'S IMPROVEMENTS AND PERSONAL PROPERTY ---------------------------------------------------------- 5.1 Improvements. The Lessee and the Lessor acknowledge that the ------------ Lessor will be caring for the Premises and all crops and trees thereon pursuant to the terms of the Culture Agreement. Therefore, the Lessor shall have the right to construct and erect any fences or other improvements on the Premises as the Lessor shall deem appropriate and necessary to perform its obligations under the Culture Agreement. All such fences, buildings, and other improvements shall remain the property of the Lessor as of the expiration or earlier termination of this Lease. 5.2 Personal Property. The Lessor shall have the right to place on the ----------------- Premises any personal property or equipment as the Lessor shall deem necessary or appropriate to perform its obligations under the Culture Agreement. Any such property or equipment shall remain the sole property of the Lessee and may be removed by the Lessee at any time during the Lease or at its termination. Any such personal property which is not removed as of the termination of this Lease shall be deemed abandoned by the Lessee and shall thereupon become the absolute property of the Lessor. SECTION SIX: LESSEE'S TREES ---------------------------- 6.1 Ownership. The Lessee shall have the right to transplant on to --------- the Premises trees for culture pursuant to the terms of the Culture Agreement. Subject to the terms of the Purchase Agreement and the Culture Agreement, any and all trees grown or maintained on the Premises by the Lessee, shall be the sole property of the Lessee, and may be harvested and removed from the -3- Premises pursuant to the Lessee's instructions under the Culture Agreement at any time during the term of this Lease. SECTION SEVEN: QUIET ENJOYMENT ------------------------------- 7.1 General. If the Lessee pays the rent and performs all of the ------- covenants and agreements on its part to be performed pursuant to this Agreement, Lessor agrees that Lessee shall have peaceful and quiet enjoyment of the Premises. Lessor agrees that Lessee's rights to lease the Premises shall be exclusive and that Lessor will not lease any interest in or portion of the Premises, including but not limited to any oil, gas, or mineral interests, to any other party during the term of this Lease. SECTION EIGHT: ASSIGNMENT AND SUBLETTING ----------------------------------------- 8.1 Prohibition Without Consent. This Lease shall not be assigned, --------------------------- nor shall any part of the Premises be sublet by the Lessee without the prior written consent of the Lessor, unless the rights of the Lessee under the Purchase Agreement and the Culture Agreement have also been assigned with the consent of the Lessor. If such assignments have occurred with the consent of the Lessor, then the Lessor's consent to the assignment of this Lease shall not be unreasonably withheld. SECTION NINE: TAXES -------------------- 9.1 Real Property. During the term of this Lease, the Lessor shall ------------- pay promptly, before any penalties or interest charge attach, all general real estate taxes and installments of special assessment and any other governmental charges levied upon the Premises; provided, however, that the Lessor reserves the right to withhold any such payments in the event of a bona fide dispute (between the Lessor and the taxing authority) regarding the same. The Lessor shall provide proof of such payments to the Lessee upon request. If the Lessor fails to make any such payments, then in the absence of a bona fide dispute (between the Lessor and the taxing authority), Lessee shall have the option to make such payments on behalf of the Lessor and deduct such amounts from the rental payable hereunder and/or collect such amounts from the Lessor immediately. 9.2 Personal Property. Lessor shall pay all personal property taxes ----------------- assessed against the personal property owned by the Lessor and located on the Premises which is assessable for -4- personal property tax purposes. 9.3 Trees. Lessee shall pay all personal property taxes assessed ----- against the Trees located on the Premises which are accessible for personal property tax purposes. SECTION TEN: UTILITY SERVICES ----------------------------- 10.1 General. Lessor shall make payment for all gas, electricity, ------- water, sewer, and any and all other public utilities used or consumed on the Premises during the term of this Lease. Lessor shall be reimbursed therefor by the Lessee pursuant to the terms of the Culture Agreement. SECTION ELEVEN: REPAIRS AND MAINTENANCE ---------------------------------------- 11.1 General. Lessor shall make and pay for all repairs, alterations, and ------- maintenance of the buildings, structures, and improvements owned by the Lessor on the Premises. Lessor shall be reimbursed therefor by the Lessee pursuant to the terms of the Culture Agreement. SECTION TWELVE: EMINENT DOMAIN ------------------------------ 12.1 Rent and Termination. In the event that any part of the Premises is -------------------- taken by condemnation, eminent domain proceedings, the rent payable thereafter shall be decreased in proportion to the portion of the Premises taken. However, if all of the Premises are taken, or if the taking precludes the Lessee from reasonably using the Premises for its farming and growing operations, this Lease shall terminate at the time possession must be surrendered, and the Lessee shall be relieved of all future rental payments. Lessor shall not voluntarily sell the Premises or any part thereof in connection with any such proceedings that may be threatened or instituted without giving Lessee the opportunity to resist such condemnation at Lessee's expense, in which case the Lessor shall resist such proceedings (if requested to do so by Lessee) at Lessee's expense in the court or forum having jurisdiction thereof . 12.2 Lessee Rights. In addition to the Lessee's rights as provided in ------------- paragraph 12.1, Lessee shall have the right to collect from the condemning authority damages by reason of loss of business, business interruption, depreciation or damage of crops, fixtures and equipment, removal and planting costs, and such other damages to which it may be legally entitled. SECTION THIRTEEN: ENVIRONMENTAL CONTAMINATION ---------------------------------------------- 13.1 Warranty. The Lessee warrants that it will comply with all federal, -------- state, and local -5- rules, regulations, statutes, and ordinances pertaining to the protection of the environment in conducting any activities on the Premises. 13.2 Indemnification. The Lessee agrees to defend and indemnify the --------------- Lessor against any obligations, costs, and liabilities (including but not limited to reasonable attorneys' fees) relating to the Premises arising out of claims for investigation, study, remedial work, monitoring, or other costs or expenses regarding any environmental contamination of the Premises caused by the Lessee, including but not limited to groundwater or soil contamination, water pollution, air pollution, personal injury, or property damage. SECTION FOURTEEN: INSURANCE ---------------------------- 14.1 Public Liability and Indemnity. Lessee shall indemnify and save ------------------------------ harmless Lessor from any liability for any loss, damage, injury, or other casualty to persons or property caused or occasioned by or arising from any act, use, occupancy, or negligence by or of Lessee or any of its agents, servants, visitors, licensees, or employees occurring during the term of this lease or any extended term. If any action or proceedings are brought against the Lessor by reason of any such claim, Lessee on timely notice from Lessor shall resist and defend such action or proceedings by counsel employed by the Lessee, which shall include the taking of all permissible appeals, unless full release of expense is obtained by way of settlement of compromise at the expense of Lessee or its insurance carrier. The Lessee shall furnish to Lessor a certificate or other evidence indicating that Lessee has had issued to it a policy or policies of insurance insuring against damage to property in the minimum amount of One Million Dollars ($1,000,000.00) in bodily injury, including death, and the minimum amount of One Million Dollars ($1,000,000.00) for injury to one (1) person and One Million Dollars ($1,000,000.00) for injury to more than one (1) person, in one accident or occurrence, naming Lessor as additional insured, and the Lessee shall pay all premiums thereon and furnish evidence of such payments to Lessor, if requested to do so. 14.2 Insurance on Buildings of Lessor. Lessor shall, at its expense, -------------------------------- insure any buildings, structures, or improvements owned by Lessor on the Premises against loss or damage under a policy or policies of fire and extended coverage insurance, including "additional perils". Such policy or policies shall contain appropriate clauses or endorsements under which the insurer -6- waives all right of subrogation against Lessee, its agents, employees, invites, and licensees with respect to losses payable under such policy or policies. In addition, Lessor hereby waives all rights of recovery which it might otherwise have against Lessee, its agents, employees, invites, or licensees for any loss or damage to the property which is covered by said policy or policies, notwithstanding that such loss or damage may result from the fault or negligence of Lessee, its employees, invites, or licensees. Such policy or policies shall be issued in an amount equal to the estimated replacement value of all buildings, structures, and improvements owned by the Lessor on the Premises. Lessor shall furnish proof of such policy or policies upon request to the Lessee. 14.3 Lessee's Personal Property. Any personal property, trees, or -------------------------- crops kept on the Premises by Lessee shall be at the Lessee's sole risk and responsibility. Any insurance maintained by Lessee on such personal property shall contain a clause or endorsement under which the insurer waives all right of subrogation against Lessor, its agents or employees, with respect to losses payable under the policy, and Lessee hereby waives all right of recovery which it might otherwise have against Lessor, its agents or employees for any damage to its personal property which is covered by a policy of insurance regardless of the amount of such insurance, notwithstanding that such damage may result from the negligence or fault of Lessor, its agents or employees. 14.4 Failure to Obtain Insurance. If Lessee or Lessor, at any time --------------------------- during the term of this Lease, fails to secure or maintain the insurance as required in this section, the other party shall be permitted to obtain such insurance and shall be compensated by the defaulting party for the cost of the insurance premiums immediately, and, in the case of payments made by the Lessee in such case, shall be entitled to deduct such amounts from the rental payable hereunder. SECTION FIFTEEN: RENEWAL AND EXTENSION OF LEASE ------------------------------------------------ 15.1 Terms. For and in consideration of the sum of one dollar ($1.00), ----- paid by the Lessee to the Lessor, the receipt of which hereby acknowledged, the Lessor hereby grants to the Lessee the exclusive right and option to renew this Lease for two separate five (5) year renewal terms on the same terms and conditions of this Lease except as otherwise provided below in paragraph 15.2; provided, however, that the Lessee shall not be entitled to renew the Lease for any renewal term unless the Lessee simultaneously renews the Culture Agreement for a renewal -7- term of the same duration. In the event that the Lessee elects to exercise such option, the Lessee shall serve the Lessor with a written notice of election to renew, not less than one hundred eighty (180) days before the end of the original term of this Lease. Upon receipt of such notice by the Lessor, this Lease shall remain in full force and effect for the renewal term. If Lessee elects not to renew this Lease and remains in possession following the end of the term of this Lease, the Lessee shall be a tenant from month to month, unless the parties otherwise agree in writing. 15.2 Rental During Renewal Terms. If this Lease is renewed pursuant --------------------------- to the provisions of paragraph 15.1, the rent for each renewal term shall be agreed upon by the Lessor and the Lessee, and shall be documented in a writing signed by the Lessor and the Lessee prior to the beginning of any such renewal term. If the Lessor and the Lessee cannot agree on the amount of the rent before the commencement of the renewal term, then the rent hereunder shall be the fair market rental value of the Premises as determined by an appraiser who shall be selected as follows: (1) one appraiser shall be selected by the Lessor, and one shall be selected by the Lessee. The two appraisers shall each agree upon and select a third appraiser, who shall conduct the appraisal. The appraisal conducted by the selected appraiser shall be binding upon the Lessor and the Lessee hereunder and the Lessor and the Lessee shall each be responsible to pay one-half (1/2) of the costs and fees associated with such appraisal. SECTION SIXTEEN: DEFAULT ------------------------- 16.1 Default in General. If the Lessee defaults in the payment of rent ------------------ when due, or if the Lessee violates or neglects to fulfill any of the covenants and agreements under this Agreement or under the Culture Agreement or under the Spring Agreements, and such default continues for thirty (30) days after written notice by the Lessor to the Lessee specifying the breach or default, the Lessor and his attorney(s), heir(s), representative(s), or assign(s) shall have the right to: (1) terminate this Lease, to re-enter into and to repossess the Premises and to remove and put out Lessee and each and every other occupant either by summary proceedings or other lawful means and to recover immediately those damages permitted by law, and/or (2) terminate the Lessee's right of possession, repossess the Premises, and without terminating this Lease, relet the Premises, and recover its damages from time to time as permitted by law. 16.2 Removal Rights. Notwithstanding the foregoing paragraph 16.1, -------------- if the Lessee -8- defaults and the Lessor invokes its rights under this paragraph, and if the Lessee pays to the Lessor all past due rental payments and other sums due to the Lessor hereunder as well as the rentals due hereunder for ninety (90) additional days, the Lessee shall have the right to care for, harvest, and remove within ninety (90) days from the date of termination of this Lease, any trees growing or cared for on the Premises at the time of the termination of this Lease. Any rights of the Lessor, any subsequent Lessee or, any other party with a subsequent interest in the Premises, with regard to the Premises shall be subject to such rights of the Lessee. 16.3 Abandonment. Any trees, crops, or personal property which remain on ----------- the Premises as of the termination of this Lease (or as of the date 90 days thereafter if the Lessee invokes its rights under paragraph 16.2) shall be deemed to be abandoned by the Lessee and the Lessor shall automatically take title thereto. Even though the Lessor's ownership rights are self-executing, the Lessee agrees to execute such documents as may be necessary to affirm or give notice of such transfer of title. SECTION SEVENTEEN: FIRE AND CASUALTY ------------------------------------- 17.1 General. If any buildings, structures, or improvements owned by ------- the Lessor are damaged by fire or by the elements or other casualty, Lessor, as soon as reasonably may be done, shall reconstruct, repair or rebuild the same to the extent necessary to make them substantially similar in character and value to their status prior to the damage. If such loss renders the Lessor's buildings, structures, or improvements totally unusable to the extent that they cannot be used by the Lessee, rent shall abate until said buildings, structures, or improvements are put back in a condition substantially similar to their condition immediately prior to the loss. However, if such buildings, structures, or improvements are partially destroyed by fire or the elements or other casualty, and are not rendered totally unusable by Lessee, the Lessee shall pay that proportion of the rental as the part of the Lessor's buildings, structures, improvements that may be used for the business of the Lessee bears to the whole thereof. SECTION EIGHTEEN: RIGHT OF ENTRY --------------------------------- 18.1 Lessor Rights. Lessor and its agents shall have the right to ------------- enter the Premises at such reasonable times as will not interfere with the Lessee's normal use thereof, for the purposes of inspection or repair, or other purposes as permitted by Lessee. -9- SECTION NINETEEN: SUBORDINATION; ATTORNMENT; -------------------------------------------- ESTOPPEL CERTIFICATE -------------------- 19.1 Subordination. This Lease shall be subject and subordinate to ------------- the interests of the holders of any notes secured by mortgages on the Premises, now or in the future, and to all ground or underlying leases and to all renewals, modifications, consolidations, replacements and extensions thereof, and while the provisions of this section are self-executing, Lessee shall execute such documents as may be necessary to affirm or give notice of such subordination. 19.2 Attornment. Lessee shall attorn to any foreclosing mortgagee or to any purchaser of the Premises at any foreclosure sale, or sale in lieu of foreclosure, for the balance of the term of the Lease on all of the terms and conditions herein contained. 19.3 Estoppel Certificate. At the Lessor's request, the Lessee shall, -------------------- within ten (10) days deliver to the Lessor, or anyone designated by the Lessor, a certificate stating and certifying such information as may be reasonably requested to verify the status of the Lessor/Lessee relationship established by the Lease. LESSOR'S COSTS -------------- 20.1 General. Any costs or expenses hereunder which are required to ------- be borne by the Lessor hereunder may be charged back to the Lessee to the extent permitted under the terms of the Culture Agreement. SECTION TWENTY-ONE: MISCELLANEOUS ----------------------------------- 21.1 Copies. This Lease may be executed in multiple counterparts, each of ------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 21.2 Captions. The captions in this Lease are for convenience only and -------- shall not be considered as part of this Lease or in any way limiting or amplifying the terms and provisions hereof. 21.3 Definitions. Words used in the singular number shall include the ----------- plural number; words used in the plural number shall include the singular number. The use of pronouns or other terms referring to the male gender shall include the female and/or neuter gender, and use of pronouns or other terms referring to the female gender shall include the male gender. Reference to any person or gender shall include the male gender. Reference to any person or entity herein is presumed by any designation of such person or entity. The word "person" includes a firm, association, partnership, -10- joint venture, corporation, trust or equivalent entity or a combination of them as well as a natural person. 21.4 Benefit. This Lease shall inure to the benefit of and be binding ------- upon the Lessor, its or their personal representatives, heirs and assigns, and the Lessee, its successors and assigns. 21.5 Notice. Any notice, reports or statements required to be given ------ hereunder shall be sufficiently given if sent by certified United States mail, return receipt requested, to the parties, at their addresses set forth on page one. The notice shall be effective when deposited in such mail. 21.6 Entire Agreement. This Agreement contains the entire agreement ---------------- between the parties hereto and may be amended or terminated only by a writing signed by each party unless otherwise set forth herein. 21.8 Michigan Law. This Agreement shall be governed by and construed ------------ according to the laws of the State of Michigan. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year above provided. ZELENKA NURSERY, INC. ----------------------------------------- Paul Zelenka Vice President NAPRO BIO THERAPEUTICS, INC. ----------------------------------------- Sterling K. Ainsworth President and Chief Executive Officer -11- EX-10.40 6 AGREEMENT FOR SALE AS OF MARCH 1. 1997 Exhibit 10-40 AGREEMENT FOR SALE AND PURCHASE ------------------------------- OF NURSERY STOCK ---------------- This Agreement is made as of this 1st day of March, 1997 and is between Zelenka Nursery, Inc. of 16127 Winans, Grand Haven, MI 49417 ("Zelenka") and NaPro BioTherapeutics, Inc. of 6304 Spine Road, Unit A, Boulder, CO 80301 ("NaPro") with respect to the sale and purchase of certain Taxus Media Hicksii trees currently owned by Zelenka. STATEMENT OF BACKGROUND INFORMATION ----------------------------------- A. Zelenka owns certain [TEXT REDACTED] trees and certain [TEXT REDACTED] trees which are currently growing in liners on real estate owned or controlled by Zelenka. B. NaPro desires to purchase from Zelenka and Zelenka desires to sell to NaPro approximately [TEXT REDACTED] trees and approximately [TEXT REDACTED] trees. C. NaPro desires to have Zelenka transplant, care for, and harvest the trees purchased by NaPro hereunder and the parties will enter into a separate Culture Agreement, in the form attached hereto, pursuant to which Zelenka will transplant, care for, harvest, and store the trees ("Culture Agreement"). D. NaPro has agreed to lease from Zelenka certain real property on which the trees purchased hereunder will be transplanted and grown, and the parties will enter into a separate Lease in the form attached hereto. E. The parties desire to set forth the terms of their agreements in this writing. STATEMENT OF AGREEMENT ---------------------- For their mutual convenience and protection, and in consideration of the mutual covenants and benefits contained in this Agreement, the parties agree as follows: SECTION ONE: SALE AND PURCHASE OF TREES ---------------------------------------- 1.1 General Agreement. Zelenka hereby agrees to sell to NaPro and NaPro ----------------- agrees to purchase from Zelenka approximately [TEXT REDACTED] trees (age as of the date hereof) and approximately [TEXT REDACTED] trees (age as of the date hereof) on the terms set forth in this Agreement. Such Trees are currently growing in liners on real estate owned or controlled by Zelenka. -1- 1.2 Price and Terms of Sale. NaPro shall pay [TEXT REDACTED]. The total ----------------------- purchase price (less the Earnest Money described below in paragraph 1.3) shall be calculated after the exact number of Trees has been identified under paragraph 1.5, and such sum shall be paid to Zelenka by NaPro in certified funds at the closing. 1.3 Earnest Money and Execution of Documents. Upon the parties' ---------------------------------------- execution of this Agreement, NaPro shall deposit with Zelenka the sum of One Hundred Thousand Dollars ($100,000.00) to be held by Zelenka as earnest money ("Earnest Money") to apply on the purchase price of the Trees hereunder. If Zelenka defaults on any of its obligations under this Agreement, NaPro shall be entitled to select one of the following options: (i) request a return of the Earnest Money, in which case : the Earnest Money shall be promptly refunded to NaPro by Zelenka, this Agreement shall be of no further effect, and neither party shall owe any liability or obligation to the other in connection with this Agreement, or (ii) pursue any of NaPro's legal and/or equitable remedies (including but not limited to specific performance) against Zelenka. If NaPro defaults on any of its obligations under this Agreement, Zelenka shall be entitled to select one of the following options: (i) retain the Earnest Money, in which case the Earnest Money shall be forfeited to Zelenka as liquidated damages, this Agreement shall be of no further effect, and neither party shall owe any liability or obligation to the other in connection with this Agreement, or (ii) pursue any of Zelenka's legal and/or equitable remedies (including but not limited to specific performance) against NaPro. The Earnest Money shall be credited against the purchase price for the Trees at the closing. Upon the parties' execution of this Agreement, the parties shall also execute and deliver to each other the Culture Agreement attached hereto as Exhibit 1.3A and the Lease attached hereto as Exhibit 1.3B. 1.4 Matters Beyond Zelenka's Control. If, for any reason beyond its -------------------------------- reasonable control (including without limitation, acts of God, acts of government, accident, fire, flood, natural disaster, weather-related causes, or failure of Comerica Bank to release all of the Trees from its collateral security interest) Zelenka is, or will be, unable to perform all of its obligations at closing hereunder, then Zelenka and NaPro shall each be entitled, by a written notice to the other, to terminate this Agreement, the Culture Agreement, and the Lease. In such event, Zelenka shall return the Earnest Money to NaPro, return to NaPro any sums (except sums for goods or services rendered which inure to the benefit of NaPro notwithstanding the termination of this Agreement) received by Zelenka under the Culture Agreement or the Lease, and neither party shall have any continuing obligation to the other under this Agreement, the Culture Agreement, or the Lease. -2- 1.5 Selection and Number of Trees. Zelenka shall be entitled to select, ----------------------------- at or before the closing, from its total inventory of [TEXT REDACTED] Trees, those specific [TEXT REDACTED] Trees which will be sold to NaPro under the terms of this Agreement. The only specifications applicable to such selection shall be the following: (1) Zelenka shall select approximately [TEXT REDACTED] Trees and approximately [TEXT REDACTED] Trees, and (2) all such Trees shall be alive at the time of the closing. Zelenka shall not be entitled to select, and NaPro shall not be obligated to purchase, any number of [TEXT REDACTED] Trees which is more than five percent (5%) greater or less than [TEXT REDACTED], nor any number of [TEXT REDACTED] Trees which is greater or less than five percent (5%) of [TEXT REDACTED]. 1.6 Closing. This sale shall be closed within 21 days after the ------- transplanting of the six year old trees under the Culture Agreement on a date agreed upon by Zelenka and NaPro, which date shall be no later than June 30, 1997. If the parties are unable to agree on a date or location for the closing, the closing shall be held on June 30, 1997 at the offices of Zelenka Nursery at the address of Zelenka Nursery as set forth on page 1. Zelenka shall deliver to NaPro at the closing a warranty bill of sale which shall identify the specific Trees sold pursuant to this Agreement, the number of trees transferred, and the location of the transferred Trees as of the closing. 1.7 Title and Risk of Loss. Title to the Trees and risk of loss shall ---------------------- pass to NaPro at the closing. SECTION TWO: GENERAL TERMS --------------------------- 2.1 Arbitration. Any disagreements or dispute between the parties shall ----------- be resolved exclusively by arbitration which shall be binding upon both of the parties. The arbitration shall be conducted by a panel of three (3) arbitrators under the rules of the American Arbitration Association. One (1) arbitrator shall be selected by Zelenka, one (1) by NaPro, and one (1) by the two (2) selected arbitrators. Any arbitration shall be conducted in Grand Haven, Michigan and the arbitrators shall apply Michigan law. Unless otherwise allocated or assessed by the arbitrators, the parties shall share equally the fees and expenses of the arbitrators. 2.2 Warranties. Except as expressly set forth in paragraph 6.3 of the ---------- Culture Agreement, Zelenka offers no representations or warranties regarding any Trees purchased hereunder. Without limiting the generality of the foregoing, Zelenka offers no representations or warranties to NaPro regarding: (1) the quality or suitability of any Trees purchased hereunder or the cuttings thereof for any purpose whatsoever, or (2) the Trees' merchantability or their fitness -3- for any particular purpose. SECTION THREE: MISCELLANEOUS ----------------------------- 3.1 Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the parties hereto and their respective successors, assigns, heirs, and personal representatives. Neither party shall assign any of its rights, privileges, or obligations under this Agreement without the written consent of the other party, which shall not be unreasonably withheld. 3.2 Notices. All notices, requests, demands, and other communications ------- hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed certified or registered mail, return receipt requested with postage prepaid, to the parties at their addresses on page one of this Agreement. Any party may change its address by providing notice under this paragraph 4.2 to all of the other parties. 3.3 Headings. The headings of sections herein and in the exhibits -------- referred to herein are for convenience only and shall not control of effect any meaning or interpretation of any provision of this Agreement. 3.4 Entire Agreement; Modifications. This Agreement contains the ------------------------------- entire agreement among the parties hereto with respect to the transactions contemplated hereby. This Agreement may be modified only by a written agreement signed by all of the parties hereto. 3.5 Counterparts. This Agreement may be executed in two (2) or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one (1) and the same instrument. 3.6 Applicable Law. This Agreement shall be construed and enforced -------------- in accordance with the laws of the State of Michigan. 3.7 Severability. In the event that any of the provisions of this ------------ Agreement shall be held to be invalid or unenforceable, the same shall not affect the validity or enforceability of any other provisions of this Agreement, unless such validity or unenforceability shall materially affect and frustrate the intentions of the parties. 3.8 Time is of the Essence. All of the parties hereto agree and ---------------------- acknowledge that time is of the essence in connection with this Agreement. 3.9 No Waiver. No waiver of any rights of any party hereunder shall --------- be effective -4- against such party unless set forth in writing and signed by such party. Further, no waiver of any right hereunder shall be construed to be a waiver of such right or any other right hereunder or in the future. ZELENKA NURSERY, INC. ----------------------------- Paul Zelenka Vice President NAPRO BIO THERAPEUTICS, INC. ------------------------------- Sterling K. Ainsworth President and Chief Executive Officer EX-23.1 7 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 Consent of Independent Auditors We consent to incorporation by reference in the Registration Statement of Form S-8 pertaining to the NaPro BioTherapeutics, Inc. 1993 Stock Option Plan and the NaPro BioTherapeutics, Inc. 1994 Long-Term Performance Incentive Plan of our report dated January 26, 1997, with respect to the consolidated financial statements of NaPro BioTherapeutics, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ Ernst & Young LLP ERNST & YOUNG LLP Denver, Colorado March 27, 1997 EX-24.1 8 POWERS OF ATTORNEY Exhibit 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Sterling K. Ainsworth and Gordon H. Link, Jr., and each of them, his or her attorneys-in-fact, with full power of substitution, for him or her in any and all capacities, to sign an annual report on Form 10K for the year ending December 31, 1996 and the associated 1997 Proxy to be filed with the Securities and Exchange Commission (the "Commission"), and all amendments (including post-effective amendments) thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Commission; granting unto said attorneys-in-fact full power and authority to perform any other act on behalf of the undersigned required to be done in the premises, hereby ratifying and confirming all that said attorneys-in-fact may lawfully do or cause to be done by virtue hereof. Date: March 31, 1997 /s/ Sterling K. Ainsworth Sterling K. Ainsworth Date: March 31, 1997 /s/ Leonard P. Shaykin Leonard P. Shaykin Date: March 31, 1997 /s/ Gordon H. Link, Jr. Gordon H. Link, Jr. Date: March 31, 1997 /s/ E. Garrett Bewkes, Jr. E. Garrett Bewkes, Jr. Date: March 31, 1997 /s/ Phillip Frost Phillip Frost Date: March 31, 1997 /s/ Richard C. Pfenniger, Jr. Richard C. Pfenniger, Jr. Date: March 31, 1997 /s/ Patricia A. Pilia Patricia A. Pilia Date: March 31, 1997 /s/ Vaughn D. Bryson Vaughn D. Bryson Date: March 31, 1997 /s/ Arthur H. Hayes, Jr. Arthur H. Hayes, Jr. Date: March 31, 1997 /s/ Mark B. Hacken Mark B. Hacken
EX-27 9 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 9,531 5,236 662 0 2,281 18,210 7,364 1,352 25,021 3,986 751 0 0 93 16,476 25,021 3,473 3,473 0 10,576 0 0 350 (6,825) 0 (6,825) 0 0 0 (6,825) (0.68) (0.68)
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