-----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, M8E0qSUwpC+72ksHRejqP3o6QfSjb8UnFw6KuP8alLF9vzf1jfQmPMQi6UKLm/uj bx6YbXx/pDK0KuOjxQKqUg== 0000892569-98-000954.txt : 19980401 0000892569-98-000954.hdr.sgml : 19980401 ACCESSION NUMBER: 0000892569-98-000954 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOTHERAPEUTICS INC CENTRAL INDEX KEY: 0000831547 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 930979187 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-28782 FILM NUMBER: 98583365 BUSINESS ADDRESS: STREET 1: 157 TECHNOLOGY DR CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 7148324902 MAIL ADDRESS: STREET 1: ONE TECHNOLOGY DR STREET 2: STE J-821 CITY: IRVINE STATE: CA ZIP: 92618 FORMER COMPANY: FORMER CONFORMED NAME: AMERICUS FUNDING CORP DATE OF NAME CHANGE: 19920703 10KSB 1 FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997 1 FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 [ ] 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 0-28782 ---------- NEOTHERAPEUTICS, INC. (Name of Small Business Issuer in its charter) DELAWARE 93-0979187 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 157 TECHNOLOGY DRIVE IRVINE, CALIFORNIA 92618 (Address of principal executive offices) (Zip Code) Issuers telephone number: (714) 788-6700 ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: N/A SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: Common Stock, $.001 par value Common Stock Purchase Warrants ---------- Check whether the issuer (1) has all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Revenues for the issuer's most recent fiscal year were $0. The aggregate market value of the voting stock held by non-affiliates as of December 31, 1997 was $43,949,199. As of March 16, 1998, there were 5,474,307 shares of the issuer's common stock outstanding. 1 2 DOCUMENTS INCORPORATED BY REFERENCE None TABLE OF CONTENTS
Page ---- PART I Item 1. Description of Business........................................ 3 Item 2. Description of Property........................................ 17 Item 3. Legal Proceedings.............................................. 18 Item 4. Submission of Matters to a Vote of Security Holders............ 18 PART II Item 5. Market for Common Equity and Related Stockholder Matters....... 18 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 19 Item 7. Financial Statements........................................... 21 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 39 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act............ 39 Item 10. Executive Compensation......................................... 41 Item 11. Security Ownership of Certain Beneficial Owners and Management............................................... 44 Item 12. Certain Relationships and Related Transactions................. 45 Item 13. Exhibits, List and Reports on Form 8-K......................... 47 SIGNATURES ............................................................... 49
2 3 This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "ITEM 1 "Description of Business", including the section therein entitled "Risk Factors Which May Affect Future Performance," and in "ITEM 6 - Discussion and Analysis of Financial Condition and Results of Operations." In this report, wherever an asterisk ("*") appears, the foregoing statement is a forward-looking statement. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Factors Which May Affect Future Performance." PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL The Company was incorporated in Colorado in December 1987. On August 7, 1996, the Company changed its name from Americus Funding Corporation to NeoTherapeutics, Inc. In June 1997, the stockholders approved the reincorporation of NeoTherapeutics, Inc. as a Delaware corporation. A wholly owned subsidiary, Advanced Immunotherapeutics, Inc. ("AIT"), was incorporated as a California corporation in June 1987. In July 1989, in a transaction accounted for as a reverse acquisition, all of the shareholders of AIT exchanged all of their shares of AIT common stock for shares of the Company's common stock, and AIT became a wholly-owned subsidiary of the Company. In April 1997, the Company established NeoTherapeutics GmbH ("NEOT GmbH"), a wholly owned subsidiary in Switzerland, for the purpose of conducting future licensing and other related activities in the international market. Unless the context otherwise requires, all references to the "Company" and "NeoTherapeutics" refer to NeoTherapeutics, Inc., a Delaware corporation, AIT and NEOT GmbH, as a consolidated entity. The Company's executive offices are located at 157 Technology Drive, Irvine, CA 92618, and its telephone number is (714) 788-6700. Effective April 18, 1998, the Company's telephone number will be (949) 788-6700. The Company is a development stage biopharmaceutical company engaged in the discovery and development of novel therapeutic drugs intended to treat neurodegenerative diseases and conditions, such as memory deficits associated with Alzheimer's disease and aging, stroke, spinal cord injuries and Parkinson's disease. The Company's initial product candidate, AIT-082, and its other compounds under development are based on the Company's patented technology. This technology uses small synthetic molecules to create non-toxic compounds, intended to be administered orally or by injection, that are capable of passing through the blood-brain barrier to rapidly act upon specific target cells in selected locations in the central nervous system, including the brain. Animal and laboratory tests have shown that the Company's AIT-082 compound appears to selectively increase the production of certain neurotrophins, a type of large protein, in the brain and spinal cord. These neurotrophins regulate nerve cell growth and function. The Company's technology has been developed to capitalize on the beneficial effects of these proteins, which have been widely acknowledged to be closely involved in the early formation and differentiation of the central nervous system. The Company believes that AIT-082 could have prophylactic, therapeutic and regenerative effects. The Company's developmental activities to date have benefited from a close association with the National Institutes of Health ("NIH"). The NIH's National Institute on Aging ("NIA") has funded a portion of the pre-clinical studies on the Company's AIT-082 compound, including toxicity studies. The NIA has committed to fund and conduct two Phase I clinical trials under the auspices of its Alzheimer's Disease Cooperative Study ("ADCS"), a consortium of approximately 35 highly regarded clinical centers throughout the United States. The NIH's National Institute for Mental Health ("NIMH") has also supported the Company's development efforts by providing funds, along with the NIA, for the production of sufficient quantities of the AIT-082 compound to complete pre-clinical toxicity testing and the two Phase I human clinical trials conducted or to be conducted by the ADCS. In July 1997, an Investigational New Drug Application ("IND") for AIT-082 was approved by the U.S. FDA and Phase I human clinical testing in the United States for the treatment of Alzheimer's disease began. In addition AIT-082 received a physician's IND in Canada, where two Phase I clinical trials for testing for the treatment of Alzheimer's disease have been completed. The Company believes that AIT-082 is the first orally active drug to enter human clinical trials that is specifically designed to address the issue of nerve regeneration. In pre-clinical trials, AIT-082 has been shown to induce the production of three neurotrophic factors, NGF, NT-3 and bFGF in the brain. These three factors have been reported to induce the multiplication and functional maturation, in the brain, of cholinergic neurons, those neurons known to die 3 4 in patients who have died from Alzheimer's disease. The Company believes that AIT-082 is the only compound in human clinical trials that has activated, in animals, multiple genes to produce three different neurotrophic factors in the specific areas of the brain associated with memory loss. The Company recognizes the need to ensure its operations will not be adversely affected by the "Year 2000" software failures as such problems may affect its or its major vendors' computer systems and software. The Company is addressing this risk to the availability and integrity of financial systems and the reliability of operational systems. This assessment, which is ongoing, consists, in part, of testing internal computer hardware and software systems, and obtaining assurances from its major vendors that their systems are or are expected to be in compliance with the Year 2000 problem. Based on the work done to date, the Company believes that, with respect to its internal computer hardware and software systems, it is in compliance. The Company also believes that, with respect to the computer systems of its major outside vendors, that should a Year 2000 problem exist whereby a vendor was unable to address the Company's needs, alternative vendors are readily available that could furnish the Company with the same or similar supplies or services that it presently receives from these vendors without undue cost or expense. INTRODUCTION TO THE CENTRAL NERVOUS SYSTEM The human brain contains some 10 billion nerve cells, or neurons, each of which has connections with many other neurons. Sensory, motor and cognitive activities are all governed by this complex network of neurons, each member of which communicates with other neurons across junctions known as "synapses." Communication between neurons involves chemical "messengers" known as neurotransmitters, which are released by the sending neuron, diffuse across a small gap, and bind to corresponding receptors on the receiving neuron. Abnormal neuronal communication has been implicated in a range of psychiatric and neurological disorders, including memory deficits, schizophrenia, depression, anxiety, Parkinson's disease and eating disorders. The treatment of most diseases is facilitated by cell regeneration, a natural component of human healing. However, in the highly complex realm of neurological diseases, treatment is more difficult because neurons do not naturally regenerate after maturity. Currently available drugs for the treatment of such significant neurological disorders as Alzheimer's and Parkinson's diseases act by increasing or replacing supplies of critical neurotransmitters, but provide time-limited benefits at best. These benefits are limited because the eventual loss of neuronal cells without regeneration means there is eventually few nerve cells for those neurotransmitters to activate. Much of the early neuroscience-oriented biotechnology research centered on the investigation of certain proteins, known as neurotrophins or neurotrophic factors, which are necessary to the early development of neurons as well as their long-term maintenance and survival. These substances are involved in the fundamental formation and shaping of the nervous system. Given their role in the early neuron development and maintenance, it has been hypothesized that these neurotrophic factors could be used in the treatment of neurodegenerative diseases. Since neurons do not naturally regenerate following damage or disease, substantial research has been conducted by academic researchers and by the pharmaceutical industry in developing these factors as possible treatments for a variety of neurological disorders. To date, the usefulness of these factors has been limited by their inability to pass the blood-brain barrier, which serves as a "filter" to keep molecules larger than a certain size from leaving the bloodstream and entering the brain and spinal cord. Therefore, neurotrophic factors, which are large protein molecules, cannot be administered orally or through injection into the bloodstream. There are currently three alternative approaches to achieving blood-brain barrier access. One approach is to introduce neurotrophic factors by direct injection into the brain through a catheter inserted into a hole drilled into the skull. While this treatment has achieved some success in alleviating some of the symptoms of Alzheimer's disease, the prospect for infection and the inconvenience and expense of the procedure have limited its practical usefulness to date. The second approach is to temporarily break down the blood-brain barrier, which would allow molecules of all sizes (including therapeutic as well as toxic or infectious agents) to enter into the central nervous system. This approach is in the early stage of development, and its utility has not been established. 4 5 The third approach, the one taken by the Company, is to find small molecules which can pass through the blood-brain barrier and which can be administered orally or through injection into the bloodstream. The small-molecule approach taken by the Company, if successful, could lead to the development of compounds which can either mimic the actions of the larger molecule neurotrophic factors or stimulate the production of such factors within the brain, after administration either orally or through injection. The Company believes that such a development could represent a major advance in the treatment of neurological disorders. Neurotrophic Factors The Company's compounds modify biological processes that involve neurotrophic factors. In the past, research on neurotrophic factors has been greatly hampered by the fact that such factors naturally exist only in small quantities. However, advances in cloning these factors over the past few years have made them more available for research. The neurotrophic factors of greatest research interest to the Company are: o NGF (Nerve Growth Factor): NGF has been shown to be essential to the development and maintenance of peripheral sensory and sympathetic system neurons, as well as central cholinergic neurons that are clustered in the hippocampus and cortex areas of the brain. These sites of activity imply possible relevance to Alzheimer's disease degeneration, since it is the loss of cholinergic neurons in those areas which is believed integral to the loss of memory functions characteristic of that disease. Animal studies have shown that NGF can reverse neuronal functional deficits induced by natural aging and by experimental surgical lesions of the brain. Direct administration of NGF into the brain through a catheter inserted into a hole drilled into the skull has led to an improvement in spatial memory in aged rats. Similarly, the direct administration of NGF into the brain of a limited number of Alzheimer's disease patients has been shown to cause an improvement in short-term memory. o NT-3 (Neurotrophin-3): like NGF , NT-3 stimulates neurite fiber growth. NT-3 appears potentially useful in the treatment of some sensory neuropathies, which are impairments of an individual's subjective awareness of his or her own muscle motion and body positioning, and are encountered in diabetics and in patients receiving chemotherapy for cancer. Infusion of NT-3 directly into the brain has led to improvement in spatial memory in aged rats. o bFGF (Fibroblast Growth Factor, basic): bFGF is neuroprotective and may promote the proliferation of certain immature nerve cells. While the exact relevance of bFGF to disease is currently being established, it appears to be the only neurotrophin that causes proliferation of nerve cells. Based on these observations, the long-held belief that new neurons cannot be generated in adults is being reconsidered. The ability to produce new neurons could have implications in a variety of diseases where neurons have been destroyed, such as Alzheimer's disease, spinal cord injuries and stroke. THE COMPANY'S DRUG DEVELOPMENT STRATEGY The Company is engaged in research that has primarily focused on the development of new drugs that act on the nervous system to treat diseases and conditions characterized by a memory impairment, such as Alzheimer's disease, memory impairment associated with aging and stroke, as well as spinal cord injuries and Parkinson's disease. The technical strategy employed by the Company is the synthesis of proprietary chemical molecules that modify specific biological processes in the body. The methods by which the molecules are synthesized are proprietary and specific molecules and their methods of use have been patented by the Company. The Company's drug design methods are based upon the use of hypoxanthine, a natural non-toxic purine compound which is contained in the genetic material of all living matter. Hypoxanthine is chemically linked to a variety of other molecules in order to produce the Company's proprietary AIT series of compounds. The various molecules that are linked to hypoxanthine are selected from known drugs that have established therapeutic activity, producing a potentially bi-functional compound. These compounds exhibit certain functional features of both hypoxanthine (including its ability to facilitate passage through the blood-brain barrier) and the linked therapeutic drugs. Chemical and behavioral studies have given the Company reason to believe that this compound synthesis and selection process increases the probability that the new AIT compounds will retain the efficacy exhibited by their "parent" drugs. 5 6 The Company conducts the synthesis and early testing to establish therapeutic potential necessary to obtain patents on new compounds. In that regard, the Company has conducted pre-clinical testing of the safety and efficacy of certain of its compounds and intends to file an Investigational New Drug Application ("IND") for each such compound. With respect to the Company's AIT-082 compound, some Phase I clinical trials will be conducted by the ADCS, and the Company intends to conduct all other clinical trials pending.* The Company intends to seek out large pharmaceutical companies as partners for the development, manufacture and marketing of certain of its other compounds.* PRODUCTS IN DEVELOPMENT The table below summarizes the primary indications and development status for some of NeoTherapeutics' current research and development programs.
PRODUCT INDICATIONS DEVELOPMENT STATUS - ------------------------------------------------------------------------------------------------------- AIT-082 Alzheimer's Disease Phase I (U.S.): One clinical trial completed(1) Phase I (Canada): Two clinical trials completed(1) Phase I (U.S.): One clinical trial in process Phase I (U.S.): Clinical trial planned for Q2-Q3, 1998* Phase II (U.S.): Clinical trial planned for early Q3, 1998* Spinal Cord Injury Pre-IND: Clinical trial planned for 1998* Stroke Pre-IND - ------------------------------------------------------------------------------------------------------- AIT-034 Severe Dementia Pre-IND: IND Submission planned Q1, 1999* - ------------------------------------------------------------------------------------------------------- AIT-202 Depression; weight loss Pre-IND - ------------------------------------------------------------------------------------------------------- AIT-203 Parkinson's Disease Pre-IND - ------------------------------------------------------------------------------------------------------- AIT-297 Migraine Pre-IND - -------------------------------------------------------------------------------------------------------
(1) Final clinical report is not yet completed. No assurance can be made that any of the Company's compounds will prove to be effective treatments for the indicated diseases or conditions or for any other purposes, or that any such compounds will receive FDA approval. AIT-082 The Company's AIT-082 compound is the most extensively studied compound in the AIT series and has been the primary focus of the Company's research efforts. AIT-082 has been shown in animal studies to enhance working (or recent) memory, the type of memory which is deficient in patients suffering from Alzheimer's disease. In addition, the Company believes that AIT-082 has potential as a treatment for memory impairments that are seen in children, aged and stroke patients. AIT-082 also has potential for treatment of patients with nerve damage such as stroke and spinal cord injury. Pre-clinical testing involving laboratory animals conducted by the Company and independent research institutions has indicated that AIT-082 exhibits the following properties and/or effects: o Memory: Shown to reduce, delay and prevent memory deficits in aged animals; shown to enhance memory function in young and aged animals. o Toxicity: Shown to be non-toxic at the highest testable dosage in dogs (1,000 mg/kg) and rats (3,000 mg/kg). 6 7 o Dosage: Effective over a wide range of doses, with effectiveness observed at doses as low as 0.5 mg/kg and up to 60 mg/kg; a single dose has been observed to have measurable effects for more than seven days. o Administration: Active both orally and through injection. o Side effects: Has no measured effect in mice on neurological parameters such as learning rate, motivation, performance or locomotor activity. Until completion of human clinical trials, there can be no assurance that these properties and/or effects can be replicated in humans. The Company has shown that when administered to neurons in tissue culture, AIT-082 can induce the same neurite outgrowth effects as NGF. The Company has also shown that AIT-082 causes the production of NGF, NT-3 and bFGF messenger RNA in tissue culture. In addition, the Company has demonstrated that oral administration of AIT-082 increases the levels of NGF, NT-3 and bFGF messenger RNA in the hippocampus and frontal cortex of aged mice. Other researchers have shown in animals that administration of multiple neurotrophins may be more effective as a treatment method than the administration of a single neurotrophic factor. The Company believes that AIT-082's mechanism of action (after it has passed through the blood-brain barrier) involves activating the genes that lead to the production of a number of different neurotrophins. Neurotrophiic factors themselves are not orally active and do not pass the blood-brain barrier. Therefore, should oral AIT-082 prove to be an effective treatment for neurological disorders, it could have two distinct practical advantages over NGF, NT-3 or bFGF administered alone directly into the brain as a treatment for such disorders: (i) it can be administered orally; and (ii) it induces the production of multiple neuotrophic factors in those areas of the brain associated with memory. The NIA and the NIMH have contracted for and completed production of sufficient quantities of AIT-082 to conduct subchronic animal toxicity studies and early human clinical trials and have provided the funding for these contracts. An IND was approved for AIT-082 by the U.S. FDA in June 1997. The ADCS has reviewed the Company's pre-clinical test data and has approved conducting such clinical trials with AIT-082 after FDA approval of the Company's IND. A Phase I clinical study of AIT-082 in the United States began in July 1997. This study and one additional study to be initiated in the second quarter of 1998 will be paid for and conducted in the United States by the ADCS. The final clinical report of the first study will be completed in the third quarter of 1998. The ADCS is a consortium of approximately 35 United States clinical centers funded by the NIA to conduct Alzheimer's disease clinical research. In September 1997, the Geriatric Research Group and Memory Clinic, McMaster University, Hamilton, Ontario, completed two Phase I clinical trials on AIT-082. Preliminary results from these clinical trials (conducted on Alzheimer's patients) confirmed that AIT-082 is rapidly absorbed after oral administration and produces no serious side effects at high doses. The Company expects that it will have to fund additional animal and human studies that may include two Phase II and possibly two Phase III human clinical studies prior to submitting AIT-082 to the FDA for marketing approval. There can be no assurance, however, that clinical trials of AIT-082 will be successful, that the marketing of AIT-082 will be approved by the FDA, or that AIT-082 can be successfully marketed to its targeted population. See "- Drug Approval Process and Government Regulation." Other Compounds in Development Due to the historically limited resources available to the Company and the Company's decision to focus those resources on the development of its AIT-082 compound, its other compounds are in earlier stages of development. These compounds include: AIT-034: AIT-034 is a distinct chemical analog of AIT-082 that has been demonstrated in animal studies to enhance memory and to reverse memory deficits in severely impaired animals that do not respond to AIT-082. AIT-034 does not induce the production of NGF, and its mechanism of action is therefore believed to be different than AIT-082. The Company believes that AIT-034 could be a complementary product for Alzheimer's disease. The Company expects initial toxicity studies on AIT-034 to commence in 1998.* AIT-203: AIT-203 is a chemical derivative of hypoxanthine and dopamine. The Company believes that AIT-203 has the potential of being developed as a product for the treatment of Parkinson's disease. The Company plans to expand pre-clinical testing and initiate toxicity studies on AIT-203 in 1999.* 7 8 AIT-297: AIT-297 is a derivative of hypoxanthine that has shown in preliminary studies activities which indicate its potential use for migraine and hypertension. The Company anticipates expanding pre-clinical testing and initiating toxicity studies on AIT-297 in 1999.* Until extensive further development and testing is completed, which will take many years, if undertaken at all, the therapeutic and other effects of these compounds cannot be established. PRIMARY THERAPEUTIC TARGETS Alzheimer's Disease. Alzheimer's disease is a neurodegenerative brain disorder that leads to progressive memory loss and dementia. Alzheimer's disease generally follows a course of deterioration over eight years or more, with the earliest symptom being impairment of short-term memory. Alzheimer's disease is now recognized as the most common cause of severe intellectual impairment in persons over the age of 65 in the United States, with approximately four million Americans diagnosed as suffering from Alzheimer's disease. The number of Alzheimer's disease patients is expected to reach 14 million by 2050. Alzheimer's disease is the fourth leading cause of death in the United States with approximately 100,000 deaths per year. The National Alzheimer's Association has estimated that the overall care costs for the treatment and care of the estimated four million United States Alzheimer's disease patients is $100 billion per year. The Company is testing two compounds, AIT-082 and AIT-034, which have shown preliminary indications in animals of enhancing or restoring memory, and have potential to be used to treat Alzheimer's disease patients. Memory Impairment Associated with Aging. Because the populations of developed countries are increasingly becoming older, the costs and social burden of medical care and housing of aged persons suffering from mentally deteriorative diseases is increasing. The availability of a drug to reduce the memory impairments associated with aging would not only have a significant economic impact but would also greatly improve the quality of life for the elderly population. Both AIT-082 and AIT-034 have shown to be effective in ameliorating memory loss associated with aging in mice. Stroke. Among older Americans, stroke ranks as the third leading cause of death. An estimated 500,000 people in the United States suffer strokes each year. The costs associated with the treatment and care of stroke patients are estimated to be approximately $25 billion per year. Most therapeutic approaches to treating strokes are directed towards correcting the circulatory deficit or to blocking the toxic effects of chemicals released in the brain at the time of the stroke. The Company is focusing its emphasis in the treatment of strokes on protecting the cells from injury or degeneration caused by strokes. Since AIT-082 has the potential to enhance nerve regeneration, the Company believes that AIT-082 may prove useful in the treatment of stroke. Spinal Cord Injury. There are an estimated 200,000 severely disabled survivors of spinal cord trauma in the United States with approximately 10,000 new injuries each year. The cost of care and services for these individuals is estimated to exceed $10 billion per year. Significant research efforts are currently being focused on the neurotrophic factors that can initiate and support new cell development, guide new or damaged nerves to appropriate targets and maintain neuronal function. Animal studies have shown that functional restorations are possible with appropriate neurotrophic factors. A major obstacle to the effective use of these neurotrophic factors is the delivery of the appropriate neurotrophin to the site of damage. AIT-082 has been shown in mice to cause the production of several neurotrophic factors in the spinal cord after oral administration, demonstrating that it can effectively penetrate the blood-brain barrier. The Company believes that AIT-082 could potentially be used to stimulate the regeneration of nerves damaged by spinal cord injury. The Company has paid $50,000 and has committed an additional $50,000 for the establishment of a NeoTherapeutics Fellowship as part of the Reeve-Irvine Research Center for spinal cord injury at the University of California, Irvine. BUSINESS STRATEGY Marketing and Sales The Company does not currently sell any products and therefore has no marketing, sales, or distribution organization. However, under the terms of any contemplated licensing agreement for developing and commercializing AIT-082 or any of its products, the Company may retain an option to co-market the product in the United States. 8 9 The Company believes the support of the NIA and NIMH, along with the clinical arm of the NIA's research on Alzheimer's disease, the Alzheimer's Disease Cooperative Study (ADCS), contributes significantly to the future marketing and educational efforts directed to physicians who treat Alzheimer's disease patients. The Company believes that this exposure to the leaders in the field of neurodegenerative diseases may reduce the time and marketing costs required to introduce the Company's products when and if they are approved by the FDA.* Production The Company currently has its compounds manufactured in large scale by third party vendors and has no plans to establish its own manufacturing facilities. In connection with any licensing arrangements it may enter into, the Company intends to retain the rights to control the manufacturing and sale of its compounds to its licensees. Preliminary estimates indicate that AIT-082 can be manufactured cost effectively. Strategic Alliance The Company believes that its patented technology platform provides a major commercial opportunity for developing strategic alliances with larger pharmaceutical companies. It is the intent of the Company to complete a series of strategic alliances with multi-national or large regional pharmaceutical companies having substantial financial capacity, marketing capability and clinical development expertise.* Any potential collaborations will enable the Company to focus on its inherent strength; namely, exploitation of the technology platform to develop additional novel therapies.* The most common phase in which industry collaborations are completed is the discovery stage, since a license for early stage discoveries generally cost a large pharmaceutical company much less than licensing later stage products. For this reason, the Company chose to postpone the structuring of a corporate sponsored licensing agreement for AIT-082, in favor of an early stage, government assisted development program. By completing strategic alliances later in the development cycle, the Company believes this may create an improved value for its' shareholders that may be reflected in the enhanced terms of any licensing agreement.* Contemplated Licensing Terms for AIT-082 In general, the terms of a licensing agreement anticipated by the Company for its lead compound, AIT-082, will include an up front payment, sustaining research and development payments, milestone payments, and royalties on product sales.* From time to time, the Company is engaged in licensing discussions with one or more multinational or regional pharmaceutical companies. No assurance can be made that any such discussions will result in a commercial transaction on terms acceptable to the Company. DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION The production and marketing of the Company's products and its research and development activities are subject to regulation for safety, efficacy and quality by numerous governmental authorities in the United States and other countries. In the United States, drugs are subject to rigorous regulation. The Federal Food, Drug and Cosmetics Act, as amended, and the regulations promulgated thereunder, as well as other federal and state statutes and regulations, govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's proposed products. Product development and approval within this regulatory framework take a number of years and involve the expenditure of substantial resources. In addition to obtaining FDA approval for each product, each drug manufacturing establishment must be registered with, and approved by, the FDA. Domestic manufacturing establishments are subject to regular inspections by the FDA and must comply with Good Manufacturing Practices ("GMP"). To supply products for use in the United States, foreign manufacturing establishments must also comply with GMP and are subject to periodic inspection by the FDA or by regulatory authorities in certain of such countries under reciprocal agreements with the FDA. Drug product 9 10 and drug substance manufacturing establishments located in California also must be licensed by the State of California in compliance with local regulatory requirements. New Drug Development and Approval. The United States system of new drug approval is one of the most rigorous in the world. According to a February 1993 report by the Congressional Office of Technology Assessment, it costs an average of $359 million and takes an average of 15 years from discovery of a compound to bring a single new pharmaceutical product to market. Approximately one in 1,000 compounds that enter the pre-clinical testing stage eventually makes it to human testing and only one-fifth of those are ultimately approved for commercialization. In recent years, societal and governmental pressures have created the expectation that drug discovery and development costs can be reduced without sacrificing safety, efficacy and innovation. The need to significantly improve or provide alternative strategies for successful pharmaceutical discovery, research and development remains a major health care industry challenge. Drug Discovery. In the initial stages of drug discovery before a compound reaches the laboratory, typically thousands of potential compounds are randomly screened for activity in an assay assumed to be predictive of a particular disease process. This drug discovery process can take several years. Once a "screening lead" or starting point for drug development is found, isolation and structural determination is initiated. Numerous chemical modifications are made to the screening lead (called "rational synthesis") in an attempt to improve the drug properties of the lead. After a compound emerges from the above process, it is subjected to further studies on the mechanism of action, further in vitro screening against particular disease targets and finally, in vivo animal screening. If the compound passes these evaluation points, animal toxicology is performed to begin to analyze the potential toxic effects of the compound, and if the results indicate acceptable toxicity findings, the compound emerges from the basic research mode and moves into the pre-clinical phase. Pre-clinical Testing. During the pre-clinical testing stage, laboratory and animal studies are conducted to show biological activity of the compound against the targeted disease, and that the compound is evaluated for safety. These tests can take up to three years or more to complete. Investigational New Drug Application (IND). After pre-clinical testing, an IND is submitted to the FDA to begin human testing of the drug. The IND becomes effective if the FDA does not reject it within 30 days. The IND must indicate the results of previous experiments, how, where and by whom the new studies will be conducted, how the chemical compound is manufactured, the method by which it is believed to work in the human body, and any toxic effects of the compound found in the animal studies. In addition, the IND clinical protocol must be reviewed and approved by an Institutional Review Board comprised of physicians and lay people at a hospital or clinic where the proposed studies will be conducted. Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA. Phase I Clinical Trials. After an IND becomes effective, Phase I human clinical trials can begin. These studies, involving usually between 20 and 80 healthy volunteers, can take up to one year or more to complete. The studies determine a drug's safety profile, including the safe dosage range. The Phase I clinical studies also determine how a drug is absorbed, distributed, metabolized and excreted by the body, as well as the duration of its action. Phase II Clinical Trials. In Phase II clinical trials, controlled studies of approximately 100 to 300 volunteer patients with the targeted disease assess the drug's effectiveness. These studies are designed primarily to evaluate the effectiveness of the drug on the volunteer patients as well as to determine if there are any side effects on these patients. These studies can take up to two years or more. In addition, Phase I/II clinical trials may be conducted that evaluate not only the efficacy but also the safety of the drug on the targeted patient population. Phase III Clinical Trials. This phase can last up to three years or more and usually involves 1,000 to 3,000 patients with the targeted disease. During the Phase III clinical trials, physicians monitor the patients to determine efficacy and to observe and report any adverse reactions that may result from long-term and more widespread use of the drug. New Drug Application (NDA). After completion of all three clinical trial phases, the data is analyzed and, if the data indicates that the drug is safe and effective, an NDA is filed with the FDA. The NDA must contain all of the information on the drug that has been gathered to date, including data from the clinical 10 11 trials. NDAs are often over 100,000 pages in length. After passage of the Prescription Drug User Fee Act, average review times for new medicine applications dropped from nearly 30 months in 1992 to less than 18 months in 1996. Fast Track Review. In December 1992, the FDA formalized procedures for accelerating the approval of drugs to be marketed for the treatment of certain serious diseases for which no satisfactory alternative treatment exists, such as Alzheimer's disease and AIDS. If it is demonstrated that the drug has a positive effect on disease course during Phase II clinical trials, then the FDA may approve the drug for marketing prior to completion of Phase III testing. At the present time, the Company believes that AIT-082 may be able to qualify for "fast-track" FDA review; however, no assurance can be made that AIT-082 will ultimately be demonstrated to meet the requirements for such "fast-track" review. Approval. If the FDA approves the NDA, the drug becomes available for physicians to prescribe. The Company must continue to submit periodic reports to the FDA, including descriptions of any adverse reactions reported. For certain drugs which are administered on a long-term basis, the FDA may request additional clinical studies (Phase IV) after the drug has begun to be marketed to evaluate long-term effects. In addition to regulations enforced by the FDA, the Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and future federal, state or local regulations. The Company's research and development activities involves the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. For marketing outside the United States, the Company or its prospective licensees will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely from country to country. PATENTS AND PROPRIETARY RIGHTS Patents and other proprietary rights are vital to the Company's business. The Company's policy is to seek patent protection for its proprietary compounds and technology, and it intends to protect its technology, inventions and improvements to inventions that are commercially important to the development of its business. The Company also intends to rely on trade secrets, know-how, continuing technology innovations and licensing arrangements to develop and maintain its competitive position. On February 25, 1992, Dr. Alvin Glasky was issued a United States patent (No. 5,091,432) which establishes proprietary rights for a series of compounds whose chemistry is based upon a purine, hypoxanthine, and for the use of these compounds in the treatment of neuroimmunologic disorders. This patent expires on March 28, 2010. These compounds are bi-functional drugs that combine the ability of hypoxanthine to be absorbed rapidly into the body with the pharmacological activity of a second molecular component. These second components were selected to provide a wide variety of potential therapeutic applications that act on the central nervous system to treat neurodegenerative diseases or conditions associated with Alzheimer's disease, impairment associated with aging, Parkinson's disease, stroke, spinal cord injuries, migraine and depression. On September 5, 1995, Dr. Glasky was issued a second United States patent (No. 5,447,939) which covers the treatment of neurological and neurodegenerative diseases through modification of certain biochemical processes in cells. This patent expires on July 25, 2014. This second patent incorporates certain technology developed under the auspices of, and belonging to, McMaster University in Ontario, Canada. Both patents have been assigned to the Company by Dr. Glasky. In connection with these assignments, Dr. Glasky has been granted a royalty of two percent of all revenues derived by the Company from the use and sale by the Company of any products which are covered by either of the aforementioned patents or any subsequent derivative patents, in each case for the life of the patent. However, Dr. Glasky will not receive any royalties with respect to sales of products which utilize patent rights licensed to the Company 11 12 by McMaster University. In the event the Company terminates Dr. Glasky's employment without cause, the royalty rate shall be increased to five percent, and in the event Dr. Glasky dies, his estate or family shall be entitled to continue to receive royalties at the rate of two percent. With respect to the second United States patent, the Company and McMaster University have entered into a license agreement whereby McMaster University has licensed to the Company all patent rights belonging to McMaster University contained in such patent. This agreement calls for minimum payments by the Company of $25,000 per year to McMaster University, with the first payment due in July of 1997, and for the Company to pay to McMaster University a royalty of five percent of the net sales of all products sold by the Company which incorporate the patent rights licensed to the Company by McMaster University. In addition to a number of foreign patents which have been granted corresponding to the first United States patent, the Company also currently has two additional United States patent applications and a number of corresponding foreign patent applications on file. There can be no assurance, however, that the scope of the coverage claimed in the Company's patent applications will not be significantly reduced prior to a patent being issued. The patent positions of pharmaceutical and drug development companies are generally uncertain and involve complex legal and factual issues. There can be no assurance that third parties will not assert patent or other intellectual property infringement claims against the Company with respect to its products or technology or other matters. There may be third-party patents and other intellectual property relevant to the Company's products and technology which are not known to the Company. Patent litigation is becoming more common in the biopharmaceutical industry. Litigation may be necessary to defend against or assert claims of infringement, to enforce patents issued to the Company, to protect trade secrets owned by the Company or to determine the scope and validity of proprietary rights of third parties. Although no third party has asserted that the Company is infringing such third party's patent rights or other intellectual property, there can be no assurance that litigation asserting such claims will not be initiated, that the Company would prevail in any such litigation or that the Company would be able to obtain any necessary licenses on reasonable terms, if at all. Any such claims against the Company, whether meritorious or not, as well as claims initiated by the Company against third parties, can be time consuming and expensive to defend or prosecute and to resolve. If competitors of the Company prepare and file patent applications in the United States that claim technology also claimed by the Company, the Company may have to participate in interference proceedings declared by the Patent and Trademark Office to determine priority of invention, which could result in substantial cost to the Company, even if the outcome were to ultimately be favorable to the Company. The results of such proceedings are highly unpredictable and, as a result of such proceedings, the Company may have to obtain licenses in order to continue to conduct clinical trials, manufacture or market certain of its products. No assurance can be made that the Company will be able to obtain any such licenses on favorable terms, if at all. The Company also relies upon unpatented trade secrets and improvements, unpatented know-how and continuing technological innovation to develop and maintain its competitive position, which it seeks to protect in part, by confidentiality agreements with its employees and consultants and with corporate partners and/or collaborators as such relationships are formed in the future. The agreements provide that all confidential information developed or made known to an individual during the course of the employment or consulting relationship shall be kept confidential and not disclosed to third parties except in specified circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual while employed by the Company shall be the exclusive property of the Company. There can be no assurance that these agreements will not be breached, that the Company would have adequate remedies for breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. COMPETITION The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. Many companies of all sizes, including a number of large pharmaceutical companies as well as several specialized biotechnology companies, are engaged in activities similar to that of the Company. The Company's competitors include Amgen, Inc., Bayer AG, Eli Lilly and Co., Novartis, Bristol-Myers Squibb Company, Glaxo Wellcome PLC, Regeneron Pharmaceuticals, Inc., Vertex Pharmaceuticals, Inc. Guilford Pharmaceuticals, Inc., Cephalon, Inc., Warner-Lambert Co., Hoechst Marion Roussel Ltd. and Pfizer, Inc., 12 13 among others. In addition, colleges, universities, governmental agencies and other public and private research institutions will continue to conduct research and are becoming more active in seeking patent protection and licensing arrangements to collect license fees, milestone payments and royalties in exchange for license rights to technologies that they have developed, some of which may be directly competitive with that of the Company. These companies and institutions also compete with the Company in recruiting highly qualified scientific personnel. Many of the Company's competitors have substantially greater financial, research and development, human and other resources than the Company. Furthermore, large pharmaceutical companies have significantly more experience than the Company in pre-clinical testing, human clinical trials and regulatory approval procedures. Although the Company has begun to conduct clinical trials with respect to AIT-082, the Company has not conducted clinical trials with respect to any of its other compounds under development nor has it sought the approval of the FDA for any product based on such compounds. Furthermore, if the Company is permitted to commence commercial sales of products based on compounds it develops, including AIT-082 and decides to manufacture and sell such products itself, then the Company will also be competing with respect to manufacturing efficiency and marketing capabilities, which are areas in which the Company has no prior experience. Any product for which the Company obtains FDA approval must also compete for market acceptance and market share. A number of drugs intended for the treatment of Alzheimer's disease, memory loss associated with aging, stroke and other neurodegenerative diseases and disorders are on the market or in the later stages of clinical testing. Two drugs are currently approved for the treatment of Alzheimer's and both are cholinesterase inhibitors: Cognex(R) (tacrine), formerly marketed by Warner-Lambert Co. and CoCensys, Inc. , and Aricept(R) (donepezil), licensed by Pfizer, Inc. from Eisai Co., Ltd.. Certain technologies under development by other pharmaceutical companies could result in treatments for Alzheimer's disease and other diseases and disorders for which the Company is developing its own treatments. Several other companies are engaged in research and development of compounds which use neurotrophic factors in a manner similar to that of the Company's compounds. In the event that one or more of these programs were successful, the market for the Company's products could be reduced or eliminated. The Company expects technological developments in the neuropharmacology field to continue to occur at a rapid rate and expects competition will remain intense as advances continue to be made. Although the Company believes, based on the preliminary pre-clinical test results involving certain of its compounds, that it will be able to continue to compete in the discovery and early clinical development of compounds for neurological disorders, there can be no assurance that the Company will be able to do so, and the Company does not presently have sufficient resources to compete with major pharmaceutical companies in the areas of later-stage clinical testing, manufacturing and marketing. EMPLOYEES As of December 31, 1997, the Company had twenty-seven full-time employees, of which seven hold Ph.D. degrees, and three part-time employees. There can be no assurance that the Company will be able to attract and retain qualified personnel in sufficient numbers to meet its needs. The Company's employees are not subject to any collective bargaining agreements, and the Company regards its relations with its employees to be good. FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934. In light of the important factors that can materially affect results, including those set forth below, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans for the Company will be achieved. Assumptions relating to budgeting, research, and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its research, capital expenditure or other budgets, which may in turn affect the Company's business, financial position, results of operations and cash flows. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein, which speak as of the date of this Annual Report on Form 10-KSB. History of Operating Losses: Future Profitability Uncertain The Company is a development stage biopharmaceutical company. From its inception in 1987 through December 31, 1997, the Company incurred losses of approximately $12.2 million , substantially all of which consisted of research and development and general and administrative expenses. The Company has not generated any revenues from product sales to date, and there can by no assurance that revenues from 13 14 product sales will ever be achieved. Moreover, even if the Company eventually generates revenues from product sales, the Company nevertheless expects to incur significant operating losses over the next several years. The Company's ability to achieve profitable operations in the future will depend in large part on completing development of its products, obtaining regulatory approvals for such products and bringing these products to market. The likelihood of the long-term success of the Company must be considered in light of the expenses, difficulties and delays frequently encountered in the development and commercialization of new pharmaceutical products, competitive factors in the marketplace as well as the burdensome regulatory environment in which the Company operates. There can be no assurance that the Company will ever achieve significant revenues or profitable operations. Technological Uncertainty; Early Stage of Product Development; No Assurance of Regulatory Approvals The Company's proposed products are in the early stage of development and will require significant further research, development, clinical testing and regulatory clearances. The Company has no products available for sale and does not expect to have any products resulting from its research efforts commercially available for at least several years. The Company's proposed products are subject to the risks of failure inherent in the development of products based on innovative technologies. These risks include the possibilities that some or all of the proposed products could be found to be ineffective or toxic, or otherwise fail to receive necessary regulatory clearances, that the proposed products, although effective, will be uneconomical to manufacture or market, that third parties may now or in the future hold proprietary rights that preclude the Company from marketing them, or that third parties will market a superior or equivalent product. Accordingly, the Company is unable to predict whether its research and development activities will result in any commercially viable products or applications. Furthermore, due to the extended testing and regulatory review process required before marketing clearance can be obtained, the Company does not expect to be able to commercialize any therapeutic drug for at least several years, either directly or through any potential corporate partners or licensees. There can be no assurance that the Company's proposed products will prove to be safe or effective in humans or will receive regulatory approval that are required for commercial sale. The Company's primary area of therapeutic focus, disorders of the central nervous system (CNS), is not thoroughly understood and there can be no assurance that the products the Company is seeking to develop will prove to be safe and effective in treating CNS disorders or any other diseases. Need for Additional Funding; Uncertainty of Access to Capital The Company will require substantial funds for further development of its potential products and to commercialize any products that may be developed. The Company's capital requirements depend on numerous factors, including the progress of its research and development programs, the progress of pre-clinical and clinical testing, the time and cost involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights, competing technological and market developments and the ability of the Company to establish collaborative arrangements. The Company believes that its existing capital resources, together with the March 1998 equity transaction for $15 million (see Item 6 - Liquidity and Capital Resources), will be sufficient to satisfy its current and projected funding requirements for the next 12 months. The Company anticipates that after the next 12 months, it may require substantial additional capital. Moreover, if the Company experiences unanticipated cash requirements during the next 12 months, the Company could require additional capital to fund its operations, continue research and development programs as well as to continue the pre-clinical and clinical testing of its potential products and to commercialize any products that may be developed. The Company may seek such additional funding through public or private financing or collaborative or other arrangements with third parties. There can be no assurance that additional funds will be available on acceptable terms, if at all. The Company may receive additional funds upon the exercise from time to time of its common stock Purchase Warrants (the "Warrants") and other outstanding warrants and stock options, but there can be no assurance that any such warrants or stock options will be exercised or that the amounts received will be sufficient for the Company's purposes. If additional funds are raised by issuing equity securities, further substantial dilution to existing shareholders may result. If adequate funds are not available, the Company may be required to delay, scale back or eliminate one or more of its development programs, or to obtain funds by entering into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its products or technologies that the Company would not otherwise relinquish. Dependence on Third Parties for Clinical Testing, Manufacturing and Marketing The Company does not have the resources and, except with respect to its AIT-082 compound, does not presently intend to conduct later-stage human clinical trials itself or to manufacture any of its proposed products for commercial sale. The Company therefore presently intends to seek larger pharmaceutical 14 15 company partners to conduct such activities for most or all of its proposed products. In connection with its efforts to secure corporate partners, the Company will seek to retain certain co-marketing rights to certain of its proposed products, so that it may promote such products to selected medical specialists while its corporate partner promotes these products to the general medical market. There can be no assurance that the Company will be able to enter into any such partnering arrangements on this or any other basis. In addition, there can be no assurance that either the Company or its prospective corporate partners can successfully introduce its proposed products, that they will achieve acceptance by patients, health care providers and insurance companies, or that they can be manufactured and marketed at prices that would permit the Company to operate profitably. Lack of Operating Experience To date, the Company has engaged exclusively in the development of pharmaceutical technology and products. Although members of the Company's management have substantial experience in pharmaceutical company operations, the Company has no experience in manufacturing or procuring products in commercial quantities or marketing pharmaceutical products and has only limited experience in negotiating, setting up and maintaining strategic relationships, conducting clinical trials and other later-stage phases of the regulatory approval process. There can be no assurance that the Company will successfully engage in any of these activities with respect to AIT-082 or any other products which it may choose to distribute. In the event the Company decides to establish a commercial-scale manufacturing facility for AIT-082, the Company will require substantial additional funds and personnel and will be required to comply with extensive regulations applicable to such a facility. There can be no assurance that the Company will be able to develop adequate manufacturing or marketing capabilities either on its own or through third parties. Need to Comply with Governmental Regulation and to Obtain Product Approvals The testing, manufacturing, labeling, distribution, marketing and advertising of products such as the Company's proposed products and its ongoing research and development activities are subject to extensive regulation by governmental regulatory authorities in the United States and other countries. The U.S. FDA and comparable agencies in foreign countries impose substantial requirements on the introduction of new pharmaceutical products through lengthy and detailed clinical testing procedures, sampling activities and other costly and time consuming compliance procedures. The Company's proprietary compounds require substantial clinical trials and FDA review as new drugs. The Company cannot predict with certainty when it might submit many of its proprietary products currently under development for regulatory review. Once the Company submits its potential products for review, there can be no assurance that FDA or other regulatory approvals for any pharmaceutical products developed by the Company will be granted on a timely basis or at all. A delay in obtaining or failure to obtain such approvals would have a material adverse effect on the Company's business and results of operations. Failure to comply with regulatory requirements could subject the Company to regulatory or judicial enforcement actions, including, but not limited to, product recalls or seizures, injunctions, civil penalties, criminal prosecution, refusals to approve new products and withdrawal of existing approvals, as well as potentially enhanced product liability exposure. Sales of the Company's products outside the United States will be subject to regulatory requirements governing clinical trials and marketing approval. These requirements vary widely from country to country and could delay introduction of the Company's products in those countries. Dependence on Key Personnel The Company's success is dependent on its key management and scientific personnel, the loss of whose services could significantly delay the achievement of the Company's planned development objectives. Although the Company has obtained key man life insurance on Dr. Alvin Glasky in the face amount of $2 million, there can be no assurance that the proceeds of such policy will be sufficient to compensate the Company for any disruptions resulting from the loss of Dr. Glasky's services. Achievement of the Company's business objectives will require substantial additional expertise in such areas as finance, manufacturing and marketing, among others. Competition for qualified personnel among pharmaceutical companies is intense, and the loss of key personnel, or the inability to attract and retain the additional, highly skilled personnel required for the expansion of the Company's activities, could have a material adverse effect on the Company's business and results of operations. 15 16 Uncertainty Regarding Patents and Proprietary Rights The Company actively pursues a policy of seeking patent protection for its proprietary products and technologies. The Company owns two United States patents and currently has two United States patent applications on file. In addition, numerous foreign patents corresponding to the Company's first patent have been granted and corresponding patent applications with respect to the Company's second United States patent and pending United States patent applications have been filed in a number of foreign jurisdictions. However, there can be no assurance that the Company's patents will provide it with significant protection against competitors. Litigation could be necessary to protect the Company's patents, and there can be no assurance that the Company will have the financial or personnel resources necessary to pursue such litigation or otherwise to protect its patent rights. In addition to pursuing patent protection in appropriate cases, the Company also relies on trade secret protection for its unpatented proprietary technology. However, trade secrets are difficult to protect. There can be no assurance that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets, that such trade secrets will not be disclosed or that the Company can effectively protect its rights to unpatented trade secrets. The Company pursues a policy of having its employees and consultants execute proprietary information agreements upon commencement of employment or consulting relationships with the Company, which agreements provide that all confidential information developed or made known to the individual during the course of the relationship shall be kept confidential except in specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's trade secrets or other proprietary information. Furthermore, there can be no assurance that claims against the Company will not be raised in the future based on patents held by others or that, if raised, such claims will not be successful. Such claims, if brought, could seek damages as well as an injunction prohibiting clinical testing, manufacturing and marketing of the affected product. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license in order to continue to manufacture or market the affected product. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available under acceptable terms, if at all. There has been, and the Company believes that there will continue to be, significant litigation in the pharmaceutical industry regarding patent and other intellectual property rights. If the Company becomes involved in any litigation, it could consume a substantial portion of the Company's financial and personnel resources regardless of the outcome of such litigation. Competition Competition in the area of pharmaceutical products is intense. There are many companies, both public and private, including well-known pharmaceutical companies, that are engaged in the development of products for certain of the applications being pursued by the Company. Most of these companies have substantially greater financial, research and development, manufacturing and marketing experience and resources than the Company and represent substantial long-term competition for the Company. In addition, there are numerous other companies that are also in the process of developing products for the treatment of diseases and disorders for which the Company is developing products. Such companies may succeed in developing pharmaceutical products that are more effective or less costly than any products that may be developed by the Company. Factors affecting competition in the pharmaceutical industry vary depending on the extent to which the competitor is able to achieve a competitive advantage based on proprietary technology. If the Company is able to establish and maintain a significant proprietary position with respect to its products, competition will likely depend primarily on the effectiveness of the product and the number, gravity and severity of its unwanted side effects as compared to alternative products. The industry in which the Company competes is characterized by extensive research and development efforts and rapid technological progress. Although the Company believes that its proprietary position may give it a competitive advantage with respect to its proposed drugs, new developments are expected to continue and there can be no assurance that discoveries by others will not render the Company's potential products noncompetitive. The Company's competitive position also depends on its ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement development and marketing plans, obtain patent protection and secure adequate capital resources. There can be no assurance that the Company will be able to successfully attract or retain such personnel. 16 17 Risk of Product Liability Although the Company currently carries product liability insurance, there can be no assurance that the amounts of such coverage will be sufficient to protect the Company, nor that there can by any assurance that the Company will be able to obtain or maintain additional insurance on acceptable terms for its clinical and commercial activities or that such additional insurance would be sufficient to cover any potential product liability claim or recall. Failure to maintain sufficient coverage could have a material adverse effect on the Company's business and results of operations. Use of Hazardous Materials The Company's research and development efforts involve the use of hazardous materials. The Company is subject to federal, state and local laws and regulations governing the storage, use and disposal of such materials and certain waste products. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. The Company may incur substantial costs to comply with environmental regulations if the Company develops its own commercial manufacturing facility. Possible Volatility of Stock Price The stock market from time to time experiences significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of the Company's common stock and/or Warrants. In addition, the market price of the common stock and/or Warrants is likely to be highly volatile. Factors such as fluctuations in the Company's results of operations, timing and announcements of technological innovations or new products by the Company or its competitors, FDA and foreign regulatory actions, developments with respect to patents and proprietary rights, public concern as to the safety of products developed by the Company or others, changes in health care policy in the United States and in foreign countries, changes in stock market analyst recommendations regarding the Company, the pharmaceutical industry generally and general market conditions each may have a significant adverse effect on the market price of the common stock and/or Warrants. In addition, it is likely that during at least some future quarterly periods, the Company's results of operations will fail to meet the expectations of stock market analysts and investors and, in such event, the market price of the Company's common stock and/or Warrants could be materially and adversely affected. Control by Directors and Executive Officers The Company's directors and executive officers beneficially own in the aggregate approximately 26.9% of the Company's outstanding common stock. These shareholders, if acting together, would be able to control substantially all matters requiring approval by the shareholders of the Company, including the election of directors and the approval of mergers or other business combination transactions. Such concentration of ownership could discourage or prevent a change of control of the Company. Effect of Certain Charter and Bylaws Provisions Certain provisions of the Company's Certificate of Incorporation and Bylaws may have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that certain investors might be willing to pay in the future for shares of common stock. These provisions may make it more difficult for shareholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of the Company. ITEM 2. DESCRIPTION OF PROPERTY During June 1997, the Company relocated its research and development and corporate administrative offices to a new 34,000 square foot facility constructed for it in Irvine, California. The facility is occupied under a non-cancellable lease for seven years and contains two five year options to renew. The monthly rent for the Irvine facility is $38,800 plus taxes, insurance and common area maintenance and, beginning in July 1999, minimum cost of living increases. The Company also maintains a small administrative office in Zurich, Switzerland on an expense sharing basis. 17 18 ITEM 3. LEGAL PROCEEDINGS The Company is not currently involved in any litigation or legal proceedings. With respect to litigation or proceeding threatened against it, the Company is currently involved in a dispute with several former employees. In 1990 and 1993 the Company entered into an Agreement (since amended) with four former and two current employees to exchange an aggregate of 678,836 shares of common stock for indebtedness arising from accrued compensation and unreimbursed expenses. The common stock is subject to forfeiture if the Company failed to attain specified revenue goals. As of December 31, 1997, when the Agreement terminated, the Company did not achieve the revenue goals set forth in the Agreement, as previously amended. Several former employees who are parties to the Agreement have indicated disagreement with the Company's position and, to date, none of the shares have been surrendered for cancellation. The Company's Chief Executive Officer and his wife, the Secretary and Treasurer of the Company, have indicated that they are willing to conditionally surrender their shares, (amounting to an aggregate of 402,245 shares) subject to resolution of the dispute with the aforementioned former employees. Until such time as the Company can obtain the surrender of all of these shares and the matter is fully resolved, the Company is accounting for all of the stock, which it has deemed forfeited, as issued and outstanding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1997. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON STOCK As December 31, 1997, there were 5,465,807 shares of common stock outstanding held of record by 260 shareholders. MARKET FOR SECURITIES The Company's common stock (NEOT) and warrant (NEOTW) are currently listed on the NASDAQ National Market. For each quarter since trading commenced, on September 26, 1996, the high and low bid quotations of the Company's common stock and warrant, as reported by NASDAQ, were as follows:
Common Stock Warrant Bid Price Bid Price ------------- ------------ High Low High Low ---- --- ---- --- Year Ended December 31, 1996: Quarter Ended ------------- September 30, 1996 $6-1/4 $ 5-1/4 $2-1/4 $1-3/4 December 31, 1996 $6 $ 3-3/4 $2-3/8 $1 Year Ended December 31, 1997: Quarter Ended ------------- March 31, 1997 $6-3/4 $ 3-7/8 $1-15/16 $1 June 30, 1997 $16-3/8 $ 4-7/8 $7-1/4 $1-1/4 September 30, 1997 $15-7/8 $11-1/2 $6-7/8 $4-3/4 December 31, 1997 $14-1/2 $ 7 $5-3/4 $2-5/8
The foregoing bid quotations reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. 18 19 DIVIDENDS The Company has never paid cash dividends on its common stock and does not intend to pay dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES The following is a summary of transactions by the Company during the year ended December 31, 1997 involving sales of the Company's securities that were not registered under the Securities Act of 1933 (the "Securities Act"). In January 1997, the Company granted options to purchase 180,000 shares of Common Stock at an exercise price of $3.88 per share to a financial consultant. 30,000 of the options were vested upon issuance, and the vesting of 150,000 of these options is contingent upon the performance by the consultant of specified future services. Exemption from the registration requirements of the Securities Act was claimed under Rule 506 and/or Section 4(2) of the Securities Act. The foregoing transactions did not involve any public offering and the recipient either received adequate information about the Company or had access, through employment or other relationships, to such information. In the foregoing transaction, the Company reasonably believed that the recipient was "sophisticated" within the meaning of Section 4(2) of the Securities Act. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRELIMINARY NOTE REGARDING FORWARD LOOKING STATEMENTS This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Item 1. "Description of Business", including the section therein entitled "Factors Which May Affect Future Performance", and this Item 6. RESULTS OF OPERATIONS Overview From the inception of the Company in June 1987 through December 31, 1997, the Company devoted its resources primarily to fund its research and development efforts, and incurred a cumulative net loss of approximately $12.2 million. During this period, the Company had only limited revenues from grants, and had no revenues from the sale of products or other sources. The Company expects its operating expenses to increase over the next several years as it expands its research and development and commercialization activities and operations. The Company expects to incur significant additional operating losses for at least the next several years unless such operating losses are offset, if at all, by licensing revenues under strategic alliances with larger pharmaceutical companies which the Company is currently seeking. To enable the Company to maintain its working capital requirements, in March 1998, the Company entered into an equity agreement with a private investor which allows the Company to sell, at its sole discretion, subject to certain restrictions, over a two and one-half year period, up to $15 million of its common stock to the investor. See - Liquidity and Capital Resources. Year ended December 31, 1997 compared to Year ended December 31, 1996 There were no revenues for the twelve month periods ended December 31, 1997 or 1996. Research and development expenses for the twelve months ended December 31, 1997 increased by approximately $3.9 million, or 632%, over the previous year. This increase was due primarily to the costs and expenses associated with the commencement of clinical trials as well as personnel additions, salary increases, facilities rent, consulting fees, license fees and insurance costs as the Company continued to expand its operations by utilizing the proceeds from the September 1996 public sale of common stock. Research and 19 20 development expenses are expected to increase as the Company continues to expand its product development and clinical trial activities. General and administrative expenses increased approximately $1.7 million or 255% for the year ended December 31, 1997 over the year ended December 31, 1996. General and administrative expenses for 1997 reflect increased expenses related to additional personnel, salary increases, insurance, professional and consulting fees, commissions, facilities rent, travel, regulatory agency and other fees associated with being a public company which were all either significantly higher in 1997 than in 1996, or were initially incurred in 1997. In 1996 the Company operated for a portion of the year on a rent-free basis from the Chief Executive Officer's residence with very limited administrative and technical staff. The Company expects general and administrative expenses to continue to increase in future periods in support of the expected increases in both research and development activities as well as sales and marketing activities should the Company successfully bring one or more of its products to market. Interest income increased by approximately $477,800 or 178% in 1997 over 1996 as a result of the full year's utilization of invested and unallocated proceeds from the September 1996 public offering. The Company expects its interest earnings to decrease over the next year due to its use of funds in current operations. LIQUIDITY AND CAPITAL RESOURCES From inception through December 1997, the Company financed its operations primarily through grants, sales of securities, borrowings and deferred payment of salaries and other expenses from related parties. On September 26, 1996, the Company effected the public sale of 2,500,000 units of its common stock and attached warrants. Each unit consisted of one share of common stock and one warrant to purchase one share of common stock. The closing took place on October 1, 1996 and on that date, the Company realized net cash proceeds of approximately $17,363,000 from the sale. On October 11, 1996, the underwriter of the public offering exercised an option to purchase an additional 200,000 units resulting in net proceeds of approximately $1,389,000 to the Company. Expenses directly related to the public offering of units were approximately $576,000, and have been offset in stockholders' equity against the common stock proceeds of the offering. At December 31, 1997, included in the Company's working capital of approximately $7 million, were cash and cash equivalents of approximately $7 million (of which approximately $0.9 million was restricted) and short-term investments of approximately $2.1 million. In comparison, at December 31, 1996, the Company had working capital of approximately $14.7 million which included cash and cash equivalents of approximately $10 million, and short-term investments of approximately $5.7 million. The $7.7 million decrease in working capital is attributable primarily to investments in property and equipment of $3.6 million and the funding of the $4.1 million operating loss for the year ended December 31, 1997. Effective June 1997, the Company entered into a non-cancelable long-term operating lease with a major developer. The lease runs for seven years and contains two renewal options for five years each at the then fair market value rate. Minimum rental commitments under this lease for the six and one-half year period from January 1998 through June 2002 are approximately $465,600 (1998), $483,100 (1999), $500,500 (2000 and 2001) $538,100 (2002) $554,200 (2003) and $285,400 (2004). In addition to rentals, the Company is obligated under the lease for real property taxes, insurance and maintenance. In March 1997, the Company also paid the developer approximately $1.4 million for construction of tenant improvements, primarily relating to specialized research and development laboratory facilities. The Company has committed an aggregate of $320,700 to a number of universities to conduct general scientific research programs and to provide for Fellowship Grants. These amounts are scheduled to be expended throughout 1998. Since its inception, the Company has been in the development stage and therefore devotes substantially all of its efforts to research and development. The Company has incurred cumulative losses of approximately $12.2 million through December 31, 1997, and expects to incur substantial losses over the next several years. The Company's future capital requirements and availability of capital will depend upon many factors, including continued scientific progress in research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost involved in filing, prosecuting and enforcing patent claims, competing technological developments, the cost of manufacturing scale-up, the cost of commercialization activities and other factors which may not be within the Company's control. While the Company believes that its existing capital resources (including expected proceeds from the March 1998 equity financing agreement hereinafter described) will be adequate to 20 21 fund its capital needs for at least 12 months of operations, the Company also believes that ultimately it will require substantial additional funds in order to complete the research and development activities currently contemplated and to commercialize its proposed products. Without additional funding, the Company may be required to delay, reduce the scope or eliminate one or more of its research and development projects, or obtain funds through arrangements with collaborative partners or others which may require the Company to relinquish rights to certain technologies, product candidates or products that the Company would otherwise seek to develop or commercialize on its own. Other factors impacting the future success of the Company are the ability to develop products which will be safe and effective in treating neurological and immunological diseases, ability to obtain government approval as well as dependency on key personnel. On March 27, 1998, the Company executed an Agreement with a private investor which provides for the Company, at its sole discretion, subject to certain restrictions, to sell ("put") to the investor up to $15 million of its common stock, subject to a minimum put of $1 million. The Agreement expires thirty months after the effective date of a Registration Statement (which is required to be filed within 45 days of the closing) and, among other things, provides for minimum and maximum puts ranging from $500,000 to $2,000,000 depending on the Company's stock price and trading volume. Puts cannot occur more frequently than every 15 days, and are subject to a discount of 12% from the then current average market price, as determined under the Agreement. In addition, the Company is required to pay sales commissions consisting of cash and shares of common stock and will issue to the investor warrants to purchase 25,000 shares of common stock at 130% of the market price, as defined in the Agreement. ITEM 7. FINANCIAL STATEMENTS. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants........................................ 22 Consolidated Balance Sheets..................................................... 23 Consolidated Statements of Operations........................................... 24 Consolidated Statements of Stockholders' Equity (Deficit)....................... 25 Consolidated Statements of Cash Flows........................................... 27 Notes to Consolidated Financial Statements...................................... 29
21 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of NeoTherapeutics, Inc.: We have audited the accompanying consolidated balance sheets of NeoTherapeutics, Inc. (a Delaware corporation in the development stage) and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1997 and for the period from inception (June 15, 1987) to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NeoTherapeutics, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 and for the period from inception (June 15, 1987) to December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Orange County, California March 27, 1998 22 23 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------------ 1996 1997 -------------- ------------- A S S E T S CURRENT ASSETS: Cash and cash equivalents.................. $ 9,995,062 $ 6,063,347 Restricted cash............................ - 935,000 Marketable securities and short-term investments............................... 5,702,114 2,133,375 Other receivables, principally investment interest.................................. 163,988 221,829 Prepaid expenses and refundable deposits... 239,171 127,259 -------------- ------------- Total current assets................... 16,100,335 9,480,810 -------------- ------------- PROPERTY AND EQUIPMENT, at cost: Equipment.................................. 158,396 1,952,262 Leasehold improvements..................... 33,076 1,803,000 Accumulated depreciation................... (58,963) (279,913) -------------- ------------- Property and equipment, net............ 132,509 3,475,349 -------------- ------------- OTHER ASSETS: Marketable securities...................... 1,746,432 - Deferred expenses and deposits ............ - 242,314 -------------- ------------- Total other assets..................... 1,746,432 242,314 -------------- ------------- $ 17,979,276 $ 13,198,473 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Line of credit............................. $ - $ 850,000 Accounts payable and accrued expenses...... 262,604 975,339 Accrued payroll and related taxes.......... 331,175 - Employee expense reimbursement............. 82,717 - Accrued interest to related parties........ 122,396 - Note payable to related party.............. 558,304 558,304 Current portion of long-term debt.......... - 94,886 -------------- --------------- Total current liabilities.............. 1,357,196 2,478,529 -------------- --------------- LONG-TERM DEBT, net of current portion......... - 176,549 -------------- --------------- Total liabilities...................... 1,357,196 2,655,078 -------------- --------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock, no par value, 25,000,000 shares authorized: Issued and outstanding, 5,361,807 and 5,465,807 shares, respectively...... 23,125,763 23,188,363 Unrealized gains on available-for-sale securities............................... - 20,256 Deficit accumulated during the development stage....................... (6,503,683) (12,665,224) -------------- ------------ Total stockholders' equity............. 16,622,080 10,543,395 -------------- ------------ $ 17,979,276 $ 13,198,473 ============== ============
The accompanying notes are an integral part of these consolidated balance sheets 23 24 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM JUNE 15, 1987 (INCEPTION) YEARS ENDED DECEMBER 31, THROUGH -------------------------------------------- DECEMBER 31, 1995 1996 1997 1997 ------------ ------------ ----------- ----------- REVENUES, from grants............... $ 125,431 $ - $ - $ 497,128 ------------ ------------ ----------- ----------- OPERATING EXPENSES: Research and development....... 305,932 615,485 4,508,255 7,475,067 General and administrative..... 667,218 659,895 2,341,276 5,770,382 ------------- ------------- ------------ ------------ 973,150 1,275,380 6,849,531 13,245,449 ------------- ------------- ------------ ------------ LOSS FROM OPERATIONS................ (847,719) (1,275,380) (6,849,531) (12,748,321) ------------- ------------- ------------ ------------ OTHER INCOME (EXPENSE): Interest income................ 131 268,231 746,008 1,021,952 Interest expense............... (46,816) (51,769) (56,419) (536,555) Other income (expense)......... (974) 20,043 (1,599) 46,700 ------------- ------------- ------------ ------------ Total other income (expense). (47,659) 236,505 687,990 532,097 ------------- ------------- ------------ ------------ NET LOSS..................... $ (895,378) $ (1,038,875) $ (6,161,541) $(12,216,224) ============= ============= ============ ============ BASIC AND DILUTED LOSS PER SHARE.... $ (0.43) $ (0.32) $ (1.14) ============= ============= ============ BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........... 2,084,348 3,292,663 5,405,831 ============= ============= ============
The accompanying notes are an integral part of these consolidated financial statements. 24 25 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
DEFICIT DEFERRED ACCUMULATED COMPENSATION REVENUE COMMON STOCK DURING THE AND PARTICIPATION ------------------------- DEVELOPMENT UNREALIZED UNITS SHARES AMOUNT STAGE GAINS TOTAL ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, Inception (June 15, 1987)... $ - - $ - $ - $ - $ - Common stock issued ............. - 465,902 2,100 - - 2,100 Net loss ........................ - - - (31,875) - (31,875) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31,1987 ........... - 465,902 2,100 (31,875) - (29,775) Common stock issued ............. - 499,173 2,250 - - 2,250 Revenue Participation Units issuance ...................... 594,000 - - - - 594,000 Net loss ........................ - - - (556,484) - (556,484) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1988 .......... 594,000 965,075 4,350 (588,359) - 9,991 Revenue Participation Units issuance ...................... 82,000 - - - - 82,000 Net effect of acquisition ....... - 145,000 354,316 - - 354,316 Net loss ........................ - - - (934,563) - (934,563) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1989 .......... 676,000 1,110,075 358,666 (1,522,922) - (488,256) Exercise of warrants ............ - 31,108 136,402 - - 136,402 Common stock issued in exchange for accrued salaries on June 30 at $1.25 .............. - 402,518 503,144 - - 503,144 Net loss ........................ - - - (859,172) - (859,172) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1990 .......... 676,000 1,543,701 998,212 (2,382,094) - (707,882) Net Loss ........................ - - - (764,488) - (764,488) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1991 .......... 676,000 1,543,701 998,212 (3,146,582) - (1,472,370) Net loss ........................ - - - (423,691) - (423,691) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1992 .......... 676,000 1,543,701 998,212 (3,570,273) - (1,896,061) Common stock issued in exchange for investment banking services on March 18 at $1.35 . - 40,000 54,000 - - 54,000 Common stock issued in exchange for accrued salaries on December 30 at $2.50 .......... - 255,476 638,694 - - 638,694 Common stock issued in exchange for note payable to President on December 30 at $2.50 ....... - 200,000 500,000 - - 500,000 Common stock issued in exchange for accrued expenses on December 30 at $2.50 ....... - 20,842 52,104 - - 52,104 Stock options issued in exchange for accrued professional fees on December 31 at $1.35 ....... - - 108,000 - - 108,000 Stock options issued in exchange for future services on December 31 at $1.35 .......... - - 39,750 - - 39,750 Stock options issued for services ...................... - - - - (93,749) (93,749) Net loss ........................ - - - (237,815) - (237,815) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE, December 31, 1993 .......... 676,000 2,060,019 2,390,760 (3,808,088) (93,749) (835,077)
25 26 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) - (CONTINUED)
DEFICIT DEFERRED ACCUMULATED COMPENSATION REVENUE COMMON STOCK DURING THE AND PARTICIPATION ---------------------------- DEVELOPMENT UNREALIZED UNITS SHARES AMOUNT STAGE GAINS TOTAL ------------ ------------ ------------ ------------ ------------ ----------- Common stock issued for cash at $2.50....................... $ - 13,000 $ 32,500 $ - $ - $ 32,500 Amortization of deferred compensation .................. - - - - 93,749 93,749 Net loss ........................ - - - (312,342) - (312,342) ------------ ------------ ------------ ------------ ------------ ----------- BALANCE, December 31, 1994 .......... 676,000 2,073,019 2,423,260 (4,120,430) - (1,021,170) Common stock issued for cash at $2.50.......................... - 22,000 55,000 - - 55,000 Common stock forfeiture ......... - (678,836) (1,193,943) - - (1,193,943) Common stock reissued at $2.50 . - 678,836 1,697,090 - - 1,697,090 Stock options issued for services at $2.50 ............. - - 105,000 - - 105,000 Net loss ........................ - - - (895,378) (895,378) ------------ ------------ ------------ ------------ ------------ ----------- BALANCE, December 31, 1995 .......... 676,000 2,095,019 3,086,407 (5,015,808) - (1,253,401) Common stock issued for cash at $2.50 (net of commission) . - 266,800 633,650 - - 633,650 Stock options issued for services at $2.50 ............. - - 103,950 - - 103,950 Cash paid out for fractional shares ........................ - (12) (25) - - (25) Conversion of Revenue Participation units into common stock .................. (676,000) 300,000 1,125,000 (449,000) - - Common stock and warrants issued for cash at $7.60, less commissions and costs of public offering ............... - 2,700,000 18,176,781 - - 18,176,781 Net loss ........................ - - - (1,038,875) - (1,038,875) ------------ ------------ ------------ ------------ ------------ ----------- BALANCE, December 31, 1996 .......... - 5,361,807 23,125,763 (6,503,683) - 16,622,080 Stock options exercised ......... - 104,000 2,600 - - 2,600 Stock options issued for services at $2.00 ............. - - 60,000 - - 60,000 Unrealized gains on available-for-sale securities .................... - - - - 20,256 20,256 Net loss ........................ - - - (6,161,541) - (6,161,541) ------------ ------------ ------------ ------------ ------------ ----------- BALANCE, December 31, 1997 .......... $ - 5,465,807 $ 23,188,363 $(12,665,224) $ 20,256 $10,543,395 ============ ============ ============ ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 26 27 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM JUNE 15, 1987 (INCEPTION) YEARS ENDED DECEMBER 31, THROUGH ---------------------------------------- DECEMBER 31, 1995 1996 1997 1997 -------- ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ................................... $(895,378) $ (1,038,875) $ (6,161,541) $(12,216,224) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............ 4,336 7,898 220,950 405,402 Issuance of common stock options for services .......................... 105,000 103,950 60,000 268,950 Amortization of deferred compensation .... - - - 93,749 Compensation expense for extension of Debt Conversion Agreements, net ....... 503,147 - - 503,147 Gain on sale of assets ................... - - - (5,299) Increase in other receivables ............ - (163,988) (57,841) (221,583) (Increase) decrease in prepaid expenses and deposits ........................... 92 (238,187) (130,402) (319,570) Increase in accounts payable and accrued expenses .......... 46,378 11,278 630,018 1,135,439 Increase (decrease) in accrued payroll and related taxes ..................... 121,667 103,388 (331,175) 638,694 Increase (decrease) in accrued interest to related parties ....................... 46,816 979 (122,396) 300,404 -------- ------------ ------------ ------------ Net cash used in operating activities ....................... (67,942) (1,213,557) (5,892,387) (9,416,891) -------- ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ......... (2,461) (131,600) (3,563,790) (3,835,565) Redemptions (purchases) of marketable securities and short-term investments ... - (7,448,546) 5,315,171 (2,133,375) Unrealized gain on available-for-sale securities .............................. - - 20,256 20,256 Payment of organization costs .............. - - - (66,093) Proceeds from sale of equipment ............ - - - 29,665 Issuance of note receivable ................ - - - 100,000 -------- ------------ ------------ ------------ Net cash provided by (used in) investing activities ................ (2,461) (7,580,146) 1,771,637 (5,885,112) -------- ------------ ------------ ------------
27 28 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
PERIOD FROM JUNE 15, 1987 (INCEPTION) YEARS ENDED DECEMBER 31, THROUGH ----------------------------------------- DECEMBER 31, 1995 1996 1997 1997 --------- ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable to related parties, net ............ $ 10,000 $ (22,500) $ - $ 757,900 Proceeds from bank line of credit ..... - - 850,000 850,000 Increase in restricted cash ........... (935,000) (935,000) Proceeds from long-term debt........... - - 326,625 326,625 Reduction of long-term debt............ - - (55,190) (55,190) Proceeds from issuance of common stock and warrants net of related offering costs and expenses ................. 55,000 18,810,431 - 19,541,828 Proceeds from exercise of stock options - - 2,600 2,600 Proceeds from Revenue Participation Units .............................. - - - 676,000 Cash paid out for fractional shares ... - (25) - (25) Cash at acquisition ................... - - - 200,612 --------- ------------ ------------ ------------ Net cash provided by financing activities .................... 65,000 18,787,906 189,035 21,365,350 --------- ------------ ------------ ------------ Net increase (decrease) in cash ......... (5,403) 9,994,203 (3,931,715) 6,063,347 Cash, beginning of period ............... 6,262 859 9,995,062 - --------- ------------ ------------ ------------ Cash, end of period ..................... $ 859 $ 9,995,062 $ 6,063,347 $ 6,063,347 ========= ============ ============ ============ SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Conversion of accrued payroll into shares of no par value common stock ....................... $ - $ - $ - $ 1,141,838 ========= ============ ============ ============ Conversion of notes payable to related parties into shares of no par value common stock ....... $ - $ - $ - $ 500,000 ========= ============ ============ ============ Conversion of accrued interest into notes payable to related parties ... $ - $ - $ - $ 300,404 ========= ============ ============ ============ Conversion of Revenue Participation Units into shares of no par value common stock ....................... $ - $ 676,000 $ - $ 676,000 ========= ============ ============ ============ Issuance of stock options for services $ 105,000 $ 103,950 $ 60,000 $ 268,950 ========= ============ ============ ============ Conversion of other accrued liabilities to shares of no par value common stock ................. $ - $ - $ - $ 52,104 ========= ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 28 29 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Business NeoTherapeutics, Inc. (the "Company") was incorporated in Colorado as Americus Funding Corporation ("AFC") in December 1987. In August 1996, AFC changed its name to NeoTherapeutics, Inc. and in June 1997, the Company was reincorporated in the state of Delaware. At December 31, 1997, the Company had two wholly owned subsidiaries, Advanced ImmunoTherapeutics, Inc. ("AIT"), incorporated in California in June 1987, and NeoTherapeutics GmbH ("NEOT GmbH"), incorporated in Switzerland in April 1997. AIT became a wholly owned subsidiary of AFC in July 1989 in a transaction accounted for as a reverse acquisition. All references to the "Company" hereinafter refer to the Company, AIT and NEOT GmbH as a consolidated entity. The Company is a development stage biopharmaceutical enterprise engaged in the discovery and development of novel therapeutic drugs intended to treat neurodegenerative diseases and conditions, such as memory deficits associated with Alzheimer's disease and aging, stroke, spinal cord injuries and Parkinson's disease. The accompanying consolidated financial statements include the results of operations of the subsidiary, AIT, from June 15, 1987 (inception), through July 18, 1989 (date of acquisition of AFC), and the consolidated results of operations of the Company thereafter. Development Stage Enterprise The Company is in the development stage and, therefore, devotes substantially all of its efforts to research and development activities. Since its inception, the Company has incurred cumulative losses of approximately $12.2 million through December 31, 1997, and expects to incur substantial losses over the next several years. While the Company believes that its existing capital resources (including the proceeds from its March 1998 private equity financing - -- see Note 12) will be adequate to fund its capital needs for at least 12 months of operations, the Company also believes that, ultimately, it will require substantial additional funds in order to complete the research and development activities currently contemplated and to commercialize its proposed products. The Company's future capital requirements and availability of capital will depend upon many factors including, but not limited to, continued scientific progress in research and development programs, the scope and results of preclinical studies and clinical trials, the time and costs involved in obtaining regulatory approvals, the cost involved in filing, prosecuting and enforcing patent claims, competing technological developments, the cost of manufacturing scale-up, the cost of commercialization activities and other factors which may not be within the Company's control. Without additional funding, the Company may be required to delay, reduce the scope or eliminate one or more of its research and development projects, or obtain funds through arrangements with collaborative partners or others which may require the Company to relinquish rights to certain technologies, product candidates or products that the Company would otherwise seek to develop or commercialize on its own. Other factors impacting the future success of the Company are the ability to develop products which will be safe and effective in treating neurological and immunological diseases, and the ability to obtain government approval as well as dependency on key personnel. Principles of Consolidation The consolidated financial statements include accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents Cash and cash equivalents consists of cash and highly liquid investments of commercial paper and demand notes with original maturities of 90 days or less. At December 31, 1997, cash equivalents of $935,000 was pledged as collateral on a bank line of credit and was classified as restricted cash on the balance sheet. Marketable Securities The Company accounts for investments in marketable securities under Statements of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The statement requires investments in debt and equity securities to be classified among three categories as follows: held-to-maturity, trading and available-for-sale. As of December 31, 1997, securities held by the Company were considered as held-to-maturity and available-for-sale. Securities held-to-maturity 29 30 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) are stated at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income on investment securities. A valuation allowance is not established to recognize temporary market value fluctuations as the Company has the intent and ability to hold these investments until maturity. Available-for-sale securities are carried at fair value, with unrealized gains and losses reported as a separate component of stockholders' equity. Quoted market prices have been used in determining the fair value of these investments. Short-term investments consist of commercial paper and equivalent corporate obligations and are stated at amortized cost, with respect to held-to-maturity investments, and at fair value with respect to investments classified as available-for-sale securities. Property and Equipment Property and equipment are carried at cost, less accumulated depreciation. Depreciation is computed using principally the straight-line method over the following estimated useful lives: Equipment 5 to 7 Years Leasehold Improvements Term of Lease Research and Development All costs related to research and development activities are expensed in the period incurred. Grant Revenue Revenue consists of amounts earned from grants which are recognized in accordance with the terms of the related agreements. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This statement, among other things, requires that income taxes be accounted for using the liability method. Stock Based Compensation The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" in October 1995. SFAS 123 encourages companies to adopt a fair value approach to valuing stock options that would require compensation cost to be recognized based on the fair value of stock options granted. The Company has elected as permitted by the standard, to continue to follow its intrinsic value based method of accounting for stock options consistent with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the measurement date over the exercise price. Net Loss Per Share Net loss per share is calculated using the weighted average number of shares outstanding for the period. Common equivalent shares are excluded from the computation as their effect is antidilutive. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 "Earnings per Share," which requires companies to present basic earnings per share and diluted earnings per share, instead of the primary and fully diluted earnings per share (EPS) as previously required. The new standard requires additional information disclosures, and also makes certain modifications to the EPS calculations defined in APB No. 15. The new standard is required to be adopted by all public companies for reporting periods ending after December 15, 1997, and require restatement of EPS for all prior periods reported. The differences between EPS reported in prior years and restated EPS amounted to an increased loss of $0.07 and $0.01 per share in 1995 and 1996, respectively. New Pronouncements Comprehensive Income Effective for fiscal years beginning after December 15, 1997, SFAS No. 130 "Reporting Comprehensive Income" requires that comprehensive income and its components as defined in the statement, be reported in a financial statement. Current accounting standards require that certain items such as (1) foreign currency translation adjustments, (2) unrealized gains and losses on certain investments in debt and equity securities, and (3) unearned compensation expense related to stock issuances to employees be presented as separate components of stockholders' equity without having been recognized in the determination of net income. Effective for fiscal years beginning after December 15, 1997, comprehensive income must be reported "in a financial statement that is displayed with the same prominence as other financial statements." The Company will adopt the provisions of SFAS No. 130 for the 1998 fiscal year. The Company does not expect SFAS No. 130 to have a material effect on the Company's financial statements. Segment Reporting SFAS No. 131 ("Disclosure About Segments of an Enterprise and Related Information") is effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 replaces SFAS No. 14 (Financial Reporting for Segments of a Business Enterprise) and several other pronouncements that amended FAS-14. SFAS No. 131 requires the disclosure of extensive information about an entity's operating segments. In addition to disclosure of information about multiple reporting segments, an enterprise is required to report certain disaggregated information, even if it functions as a single operating unit. The Company will adopt SFAS No. 131 for the 1998 fiscal year. Reclassifications Certain amounts in the accompanying 1995 financial statements have been reclassified to conform with the 1996 and 1997 presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 30 31 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. RELATED PARTY TRANSACTIONS During 1987 and 1988, the Company's Chief Executive Officer, who is also a major stockholder of the Company, loaned a total of $270,650 to the Company for working capital purposes, of which $250,000 plus $2,000 of accrued interest was canceled in December 1988 in exchange for the issuance of 28 RPU's. The RPU's, in turn, were converted into 112,000 shares of common stock (see Note 8). From 1989 through 1993 the Company borrowed an additional $757,900 from the Chief Executive Officer which, together with accrued interest of $300,404, aggregated $1,058,304 on December 31, 1993, at which time the Company issued 200,000 shares of common stock to the Chief Executive Officer in exchange for cancellation of $500,000 of loans made to the Company. The remaining $257,900 in principal and accrued interest of $300,404 were converted to a $558,304 promissory note which, as amended from time to time, is currently unsecured, bears interest at 9% per annum, and is payable upon demand. In September 1990, the Company issued a warrant to the Chief Executive Officer to purchase up to 88,173 shares of common stock of the Company at any time between September 1, 1990 and August 31, 1995 for $3.75 per share. Effective August 31, 1995, the expiration date of the warrant was extended to August 31, 2000. In June 1990, certain founders and key employees of the Company converted $503,144 of accrued salaries due them to 402,518 shares of common stock at the price of $1.25 per share, the estimated fair market value as determined by the Board of Directors. On December 31, 1993, certain key employees agreed to accept 276,318 shares of common stock, in exchange for cancellation of $690,798 of indebtedness for unpaid compensation and unreimbursed expenses. The exchange, which was at the price of $2.50 per share, was in excess of estimated fair market value on the issuance date as determined by the Board of Directors. All of the aforementioned shares, aggregating 678,836 shares, had a risk of forfeiture whereby, if the Company did not generate a minimum of $500,000 in total operating revenues from inception through December 31, 1995, all shares were to be returned to the Company and the holders would forfeit all rights to the shares and any claim to the previously accrued but unpaid compensation and expenses. Effective December 31, 1995, five of the parties, including the Chief Executive Officer, who were present or past employees, entered into agreements with the Company, whereby the forfeiture date for the Debt Conversion Agreements of 1990 and 1993 was extended from December 31, 1995 to December 31, 1997, in exchange for increasing the minimum total operating revenues from $500,000 to $1,000,000 to be achieved by December 31, 1997. The compensation expense previously recorded which related to the shares forfeited on December 31, 1995, was reversed in the 1995 statement of operations. Accordingly, a new measurement date exists for new shares issued subject to forfeiture on December 31, 1997. The value used to record compensation expense is the estimated fair market value as determined by the Board of Directors on December 31, 1995. One party claimed that his 88,848 shares are vested and that there was no need for him to enter into a new Agreement, and therefore had not entered into an Agreement under the new terms. As of December 31, 1997, when the Agreement terminated, the Company did not achieve the revenue goals set forth in the Agreement, as previously amended. Several former employees who are parties to the Agreement have indicated disagreement with the Company's position and, to date, none of the shares have been surrendered for cancellation. The Company's Chief Executive Officer and his wife, the Secretary and Treasurer of the Company, have indicated that they are willing to conditionally surrender their shares, (amounting to an aggregate of 402,245 shares) subject to resolution of the dispute with the aforementioned former employees. Until such time as the Company can obtain the surrender of all of these shares and the matter is fully resolved, the Company is accounting for all of the stock, which it has deemed forfeited, as issued and outstanding. 31 32 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Assignment of Patents by Chief Executive Officer The Chief Executive Officer of the Company has assigned two patents to the Company: a) On June 6, 1991, the Chief Executive Officer assigned to the Company all rights to the inventions covered by U.S. Patent No. 5,091,432 (a composition of matter patent covering the "AIT" series of chemical compounds) and any corresponding foreign applications and patents, including all continuations, divisions, reissues and renewals of said applications and any patents issued out of or based upon said applications; b) On June 30, 1996, the Chief Executive Officer assigned to the Company all rights to the inventions covered by U.S. Patent No. 5,447,939, covering certain inventions in carbon monoxide dependent guanylyl cyclase and methods of use. Both patent assignment agreements, which were amended on July 26, 1996, expire concurrently with the expiration of the underlying patent and any patents derived therefrom. Under each of the Agreements, as amended, the Company is obligated to pay the Chief Executive Officer a royalty of two percent (2%) of all revenues derived by the Company from the use and sale by the Company of any products or methods included in the patents. Further, in the event that the Chief Executive Officer's employment is terminated by the Company without cause, the royalty rate under each Agreement was to be increased to five percent (5%). Finally, in the event of the Chief Executive Officer's death, the family or estate is entitled to continue to receive under each Agreement royalties at a rate of two percent (2%) for the duration of the respective agreement. McMaster University Agreement On July 10, 1996 the Company entered into a license agreement with McMaster University (the "University") which allows the Company use of certain chemical compounds developed by the University covered in a patent filed jointly by the Company and the University. Under the agreement the Company paid a one time licensing fee of $15,000 and is obligated to pay an annual royalty of five percent (5%) on net sales of products containing compounds developed by the University. The Company commenced payment of minimum annual royalties of $25,000 beginning July 1997. Employment Agreement Effective July 1, 1996, the Company entered into an employment agreement with the Chief Executive Officer. The agreement, among other things, provides for the grant of incentive stock options, an annual base salary with annual increases and an annual bonus based on the Company's attainment of certain performance objectives. The agreement terminates on June 30, 1999. The agreement also provides for guaranteed severance payments upon the Chief Executive Officer's termination of employment without cause, or upon a change of control of the Company. In connection with entering into this Agreement, the Chief Executive Officer was granted an incentive option to purchase 75,000 shares of common stock at 110 percent of fair market value at the date of grant ($4.13 per share). This option vests in three equal increments over the life of the agreement. 32 33 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. MARKETABLE SECURITIES A summary of marketable securities at December 31, 1996 and 1997 are as follows:
Gross Gross Unrealized Unrealized Market Type of Investment Cost Gains (Losses) Value ------------------ ---- ----- -------- ----- December 31, 1996: Held-to-Maturity: Commercial Paper $ 1,553,759 $ -- $ (10,769) $ 1,542,990 Corporate Bonds 4,148,355 1,391 (468) 4,149,278 ----------- ----------- ----------- ----------- 5,702,114 1,391 (11,237) 5,692,268 U.S. Government Agencies 1,746,432 1,468 -- 1,747,900 ----------- ----------- ----------- ----------- Total Securities Held to Maturity $ 7,448,546 $ 2,859 $ (11,237) $ 7,440,168 =========== =========== =========== =========== December 31, 1997: Held-to-Maturity: Corporate Bonds $ 168,992 $ 1,008 $ -- $ 170,000 ----------- ----------- ----------- ----------- Available-for-Sale: U.S. Government Treasury Notes and Bonds 1,292,951 10,218 (388) 1,302,781 U.S. Government guaranteed securities 447,900 8,770 -- 456,670 Corporate Bonds 203,276 1,656 -- 204,932 ----------- ----------- ----------- ----------- Total securities available 1,944,127 20,644 (388) 1,964,383 ----------- ----------- ----------- ----------- Total Investments $ 2,113,119 $ 21,652 $ (388) $ 2,134,383 =========== =========== =========== ===========
The above securities are shown in the accompanying balance sheet at December 31, 1997, as follows: Marketable securities and short-term investments: Held-to-Maturity $ 168,992 Available-for-Sale 1,964,383 ------------ $ 2,133,375 ============
There were no sales of securities for the year ended December 31, 1997. 4. DEBT During August 1997, the Company established a Line of Credit Agreement with its bank which expires August 30, 1998. Borrowings under the Agreement (maximum $1,600,000) were originally secured by a marketable security having a face amount of $1,750,000. During December 1997, the security was redeemed by the issuer at face amount. Pursuant to the Agreement, current borrowings are secured by cash equivalents equal to approximately 111% of the outstanding loan amount. At December 31, 1997, the Company was indebted to the bank for $850,000 under the Agreement. Such debt was collateralized by restricted cash equivalents in the amount of $935,000. The interest rate on these borrowings was approximately 8% at December 31, 1997. At February 28, 1998, the Company had no borrowings under the Agreement. In September 1997, the Company financed the premium for a three year insurance policy through a borrowing from the insurer. The loan is payable through August 2000 in monthly installments of $9,475, including principal and 8.25% interest. Future installments of principal are as follows:
Year Amount ---- ------ 1998 $ 94,886 1999 102,975 2000 73,574 -------- $271,435 ========
33 34 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REVENUE FROM GRANTS In July 1995, a Small Business Innovative Research Grant (the SBIR Grant) from the National Institute of Health was completed and no additional funds were due or collected. The Company has received an aggregate of $497,128 from the SBIR Grant. 6. PROVISION FOR INCOME TAXES No provision for federal and state income taxes has been recorded as the Company incurred net operating losses through December, 31, 1997. At December 31, 1997, the Company had approximately $8 million of federal net operating loss carryforwards available to offset future United States taxable income, if any; and approximately $12 million of net operating loss carryforwards available for financial reporting purposes. Such carryforwards expire from 2009 through 2012. The primary differences between tax and financial reporting is the capitalization of certain start-up expenses for income tax reporting purposes which are expensed for financial reporting purposes. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating losses carried forward may be impaired or limited in certain circumstances. Events which may cause limitations in the amount of net operating losses that the Company may utilize in any one year include but are not limited to, a cumulative ownership change of more than 50 percent over a three year period. At December 31, 1997, the effect of such limitation, if imposed, has not been determined. The Company's foreign subsidiary has a loss carryforward of approximately $1.7 million at December 31, 1997. The Company's foreign subsidiary has a loss carryforward of approximately $1.7 million at December 31, 1997, resulting principally from the transfer of licensing rights by the Parent to the foreign subsidiary and from the Parent Company's allocation of research and development costs to the foreign subsidiary during the period April through December 1997. 7. COMMITMENTS AND CONTINGENCIES Facility Leases During late June 1997, the Company relocated to a new facility, which it leases from a property developer under a non-cancelable operating lease expiring in June 2004. The lease requires monthly rent payments (subject to increases in cost of living adjustments) ranging from $38,800 to $47,600 over its term, plus property taxes, insurance and maintenance reimbursements. The lease contains two five year options to renew at fair value rates in effect at the time of renewal. In addition, the Company leases certain office and telephone equipment under non-cancelable operating leases expiring in 2002. Minimum lease requirements for each of the next five years and thereafter under the aforementioned property and equipment leases follows: Years ending December 31: 1998 $ 484,100 1999 501,600 2000 517,800 2001 513,400 2002 542,100 2003-2004 839,600 ---------- Total $3,398,600 ==========
Rent expense for the years ended December 31, 1997 and 1996 aggregated approximately $372,000 and $26,800 respectively. 34 35 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) University Research Grants At December 31, 1997, the Company has committed to pay an aggregate of $320,700 to a number of universities, including $50,000 to the Reeve-Irvine Research Center at the University of California, Irvine, to conduct general scientific research programs and to provide for a Fellowship Grant. The Company anticipates paying all of these grants in 1998. 8. STOCKHOLDERS' EQUITY (DEFICIT) Revenue Participation Units In 1988 and 1989, AIT raised private placement funds via a financial instrument specified as a Revenue Participation Unit ("RPU"). The Company raised an aggregate of $676,000 from the issuance of seventy-five RPU's at prices ranging from $9,000 to $10,000 per RPU. The RPU's entitled holders to cash payments based on stipulated percentages of revenues. Holders of RPUs were entitled to convert to common stock at any time and AIT had the option to redeem the RPU's subject to certain conditions by paying cash or in exchange for common stock. In July 1996, the Company offered, and all RPU holders accepted, an option to convert each RPU unit into 4,000 shares of common stock (300,000 shares in the aggregate) in exchange for waiving all rights as an RPU holder. Reverse Stock Split In June 1996, the Board of Directors authorized, with shareholder approval, a reverse split of the Company's outstanding common stock on the basis of 1 share for each 2.5 shares of the then outstanding common stock. The Board of Directors also authorized, with shareholder approval, an increase in the authorized common stock from 10 million to 25 million shares and the creation of a new class of preferred stock with the authorization to issue up to 5 million shares of such preferred stock. All references to common stock amounts and loss per share in the accompanying financial statements give effect to the reverse stock split. Re-incorporation During June 1997, the stockholders of the Company approved the re-incorporation of the Company as a Delaware corporation. In connection therewith, a par value of $.001 per share was assigned to the common stock of the Company. The total number of authorized and issued shares remained unchanged. Common Stock During 1993, the Company issued to a financial consultant in exchange for investment banking services, 40,000 shares of common stock at $1.35 per share, the market value on issuance date, for an aggregate amount of $54,000. During 1994, three investors bought 13,000 shares of restricted (restrictions as to transferability) common stock at $2.50 per share, for an aggregate amount of $32,500, through a private placement. During 1995, six investors bought 22,000 shares of restricted common stock at $2.50 per share, for an aggregate amount of $55,000, through a private placement. From January 1, 1996 to June 20, 1996, 266,800 shares of restricted (restrictions as to transferability) common stock were issued at $2.50 per share, for an aggregate amount of $633,650 (net of commission), through a private placement. In June 1996, the Company filed a registration statement with the Securities and Exchange Commission offering to the public 2,500,000 units (the "Units"), each Unit consisting of one share of the Company's common stock (the "common stock"), and one warrant to purchase one share of common stock (the "warrants"). The registration statement became effective on September 26, 1996, and on October 1, 1996, the Company realized $17,363,003 in net proceeds from the sale of the 2,500,000 Units. 35 36 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On October 11, 1996, the principal underwriter of the offering exercised a portion of its overallotment option and purchased 200,000 Units for net cash of $1,389,280. The Units separated immediately following issuance and the common stock and Warrants that made up the Units trade only as separate securities. 9. STOCK OPTIONS The Company has two stock option plans: the 1991 Stock Incentive Plan (the "1991 Plan") and the 1997 Stock Incentive Plan (collectively, the "Plans"). The Plans were adopted by the Company's shareholders and Board of Directors in May 1991 and June 1997, respectively, and provide for the granting of incentive and nonqualified stock options as well as other stock-based compensation. The 1991 Plan authorizes for issuance up to 140,000 shares of the Company's common stock and the number of shares issuable increases automatically each January 1 by a number equal to 1% of the then total outstanding shares. On August 7, 1996, the Company's shareholders approved an amendment to the 1991 Plan increasing the number of authorized shares by 60,000, to a total of 293,154 shares as of that date. As of January 1, 1998, the number of shares authorized under the 1991 Plan automatically increased by 54,658 (one percent of the total shares outstanding on that date) to a total of 347,812. Options which have been granted under the 1991 Plan contain vesting provisions determined by the Board of Directors which range from one to four years. The 1997 Plan authorizes for issuance up to 500,000 shares of the Company's common stock. Under the Plans, shares of the Company's common stock may be granted to directors, officers and employees of the Company, except that incentive stock options may not be granted to non-employee directors. The Plans provide for issuance of incentive stock options having exercise prices equal to the fair market values of the stock at the times of grant of the options or, in certain circumstances, at option prices at least equal to 110 percent of the fair market value of the stock at the time the options are granted. An option granted under the Plans is exercisable in such a manner and within such period, not to exceed ten years from the date of the grant, as shall be set forth in a stock option agreement between the employee and the Company. Stock options have also been issued outside of the aforementioned plans to various consultants. During the period of December 1993 through December 1996, the Company issued a total of 194,000 options to purchase common stock to two technical consultants and a financial consultant in exchange for past and future services. The options are exercisable through December 31, 2001 at an exercise price of $0.025 per share. As the exercise price was lower than the fair market value of the stock on the date the options were granted, compensation expense was recorded for the difference between the option exercise price and the estimated fair market value of the stock as determined by the Board of Directors on the grant date. All options and warrants issued outside of the plan were vested and exercisable upon issuance. In September 1990, the Company issued a Warrant to the Chief Executive Officer of the Company to purchase 88,173 shares of common stock at $3.75 per share. The Warrant expires August 31, 2000. In January 1997, the Company issued stock options for 180,000 shares to a financial consultant at the exercise price of $3.875 per share. A portion (30,000) of the options, were vested immediately. The remaining 150,000 options will vest upon the occurrence of certain events as specified in the related agreements. The Company recognized $60,000 of compensation expense for these options pursuant to SFAS No. 123. The Company's 1987 Stock Incentive Plan expired in 1997. No options had been issued under that Plan. 36 37 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of stock option activities are as follows:
1995 1996 1997 ------------------------ ----------------------- ------------------------ Weighted Weighted Weighted Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Outstanding at beginning of year 198,173 $0.28 240,173 $0.24 447,173 $3.15 Granted 42,000 0.025 207,000 3.39 329,000 5.37 Exercised - - - - (104,000) 0.025 Forfeited - - - - (14,000) 4.29 Expired - - - - - - ------- ----- ------- ----- ------- ----- Outstanding, at end of year 240,173 $0.24 447,173 $3.15 658,173 $4.66 ======= ===== ======= ===== ======= ===== Exercisable, at end of year 240,173 $0.24 270,173 $0.21 363,923 $1.18 ======= ===== ======= ===== ======= =====
The following table summarizes information about stock options outstanding at December 31, 1997:
Weighted Weighted Weighted Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/97 Life Price 12/31/97 Price -------- ----------- --------- -------- ----------- -------- .025 to 3.74 90,000 2.00 .025 90,000 .025 3.75 to 4.50 443,673 7.60 4.01 241,923 4.06 4.51 to 12.88 124,500 9.53 9.19 32,000 9.97
As of December 31, 1997, there were 45,000 options outstanding under the 1997 plan, 254,000 options outstanding under the 1991 Plan and the remaining 359,173 outstanding options were granted outside of option plans. The Company applies APB Opinion No. 25 and related interpretations in accounting for stock options, and does not recognize compensation expense when the exercise price of the options equals the fair market value of the underlying shares at the date of grant. Directors' stock options are treated in the same manner as employee stock options for accounting purposes. Under SFAS No. 123, the Company is required to present certain pro forma earnings information determined as if employee stock options were accounted for under the fair value method of that statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1995, 1996 and 1997, respectively: risk-free interest rates of 5.86%, 6.52% and 6.37%; zero expected dividend yields; expected lives of 5 years; expected volatility of 50 percent. For purposes of the following required pro forma information, the weighted average fair value of stock options granted in 1995, 1996 and 1997 was $2.48, $2.14 and $3.06, respectively. The total estimated fair value is amortized to expense over the vesting period.
1995 1996 1997 --------- ------------ ----------- Pro forma net loss $(999,593) $(1,218,389) $(6,551,287) Pro forma basic and diluted loss per share $ (0.48) $ (0.37) $ (1.21)
10. SALARY DEFERRAL PLAN The Company established a 401(k) Salary Deferral Plan on January 1, 1990. The Plan allows eligible employees to defer part of their income on a tax-free basis. Contributions by the Company to the Plan are discretionary upon approval by the Board of Directors. To date, the Company has not made any contributions into the Plan. 37 38 NEOTHERAPEUTICS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. RESEARCH ACTIVITIES During 1995, the National Institute on Aging (NIA) and the National Institute for Mental Health (NIMH) issued contracts to an independent subcontractor of theirs to manufacture AIT-082 for animal and human testing programs. The NIA also issued an additional contract to one of its subcontractors to conduct the subchronic animal toxicity studies required by the U.S. Food and Drug Administration as a part of any Investigational New Drug (IND) application for AIT-082. The entire cost of these two contracts will be paid by the NIA and NIMH directly to the subcontractors. 12. EVENTS SUBSEQUENT TO DECEMBER 31, 1997 On March 27, 1998, the Company executed an Agreement with a private investor which provides for the Company, at its sole discretion, subject to certain restrictions, to sell ("put") to the investor up to $15 million of its common stock, subject to a minimum put of $1 million. The Agreement expires thirty months after the effective date of a Registration Statement (which is required to be filed within 45 days of the closing) and, among other things, provides for minimum and maximum puts ranging from $500,000 to $2,000,000 depending on the Company's stock price and trading volume. Puts cannot occur more frequently than every 15 days, and are subject to a discount of 12% from the then current average market price, as determined under the Agreement. In addition, the Company is required to pay sales commissions consisting of cash and shares of common stock and will issue to the investor warrants to purchase 25,000 shares of common stock at 130% of the market price, as defined in the Agreement. 38 39 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth certain information with respect to each person who is an executive officer or a director of the Company:
Name Age Position - ---- --- -------- Executive Officers and Directors Alvin J. Glasky, Ph.D. ................. 64 Chairman of the Board, Chief Executive Officer, President and Director Samuel Gulko............................. 66 Chief Financial Officer Stephen Runnels......................... 48 Executive Vice President Michelle S. Glasky, Ph.D. .............. 38 Vice President Scientific Affairs Mark J. Glasky........................... 35 Director Frank M. Meeks........................... 52 Director Carol O'Cleireacain, Ph.D. ............. 51 Director Paul H. Silverman, Ph.D., D.Sc. ........ 72 Director Rosalie H. Glasky........................ 61 Secretary and Treasurer
Executive Officers and Directors Alvin J. Glasky, Ph.D., has been Chief Executive Officer, President and a director of AIT since its inception in June 1987, and has served as the Chairman of the Board, Chief Executive Officer, President and a director of the Company since July 1989, when AIT became a wholly-owned subsidiary of the Company. From March 1986 to January 1987, Dr. Glasky was Executive Director of the American Social Health Association, a non-profit organization. From 1968 until March 1986, Dr. Glasky was the President and Chairman of the Board of Newport Pharmaceuticals International, Inc., a publicly-held pharmaceutical company that developed, manufactured and marketed prescription medicines. From 1966 to 1968, Dr. Glasky served as Director of Research for ICN Pharmaceutical, Inc. and as Director of the ICN-Nucleic Acid Research Institute in Irvine, California. During that period he was also an assistant professor in the Pharmacology Department of the Chicago Medical School. Dr. Glasky currently is a Regent's Professor at the University of California, Irvine. Dr. Glasky received a B.S. degree in Pharmacy from the University of Illinois College of Pharmacy in 1954 and a Ph.D. degree in Biochemistry from the University of Illinois Graduate School in 1958. Dr. Glasky was also a Post-Doctoral Fellow, National Science Foundation, in Sweden. Mark J. Glasky has been a director of the Company since August 1994. Since 1982, Mr. Glasky has been employed by Bank of America NT&SA in various corporate lending positions and currently serves as Vice President Commercial Banking Manager. Mr. Glasky obtained a B.S. degree in International Finance from the University of Southern California in 1983 and an M.B.A. degree in Corporate Finance from the University of Texas at Austin in 1987. Frank M. Meeks has been a director of the Company since July 1989. Since September 1992, Mr. Meeks has been pursuing personal investments in real estate, property management and oil and gas. Mr. Meeks was employed by Environmental Developers, Inc., a real estate development and construction company, from June 1979 until March 1993, first as Vice President and finally as Financial Vice President. Mr. Meeks obtained a B.S. degree in Business Administration from Wittenberg University in 1966, and an M.B.A. degree from Emory University in 1967. Mr. Meeks is a non-practicing certified public accountant and a licensed real estate broker. Carol O'Cleireacain, Ph.D., has been a director of the Company since September 1996. Dr. O'Cleireacain has served as an independent economic and management consultant in New York City since 1994. Since 1997 through 1998, Dr. O'Cleireacain has been an adjunct Associate Professor at the Wagner Graduate School of Public Service, New York University and at Barnard College, Columbia University and is serving on a Presidential Commission examining the possibility of a capital budget for the United States. Since May 1996, Dr. O'Cleireacain has served as a director of Franklin Research and Development Corp., an employee-owned investment company in Boston. From March 1996 until June 1997 Dr. O'Cleireacain was a Visiting Fellow, Economic Studies, at The Brookings Institution in Washington D.C., where she authored The Orphaned Capital: Adopting the Right Revenues for the District of Columbia. From April 1994 through April 1996, Dr. O'Cleireacain served as the first nominee of the United Steelworkers of America and the first woman director of ACME Metals Inc. Dr. O'Cleireacain served as the Director of the New York City Office of Management and Budget from August 1993 until December 1993. From February 1990 until August 1993, Dr. O'Cleireacain was the Commissioner of the New York City Department of Finance. Dr. O'Cleireacain received a B.A. degree, with honors, in Economics from the University of Michigan in 1968, an M.A. degree in Economics from the University of Michigan in 1970 and a Ph.D. in Economics from the London School of Economics in 1977. Dr. O'Cleireacain is a member of the Council of Foreign Relations. Paul H. Silverman, Ph.D., D.Sc., has been a director of the Company since September 1996. Dr. Silverman has served as a Director for the Western Center of the American Academy of Arts and Sciences located on the University of California, Irvine campus since March 1997. Since March 1993, Dr. Silverman has also been an Adjunct Professor in the Department of Medicine at the University of California, Irvine. From January 1994 until July 1996 Dr. Silverman has served as an Associate Chancellor for the Center for Health Sciences at the University of California, Irvine. From August 1992 until January 1994, Dr. Silverman served as the Director of Corporate and Government Affairs at the Beckman Laser Institute and Medical Clinic in Irvine, California. From November 1990 until December 1993, Dr. Silverman served as Director of Scientific Affairs at Beckman Instruments, Inc. Prior to 1990, Dr. Silverman served as the Director of the Systemwide Biotechnology Research and Education Program for the University of California; the Director of 39 40 the Donner Laboratory and an Associate Director of the Lawrence Berkeley Laboratory at the University of California, Berkeley; as the President of the University of Maine at Orono; as the President of The Research Foundation of the State University of New York, and as the head of the Department of Immunoparasitology at Glaxo, Ltd. Dr. Silverman received his Ph.D. in Parasitology and Epidemiology and his Doctor of Science degree from the University of Liverpool, England. Samuel Gulko has served as the Chief Financial Officer of the Company, on a part-time basis, since September 1996. From 1968 until March 1987, Mr. Gulko served as a partner in the audit practice of Ernst & Young, LLP, Certified Public Accountants. From April 1987 to the present, Mr. Gulko has been self-employed as a Certified Public Accountant and business consultant, as well as the part-time Chief Financial Officer of several companies, including a computer peripheral manufacturer (from April 1987 to March 1991) and a chain of medical clinics (from April 1987 to September 1990). Mr. Gulko obtained his B.S. degree in Accounting from the University of Southern California in 1958. Stephen Runnels joined the Company as Executive Vice President in April, 1997. Prior to joining the Company, Mr. Runnels held the position of Vice President, Marketing and Business Development for Sigma-Aldrich, Inc., a Fortune 500 manufacturer of biochemicals, pharmaceuticals, and biotechnology products. Mr. Runnels has also held positions as Vice President - Sales and Marketing for Irvine Scientific, and Vice President, International Operations for Gamma Biologicals. Mr. Runnels is certified by the American Society of Clinical Pathologists as a specialist in Immunohematology, and was an instructor of Clinical Immunology at Arizona State University. Mr. Runnels obtained a B.S. in Cell Biology from the University of Arizona. Michelle S. Glasky, Ph.D. joined the Company as Director of Scientific Affairs in July 1996 and was promoted to Vice President, Scientific Affairs in June 1997. Prior to joining the Company, Dr. M. Glasky worked at the Department of Pathology, University of Southern California School of Medicine, as a Research Associate and Laboratory Administrator from February 1991 until July 1996. Dr. M. Glasky served as a consultant to the Company from August 1990 to July 1996. Dr. M. Glasky holds a research professor position at the University of California, Irvine. Dr. M. Glasky received a B.A. degree in Microbiology from the University of California, San Diego in 1981, and a Ph.D. degree in Biomedical Sciences from the University of Texas Health Science Center in 1988. Dr. M. Glasky completed a post-doctoral fellowship at Stanford University School of Medicine. Rosalie H. Glasky has served as Treasurer and Secretary of the Company since November 1991. Mark J. Glasky and Dr. Michelle S. Glasky are the adult son and daughter, respectively, of Dr. Alvin Glasky and Rosalie Glasky. Dr. Alvin Glasky and Rosalie Glasky are husband and wife. The Board of Directors of the Company currently consists of five directors and there are no vacancies. All directors hold office until the next annual meeting of shareholders or until their successors have been duly elected and qualified. Officers are elected by, and serve at the discretion of, the Board of Directors. The Board of Directors currently has two committees. The Compensation Committee, which consists of Mr. Meeks, Dr. O'Cleireacain and Dr. Silverman, has been established to recommend salaries and incentive compensation for executive officers of the Company. The Audit Committee, which consists of Dr. O'Cleireacain, Mr. Glasky and Mr. Meeks, has been established to review the results and scope of the audit and other services provided by the Company's independent public accountants. SCIENTIFIC ADVISORY BOARD The Company has established a Scientific Advisory Board consisting of distinguished scientists whom the Company believes will make a contribution to the development of the Company's business. The Scientific Advisory Board members review the Company's research and development progress, advise the Company of advances in their fields and assist in identifying special product opportunities. Members are compensated on a consulting fee basis for their services and are reimbursed for reasonable travel expenses. Each of Dr. Nelson and Dr. Krassner, in their capacity as members of the Scientific Advisory Board, received options to purchase 6,000 shares of common stock for $0.025 per share as compensation for their services during 1996. All of the advisors are employed by employers other than the Company and may have commitments to, or consulting or advisory agreements with, other entities, including potential competitors of the Company, that may limit their availability to the Company. Although these advisors may contribute 40 41 significantly to the affairs of the Company, none are required to devote more than a small portion of his time to the Company in their capacity as members of the Scientific Advisory Board. The members of the Scientific Advisory Board currently are as follows: Stuart M. Krassner, Ph.D. has been affiliated with the University of California, Irvine since 1965, currently as Professor of Biological Sciences and formerly in several administrative positions, most recently as Associate Dean of Research and Graduate Studies. Dr. Krassner has conducted research at both the Rockefeller University (New York) and the Swiss Tropical Institute (Basel). Dr. Krassner's research interests included parasitology and immunology and has numerous publications in those fields. Dr. Krassner received his doctorate degree in Parasitology from Johns Hopkins University in 1961. Eric L. Nelson, Ph.D. has been a pharmaceutical research consultant since 1986. He was a founder, and served as Chairman until 1986, of Nelson Research and Development Corporation, a publicly held corporation engaged in research and development of drug receptor technology applied to the development of pharmaceutical products and novel drug delivery systems. Prior to 1972, Dr. Nelson spent eleven years at Allergan Pharmaceuticals, Inc., where as Vice President of Research he was responsible for establishing Allergan's entire research organization. Dr. Nelson received his doctorate degree in Microbiology from UCLA in 1951 and has authored numerous publications. He is the inventor on various patents in the areas of microbiology, immunology, molecular biology and pharmacology. Paul H. Silverman, Ph.D., D.Sc. See "Executive Officers and Directors." COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Based solely upon its review of the copies of reporting forms furnished to the Company, and written representations that no other reports were required, the Company believes that all filing requirements under Section 16(a) of the Securities Exchange Act of 1934 applicable to its directors, officers and any persons holding 10% or more of the Company's common stock with respect to the Company's fiscal year ended December 31, 1997, were satisfied, except that Rosalie Glasky inadvertently failed to file a Form 4 Statement of Changes in Beneficial Ownership on a timely basis in connection with the sale by her husband, Dr. Alvin J. Glasky, of shares of the Company's common stock. However, Dr. Alvin J. Glasky did timely file a Form 4 with respect to such sale. Mrs. Glasky has disclaimed beneficial ownership of these shares of common stock, and a filing with the correct information has been made with the Securities and Exchange Commission. ITEM 10. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION The following table sets forth summary information concerning the compensation of the Company's Chief Executive Officer (the "Named Executive Officer") and its Executive Vice President for services rendered to the Company in all capacities during the fiscal years ended December 31, 1996 and 1997. No other executive officer of the Company received compensation in 1997 in excess of $100,000.
LONG TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES --------------------------------------------- UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS - --------------------------- ---- ------ ----- ----- ------- Alvin J. Glasky, Ph.D. Chairman, Chief Executive Officer and President 1997.... $ 199,992(1) $ -- $ -- $ -- 1996.... 165,398(2) -- -- 75,000 Stephen Runnels Executive Vice President 1997.... 108,513 -- $ 25,107(3) 62,000
- ---------- (1) Excludes prior years accrued salaries of $265,328 and auto allowances and expense account reimbursements previously accrued aggregating $84,516, all of which were paid in 1997. (2) Includes an auto allowance of $450 per month. See "Employment Agreement". Of the total amounts, $72,998 has been paid and $92,400 has been accrued for 1996. (3) Represents a one-time relocation allowance. 41 42 OPTION GRANTS The following table sets forth the options granted during the period commencing January 1, 1997 and ending December 31, 1997 to the executive officers named in the Summary Compensation table: STOCK OPTIONS GRANTED IN FISCAL YEAR ENDED DECEMBER 31, 1997
PERCENTAGE OF TOTAL OPTIONS GRANTED TO EXERCISE OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION NAME (NO. OF SHARES) FISCAL YEAR ($/SHARE) DATE ---- --------------- ----------- --------- ---- Stephen Runnels 50,000(1) 48% $7.25 April 7, 2007 " 12,000(2) 12% $5.13 April 29, 2007
- ---------- (1) Option becomes exercisable in 25% increments, commencing twelve months from the date of grant and each year thereafter. (2) Option becomes exercisable in 25% increments, commencing three months from the date of grant and each three months thereafter. OPTIONS EXERCISES AND FISCAL YEAR-END VALUES The following table sets forth the options exercised during the period commencing January 1, 1997 and ending December 31, 1997 by the executive officers named in the Summary Compensation table: AGGREGATE STOCK OPTIONS EXERCISED IN FISCAL YEAR ENDED DECEMBER 31, 1997 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES FISCAL YEAR-END FISCAL YEAR-END(1) ACQUIRED VALUE ------------------------ ------------------------- NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISED EXERCISED UNEXERCISED - ---- ----------- -------- ----------- ----------- --------- ----------- Alvin J. Glasky, Ph.D. - - 25,000 75,000 - $787,500 Stephen Runnels - - 12,000 62,000 - $651,000
- ---------- (1) Based upon the closing price of the common stock on December 31, 1997, as reported by the NASDAQ National Market ($10.50 per share). EMPLOYMENT AGREEMENT The Company has an employment agreement with Dr. Alvin J. Glasky, effective as of July 1, 1996. The agreement requires Dr. Glasky to devote all of his productive time, attention, knowledge and skill to the affairs of the Company during the term of the agreement. The agreement provides for an annual base salary of $200,000 with annual increases and an annual bonus based on the Company's attainment of certain performance objectives. The agreement ends on June 30, 1999 and may be terminated by the Company with or without cause as defined in the agreement. The agreement also provides for guaranteed severance payments equal to Dr. Glasky's annual base salary over the remaining life of the agreement upon the termination of employment without cause or upon a change in control of the Company. In connection with entering into this agreement, Dr. Glasky was granted an incentive stock option to purchase 75,000 shares of 42 43 common stock at an exercise price of $4.13 per share, which vests in three equal increments over the life of Dr. Glasky's employment agreement. COMPENSATION OF DIRECTORS Each of the Company's non-employee directors receives $1,000 for each Board of Directors meeting and $500 for each committee meeting attended (with the Chairperson of the Committee receiving $1,000). The directors are also reimbursed for certain expenses in connection with attendance at Board meetings. In June 1997, the Company granted to each non-employee director an option to purchase 10,000 shares of common stock at $12.88 per share. STOCK OPTION PLANS The Company has two stock option plans: the 1991 Stock Incentive Plan (the "1991 Plan") and the 1997 Stock Incentive Plan (the "1997 Plan") (the "Plans"). The Plans were adopted by the Company's shareholders and Board of Directors in May 1991 and June 17, 1997, respectively. The Company's 1987 Stock Incentive Plan, under which no options were issued, expired in 1997. The 1991 Incentive Stock Option Plan The 1991 Plan provides for grants of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("the Code"), nonqualified stock options, SARs and bonus stock. The 1991 Plan authorized for issuance up to 140,000 shares of the Company's common stock. The number of shares issuable under the 1991 Plan is increased each January 1 by a number equal to one percent of the Company's then total outstanding shares. On August 7, 1996, the Company's shareholders approved an amendment to the 1991 Plan increasing the number of authorized shares by 60,000, to a total of 293,154 shares as of that date. As of January 1, 1997, the number of shares authorized under the 1991 Plan automatically increased by 53,618 (one percent of the total shares outstanding on that date) to a total of 346,772. Under the 1991 Plan, incentive stock options may be granted to employees, and nonqualified stock options, SARs and bonus stock may be granted to employees of the Company and other persons whose participation in the 1991 Plan is determined to be in the Company's best interest. As of January 1, 1998, there were options to purchase 91,772 shares of common stock outstanding under the 1991 Plan. The 1997 Incentive Stock Option Plan The 1997 Plan provides for grants of "incentive stock options" within the meaning of the Code, nonqualified stock options and rights to purchase shares of common stock ("Purchase Rights"). The 1997 Plan authorized for issuance up to 500,000 shares of the Company's common stock, subject to adjustment in the number and kind of shares subject to the 1997 Plan and to outstanding shares in the event of stock splits, stock dividends or certain other similar changes in the capital structure of the Company. Under the 1997 Plan, incentive stock options, nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates. Nonqualified stock options and Purchase Rights may be granted to employees of the Company and its subsidiaries and affiliates, non-employee directors and officers, consultants and other service providers. As of January 1, 1998, there were options to purchase 455,000 shares of common stock outstanding under the 1997 Plan. The Plans are administered by the Board of Directors or a committee appointed by the Board (the "Committee"), which has sole discretion and authority, consistent with the provisions of the Plans, to determine which eligible participants will receive options, the time when options will be granted, the terms of options granted and the number of shares which will be subject to options granted under the Plans. In the event of a merger of the Company with or into another corporation or the sale of substantially all of the assets of the Company, all outstanding options and SARs granted under the 1991 Plan shall be 43 44 assumed or equivalent options and SARs substituted by the successor corporation. In the event a successor corporation refuses to assume or substitute the options and SARs, the exercisability of the options and SARs under the 1991 Plan shall be accelerated. The exercise price of incentive stock options must be not less than the fair market value of a share of common stock on the date of the option is granted (110% with respect to optionees who own at least 10% of the outstanding common stock). Nonqualified options shall have such exercise price as determined by the Committee. The Committee has the authority to determine the time or times at which options granted under the Plans become exercisable, provided that options expire no later than ten years from the date of grant (five years with respect to optionees who own at least 10% of the outstanding common stock). Options are nontransferable, other than upon death, by will and the laws of descent and distribution, and incentive stock options may be exercised only by an employee while employed by the Company or within three months after termination of employment (one year for termination resulting from death or disability). SECTION 401(k) PLAN In January 1990, the Company adopted the AIT Cash or Deferred Profit Sharing Plan (the "401(k) Plan") covering the Company's full-time employees located in the United States. The 401(k) Plan is intended to qualify under Section 401(k) of the Code, so that contributions to the 401(k) Plan by employees or by the Company, and the investment earnings thereon, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit ($10,000 in 1998) and to have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions to the 401(k) Plan by the Company on behalf of all participants in the 401(k) Plan. The Company has not made any contributions to the 401(k) Plan. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information with respect to the beneficial ownership of the Company's common stock as of March 16, 1998 by (i) each person (or group of affiliated persons) who is known by the Company to own beneficially 5% or more of the common stock, (ii) each of the Company's directors, (iii) the Named Executive Officer, and (iv) all executive officers and directors of the Company as a group. The information as to each person or entity has been furnished by such person or entity, and unless otherwise indicated, the persons named in the table have sole voting and sole investment power with respect to all shares beneficially owned, subject to community property laws where applicable.
SHARES PERCENT OF BENEFICIALLY SHARES NAME AND ADDRESS OF BENEFICIAL OWNERSHIP (1) OWNED (1) OUTSTANDING - ------------------------------------------- --------- ----------- Alvin J. Glasky, Ph.D.(2)....................... 1,314,161 23.5% 157 Technology Drive Irvine, CA 92618 Mark J. Glasky (3)(4)........................... 28,479 * Michelle S. Glasky, Ph.D.(5)(6)................. 19,480 * Frank M. Meeks(7)............................... 40,460 * Carol O'Cleireacain, Ph.D.(8)................... 20,000 * Paul H. Silverman, Ph.D., Sc.(8) ............... 20,000 * All Executive Officers and Directors as a group (nine persons)(9).................. 1,543,142 26.9%
44 45 - ---------- * less than 1% (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to options and warrants currently exercisable or convertible, or exercisable or convertible within 60 days of March 16, 1998, are deemed beneficially owned and outstanding for computing the percentage of the person holding such securities, but are not considered outstanding for computing the percentage of any other person. (2) Includes 88,173 shares issuable within 60 days of March 16, 1998 upon exercise of the Glasky Warrant and 4,000 shares owned by the AIT Cash or Deferred Profit Sharing Plan (401(k)), of which Dr. Glasky is the trustee. Does not include 55,962 shares beneficially owned by Dr. Glasky's wife, Rosalie H. Glasky, 28,479 shares beneficially owned by Mark J. Glasky and 19,480 shares beneficially owned by Dr. Michelle S. Glasky, Dr. Glasky's adult children, for which Dr. Glasky disclaims beneficial ownership. (3) Mark J. Glasky is the adult son of Dr. Alvin J. Glasky. (4) Includes 20,000 shares subject to options held by Mr. Glasky which are currently exercisable or exercisable within 60 days of March 16, 1998, and 1,000 shares subject to currently exercisable Warrants. (5) Michelle S. Glasky, Ph.D., is the adult daughter of Dr. Alvin J. Glasky. (6) Includes 12,000 shares subject to options held by Dr. Michelle S. Glasky which are currently exercisable or exercisable within 60 days of March 16, 1998, and 500 shares subject to currently exercisable Warrants. (7) Includes 20,000 shares subject to options held by Mr. Meeks which are currently exercisable or exercisable within 60 days of March 16, 1998. Does not include 460 shares beneficially owned by Mr. Meeks' wife, for which Mr. Meeks disclaims beneficial ownership. (8) Includes 20,000 shares subject to options held by each of Drs. O'Cleireacain and Silverman which are currently exercisable or exercisable within 60 days of March 16, 1998. (9) Includes 88,173 shares issuable upon the exercise of the Glasky Warrant, 172,250 shares subject to options which are currently exercisable or exercisable within 60 days of March 16, 1998, 2,050 shares subject to currently exercisable Warrants. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In September 1990, the Company issued a warrant to Dr. Alvin J. Glasky (the "Glasky Warrant") to purchase up to 88,173 shares of common stock of the Company at any time between September 1, 1990 and August 31, 1995 for $3.75 per share. Effective August 31, 1995, the expiration date of the Glasky Warrant was extended to August 31, 2000. On June 30, 1990, in exchange for cancellation of $503,148 of indebtedness for unpaid compensation, the Company issued a total of 402,518 shares of common stock in the following amounts: Dr. Alvin Glasky, 184,000 shares; Sanford Glasky (the brother of Dr. Alvin Glasky), 60,012 shares; JoAnne Law, 24,344 shares; Luana Kruse, 19,200 shares; Rosalie Glasky (the wife of Dr. Glasky), 28,066 shares; and John W. Baldridge, 86,906 shares (the "1990 Restricted Stock Exchange"). On December 30, 1993, in exchange for cancellation of $690,795 of indebtedness for unpaid compensation and accrued expenses, the Company issued a total of 276,318 shares of common stock in the following amounts: Dr. Alvin Glasky, 169,001 shares; Sanford Glasky, 49,837 shares; JoAnne Law, 16,560 shares; Luana Kruse, 19,800 shares; Rosalie Glasky, 19,178 shares; and John W. Baldridge, 1,942 shares (the "1993 Restricted Stock Exchange"). Both the 1990 Restricted Stock Exchange and the 1993 Restricted Stock Exchange involved a risk of forfeiture whereby if the Company did not generate a minimum of $500,000 in total operating revenues from inception through December 31, 1995, all shares would be returned to the Company with the holders forfeiting all rights to the shares and forfeiting any claim to the previously accrued but unpaid compensation. Effective December 31, 1995, five of the parties, all of whom were present or past employees of the Company, entered into agreements with the Company whereby the forfeiture date was extended from December 31, 1995 to 45 46 December 31, 1997 in exchange of increasing the minimum total operating revenues which the Company would need to achieve in order to avoid forfeiture of the shares from $500,000 to $1,000,000, with such revenues to be achieved by December 31, 1997. The compensation expense previously recorded which related to the shares forfeited on December 31, 1995, was reversed in the 1995 statement of operations. Accordingly, a new measurement date exists for new shares issued subject to forfeiture on December 31, 1997. The value used to record compensation expense is the estimated fair market value as determined by the Board of Directors on December 31, 1995. One party claimed that his 88,848 shares are vested and that there was no need for him to enter into a new Agreement, and therefore had not entered into an Agreement under the new terms. As of December 31, 1997, when the Agreement terminated, the Company did not achieve the revenue goals set forth in the Agreement, as previously amended. Several former employees who are parties to the Agreement have indicated disagreement with the Company's position and, to date, none of the shares have been surrendered for cancellation. The Company's Chief Executive Officer and his wife, the Secretary and Treasurer of the Company, have indicated that they are willing to conditionally surrender their shares, (amounting to an aggregate of 402,245 shares) subject to resolution of the dispute with the aforementioned former employees. Until such time as the Company can obtain the surrender of all of these shares and the matter is fully resolved, the Company is accounting for all of the stock, which it has deemed forfeited, as issued and outstanding. On June 6, 1991, the Company entered into an agreement (the "1991 Patent Agreement") with Dr. Alvin Glasky whereby Dr. Glasky assigned to the Company all rights to the inventions covered by United States Patent No. 5,091,432 and any corresponding foreign applications and patents, including all continuations, divisions, reissues and renewals of said applications and any patents issued out of or based upon said applications (the "Assigned Rights"). The 1991 Patent Agreement was amended on July 26, 1996. The 1991 Patent Agreement, as amended, calls for the Company to pay Dr. Glasky a two percent royalty on all revenues derived by the Company from the use and sale by the Company of any products covered by these patents and applications or any patents derived from them. In the event that Dr. Glasky's employment is terminated by the Company without cause, the royalty rate shall be increased to five percent and in the event that Dr. Glasky dies during the term of the 1991 Patent Agreement, Dr. Glasky's family or estate shall be entitled to continue to receive royalties at the rate of two percent. The 1991 Patent Agreement terminates on the later of its ten year anniversary or the expiration of the final patent included within the Assigned Rights. On June 30, 1996, the Company and Dr. Glasky entered into an agreement whereby Dr. Glasky assigned to AIT all rights to the inventions covered by United States Patent No. 5,447,938 (the "1996 Patent Agreement"). The scope of the 1996 Patent Agreement as well as its terms and conditions are identical in all material respects to the 1991 Patent Agreement; provided, however, that the aggregate royalty amount with respect to any product shall be two percent (five percent in the event of termination without cause), even if a product is based on both patents. The 1996 Patent Agreement was also amended on July 26, 1996. Dr. Glasky will not receive any royalties with respect to sales of products which utilize patent rights licenses to the Company by McMaster University. See "ITEM 1 - Description of Business Patents and Proprietary Rights." On December 31, 1993, the Company issued 200,000 shares of common stock to Dr. Glasky in Exchange for cancellation of $500,000 of indebtedness for loans made by Dr. Glasky to the Company. Dr. Glasky received certain registration rights with respect to these shares. The remaining $257,900 in principal on the loans payable and accrued interest of $300,404 due to Dr. Glasky were converted into a $558,304 promissory note which, as amended from time to time, is currently unsecured, bears interest at 9% per annum, and is payable upon demand. In July 1996, all of the holders of the 75 outstanding Revenue Participation Units ("RPUs") converted their RPUs into an aggregate of 300,000 shares of common stock. As a part of this transaction, Dr. Glasky converted his 28 outstanding RPUs into a total of 112,000 shares of common stock. See Note 8 of Notes to Consolidated Financial Statements. 46 47 ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K a) Exhibits
EXHIBIT NO. DESCRIPTION - -------------- ----------------------------------------------------------------- 3.1 Certificate of Incorporation of the Registrant, as filed on May 7, 1997. (Filed as Exhibit B to the Definitive Proxy Statement dated May 8, 1997, for the Annual Meeting of Shareholders of NeoTherapeutics Colorado, the predecessor to Registrant, held on June 17, 1997, as filed with the Securities and Exchange Commission on May 9, 1997, and incorporated herein by reference.) 3.2 Bylaws of the Registrant. (Filed as Exhibit C to the Definitive Proxy Statement dated May 8, 1997, for the Annual Meeting of Shareholders of NeoTherapeutics Colorado, the predecessor to Registrant, held on June 17, 1997, as filed with the Securities and Exchange Commission on May 9, 1997, and incorporated herein by reference.) 4.1 Form of Registration Rights Agreement dated as of July 23, 1996, entered into between the Registrant and certain investors named therein. (Filed as Exhibit 4.1 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.2 Form of Registration Rights Agreement dated December 30, 1993, entered into between the Registrant and each of Alvin J. Glasky, Sanford J. Glasky, Joanne Law, Luana M. Kruse, Rosalie H. Glasky and John W. Baldridge. (Filed as Exhibit 4.2 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.3 Form of Representatives' Warrant Agreement dated as of September 25, 1996, entered into in connection with the public offering of the Company's securities on September 26, 1996. (Filed as Exhibit 4.3 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.4 Form of Stock Purchase Agreement dated December 30, 1993, including amendment effective December 30, 1995, between the Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as Exhibit 4.4 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.5 Form of Stock Purchase Agreement dated June 30, 1990, as amended on May 27, 1992, June 30, 1993 and December 30, 1993, and amendment thereto effective December 30, 1995, between the Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as Exhibit 4.5 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.6 Warrant Agreement entered into between Neotherapeutics, Inc. and U.S. Stock Transfer Corporation dated as of September 25, 1996. (Filed as Exhibit 4.6 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.1 Intentionally omitted. 10.2* 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.3* Employment Agreement between the Registrant and Alvin J. Glasky, Ph.D. (Filed as Exhibit 10.3 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.4 Note dated June 21, 1996 between the Registrant and Alvin J. Glasky and related Security Agreement dated August 31, 1990. (Filed as Exhibit 10.4 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
47 48
EXHIBIT NO. DESCRIPTION - -------------- ----------------------------------------------------------------- 10.5 Warrant to purchase common stock of the Registrant dated August 31, 1990 held by Alvin J. Glasky. (Filed as Exhibit 10.6 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.6 Agreement dated as of June 6, 1991, as amended on July 26, 1996, by and between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.7 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.7 Agreement dated as of June 30, 1991, as amended on July 26, 1996, by and between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.8 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.8* Form of Indemnification Agreement between the Registrant and each of its officers and directors. (Filed as Exhibit 10.10 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.9 Underwriting Agreement dated as of September 25, 1996, among the Company, Paulson Investment Company, Inc. and First Colonial Securities Group, Inc. (Filed as Exhibit 1.1 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.10 Letter Agreement dated March 18, 1993, including addendums dated April 1, 1993, December 31, 1993, April 6, 1995 and May 3, 1996, and amendment dated July 26, 1996, between the Registrant and North American Capital Partners. (Filed as Exhibit 1.2 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.11 Industrial Lease Agreement, dated January 16, 1997, between the Company and the Irvine Company. (Filed as Exhibit 10.11 to the Form 10-KSB for the fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 31, 1997 and incorporated herein by reference.) 10.12 Addendum to Note dated June 21, 1996 between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.12 to the Form 10-KSB for fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 31, 1997 and incorporated herein by reference.) 10.13 1997 Stock Incentive Plan. (Filed as Exhibit D to the Definitive Proxy Statement dated May 8, 1997, for the Annual Meeting of Shareholders of NeoTherapeutics Colorado, the predecessor to Registrant, held on June 17, 1997, as filed with the Securities and Exchange Commission on May 9, 1997, and incorporated herein by reference.) 10.14 Line of Credit Agreement dated as of August 20, 1997, between the Company and Sanwa Bank California. 21.1 Subsidiaries of Registrant. 27 Financial Data Schedule.
- -------- * Indicates a management contract or compensatory plan or arrangement. (b)....Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended December 31, 1996. 48 49 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEOTHERAPEUTICS, INC. Date: March 30, 1998 By: /s/ Alvin J. Glasky ------------------------------------- Alvin J. Glasky, Ph.D. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ Alvin J. Glasky Chairman of the Board, March 30, 1998 - ----------------------------- Chief Executive Officer, Alvin J. Glasky, Ph.D. President and Director (Principal Executive Officer) /s/ Samuel Gulko Chief Financial Officer March 30, 1998 - ----------------------------- (Principal Accounting and Samuel Gulko Financial Officer) /s/ Mark J. Glasky Director March 30, 1998 - ----------------------------- Mark J. Glasky /s/ Frank M. Meeks Director March 30, 1998 - ----------------------------- Frank M. Meeks /s/ Carol O'Cleireacain Director March 30, 1998 Carol O'Cleireacain, Ph.D. /s/ Paul H. Silverman Director March 30, 1998 - ----------------------------- Paul H. Silverman Ph.D., D.Sc.
49 50
EXHIBIT NO. DESCRIPTION - -------------- ----------------------------------------------------------------- 3.1 Amended and Restated Articles of Incorporation of the Registrant, as filed on August 7, 1996. (Filed as Exhibit 3.2 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 3.2 Bylaws of the Registrant. (Filed as Exhibit 3.3 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.1 Form of Registration Rights Agreement dated as of July 23, 1996, entered into between the Registrant and certain investors named therein. (Filed as Exhibit 4.1 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.2 Form of Registration Rights Agreement dated December 30, 1993, entered into between the Registrant and each of Alvin J. Glasky, Sanford J. Glasky, Joanne Law, Luana M. Kruse, Rosalie H. Glasky and John W. Baldridge. (Filed as Exhibit 4.2 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.3 Form of Representatives' Warrant Agreement dated as of September 25, 1996, entered into in connection with the public offering of the Company's securities on September 26, 1996. (Filed as Exhibit 4.3 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.4 Form of Stock Purchase Agreement dated December 30, 1993, including amendment effective December 30, 1995, between the Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as Exhibit 4.4 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.5 Form of Stock Purchase Agreement dated June 30, 1990, as amended on May 27, 1992, June 30, 1993 and December 30, 1993, and amendment thereto effective December 30, 1995, between the Registrant and each of Alvin J. Glasky, Sanford Glasky, Joanne Law, Luana Kruse, Rosalie Glasky and John Baldridge. (Filed as Exhibit 4.5 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 4.6 Warrant Agreement entered into between Neotherapeutics, Inc. and U.S. Stock Transfer Corporation dated as of September 25, 1996. (Filed as Exhibit 4.6 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.1 Intentionally omitted. 10.2* 1991 Stock Incentive Plan. (Filed as Exhibit 10.2 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.3* Employment Agreement between the Registrant and Alvin J. Glasky, Ph.D. (Filed as Exhibit 10.3 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.4 Note dated June 21, 1996 between the Registrant and Alvin J. Glasky and related Security Agreement dated August 31, 1990. (Filed as Exhibit 10.4 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.)
51
EXHIBIT NO. DESCRIPTION - -------------- ----------------------------------------------------------------- 10.5 Warrant to purchase common stock of the Registrant dated August 31, 1990 held by Alvin J. Glasky. (Filed as Exhibit 10.6 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.6 Agreement dated as of June 6, 1991, as amended on July 26, 1996, by and between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.7 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.7 Agreement dated as of June 30, 1991, as amended on July 26, 1996, by and between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.8 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.8* Form of Indemnification Agreement between the Registrant and each of its officers and directors. (Filed as Exhibit 10.10 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.9 Underwriting Agreement dated as of September 25, 1996, among the Company, Paulson Investment Company, Inc. and First Colonial Securities Group, Inc. (Filed as Exhibit 1.1 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.10 Letter Agreement dated March 18, 1993, including addendums dated April 1, 1993, December 31, 1993, April 6, 1995 and May 3, 1996, and amendment dated July 26, 1996, between the Registrant and North American Capital Partners. (Filed as Exhibit 1.2 to the Registration Statement on Form SB-2 as amended (No. 333-05342-LA), and incorporated herein by reference.) 10.11 Industrial Lease Agreement, dated January 16, 1997, between the Company and the Irvine Company. (Filed as Exhibit 10.11 to the Form 10-KSB for the fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 31, 1997 and incorporated herein by reference.) 10.12 Addendum to Note dated June 21, 1996 between the Registrant and Alvin J. Glasky. (Filed as Exhibit 10.12 to the Form 10-KSB for fiscal year ended December 31, 1996, as filed with the Securities and Exchange Commission on March 31, 1997 and incorporated herein by reference.) 10.13 1997 Stock Incentive Plan. (Filed as Exhibit D to the Definitive Proxy Statement dated May 8, 1997, for the Annual Meeting of Shareholders of NeoTherapeutics Colorado, the predecessor to Registrant, held on June 17, 1997, as filed with the Securities and Exchange Commission on May 9, 1997, and incorporated herein by reference.) 10.14 Line of Credit Agreement dated as of August 20, 1997, between the Company and Sanwa Bank California. 21.1 Subsidiaries of Registrant. 27 Financial Data Schedule.
- -------- * Indicates a management contract or compensatory plan or arrangement. (b)....Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended December 31, 1996. EX-10.14 2 LINE OF CREDIT AGREEMENT 1 EXHIBIT 10.14 LINE OF CREDIT AGREEMENT This Line of Credit Agreement ("Agreement") is made and entered into this 20th day of August, 1997 by and between SANWA BANK CALIFORNIA (the "Bank") and NEOTHERAPEUTICS, INC. (the "Borrower"). SECTION I DEFINITIONS 1.01 CERTAIN DEFINED TERMS. Unless elsewhere defined in this Agreement the following terms shall have the following meanings (such meanings to be generally applicable to the singular and plural forms of the terms defined): A. "ADVANCE" shall mean an advance to the Borrower under any line of credit facility or similar facility provided for in Section II of this Agreement which provides for draws by the Borrower against an established credit line. B. "BUSINESS DAY" shall mean a day, other than a Saturday or Sunday, on which commercial banks are open for business in California. C. "COLLATERAL" shall mean the property in which the Bank is granted a security interest pursuant to provisions of the section herein entitled "Collateral", together with any other personal or real property in which the Bank may be granted a lien or security interest to secure payment of the Obligations. D. "COST OF FUNDS RATE" shall mean an interest rate determined by the Bank, in its sole and absolute discretion, to be approximately equivalent to the Bank's cost of acquiring funds in an amount approximately equal to the relevant amount and for a period of time approximately equal to the relevant period and adjusted for any and all assessments, surcharges and reserve requirements pertaining to the borrowing or purchase of such funds by the Bank. E. "DEBT" shall mean all liabilities of the Borrower less Subordinated Debt. F. "EFFECTIVE TANGIBLE NET WORTH" shall mean the Borrower's stated net worth plus Subordinated Debt but less all intangible assets of the Borrower (i.e., goodwill, trademarks, patents, copyrights, organization expense and similar intangible items). G. "ENVIRONMENTAL CLAIMS" shall mean all claims, however asserted, by any governmental authority or other person alleging potential liability or responsibility for violation of any Environmental Law or for release or injury to the environment or threat to public health, personal injury (including sickness, disease or death), property damage, natural resources damage, or otherwise alleging liability or responsibility for damages (punitive or otherwise), cleanup, removal, remedial or response costs, restitution, civil or criminal penalties, injunctive relief, or other type of relief, resulting from or based upon (i) the presence, placement, discharge, emission or release (including intentional and unintentional, negligent and non-negligent, sudden or non-sudden, accidental or non-accidental placement, spills, leaks, discharges, emissions or releases) of any hazardous Materials at, in, or from property owned, operated or controlled by the Borrower, or (ii) any other circumstances forming the basis of any violation, or alleged violation, of any Environmental Law. H. "ENVIRONMENTAL LAWS" shall mean all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authorities, in each case relating to environmental, health, safety and land use matters; including the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Clean Air Act, the Federal Water Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Emergency Planning and Community Right-to-Know Act, the California Hazardous Waste Control Law, the California Solid Waste Management, Resource, Recovery and Recycling Act, the California Water Code and the California Health and Safety Code. 1 2 I. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, including (unless the context otherwise requires) any rules or regulations promulgated thereunder. J. "EVENT OF DEFAULT" shall have the meaning set forth in the section herein entitled "Events of Default". K. "HAZARDOUS MATERIALS" shall mean all those substances which are regulated by, or which may form the basis of liability under any Environmental Law, including all substances identified under any Environmental Law as a pollutant, contaminant, hazardous waste, hazardous constituent, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste. L. "INDEBTEDNESS" shall mean, with respect to the Borrower, (i) all indebtedness for borrowed money or for the deferred purchase price of property or services in respect of which the Borrower is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss and (ii) obligations under leases which shall have been or should be, in accordance with generally accepted accounting principles, reported as capital leases in respect of which the Borrower is liable, contingently or otherwise, or in respect of which the Borrower otherwise assures a creditor against loss. M. "LIBOR RATE" shall mean an interest rate determined by the Bank's Treasury Desk as being the arithmetic mean (rounded upwards, if necessary, to the nearest whole multiple of one-sixteenth of one percent (1/16%)) of the U.S. dollar London Interbank Offered Rates for the relevant period appearing on page3750 (or such other page as may replace 3750) of the Telerate screen at or about 11:00 a.m. (London time) on the second Business Day prior to the first day of the relevant interest period (adjusted for any and all assessments, surcharges and reserve requirements). N. "OBLIGATIONS" shall mean all amounts owing by the Borrower to the Bank pursuant to this Agreement including, but not limited to, the unpaid principal amount of Advances. O. "PERMITTED LIENS" shall mean": (i) liens and security interests securing indebtedness owed by the Borrower to the Bank; (ii) liens for taxes, assessments or similar charges either not yet due or being contested in good faith, provided proper reserves are maintained therefor in accordance with generally accepted accounting procedure; (iii) liens of materialmen, mechanics, warehousemen, or carriers or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (iv) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure Indebtedness outstanding on the date hereof or permitted to be incurred pursuant to this Agreement; (v) liens and security interests which, as of the date hereof, have been disclosed to and approved by the Bank in writing; and (vi) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of the Borrower's assets. P. "POSSESSORY COLLATERAL" shall mean that portion of the Collateral which consists of securities, certificates of deposit, savings or checking accounts, notes and instruments and any other similar collateral in which the security interest is normally perfected through possession by the Bank or its agent. Q. "REFERENCE RATE" shall mean an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate and as to which loans may be made by the Bank at, below or above such reference rate. R. "SUBORDINATED DEBT" shall mean such liabilities of the Borrower which have been subordinated to those owed to the Bank in a manner acceptable to the Bank. 1.02 ACCOUNTING TERMS. All references to financial statements, assets, liabilities, and similar accounting items not specifically defined herein shall mean such financial statements or such items prepared or determined in accordance with generally accepted accounting principles consistently applied and, except where otherwise specified, all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. 2 3 1.03 OTHER TERMS. Other terms not otherwise defined shall have the meanings attributed to such terms in the California Uniform Commercial Code. SECTION II CREDIT FACILITIES 2.01 COMMITMENT TO LEND. Subject to the terms and conditions of this Agreement and so long as no Event of Default occurs, the Bank agrees to extend to the Borrower the credit accommodations that follow: 2.02 LINE OF CREDIT FACILITY. The Bank agrees to make loans and Advances to the Borrower, upon the Borrower's request therefor made prior to the Expiration Date (as defined below in this Section 2.02), up to a total principal amount from time to time outstanding of not more than $1,600,000.00. Within the foregoing limits, the Borrower may borrow, partially or wholly prepay, and reborrow under this Line of Credit facility. A. PURPOSE. Advances made under this Line of Credit shall be used for asset expansion. B. INTEREST RATE. Interest shall accrue on the outstanding principal balance of Advances under this Line of Credit at a variable rate equal to the Bank's Reference Rate, per annum, as it may change from time to time. (Such rate is referred to in this Section 2.02 as the "Variable Rate".) The Variable Rate shall be adjusted concurrently with any change in the Reference Rate. Interest shall be calculated on the basis of 360 days per year but charged on the actual number of days elapsed. C. PAYMENT OF INTEREST. The Borrower hereby promises and agrees to pay interest monthly on the last day of each month, commencing on September 30, 1997. D. REPAYMENT OF PRINCIPAL. Unless sooner due in accordance with the terms of this Agreement, on August 31, 1998 the Borrower hereby promises and agrees to pay the Bank in full the aggregate unpaid principal balance of all Advances then outstanding, together with all accrued and unpaid interest thereon. Any payment received by the Bank shall, at the Bank's option, first be applied to pay any late fees or other fees then due and unpaid, and then to interest then due and unpaid and the remainder thereof (if any) shall be applied to reduce principal. E. FIXED RATE ALTERNATIVE PRICING. In addition to Advances based upon the Variable Rate ("Variable Borrower under this Line of Credit at a fixed rate ("Fixed Rate") which shall be, at the Borrower's option, either equivalent to 1.5% per annum in excess of the Cost of Funds Rate or 1.5% per annum in excess of the LIBOR Rate. Such Advances shall be in the minimum amount of $100,000.00 and in $100,000.00 increments thereafter and for such period of time (each an "Interest Period") as the Bank may quote and offer, provided that the Interest Period shall be for a Rate Advances"), at the Borrower's election, the Bank hereby agrees to make Advances to the minimum of at least 7 days and not exceed a maximum of 365 days and provided further that any interest Period shall not extend beyond the Expiration Date (as defined below) of this facility. Advances based upon the Fixed Rate are hereinafter referred to as "Fixed Rate Advances". Interest on any Fixed Rate Advance shall be computed on the basis of 360 days per year but charged on the actual number of days elapsed. The Borrower hereby promises and agrees to pay the Bank interest on any Fixed Rate Advance with an Interest Period of 90 days or less on the last day of the relevant Interest Period. The Borrower further promises and agrees to pay the Bank interest on any Fixed Rate Advance with an Interest Period in excess of 90 days on a quarterly basis (i.e., on the last day of each 90-day period occurring in such Interest Period) and on the last day of the relevant Interest Period. If interest is not paid as and when it is due, the amount of such unpaid interest shall bear interest, until paid in full, at a rate of interest equal to the Variable Rate. 3 4 (i) REPAYMENT OF FIXED RATE ADVANCES. Unless sooner due in accordance with other terms of this Agreement, or unless adjusted at the end of the relevant Interest Period as described below, the Borrower hereby promises and agrees to pay the Bank the principal amount of each Fixed Rate Advance, together with accrued and unpaid interest thereon, on the last day of the Interest Period pertaining to such Fixed Rate Advance. (ii) NOTICE OF ELECTION TO ADJUST INTEREST RATE. Upon telephonic notice which shall be received by the Bank at or before 2:00 p.m. (California time) on a Business Day, the Borrower may elect: (a) That interest on a Variable Rate Advance shall be adjusted to accrue at the Fixed Rate; provided, however, that such notice shall be received by the Bank no later than two business days prior to the day (which shall be a business day) on which the Borrower requests that interest be adjusted to accrue at the Fixed Rate. (b) That interest on a Fixed Rate Advance shall continue to accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the Variable Rate; provided however, that such notice shall be received by the Bank no later than two business day prior to the last day of the Interest Period pertaining to such Fixed Rate Advance. If the Bank shall not have received notice as prescribed herein of the Borrower's election that interest on any Fixed Rate Advance shall continue to accrue at the Fixed Rate, the Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Variable Rate upon the expiration of the Interest Period pertaining to such Advance. (iii) PROHIBITION AGAINST PREPAYMENT OF FIXED RATE ADVANCES. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE AGREEMENT, NO PREPAYMENT SHALL BE MADE ON ANY FIXED RATE ADVANCE EXCEPT ON A DAY WHICH IS THE LAST DAY OF THE INTEREST PERIOD PERTAINING THERETO. IF THE WHOLE OR ANY PART OF ANY FIXED RATE ADVANCE IS PREPAID BY REASON OF ACCELERATION OR OTHERWISE, THE BORROWER SHALL, UPON THE BANK'S REQUEST, PROMPTLY PAY TO AND INDEMNIFY THE BANK FOR ALL COSTS AND ANY LOSS (INCLUDING INTEREST) ACTUALLY INCURRED BY THE BANK AND ANY LOSS (INCLUDING LOSS OF PROFIT RESULTING FROM THE RE-EMPLOYMENT OF FUNDS) SUSTAINED BY THE BANK AS A CONSEQUENCE OF SUCH PREPAYMENT. (iv) INDEMNIFICATION FOR FIXED RATE COSTS. During any period of time in which interest on any Advance is accruing on the basis of a Fixed Rate, the Borrower shall, upon the Bank's request, promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment, reserve, deposit or similar requirements or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to funds used by the Bank in quoting and determining the Fixed Rate. (v) INVOLUNTARY CONVERSION FROM FIXED RATE TO VARIABLE RATE. In the event that the Bank shall at any time determine that the accrual of interest on the basis of the Fixed Rate (a) is infeasible because the Bank is unable to determine the Fixed Rate due to the unavailability of U.S. dollar deposits, contracts or certificates of deposit in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to the relevant Interest Period; or (b) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event any Fixed Rate Advance shall be deemed to be a Variable Rate Advance and interest shall thereupon immediately accrue at the Variable Rate. 4 5 F. LATE FEE. If any regularly scheduled payment of principal and/or interest (exclusive of the final payment upon maturity), or any portion thereof, under this Line of Credit is not paid within ten (10) calendar days after it is due, a late payment charge equal to five percent (5%) of such past due payment may be assessed and shall be immediately payable. G. MAKING LINE ADVANCES/NOTICE OF BORROWING. Each Advance made hereunder shall be conclusively deemed to have been made at the request of and for the benefit of the Borrower (i) when credited to any deposit account of the Borrower maintained with the Bank or (ii) when paid in accordance with the Borrower's written instructions. Subject to any other requirements set forth in this Agreement, Advances shall be made by the Bank upon telephonic or written notice received from the Borrower in form acceptable to the Bank, which notice shall be received by the Bank at or before 2:00 p.m. (California time) on a Business Day. The Borrower may borrow under the Line of Credit by requesting either: (i) A VARIABLE RATE ADVANCE. A Variable Rate Advance may be made on the Business Day notice is received by the Bank; provided however, that if the Bank shall not have received notice at or before 2:00 p.m. (California time) on the day such Advance is requested to be made, such Variable Rate Advance may be made, at the Bank's option, on the next Business Day. (ii) A FIXED RATE ADVANCE. The Borrower may elect that an Advance be made as a Fixed Rate advance by requesting the Bank to provide a quote as to the rate which would apply for a designated Interest Period and concurrently with receiving such quote, giving the Bank irrevocable notice of the Borrower's acceptance of the rate quoted, provided such notice shall be given to the Bank not later than 10:00 a.m. (California time) on a date (which shall be a Business Day) at least two days prior to the first day of the requested Interest Period. Any telephonic or oral quote or offer by the Bank of a Fixed Rate for a given Interest Period may be confirmed in writing by the Bank upon the election (as provided herein) of the Borrower to accept such terms and such confirmation shall be deemed conclusive as to the terms quoted and offered. H. AUTOMATIC PAYMENTS - AUTHORIZATION TO CHARGE ACCOUNT. The Borrower hereby authorizes and instructs the Bank to charge regularly scheduled payments of interest under this Line of Credit facility against the undersigned's checking account number 1064-11518 on a monthly basis commending on September 30, 1997, and to credit such amounts towards payments due under this Line of Credit facility. In the event there are not sufficient funds in such account on the day of the charge, the Bank is hereby authorized, at any time thereafter, to deduct, in addition to the amount indicated above, a late charge in accordance with the terms of this Line of Credit facility. This authorization shall remain in full force and effect until revoked by the undersigned in writing, or until all amounts due the Bank under this Line of Credit facility are paid in full; provided however that the Bank reserves the right, at any time, to discontinue or suspend the taking of automatic payments hereunder. I. EXPIRATION OF THE LINE OF CREDIT FACILITY. Unless earlier terminated in accordance with the terms of this Agreement, the Bank's commitment to make Advances to the Borrower hereunder shall automatically expire on August 30, 1998 (the "Expiration Date"), and the Bank shall be under no further obligation to advance any monies thereafter. J. LINE ACCOUNT. The Bank shall maintain on its books a record of account in which the Bank shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the Line of Credit facility (the "Line Account"). The Bank shall provide the Borrower with a monthly statement of the Borrower's Line Account, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Bank is notified by the Borrower to the contrary within thirty (30) days after the Borrower's receipt of any such statement which is deemed to be incorrect. 5 6 K. AMOUNTS PAYABLE ON DEMAND. If the Borrower fails to pay on demand any amount so payable under this Agreement, the Bank may, at its option and without any obligation to do so and without waiving any default occasioned by the Borrower's failure to pay such amount, create an Advance in an amount equal to the amount so payable, which Advance shall thereafter bear interest as provided under this Line of Credit facility. In addition, the Borrower hereby authorizes the Bank, if and to the extent payment owed to the Bank under this Line of Credit facility is not made when due, to charge, from time to time, against any or all of the deposit accounts maintained by the Borrower with the Bank any amount so due. L. CONVERSION TO TERM LOAN. It is hereby agreed that the Borrower may, by giving written notice to the Bank at least thirty (30) days prior to July 7, 1998, convert the principal balance outstanding under the Line of Credit as of August 7, 1998 to be payable on a term loan basis. The term loan (the "Converted Term Loan") shall be in the amount of such outstanding principal balance and shall be evidenced by a promissory notice or credit agreement (the "Term Agreement") containing the following payment terms: At the Borrower's election made prior to the conversion, interest shall accrue on the outstanding balance under the converted term note at one of the following rates: (i) A variable rate equal to the Bank's Reference Rate, per annum, as it may change from time to time; or (ii) a fixed rate to be quoted and offered by the Bank which shall be approximately equal to 1.5% per annum in excess of the Cost of Funds rate, or, at the Borrower's option, 1.5% per annum in excess of the LIBOR Rate. If the variable rate is selected, the interest rate shall be adjusted concurrently with any change in the Reference Rate. The Borrower may elect the fixed rate option only for a Converted Term Loan in the minimum amount of $100,000.00. Repayment under the Converted Term Loan shall be made in 72 monthly installments of principal plus interest if a variable rate is elected or principal and interest if the fixed rate option is elected with the exact amount and dates for such payments to be determined upon the issuance of the Term Agreement. Accrued and unpaid interest under the Line of Credit shall be paid to the Bank concurrently with the Borrower's execution of the Term Agreement. Interest shall accrue and principal and interest shall be paid in accordance with the terms and provisions of the Term Agreement. SECTION III COLLATERAL 3.01 GRANT OF SECURITY INTEREST. To secure payment and performance of all of the Borrower's Obligations under this Agreement and the performance of all the terms, covenants and agreements contained in this Agreement (and any and all modifications, extensions and renewals of the Agreement) and in any other document, instrument or agreement evidencing or related to the Obligations or the Collateral, and also to secure all other liabilities, loans, guarantees, covenants and duties owed by the Borrower to the Bank, whether or not evidenced by this or by any other agreement, absolute or contingent, due or to become due, now existing or hereafter and howsoever created, the Borrower hereby grants to the Bank a security interest in and to all of the following property: A. SECURITIES. Those share of stock, bonds, and other negotiable and non-negotiable securities listed on the "Collateral Securities Schedule" attached to this Agreement and on any additional and supplemental schedules or exhibits now or hereafter attached hereto, together with all warrants, options, stock rights, rights to subscribe, liquidating dividends, payments, dividends paid in stock, new securities or other property derived therefrom or to which the Borrower may become entitled to receive on account thereof. B. MONIES AND OTHER PROPERTY IN POSSESSION. In addition to the above, all monies, and property of the Borrower now or hereafter in the possession of the Bank or the Bank's agents, or any one of them, including, but not limited to, all deposit accounts, certificates of deposit, stocks, bonds, indentures, warrants, options and other negotiable and non-negotiable securities and instruments, together with all stock rights, rights to subscribe, liquidating dividends, cash dividends, payments dividends paid in stock, new securities or other property to which the Borrower may become entitled to receive on account of such property. 3.02 CONTINUING LIEN & PROCEEDS. The Bank's security interest in the Collateral shall be a continuing lien and shall include all proceeds and products of the Collateral including, but not limited to, the proceeds of any insurance thereof. 6 7 3.02 EXCLUSION OF CONSUMER DEBT. The Obligations and performance secured hereby shall not include any indebtedness of the Borrower incurred for personal, family or household purposes except to the extent any disclosure required under any consumer protection law (including but not limited to the Truth in Lending Act) or any regulation thereto, as now existing or hereafter amended, is or has been given. SECTION IV CONDITIONS PRECEDENT 4.01 CONDITIONS PRECEDENT TO THE INITIAL EXTENSION OF CREDIT AND/OR FIRST ADVANCE. The obligation of the Bank to make the initial extension of credit and/or the first Advance hereunder is subject to the conditions precedent that the Bank shall have received before the date of such extension of credit and/or the first Advance all of the following, in form and substance satisfactory to the Bank: A. AUTHORITY TO BORROW. Evidence relating to the duly given approval and authorization of the execution, delivery and performance of this Agreement, all other documents, instruments and agreements required under this Agreement and all other actions to be taken by the Borrower hereunder or thereunder. B. LOAN FEES. Evidence that any required loan fees and expenses as set forth above with respect to each credit facility have been paid or provided for by the Borrower. C. AUDIT. The opportunity to conduct an audit of the Borrower's books, records and operations and the Bank shall be satisfied as to the condition thereof. D. MISCELLANEOUS DOCUMENTS. Such other documents, instruments, agreements and opinions as are necessary, or as the Bank may reasonably require, to consummate the transactions contemplated under the Agreement, all fully executed. 4.02 CONDITIONS PRECEDENT TO ALL EXTENSIONS OF CREDIT AND/OR ADVANCES. The obligation of the Bank to make any extensions of credit and/or each Advance to or on account of the Borrower (including the initial extension of credit and/or the first Advance) shall be subject to the further conditions precedent that, as of the date of each extension of credit or Advance and after the making of such extension of credit or Advance: A. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth in the Section entitled "Representations and Warranties" herein and in any other document, instrument, agreement or certificate delivered to the Bank hereunder are true and correct. B. COLLATERAL. The security interest in the Collateral has been duly authorized, created and perfected with first priority and is in full force and effect and the Bank has been provided with satisfactory evidence of all filings necessary to establish such perfection and priority. C. EVENT OF DEFAULT. No event has occurred and is continuing which constitutes, or, with the lapse of time or giving of notice or both, would constitute an Event of Default. D. SUBSEQUENT APPROVALS, ETC. The Bank shall have received such supplemental approvals, opinions or documents as the Bank may reasonably request. 4.03 REAFFIRMATION OF STATEMENTS. For the purposes hereof, the Borrower's acceptance of the proceeds of any extension of credit and the Borrower's execution of any document or instrument evidencing or creating any Obligation hereunder shall each be deemed to constitute the Borrower's representation and warranty that the statements set forth above in this Section are true and correct. 7 8 SECTION V REPRESENTATIONS AND WARRANTIES The Borrower hereby makes the following representations and warranties to the Bank, which representations and warranties are continuing: 5.01 STATUS. The Borrower is a corporation duly organized and validly existing under the laws of the State of Colorado and is properly licensed, qualified to do business and in good standing in, and, where necessary to maintain the Borrower's rights and privileges, has complied with the fictitious name statute of every jurisdiction in which the Borrower is doing business. 5.02 AUTHORITY. The execution, delivery and performance by the Borrower of this Agreement and any instrument, document or agreement required hereunder have been duly authorized and do not and will not: (i) violate any provision of any law, rule, regulation, writ, judgment or injunction presently in effect affecting the Borrower; (ii) require any consent or approval of the stockholders of the Borrower of violate any provision of the articles of incorporation or by-laws of the Borrower; or (iii) result in a breach of or constitute a default under any material agreement to which the Borrower is a party or by which it or its properties may be bound or affected. 5.03 LEGAL EFFECT. This Agreement constitutes, and any document, instrument or agreement required hereunder when delivered will constitute, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 5.04 FICTITIOUS TRADE STYLES. The Borrower currently uses no fictitious trade styles in connection with its business operations. The Borrower shall notify the Bank within thirty (30) days of the use of any fictitious trade style at any future date, indicating the trade style and state(s) of its use. 5.05 FINANCIAL STATEMENTS. All financial statements, information and other data which may have been and which may hereafter be submitted by the Borrower to the Bank are true, accurate and correct and have been and will be prepared in accordance with generally accepted accounting principles consistently applied and accurately represent the Borrower's financial condition and, as applicable, the other information disclosed therein. Since the most recent submission of any such financial statement, information or other data to the Bank, the Borrower represents and warrants that no material adverse change in the Borrower's financial condition or operations has occurred which has not been fully disclosed to the Bank in writing. 5.06 LITIGATION. Except as have been disclosed to the Bank in writing, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or the Borrower's properties before any court or administrative agency which, if determined adversely to the Borrower, would have a material adverse effect on the Borrower's financial condition, operations or the Collateral. 5.07 TITLE TO ASSETS. The Borrower has good and marketable title to all of its assets (including, but not limited to, the Collateral) and the same are not subject to any security interest, encumbrance, lien or claim of any third person except for Permitted Liens. 5.08 ERISA. If the Borrower has a pension, profit sharing or retirement plan subject to ERISA, such plan has been and will continue to be funded in accordance with its terms and otherwise complies with and continues to comply with the requirements of ERISA. 5.09 TAXES. The Borrower has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than taxes which are currently payable without penalty or interest or those which are being duly contested in good faith. 5.10 ENVIRONMENTAL COMPLIANCE. The operations of the Borrower comply, and during the term of this Agreement will at all times comply, in all respects with all Environmental Laws; the Borrower has obtained licenses, permits, authorizations and registrations required under any Environmental Law ("Environmental Permits") and necessary for its ordinary operations, all such Environmental Permits are in good standing, and the Borrower is in 8 9 compliance with all material terms and conditions of such Environmental Permits; neither the Borrower nor any of its present properties or operations are subject to any outstanding written order from or agreement with any governmental authority nor subject to any judicial or docketed administrative proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Material; there are no Hazardous Materials or other conditions or circumstances existing, or arising from operations prior to the date of this Agreement, with respect to any property of the Borrower that would reasonably be expected to give rise to Environmental Claims; provided however, that with respect to property leased from an unrelated third party, the foregoing representation is made to the best knowledge of the Borrower. In addition, (i) the Borrower does not have or maintain any underground storage tanks which are not properly registered or permitted under applicable Environmental Laws or which are leaking or disposing of Hazardous Materials off-site, and (ii) the Borrower has notified all of its employees of the existence, if any, of any health hazard arising from the conditions of their employment and have met all notification requirements under Title III of CERCLA and all other Environmental Laws. SECTION VI COVENANTS The Borrower covenants and agrees that, during the term of this Agreement, and so long thereafter as the Borrower is indebted to the Bank under this Agreement, the Borrower shall, unless the Bank otherwise consents in writing: 6.01 PRESERVATION OF EXISTENCE; COMPLIANCE WITH APPLICABLE LAWS. Maintain and preserve its existence and all rights and privileges now enjoyed; not liquidate or dissolve, merge or consolidate with or into, or acquire any other business organization; and conduct its business in accordance with all applicable laws, rules and regulations. 6.02 MAINTENANCE OF INSURANCE. Maintain insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower operates and maintain such other insurance and coverages as may be required by the Bank. All such insurance shall be in form and amount and with companies satisfactory to the Bank. With respect to insurance covering properties in which the Bank maintains a security interest or lien, such insurance shall be in an amount not less than the full replacement value thereof, at the Bank's request, shall name the Bank as loss payee pursuant to a loss payable endorsement satisfactory to the Bank and shall not be altered or canceled except upon ten (10) days' prior written notice to the Bank. Upon the Bank's request, the Borrower shall furnish the Bank with the original policy or binder of all such insurance. 6.03 MAINTENANCE OF COLLATERAL AND OTHER PROPERTIES. With respect to Possessory Collateral: (i) such Collateral at all times be of a character and value acceptable to the Bank, as determined by the Bank in its sole and absolute judgment; (ii) the Borrower shall not withdraw or seek to withdraw any of such Collateral now or hereafter in the possession of the Bank or the Bank's agents or any one of them; and (iii) the Borrower shall make timely payments of all taxes, charges, liens and assessments against the Collateral. With respect to all Collateral, except for Permitted Liens, the Borrower shall keep and maintain the Collateral free and clear of all levies, liens, encumbrances and security interests (including but not limited to, any lien of attachment, judgment or execution) and defend the Collateral against any such levy, lien, encumbrance or security interest, comply with all laws, statutes and regulations pertaining to the Collateral and its use and operation; execute, file and record such statements, notices and agreements, take such actions and obtain such certificates and other documents as necessary to perfect, evidence and continue the Bank's security interest in the Collateral and the priority thereof; maintain accurate and complete records of the Collateral which show all sales, claims and allowances; and properly care for, house, store and maintain the Collateral in good condition, free of misuse, abuse and deterioration, other than normal wear and tear. The Borrower shall also maintain and preserve all its properties in good working order and condition in accordance with the general practice of other businesses of similar character and size, ordinary wear and tear excepted. 6.04 PAYMENT OF OBLIGATIONS AND TAXES. Make timely payment of all assessments and taxes and all of its liabilities and obligations including, but not limited to, trade payables, unless the same are being contested in good faith by appropriate proceedings with the appropriate court or regulatory agency. For purposes hereof, the Borrower's issuance of a check, draft or similar instrument without delivery to the intended payee shall not constitute payment. 9 10 6.05 POSSESSORY COLLATERAL LOAN-TO-VALUE RATIO. The Borrower covenants and agrees that so long as all or any part of the Obligations shall remain outstanding, the outstanding principal balance of the Obligations shall remain outstanding, the outstanding principal balance of the Obligations shall at no time be greater than 90% of the value of the Possessory Collateral specifically identified in the "Collateral" section of this Agreement (or in any attached schedule) at its then current market value (as determined by the Bank) (the "Loan-to-Value Ratio"). To the extent that such Possessory Collateral Loan-to-Value Ratio is not maintained, the Borrower shall promptly, upon the Bank's request: (i) assign and pledge to the Bank such additional assets of a character satisfactory to the Bank and having a market value sufficient to reinstate and maintain such Possessory Collateral Loan-to-Value Ratio, or (ii) make payment to the Bank in an amount sufficient to reduce the outstanding principal balance of the Obligations so that such Possessory Collateral Loan-to-Value Ratio is reinstated and maintained. 6.06 INSPECTION RIGHTS. At any reasonable time and from time to time permit the Bank or any representative thereof to examine and make copies of the records and visit the properties of the Borrower and to discuss the business and operations of the Borrower with any employee or representative thereof. If the Borrower now or at any time hereafter maintains any records (including, but not limited to, computer generated records and computer programs for the generation of such records) in the possession of a third party, the Borrower hereby agrees to notify such third party to permit the Bank free access to such records at all reasonable times and to provide the Bank with copies of any records it may request, all at the Borrower's expense, the amount of which shall be payable immediately upon demand. In addition, the Bank may, at any reasonable time and from time to time, conduct inspections and audits of the Collateral and the Borrower's accounts payable, the cost and expenses of which shall be paid by the Borrower to the Bank upon demand. 6.07 REPORTING REQUIREMENTS. Deliver or cause to be delivered to the Bank in form and detail satisfactory to the Bank: A. 10-K REPORT. Not later than 30 days after filing with the Securities and Exchange Commission (SEC), a copy of the 10K report filed for that period. B. 10-Q REPORT. Not later than 75 days after the end of each quarter, a copy of the 10Q report for that period. C. OTHER INFORMATION. Promptly upon the Bank's request, such other information pertaining to the Borrower, the Collateral, or any Guarantor as the Bank may reasonably request. 6.08 TRANSFER ASSETS. Not sell, contract for sale, transfer, convey, assign, lease or sublet any assets of the Borrower, including, but not limited to, the Collateral, except in the ordinary course of business as presently conducted by the Borrower, and then, only for full, fair and reasonable consideration. 6.09 CHANGE IN THE NATURE OF BUSINESS. Not make any material change in the Borrower's financial structure or in the nature of the Borrower's business as existing or conducted as of the date of this Agreement. 6.10 NET WORTH. Maintain at all times a minimum Effective Tangible Net Worth of not less than $1.00. 6.11 COMPENSATION OF EMPLOYEES. Compensate the employees of the Borrower for services rendered at an hourly rate at least equal to the minimum hourly rate prescribed by any applicable federal or state law or regulation. 6.12 ENVIRONMENTAL COMPLIANCE. The Borrower shall: A. Conduct the Borrower's operations and keep and maintain all of its properties in compliance with all Environmental Laws. B. Give prompt written notice to the Bank, but in no event later than 10 days after becoming aware, of the following: (i) any enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened against the Borrower or any of its affiliates or any of its respective properties pursuant to any applicable Environmental Laws, (ii) all other Environmental Claims, and (iii) any 10 11 environmental or similar condition on any real property adjoining or in the vicinity of the property of the Borrower or its affiliates that could reasonably be anticipated to cause such property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of such property under any Environmental Laws. C. Upon the written request of the Bank, the Borrower shall submit to the Bank, at its sole cost and expense, at reasonable intervals, a report providing an update of the status of any environmental, health or safety compliance, hazard or liability issue identified in any notice required pursuant to this Section. D. At all times indemnify and hold harmless the Bank from and against any and all liability arising out of any Environmental Claims. 6.13 NOTICE. Give the Bank prompt written notice of any and all (i) Events of Default; (ii) litigation, arbitration or administrative proceedings to which the Borrower is a party and which affects the Collateral; (iii) any change in the place of business of the Borrower or the acquisition of more than one place of business by the Borrower; (iv) any proposed or actual change in the name, identity or the business nature of the Borrower; and (v) other matters which have resulted in, or might result in a material adverse change in the Collateral or the financial condition or business operations of the Borrower. SECTION VII EVENTS OF DEFAULT Any one or more of the following described events shall constitute an event of default under this Agreement: 7.01 NON-PAYMENT. The Borrower shall fail to pay any Obligations within 10 days of when due. 7.02 PERFORMANCE UNDER THIS AND OTHER AGREEMENTS. The Borrower shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or in any document, instrument or agreement evidencing or relating to any indebtedness of the Borrower (whether owed to the Bank or third persons), and any such failure (exclusive of the payment of money to the Bank under this Agreement or under any other document, instrument or agreement, which failure shall constitute and be an immediate Event of Default if not paid when due or when demanded to be due) shall continue for more than 30 days after written notice from the Bank to the Borrower of the existence and character of such Event of Default. 7.03 REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS. Any representation or warranty made by the Borrower under or in connection with this Agreement or any financial statement given by the Borrower or any Guarantor shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. 7.04 INSOLVENCY. The Borrower or any Guarantor shall: (i) become insolvent or be unable to pay its debts as they mature; (ii) make an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its properties or assets; (iii) file a voluntary petition in bankruptcy or seeking reorganization or to effect a plan or other arrangement with creditors; (iv) file an answer admitting the material allegations of an involuntary petition relating to bankruptcy or reorganization or join in any such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or consent to the appointment of, or consent than an order be made, appointing any receiver, custodian or trustee for itself or any of its properties, assets or businesses; or (vii) any receiver, custodian or trustee shall have been appointed for all or a substantial part of its properties, assets or businesses and shall not be discharged within 30 days after the date of such appointment. 7.05 EXECUTION. Any writ of execution or attachment or any judgment lien shall be issued against any property of the Borrower and shall not be discharged or bonded against or released within 30 days after the issuance or attachment of such writ or lien. 7.06 REVOCATION OR LIMITATION OF GUARANTY. Any Guaranty shall be revoked or limited or its enforceability or validity shall be contested by any Guarantor, by operation of law, legal proceeding or otherwise or any Guarantor who is a natural personal shall die. 11 12 7.07 SUSPENSION. The Borrower shall voluntarily suspend the transaction of business or allow to be suspended, terminated, revoked or expired any permit, license or approval of any governmental body necessary to conduct the Borrower's business as now conducted. 7.08 IMPAIRMENT OF COLLATERAL. There shall occur any injury or damage to all or any part of the Collateral or all or any part of the Collateral shall be lost, stolen, or destroyed, or, with respect to Possessory Collateral, there shall occur any deterioration or impairment of all or any part of such Collateral or a decline or depreciation in the value or market price of such Collateral, which changes cause the Collateral, in the sole and absolute judgement of the Bank, to become unacceptable as to character and value. SECTION VIII REMEDIES ON DEFAULT Upon the occurrence of any Event of Default, the Bank may, at its sole election, without demand and upon only such notice as may be required by law: 8.01 ACCELERATION. Declare any or all of the Borrower's indebtedness owing to the Bank, whether under this Agreement or under any other document, instrument or agreement, immediately due and payable, whether or not otherwise due and payable. 8.02 CEASE EXTENDING CREDIT. Cease making Advances or otherwise extending credit to or for the account of the Borrower under this Agreement or under any other agreement now existing or hereafter entered into between the Borrower and the Bank. 8.03 TERMINATION. Terminate this Agreement as to any future obligation of the Bank without affecting the Borrower's obligations to the Bank or the Bank's rights and remedies under this Agreement or under any other document, instrument or agreement. 8.04 RECORDS OF COLLATERAL. Require the Borrower to periodically deliver to the Bank records and schedules showing the status, condition and location of the Collateral and such contracts or other matters which affect the Collateral. In connection herewith, the Bank may conduct such audits or other examination of such records as the Bank, in its sole and absolute discretion, deems necessary. 8.05 PROTECTION OF SECURITY INTEREST. Make such payments and do such acts as the Bank, in its sole judgment, considers necessary and reasonable to protect its security interest or lien in the Collateral. The Borrower hereby irrevocably authorizes the Bank to pay, purchase, contest or compromise any encumbrance, lien or claim which the Bank, in its sole judgment, deems to be prior or superior to its security interest. Further, the Borrower hereby agrees to pay to the Bank, upon demand therefor, all expenses and expenditures (including attorneys' fees) incurred in connection with the foregoing. 8.06 FORECLOSURE. Enforce any security interest or lien given or provided for under this Agreement or under any security agreement, mortgage, deed or trust or other document relating to the Collateral, in such manner and such order, as to all or any part of the Collateral, as the Bank, in its sole judgment, deems to be necessary or appropriate and the Borrower hereby waives any and all rights, obligations or defenses now or hereafter established by law relating to the foregoing. In the enforcement of its security interest or lien, the Bank is authorized to enter upon the premises where any Collateral is located and take possession of the Collateral or any part thereof, together with the Borrower's records pertaining thereto, or the Bank may require the Borrower to assemble the Collateral and records pertaining thereto and make such Collateral and records available to the Bank at a place designated by the Bank. The Bank may sell the Collateral or any portions thereof, together with all additions, accessions and accessories thereto, giving only such notices and following only such procedures as are required by law, at either a public or private sale, or both, with or without having the Collateral present at the time of sale, which sale shall be on such terms and conditions and conducted in such manner as the Bank determines in its sole judgment to be commercially reasonable. Any deficiency which exists after the disposition or liquidation of the Collateral shall be a continuing liability of any obligor on or any guarantor of the Obligations and shall be immediately paid to the Bank. 12 13 8.07 APPLICATION OF PROCEEDS. All amounts received by the Bank as proceeds from the disposition or liquidation of the Collateral shall be applied to the Borrower's indebtedness to the Bank as follows: first, to the costs and expenses of collection, enforcement, protection and preservation of the Bank's lien in the Collateral, including court costs and reasonable attorneys' fees, whether or not suit is commenced by the Bank; next, to those costs and expenses incurred by the Bank in protecting, preserving, enforcing, collecting, selling or disposing of the Collateral; next to the payment of accrued and unpaid interest on all of the Obligations; next, to the payment of the outstanding principal balance of the Obligation; and last, to the payment of any other indebtedness owed by the Borrower to the Bank. Any excess Collateral or excess proceeds existing after the disposition or liquidation of the Collateral will be returned or paid by the Bank to the Borrower. 8.08 NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's rights set forth herein or seek such other rights or pursue such other remedies as may be provided by law, in equity or in any other agreement now existing or hereafter entered into between the Borrower and the Bank, or otherwise. SECTION IX MISCELLANEOUS PROVISIONS 9.01 DEFAULT INTEREST RATE. If an Event of Default has occurred and is continuing, the Bank, at its option, may require the Borrower to pay to the Bank interest on any Indebtedness or amount payable under this Agreement at a rate which is 3% in excess of the rate or rates otherwise then in effect under this Agreement. 9.02 BANK'S RIGHTS WITH RESPECT TO POSSESSORY COLLATERAL. With respect to the Possessory Collateral, at its option, whether or not the Borrower is in default, and without any obligation of the Bank to do so, the Bank may, either in the name of the Bank, the Bank's nominee or the Borrower: A. Collect, endorse and receive all sums including, but not limited to, dividends, and interest, now or hereafter payable upon or on account of the Possessory Collateral. B. Enter into any agreement relating to or affecting the Possessory Collateral and, in connection therewith, the Bank may surrender control of any such Collateral, accept other property in exchange for such Collateral and do and perform such acts as it deems proper. Any money or property received in exchange for any such Collateral shall be subject to and held by the Bank pursuant to the terms of this Agreement. C. Make any compromise or settlement with respect to the Possessory Collateral that the Bank, in its sole and absolute discretion, deems proper. D. Insure and do such other acts as the Bank deems necessary, in its sole discretion, to preserve or protect the Possessory Collateral. E. Cause the Possessory Collateral to be transferred to the Bank's name or the name of the Bank's nominee. F. With respect to the Possessory Collateral, exercise all rights, powers and remedies of an owner but excluding any voting rights. 9.03 RELIANCE. Each warranty, representation, covenant and agreement contained in this Agreement shall be conclusively presumed to have been relied upon by the Bank regardless of any investigation made or information possessed by the Bank and shall be cumulative and in addition to any other warranties, representations, covenants or agreements which the Borrower shall now or hereafter give, or cause to be given, to the Bank. 9.04 DISPUTE RESOLUTION. A. DISPUTES. It is understood and agreed that, upon the request of any party to this Agreement, any dispute, claim or controversy of any kind, whether in contract or in tort, statutory or common law, legal or equitable, now existing or hereinafter arising between the parties in any way arising out of, pertaining to or in connection with: (i) this Agreement, or any related agreements, documents or instruments, (ii) all past and present loans, credits, accounts, deposit accounts (whether demand deposits or time deposits), safe deposit 13 14 boxes, safekeeping agreement, guarantees, letters of credit, goods or services, or other transactions, contracts or agreements of any kind, (iii) any incidents, omissions, acts, practices, or occurrences causing injury to any party whereby another party or its agents, employees or representatives may be liable, in whole or in part, or (iv) any aspect of the past or present relationships of the parties, shall be resolved through two-step dispute resolution process administered by the Judicial Arbitration & Mediation Services, Inc. ("JAMS") as follows: B. STEP I - MEDIATION. At the request of any party to the dispute, claim or controversy, the matter shall be referred to the nearest office of JAMS for mediation, which is an informal, non-binding conference or conferences between the parties in which a retired judge or justice from the JAMS panel will seek to guide the parties to a resolution of the case. C. STEP II - ARBITRATION (CONTRACTS NOT SECURED BY REAL PROPERTY). Should any dispute, claim or controversy remain unresolved at the conclusion of the Step I Mediation Phase, then (subject to the restriction at the end of this subparagraph) all such remaining matters shall be resolved by final and binding arbitration before a different judicial panelist, unless the parties shall agree to have the mediator panelist act as arbitrator. The hearing shall be conducted at a location determined by the arbitrator in Los Angeles, California (or such other city as may be agreed upon by the parties) and shall be administered by and in accordance with the then existing Rules of Practice and Procedure of JAMS and judgement upon any award rendered by the arbitrator may be entered by any State or Federal Court having jurisdiction thereof. The arbitrator shall determine which is the prevailing party and shall include in the award that party's reasonable attorneys' fees and costs. This subparagraph shall apply only if, at the time of the submission of the matter to JAMS, the dispute or issues involved do not arise out of any transaction which is secured by real property collateral or, if so secured, all parties consent to such submission As soon as practicable after selection of the arbitrator, the arbitrator, or the arbitrator's designated representative, shall determine a reasonable estimate of anticipated fees and costs of the arbitrator, and render a statement to each party setting forth that party's pro-rata share of said fees and costs. Thereafter, each party shall, within 10 days of receipt of said statement, deposit said sum with the arbitrator. Failure of any party to make such a deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the claim which is the subject of the arbitration, but shall not otherwise serve to abate, stay or suspend the arbitration proceedings. D. STEP II - TRIAL BY COURT REFERENCE (CONTRACTS SECURED BY REAL PROPERTY). If the dispute, claim or controversy is not one required or agreed to be submitted to arbitration, as provided in the above subparagraph, and has not been resolved by Step I mediation, then any remaining dispute, claim or controversy shall be submitted for determination by a trial on Order of Reference conducted by a retired judge or justice from the panel of JAMS appointed pursuant to the provisions of Section 638(1) of the California Code of Civil Procedure, or any amendment, addition or successor section thereto, to hear the case and report a statement of decision thereon. The parties intend this general reference agreement to be specifically enforceable in accordance with said section. If the parties are unable to agree upon a member of the JAMS panel to act as referee, then one shall be appointed by the Presiding Judge of the county wherein the hearing is to be held. The parties shall pay in advance, to the referee, the estimated reasonable fees and costs of the reference, as may be specified in advance by the referee. The parties shall initially share equally, by paying their proportionate amount of the estimated fees and costs of the reference. Failure of any party to make such a fee deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend any cause of action which is the subject of the reference, but shall not otherwise serve to abate, stay or suspend the reference proceeding. E. PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE. No provision of, or the exercise of any rights under any portion of this Dispute Resolution provision, shall limit the right of any party to exercise self help remedies such as set off, foreclosure against any real or personal property collateral, or the obtaining of provisional or ancillary remedies, such as injunctive relief or the appointment of a receiver, from any court having jurisdiction before, during or after the pendency of any arbitration. At the Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage, or by judicial foreclosure. The institution and maintenance of an action for provisional 14 15 remedies, pursuit of provisional or ancillary remedies or exercise of self help remedies shall not constitute a waiver of the right of any party to submit the controversy or claim to arbitration. 9.05 WAIVER OF JURY. The Borrower and the Bank hereby expressly and voluntarily waive any and all rights, whether arising under the California constitution, any rules of the California Code of Civil Procedure, common law or otherwise, to demand a trial by jury in any action, matter, claim or cause of action whatsoever arising out of or in any way related to this Agreement or any other agreement, document or transaction contemplated hereby. 9.06 RESTRUCTURING EXPENSES. In the event the Bank and the Borrower negotiate for, or enter into, any restructuring, modification or refinancing of the Indebtedness under this Agreement for the purposes of remedying an Event of Default, The Bank, may require the Borrower to reimburse all of the Bank's costs and expenses incurred in connection therewith, including, but not limited to reasonable attorneys' fees and the costs of any audit or appraisals required by the Bank to be performed in connection with such restructuring, modification or refinancing. 9.07 ATTORNEYS' FEES. In the event of any suit, mediation, arbitration or other action in relation to this Agreement or any document, instrument or agreement executed with respect to, evidencing or securing the indebtedness hereunder, the prevailing party, in addition to all other sums to which it may be entitled, shall be entitled to reasonable attorneys' fees. 9.08 NOTICES. All notices, payments, requests, information and demands which either party hereto may desire, or may be required to give or make to the other party shall be given or made to such party by hand delivery or through deposit in the United States mail, postage prepaid, or by Western Union telegram, addressed to the address set forth below such party's signature to this Agreement or to such other address as may be specified from time to time in writing by either party to the other. 9.09 WAIVER. Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right; nor shall any waiver of any right or default hereunder or under any other document, instrument or agreement mentioned herein constitute a waiver of any other right or default or constitute a waiver of any other default of the same or any other term or provision. 9.10 CONFLICTING PROVISIONS. To the extent that any of the terms or provisions contained in this Agreement are inconsistent with those contained in any other document, instrument or agreement executed pursuant hereto, the terms and provisions contained herein shall control. Otherwise, such provisions shall be considered cumulative. 9.11 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Borrower and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the Bank's prior written consent. The Bank may sell, assign or grant participations in all or any portion of its rights and benefits hereunder. The Borrower agrees that, in connection with any such sale, grant or assignment, the Bank may deliver to the prospective buyer, participant or assignee financial statements and other relevant information relating to the Borrower and any guarantor. 9.12 JURISDICTION. This Agreement, any notes issued hereunder, the rights of the parties hereunder to and concerning the Collateral, and any documents, instruments or agreements mentioned or referred to herein shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby submit. 9.13 HEADINGS. The heading set forth herein are solely for the purpose of identification and have no legal significance. 9.14 ENTIRE AGREEMENT. This Agreement and all documents, instruments and agreements mentioned herein constitute the entire and complete understanding of the parties with respect to the transactions contemplated hereunder. All previous conversations, memoranda and writings between the parties or pertaining to the transactions contemplated hereunder that are not incorporated or referenced in this Agreement or in such documents, instruments and agreements are superseded hereby. 15 16 IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first hereinabove written. BANK: BORROWER: SANWA BANK CALIFORNIA NEOTHERAPEUTICS, INC. By /s/Fred A. Hoekstra By /s/Alvin J. Glasky ------------------------------------ -------------------------- Fred A. Hoekstra, Authorized Officer Alvin J. Glasky, President Address: Address: Newport Beach Office 157 Technology Drive 4400 MacArthur Boulevard Irvine, CA 92618 Newport Beach, CA 92660 16 17 SECURITIES SCHEDULE The securities described below are part of the Collateral as defined and described in this Line of Credit Agreement dated August 20, 1997 to which this Schedule is attached. - -------------------------------------------------------------------------------- BONDS: $1,750,000.00 par value Federal Home Loan Banks Consolidated Bond dated December 28, 1995 at 6.03% maturing December 28, 1998 held by Bank of America Illinois in Account No. 17 18 SECURITY AGREEMENT This Security Agreement ("Agreement") is made and entered into this 14th day of November 1997 by and between SANWA BANK CALIFORNIA (the "Bank") and NEOTHERAPEUTICS, INC. (the "Grantor"). 1. GRANT OF SECURITY INTEREST. The Grantor hereby grants to the Bank a security interest in and to all of the following property (hereinafter collectively referred to as the "Collateral"): A. SECURITIES. Those shares of stock, bonds, and other negotiable and non-negotiable securities listed on the "Collateral Securities Schedule" attached to this Agreement and on any additional and supplemental schedules or exhibits now or thereafter attached hereto, together with all warrants, options, stock rights, rights to subscribe, liquidating dividends, payments, dividends paid in stock, new securities or other property derived therefrom or to which the Grantor may become entitled to receive on account thereof. B. MONIES AND OTHER PROPERTY IN POSSESSION. In addition to the above, all monies, and property of the Grantor now or hereafter in the possession of the Bank or the Bank's agents, or any one of them, including, but not limited to, all deposit accounts, certificates of deposit, stocks, bonds, indentures, warrants, options and other negotiable and non-negotiable securities and instruments, together with all stock rights, rights to subscribe, liquidating dividends, cash dividends, payments, dividends paid in stock, new securities or other property to which the Grantor may become entitled to receive on account of such property. The Bank's security interest in the Collateral shall be a continuing lien and shall include all proceeds and products of the Collateral including but not limited to, the proceeds of any insurance thereon. 2. THE INDEBTEDNESS. The Collateral secures payment of all obligations and indebtedness pursuant to that certain Line of Credit Agreement dated August 20, 1997 between the Bank and the Borrower in the original aggregate principal balance of $1,600,000.00. The indebtedness and obligations secured hereby (hereinafter referred to as the "Indebtedness") shall include any and all modifications, extensions and renewals of such obligations or indebtedness and performance of all the terms, covenants and agreements contained in this Security Agreement and in any other document, instrument or agreement evidencing or related to the Indebtedness or the Collateral. The Indebtedness secured hereby shall not include any indebtedness incurred for personal, family or household purposes except to the extent any disclosure required under any consumer protection law (including but not limited to the Truth in Lending Act) or any regulation thereto, as now existing or hereafter amended, is or has been given. (1) 19 3. GRANTOR'S REPRESENTATIONS AND WARRANTIES. The Grantor hereby makes the following representations and warranties to the Bank, which representations and warranties are continuing: A. STATUS. The Grantor is a corporation duly organized and validly existing under the laws of the State of Colorado and is properly licensed, qualified to do business and in good standing in, and, where necessary to maintain the Grantor's rights and privileges, has complied with the fictitious name statute of every jurisdiction in which the Grantor is doing business. B. AUTHORITY. The execution, delivery and performance by the Grantor of this Security Agreement and any instrument, document or agreement required hereunder have been duly authorized and do not and will not: (i) violate any provision of any law, rule, regulation, writ, judgment or injunction presently in effect affecting the Grantor; (ii) require any consent or approval of the stockholders or violate any provision of the articles of incorporation or by-laws of the Grantor; or (iii) result in a breach of or constitute a default under any material agreement to which the Grantor is a party or by which the Grantor's properties may be bound or affected. C. LEGAL EFFECT. This Security Agreement constitutes, and any document, instrument or agreement required hereunder when delivered will constitute, legal, valid and binding obligations of the Grantor enforceable against the Grantor in accordance with their respective terms. D. FICTITIOUS TRADE STYLES. The Grantor currently uses no fictitious trade styles in connection with its business operations. The Grantor shall notify the Bank within thirty (30) days of the use of any fictitious trade style at any future date, indicating the trade style and state(s) of its use. E. TITLE TO COLLATERAL; PERMITTED LIENS. The Grantor has good and marketable title to the Collateral and the same is not now and shall not become subject to any security interest, encumbrance, lien or claim of any third person other than: (i) liens and security interests securing the Indebtedness or other indebtedness owed to the Bank; (ii) liens for taxes, assessments or similar charges either not yet due or being contested in good faith; (iii) liens of mechanics, materialmen, warehousemen, carriers or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (iv) purchase money liens or purchase money security interests upon or in any property acquired or held by the Grantor in the ordinary course of business to secure indebtedness outstanding on the date hereof or permitted to be incurred hereunder; (v) liens and security interests which, as of the date hereof, have been disclosed to and approved by the Bank in writing; and (vi) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount which respect to the net value of the Grantor's assets (collectively, the "Permitted Liens"). F. FINANCIAL STATEMENTS. All financial statements, information and other data now or hereafter submitted to the Bank by the Grantor in connection with the transaction with respect to which this Security Agreement is entered into are true, accurate and correct and have been or will be prepared in accordance with generally accepted accounting principles consistently applied. Since the most recent submission of any such financial statement, information or other data to the Bank, the Grantor represents and warrants that no material adverse change in the financial condition or operations as disclosed therein or thereby has occurred which has not been fully disclosed to the Bank in writing. G. LITIGATION. Except as have been disclosed to the Bank in writing, there are no actions, suits or proceedings pending or, to the knowledge of the Grantor, threatened against or affecting the Grantor's properties before any court of administrative agency which, if determined adversely to the Grantor, would have a material adverse effect on the Grantor's financial condition, operations or the Collateral. H. TAXES The Grantor has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than taxes which are currently payable without penalty or interest or those which are being duly contested in good faith. (2) 20 4. GRANTOR'S COVENANTS. The Grantor covenants and agrees that, unless the Bank otherwise consents in writing, the Grantor shall at all times: A. MAINTENANCE OF COLLATERAL. Except for Permitted Liens, keep and maintain the Collateral free and clear of all levies, liens, encumbrances and other security interests (including, but not limited to, any lien of attachment, judgment or execution) and defend the Collateral against any such levy, lien, encumbrance or security interest; comply with all laws, statutes and regulations pertaining to the Collateral and take such actions and execute such agreements and other documents necessary to perfect, evidence and continue the Bank's security interest in the Collateral and the priority thereof. B. COVENANTS WITH RESPECT TO POSSESSORY COLLATERAL. With respect to Possessory Collateral, (which is defined to mean that portion of the Collateral which consists of securities, certificates of deposit, savings or checking accounts, notes and instruments and any other similar collateral in which a security interest is normally perfected through possession by the Bank or its agent), the Grant covenants and agrees: (i) The Possessory Collateral shall at all times be of a character and value acceptable to the Bank, as determined by the Bank in its sole and absolute judgment. (ii) The Grantor shall not withdraw or seek to withdraw any of the Possessory Collateral now or hereafter in the possession of the Bank or the Bank's agents. (iii) The Grantor shall make timely payments of all taxes, charges, liens and assessments against the Possessory Collateral. C. REPORTING REQUIREMENTS. Promptly upon the Bank's request, deliver or cause to be delivered to the Bank such information pertaining to the Grantor, the Collateral or such other matters as the Bank may reasonably request. D. PAYMENT OF OBLIGATIONS. Pay all of the Grantor's liabilities and obligations when due. E. COMPENSATION OF EMPLOYEES. Compensate the Grantor's employees for services rendered at an hourly rate at least equal to the minimum hourly rate prescribed by any applicable federal or state law or regulation. F. POSSESSORY COLLATERAL LOAN-TO-VALUE RATIO. The Grantor covenants and agrees that so long as all or any part of the Indebtedness shall remain outstanding, the outstanding principal balance of the obligations secured by this Agreement shall at no time be greater than 90.00% of the value of the Possessory Collateral at its then current market value (as determined by the Bank) "the "Loan-to-Value Ratio"). G. NOTICES. Give the Bank prompt written notice of: (i) any change in the Grantor's place of business or the acquisition of more than one place of business; (ii) any proposed or actual change in the Grantor's name, identify or business nature; (iii) any change in the location of any Collateral; (iv) any Event of Default; (v) litigation, arbitration or administrative proceedings to which the Grantor is a party and which affects the Collateral; (3) 21 and (vi) any other matter which has resulted in, or might result in, a material adverse change in the Collateral or the financial condition or business operations of the Grantor. 5. BANK'S RIGHTS REGARDING POSSESSORY COLLATERAL. With respect to the Possessory Collateral, at its option and without any obligation to do so, the Bank may, either in the name of the Bank, the Bank's nominee or the Grantor: A. Collect, endorse and receive all sums including, but not limited to, dividends, and interest, now or hereafter payable upon or on account of the Possessory Collateral. B. Enter into any agreement relating to or affecting the Possessory Collateral and, in connection therewith, the Bank may surrender control of any such Collateral, accept other property in exchange for such Collateral and do and perform such acts as it deems proper. Any money or property received in exchange for any such Collateral shall be subject to and held by the Bank pursuant to the terms of this Security Agreement. C. Make any compromise or settlement with respect to the Possessory Collateral that the Bank, in its sole and absolute discretion, deems proper. D. Insure and do such other acts as the Bank deems necessary, in its sole discretion, to preserve or protect the Possessory Collateral. E. Cause the Possessory Collateral to be transferred to the Bank's name or the name of the Bank's nominee. F. With respect to the Possessory Collateral, exercise all rights, powers and remedies of an owner but excluding any voting rights. 6. EVENTS OF DEFAULT. Any one or more of the following described events shall constitute an event of default ("Event of Default") hereunder. A. NON-PAYMENT. There shall occur a failure to pay when due any payment of principal or interest or any other sum referred to in this Security Agreement or under any other document, instrument or agreement evidencing or relating to any indebtedness owed by the Grantor to the Bank or owed to the Bank by any obligor on the Indebtedness. B. PERFORMANCE UNDER THIS AND OTHER AGREEMENTS. The Grantor shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Security Agreement or in any document, instrument or agreement evidencing or relating to any indebtedness of the Grantor or any indebtedness of any obligor on the Indebtedness (whether such indebtedness is owed to the Bank or third persons), and any such failure (exclusive of the payment of money to the Bank, which failure shall constitute and be an immediate Event of Default if not paid when due or when demanded to be due) shall continue for more than 30 days after written notice from the Bank to the Grantor or the obligor on the Indebtedness of the existence and character of such Event of Default. C. REPRESENTATIONS AND WARRANTIES: FINANCIAL STATEMENTS. Any representation or warranty made under or in connection with this Security Agreement or any financial statement or information given in connection with the transaction with respect to which this Security Agreement is entered into shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. D. INSOLVENCY. The Grantor or any obligor on or any guarantor of the Indebtedness shall: (i) become insolvent or be unable to pay its debts as they mature; (ii) make an (4) 22 assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its properties or assets; (iii) file a voluntary petition in bankruptcy or seeking reorganization or to effect a plan or other arrangement with creditors; (iv) file an answer admitting the material allegations of an involuntary petition relating to bankruptcy or reorganization or join in any such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or consent to the appointment of, or consent that an order be made appointing, any receiver, custodian or trustee, for itself or any of its properties, assets or business; of (vii) any receiver, custodian or trustee shall have been appointed for all or a substantial part of its properties, assets or businesses and shall not be discharged within 30 days after the date of such appointment. E. EXECUTION. Any writ of execution or attachment or any judgment lien shall be issued against the Collateral and shall not be discharged or bonded against or released within 30 days after the issuance or attachment of such writ or lien. F. IMPAIRMENT OF COLLATERAL. There shall occur any deterioration or impairment of all or any part of the Collateral or any decline or depreciation in the value or market price of the Collateral which causes the Collateral, in the sole and absolute judgment of the Bank, to become unacceptable as to character or value. G. REVOCATION OR LIMITATION OF GUARANTY. Any guaranty given with respect to the Indebtedness shall be revoked or limited or its enforceability or validity shall be contested by any guarantor, by operation of law, legal proceeding or otherwise or any guarantor who is a natural person shall die. H. SUSPENSION. The Grantor or any obligor on the Indebtedness shall voluntarily suspend the transaction of business or allow to be suspended, terminated, revoked or expired any permit, license or approval of any federal, state or municipal agency or authority necessary to conduct such person's business as now conducted. I. CHANGE IN OWNERSHIP. There shall occur a sale, transfer, disposition or encumbrance (whether voluntary or involuntary), or an agreement shall be entered into to do so, with respect to more than 10% of the issued and outstanding capital stock of the Grantor or any obligor on the Indebtedness, if a corporation, or there shall occur a change in any general partner or a change affecting the control of the Grantor or any obligor on the Indebtedness, if a partnership. 7. BANK'S RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default, the Bank may, at its sole and absolute election, without demand and only upon such notice as may be required by law: A. ACCELERATION. Declare the Indebtedness and any or all other indebtedness owing to the Bank by the Grantor or any obligor on the Indebtedness (however such indebtedness may be evidence or secured) immediately due and payable, whether or not otherwise due and payable. B. CEASE EXTENDING CREDIT. Cease extending credit to or for the account of the Grantor or any obligor on the Indebtedness under any agreement now existing or hereafter entered into with the Bank. C. TERMINATION. Terminate any agreement as to any future obligation of the Bank without affecting the Grantor's obligations to the Bank or the Bank's rights and remedies under this Security Agreement or under any other document, instrument or agreement. (5) 23 D. PROTECTION OF SECURITY INTEREST IN COLLATERAL. Make such payments and do such acts as the Bank, in its sole judgment, considers necessary and reasonable to protect its security interest in the Collateral. The Grantor hereby irrevocably authorizes the Bank to pay, purchase, contest or compromise any encumbrance, lien or claim which the Bank, in its sole judgment, deems to be prior or superior to its security interest. Further, the Grantor hereby agrees to pay to the Bank, upon demand therefor, all expenses and expenditures (including attorneys' fees) incurred in connection with the foregoing. E. FORECLOSURE. Enforce any security interest or lien given or provided for under this Security Agreement or under any other document relating to the Collateral, in such manner and such order, as to all or any part of the Collateral, as the Bank, in its sole judgment, deems to be necessary to appropriate and the Grantor hereby waives any and all rights, obligations or defenses now or hereafter established by law relating to the foregoing. In the enforcement of its security interest in the Collateral, the Bank is authorized to enter upon the premises where any Collateral is located and take possession of the Collateral or any part thereof, together with the Grantor's records pertaining thereto, or the Bank may require the Grantor to assemble the Collateral and records pertaining thereto and make such Collateral and records available to the Bank at a place designated by the Bank. The Bank may sell the Collateral or any portions thereof, together with all additions, accessions and accessories thereto, giving only such notices and following only such procedures as are required by law, at either a public or private sale, or both, with or without having the Collateral present at the time of sale, which sale shall be on such terms and conditions and conducted in such manner as the Bank determines in its sole judgment to be commercially reasonable. Any deficiency which exists after the disposition or liquidation of the Collateral shall be a continuing liability of any obligor on or any guarantor of the Indebtedness and shall be immediately paid to the Bank. F. APPLICATION OF PROCEEDS. All amounts received by the Bank as proceeds from the disposition or liquidation of the Collateral shall be applied as follows: first, to the costs and expenses of collection, including court costs and reasonable attorneys' fees, whether or not suit is commenced by the Bank; next, to those costs and expenses incurred by the Bank in protecting, preserving, enforcing, collecting, selling or disposing of the Collateral; next, to the payment of accrued and unpaid interest on all of the Indebtedness; next, to the payment of the outstanding principal balance of the Indebtedness; and last, to the payment of any other indebtedness owed by the Grantor to the Bank. Any excess Collateral or excess proceeds existing after the disposition or liquidation of the Collateral will be returned or paid by the Bank to the Grantor. G. NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's rights set forth herein or seek such other rights or pursue such other remedies as may be provided by law, in equity or in any other agreement now existing or hereafter entered into between the Bank and the Grantor or any obligor on or guarantor of the Indebtedness, or otherwise. 8. MISCELLANEOUS PROVISIONS. A. AMOUNTS PAYABLE UNDER THIS SECURITY AGREEMENT. If the Grantor fails to pay on demand the amount of any obligations referred to in this Security Agreement, the Bank may pay such amount at its option and without any obligation to do so and without waiving any default occasioned by the Grantor's failure to pay such amount. All amounts so paid by the Bank, together with reasonable attorneys' fees and all other costs, charges and expenses relating to the Indebtedness, shall be a part of the Indebtedness and shall bear interest at the highest rate chargeable on any Indebtedness until paid in full. (6) 24 B. OTHER TERMS. Terms not otherwise defined in this Security Agreement shall have the meanings attributed to such terms in the California Uniform Commercial Code. C. RELIANCE. Each warranty, representation, covenant and agreement contained in this Security Agreement shall be conclusively presumed to have been relief upon by the Bank regardless of any investigation made or information possessed by the Bank and shall be cumulative and in addition to any other warranties, representations, covenants or agreements which the Grantor shall now or hereafter give, or cause to be given, to the Bank. D. ATTORNEYS' FEES. In the event of any action in relation to this Security Agreement, the Collateral or any document, instrument or agreement secured hereby or related hereto, the prevailing party, in addition to all other sums to which it may entitled, shall be entitled to reasonable attorneys' fees. E. NOTICES. All notices, payments, requests, information and demands which either party hereto may desire, or be required to give or make to the other party, shall be given or made to such party by hand delivery or through deposit in the United States mail, postage prepaid, or by Western Union telegram, addressed to the address set forth below such party's signature to this Security Agreement or to such other address as may be specified from time to time in writing by either party to the other. F. WAIVER. Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any other document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right, nor shall any waiver of any right or default hereunder or under any other document, instrument or agreement mentioned herein constitute a waiver of any other right or default or constitute a waiver of any other default of the same or any other term or provision. G. ASSIGNMENT. This Security Agreement shall be binding upon and inure to the benefit of the Grantor and the Bank and their respective successors and assigns, except that the Grantor shall not have the right to assign the Grantor's rights hereunder or any interest herein without the Bank's prior written consent. The Bank may sell or assign all or any portion of its rights and benefits hereunder and, in connection therewise, may deliver to such prospective buyer or assignee financial statements and other relevant information pertaining to the Grantor or any obligor on the Indebtedness. H. SEVERABILITY. Should any one or more provisions of this Security Agreement be determined to be illegal or unenforceable, all other provisions shall remain effective. I. JURISDICTION. This Security Agreement and the rights of the parties hereunder to and concerning the Collateral, and any documents, instruments or agreements mentioned or referred to herein, shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby submit. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be executed as of the date first hereinabove written. BANK: SANWA BANK CALIFORNIA (7) 25 BY: /S/ TODD L. MALDONADO -------------------------- TODD L. MALDONADO COMMERCIAL BANKING OFFICER ADDRESS: NEWPORT BEACH OFFICE 4400 MACARTHUR BOULEVARD NEWPORT BEACH, CA 92660 GRANTOR: NEOTHERAPEUTICS, INC. BY: /S/ ALVIN J. GLASKY -------------------------- ALVIN J. GLASKY, PRESIDENT ADDRESS: 157 TECHNOLOGY DRIVE IRVINE, CA 92618 (8) 26 SECURITIES SCHEDULE The securities described below are part of the Collateral as defined and described in this Security Agreement dated November 14, 1997 to which this Schedule is attached. - -------------------------------------------------------------------------------- BONDS: $1,750,000.00 par value Federal Home Loan Banks Consolidated Bond dated December 28, 1995 at 6.030% maturing December 28, 1998 held by Sanwa Bank California's Trust Department in account No. 71N001004. (9) 27 PLEDGEHOLDER AGREEMENT THIS PLEDGEHOLDER AGREEMENT (the "Agreement") is made as of this 20th day of August, 1997 by and between SANWA BANK CALIFORNIA (the "Bank"), NEOTHERAPEUTICS, INC. (the "Grantor"), and BANK OF AMERICA (the "Pledgeholder") with respect to the matters that follow: 1. THE COLLATERAL. As security for the payment of certain debts, obligations and liabilities (hereinafter collectively referred to as the "Indebtedness") owed and to be owed by NEOTHERAPEUTICS, INC. to the Bank and performance of all the terms, covenants and agreements contained in certain documents, instruments and agreements evidencing, securing or related to the Indebtedness, the Grantor has granted to the Bank, pursuant to the terms, covenants and agreements contained in a certain security agreement (the "Security Agreement") entered into between the Bank and the Grantor and relating to the property described below, together with all proceeds thereof (hereinafter collectively referred to as the "Collateral"), a security interest in and to, among other items, the following: Those shares of stock, bonds, indentures, negotiable and non-negotiable securities and instruments listed on the attached Exhibit "A" and on any additional and supplemental exhibits to this Agreement, together with all warrants, options, stock rights, right to subscribe, liquidating dividends, cash dividends, payments, dividends paid in stock, new securities or other property derived therefrom or to which the Grantor may become entitled to receive on account thereof, which are held by the Pledgeholder and which are maintained by the Pledgeholder in one or more accounts, including but not limited to the account numbered 01-40-403-0008875 (collectively, the "Account"). 2. APPOINTMENT OF PLEDGEHOLDER. In order to perfect the security interest of the Bank in and to the Collateral, the Bank in and to the Collateral, the Bank hereby appoints the Pledgeholder, the Grantor hereby acknowledges and irrevocably authorizes the appointment of the Pledgeholder, and the Pledgeholder irrevocably accepts its appointment, as agent for and under the instructions of the Bank, to hold any and all Collateral which is now or shall hereafter be in the possession or under the control of the Pledgeholder. 3. LIMITATIONS ON DISPOSITION OF COLLATERAL. Except to the extent that the Pledgeholder is authorized or permitted by the Bank or under this Agreement or is required by court order, writ or other legal process, the Collateral or any portion thereof shall not be released by or withdrawn from the possession or control of the Pledgeholder. Notwithstanding the foregoing, to the extent that the Collateral or any portion thereof consists of stock, bonds, indentures, warrants, options, stock rights, or other negotiable or non-negotiable securities, such item or items of the Collateral may, at the option and direction of the Grantor, be sold or otherwise disposed of provided that the proceeds therefrom are reinvested in other securities which are held by the Pledgeholder and are of a character and value acceptable to the Bank and provided further that, prior to and following such sale or disposition and such reinvestment, the then current market value of such securities held by the Pledgeholder shall not be less than an a mount designated from time to time by the Bank to the Pledgeholder. 4. TRANSFER OF COLLATERAL TO BANK. Upon such instructions as may be given by the Bank to the Pledgeholder, the Pledgeholder shall (as directed by the Bank) either deliver the Collateral or such portions thereof (together with, as applicable, all stock powers executed by the Grantor, the Pledgeholder and others) to the Bank or liquidate, sell or otherwise dispose of the Collateral or (1) 28 such portions thereof and remit the proceeds therefrom to the Bank at the address set forth herein or in the instructions given by the Bank to the Pledgeholder. 5. INDEMNIFICATION OF PLEDGEHOLDER. The Pledgeholder is hereby authorized to comply with the terms and conditions of this Agreement and the instructions given to the Pledgeholder pursuant hereto, and the Grantor hereby releases and discharges the Pledgeholder from any and all duties and obligations which the Pledgeholder may otherwise have to the Grantor under any prior instructions or agreements which conflict with the matters contained in this Agreement. The Grantor hereby agrees to and shall indemnify and defend the Pledgeholder and shall hold the Pledgeholder harmless from and against any and all claims, demands, costs and expenses (including court costs and attorneys' fees) arising from any litigation or proceeding which may be commenced with respect to the Collateral, the Account or the obligations of the Pledgeholder hereunder or which may be incurred by reason of following any instruction given to the Pledgeholder pursuant to this Agreement. 6. DEFINITIONS. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the California Uniform Commercial Code. 7. DISPUTE RESOLUTION. A. DISPUTES. It is understood and agreed that, upon the request of any party to this Agreement, any dispute, claim or controversy of any kind, whether in contract or in tort, statutory or common law, legal or equitable, now existing or hereinafter arising between the parties in any way arising out of, pertaining to or in connection with: (i) this Agreement, or any related agreements, documents or instruments, (ii) all past and present loans, credits, accounts, deposit accounts (whether demand deposits or time deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of credit, goods or services, or other transactions, contracts or agreements of any kind, (iii) any incidents, omissions, acts, practices, or occurrences causing injury to any party whereby another party or its agents, employees or representatives may be liable, in whole or in part, or (iv) any aspect of the past or present relationships of the parties, shall be resolved through a two-step dispute resolution process administered by the Judicial Arbitration & Mediation Services, Inc. ("JAMS") as follows: B. STEP I - MEDIATION. At the request of any party to the dispute, claim or controversy, the matter shall be referred to the nearest office of JAMS for mediation, which is an informal, non-binding conference or conferences between the parties in which a retired judge or justice from the JAMS panel will seek to guide the parties to a resolution of the case. C. STEP II - ARBITRATION (CONTRACTS NOT SECURED BY REAL PROPERTY). Should any dispute, claim or controversy remain unresolved at the conclusion of the Step I Mediation Phase, then (subject to the restriction at the end of this subparagraph ) all such remaining matters shall be resolved by final and binding arbitration before a different judicial panelist, unless the parties shall agree to have the mediator panelist act as arbitrator. The hearing shall be conducted at a location determined by the arbitrator in Los Angeles, California (or such other city as may be agreed upon by the parties) and shall be administered by and in accordance with the then existing Rules of Practice and Procedure of JAMS and judgement upon any award rendered by the arbitrator may be entered by any State or Federal Court, having jurisdiction thereof. The arbitrator shall determine which is the prevailing party and shall include in the award that party's reasonable attorneys' fees and costs. This subparagraph shall apply only if, at the time of the submission of the matter to JAMS, the dispute or issues involved do not arise out of any transaction which is secured by real property collateral or, if so secured, all parties consent to such submission. (2) 29 As soon as practicable after selection of the arbitrator, the arbitrator, or the arbitrator's designated representative, shall determine a reasonable estimate of anticipated fees and costs of the arbitrator, and render a statement to each party setting forth that party's pro-rata share of said fees and costs. Thereafter, each party shall, within 10 days of receipt of said statement, deposit said sum with the arbitrator. Failure of any party to make such a deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend the claim which is the subject of the arbitration, but shall not otherwise serve to abate, stay or suspend the arbitration proceedings. D. STEP II - TRIAL BY COURT REFERENCE (CONTRACTS SECURED BY REAL PROPERTY). If the dispute, claim or controversy is not one required or agreed to be submitted to arbitration, as provided in the above subparagraph, and has not been resolved by Step I mediation, then any remaining dispute, claim or controversy shall be submitted for determination by a trial on Order of Reference conducted by a retired judge or justice from the panel of JAMS appointed pursuant to the provisions of Section 638(1) of the California Code of Civil Procedure, or any amendment, addition or successor section thereto, to hear the case and report a statement of decision thereof. The parties intend this general reference agreement to be specifically enforceable in accordance with said section. If the parties are unable to agree upon a member of the JAMS panel to act as referee, then one shall be appointed by the Presiding Judge of the county wherein the hearing is to be held. The parties shall pay in advance, to the referee, the estimated reasonable fees and costs of the reference, as may be specified in advance by the referee. The parties shall initially share equally, by paying their proportionate amount of the estimated fees and costs of the reference. Failure of any party to make such a fee deposit shall result in a forfeiture by the non-depositing party of the right to prosecute or defend any cause of action which is the subject of the reference, but shall not otherwise serve to abate, stay or suspend the reference proceeding. E. PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE. No provision of, or the exercise of any rights under any portion of this Dispute Resolution provision, shall limit the right of any party to exercise self help remedies such as set off, foreclosure against any real or personal property collateral, or the obtaining of provisional or ancillary remedies, such as injunctive relief or the appointment of a receiver, from any court having jurisdiction before, during or after the pendence of any arbitration. At the Bank's option, foreclosure under a deed of trust or mortgage may be accomplished either by exercise of power of sale under the deed of trust or mortgage, or by judicial foreclosure. The institution and maintenance of an action for provisional remedies, pursuit of provisional or ancillary remedies or exercise of self help remedies shall not constitute a waiver of the right of any party to submit the controversy or claim or arbitration. 8. ATTORNEY'S FEES. In the event of any mediation, arbitration, suit or other action to enforce this Agreement or which otherwise arises out of this Agreement, the prevailing party, in addition to all other sums to which it may be entitled, shall be entitled to reasonable attorneys' fees. 9. NOTICES. All notices, payments, requests, information and demands which any party hereto may desire or be required to give or make to any other party shall be given or made to such party by hand delivery or express mail or through deposit in the United States mail, postage prepaid, or by Western Union telegram, or by telex, addressed to the address set forth below such party's signature to this Agreement or to such other address as may be specified from time to time in writing by any party to the other parties. (3) 30 10. NO WAIVER. Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any other document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right. 11. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and agents. 12. JURISDICTION. This Agreement and the rights of the parties hereunder to and concerning the Collateral, and any documents, instruments or agreements mentioned or referred to herein, shall be governed by and construed according to the laws of the State of California, to the jurisdiction of whose courts the parties hereby submit. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first hereinabove written. BANK: GRANTOR: SANWA BANK CALIFORNIA NEOTHERAPEUTICS, INC. BY: /S/ FRED A. HOEKSTRA BY: /S/ ALVIN J. GLASKY ----------------------------------- ---------------------------------- FRED A. HOEKSTRA, AUTHORIZED OFFICER ALVIN J. GLASKY, PRESIDENT ADDRESS: ADDRESS: NEWPORT BEACH OFFICE ONE TECHNOLOGY DRIVE 4400 MACARTHUR BOULEVARD IRVINE, CA 92618 NEWPORT BEACH, CA 92660 PLEDGEHOLDER: BANK OF AMERICA BY: --------------------------------- NAME/TITLE ADDRESS: 231 SOUTH LASALLE STREET CHICAGO, IL 60697 (4) 31 EXHIBIT "A" SECURITIES SCHEDULE PLEDGEHOLDER AGREEMENT - -------------------------------------------------------------------------------- VOID (5) 32 ASSIGNMENT AS SECURITY FOR VALUE RECEIVED, I, NeoTherapeutics, Inc., Principal Trustor Beneficiary under the above account number in the files of SANWA BANK CALIFORNIA, Trust Department (hereinafter referred to as Trustee/Custodian), do hereby assign and deliver unto Sanwa Bank California, (hereinafter referred to as Assignee) all my right, title, and interest in and to said account and the benefits thereof, subject to the rights hereinafter reserved to the undersigned, and subject to said rights, I do hereby authorize said Trustee/Custodian to pay and turn unto said Assignee all moneys and benefits growing out of said interest hereby assigned. This assignment is made as collateral security for the payment of that certain promissory note dated August 20, 1997, in favor of Assignee in the amount of $1,600,000.00, or any extension or renewal thereof, together with any interest and expenses which may accrue thereon, and in accordance with the terms thereof, and also as security for any other sums which may be due or become due said Assignee by the undersigned; provided, however that the Trustee/Custodian shall distribute the net income derived from the account to the person or persons entitled thereto by the provisions thereof, until said Trustee/Custodian shall be otherwise directed by said Assignee; and provided further, that the undersigned shall not exercise any rights to terminate said account in whole or in part, and/or to direct the investment or reinvestment of all or any part of the account, and/or to amend said account in such manner as to affect the rights of the Assignee hereunder, until said obligations shall be fully satisfied and discharged and/or all sums owing by the undersigned to said Assignee shall have been fully repaid, except with the written consent of the said Assignee. Unless otherwise paid, said Trustee/Custodian is authorized and directed to pay, when due, the indebtedness hereby secured by the account out of any funds belonging to the account and available for that purpose, or, in the event there are not funds belonging to the account available for the payment of said obligation when due, said Trustee/Custodian is authorized and directed to sell at public or private sale, in any lawful manner, such property belonging to the account as may be necessary for the purpose of providing such funds. Pursuant to the power reserved to the undersigned in and by said account, the undersigned does hereby alter, amend, and/or change said account, and the estates and interests thereby created, to such extent and for such periods as may be necessary to carry out the provisions hereof. It is understood and agreed that, upon the full payment by the undersigned of all indebtedness secured hereby, or in connection herewith or otherwise, this assignment shall terminate and become null, void, and of no effect, and thereupon the Trustee/Custodian shall hold the entire account then remaining for the benefit of the person or persons entitled thereto by the provisions of said account. The undersigned does hereby agree to indemnify and save harmless said Trustee/Custodian from any loss, damage, or liability that it may suffer or incur by reason of complying with the terms of this assignment. Dated this____________________day of_________________, 19__________. Signature of Assignor /s/ Alvin J. Glasky ------------------- SANWA BANK OF CALIFORNIA, as Custodian, hereby consents to the above assignment. DATED this 18th day of November, 1997. ---- -------------- SANWA BANK OF CALIFORNIA /s/ Kelly Ann Laghaei /s/ Dina M. Anguiano ------------------------------------------ Trust Officer EX-21.1 3 SUBSIDIARIES LIST 1 EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT 1. Advanced ImmunoTherapeutics, Inc., a California corporation. 2. NeoTherapeutics GmbH, a Switzerland corporation. EX-27 4 FINACNIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1997 FINANCIAL STATEMENTS OF NEOTHERAPEUTICS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-KSB, YEAR ENDED DECEMBER 31, 1997. YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 6,998,347 2,133,375 221,829 0 0 9,480,810 3,755,262 279,913 13,198,473 2,478,529 176,549 0 0 23,188,363 (12,644,968) 13,198,473 0 0 0 6,849,531 1,599 0 56,419 (6,161,541) 0 (6,161,541) 0 0 0 (6,161,541) (1.14) 0
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