-----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, UpmB/qG9/F7gOHPhY5Mqe1VEykgwl0rOCtc0qh+/OjrOS/ETCU5Gn9HAp5w3K5Kx L5xlSmw+LULK0qIBD4ay9Q== 0000950115-97-000037.txt : 19970114 0000950115-97-000037.hdr.sgml : 19970114 ACCESSION NUMBER: 0000950115-97-000037 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOSE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000877902 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 133549286 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-19629 FILM NUMBER: 97504615 BUSINESS ADDRESS: STREET 1: 102 WITMER ROAD CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 2154415890 MAIL ADDRESS: STREET 1: 102 WITMER ROAD CITY: HORSHAM STATE: PA ZIP: 19044 S-1 1 INITIAL STATEMENT As filed with the Securities and Exchange Commission on January 13, 1997 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------- NEOSE TECHNOLOGIES, INC. (Exact name of Registrant as specified in charter)
Delaware 8731 13-3549286 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
102 Witmer Road Horsham, Pennsylvania 19044 (215) 441-5890 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Stephen A. Roth, Ph.D. Chief Executive Officer Neose Technologies, Inc. 102 Witmer Road Horsham, Pennsylvania 19044 (215) 441-5890 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: --------------- David R. King, Esq. James R. Tanenbaum, Esq. Morgan, Lewis & Bockius LLP Stroock & Stroock & Lavan 2000 One Logan Square Seven Hanover Square Philadelphia, Pennsylvania 19103 New York, New York 10004 (215) 963-5000 (212) 806-5400 --------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / --------------- CALCULATION OF REGISTRATION FEE
===================================================================================================================== Proposed Maximum Proposed Maximum Title of Each Class Amount to Be Offering Price Aggregate Offering Amount of of Securities to Be Registered Registered Per Unit Price Registration Fee - --------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share .............. 1,250,000 $18.25(1) $22,812,500.00(1) $7,866.00 ====================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended. --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. ================================================================================ Information contained herein is subject to completion or amendment. A Registration Statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the Registration Statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED JANUARY 13, 1997 PROSPECTUS 1,250,000 Shares [NEOSE TECHNOLOGIES, INC. LOGO] Common Stock All of the 1,250,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), offered hereby are being sold by Neose Technologies, Inc. ("Neose" or the "Company"). The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "NTEC." On January 10, 1997, the last reported sale price of the Common Stock, as reported on the Nasdaq National Market, was $18.00 per share. See "Price Range of Common Stock." --------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
======================================================================================================================== Price to Placement Agent Proceeds to Public Fees (1) Company (2)(3) - ------------------------------------------------------------------------------------------------------------------------ Per Share................... $ $ $ - ------------------------------------------------------------------------------------------------------------------------ Total....................... $ $ $ ========================================================================================================================
(1) The Common Stock is being offered on an all or none basis by the Company to selected institutional investors. Vector Securities International, Inc. (the "Placement Agent") has been retained to act, on a best efforts basis, as agent for the Company in connection with the arrangement of this transaction. The Company has agreed to pay the Placement Agent a fee in connection with the arrangement of this transaction and reimburse the Placement Agent for certain out-of-pocket expenses. The Company has agreed to indemnify the Placement Agent against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Plan of Distribution." (2) The termination date of the offering is , 1997, subject to extension by mutual agreement of the Company and the Placement Agent. Prior to the closing date of this best efforts, all or nothing, offering all investor funds will promptly be placed in escrow with Citibank, N.A., as escrow agent for funds collected in connection with the offering (the "Escrow Agent"), in an escrow account established for the benefit of the investors. Upon receipt of notice from the Escrow Agent that investors have affirmed purchase of the Common Stock and deposited the requisite funds in the escrow account, the Company will deposit with The Depository Trust Company ("DTC") the shares of Common Stock to be credited to the accounts of the investors and will collect the investor funds from the Escrow Agent. In the event that investor funds are not received in the full amount necessary to satisfy the requirements of the offering, all funds deposited with the Escrow Agent will promptly be returned to the investors. See "Plan of Distribution." (3) Before deducting expenses payable by the Company estimated at $285,000. ---------- Vector Securities International, Inc. The date of this Prospectus is , 1997. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. [This page intentionally left blank] PROSPECTUS SUMMARY The statements in this Prospectus that relate to future plans, events or performance are forward-looking statements. Actual results could differ materially due to a variety of factors, including the factors described under "Risk Factors" and the other risks described in this Prospectus. The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus, including information under "Risk Factors." The Company Neose Technologies, Inc. ("Neose" or the "Company") is focused on the enzymatic synthesis of complex carbohydrates (oligosaccharides), and the discovery and development of complex carbohydrates for nutritional and pharmaceutical uses. Complex carbohydrates serve as attachment sites for many pathogens that cause infectious diseases. Present on all cells, these compounds also play a critical role in the immune response. Because oligosaccharides are difficult and expensive to produce, their commercial development has been significantly limited despite the role they play in human diseases. The Company believes that its proprietary Multi-Transferase Reaction ("MTR") technology enables, for the first time, the rapid and cost-efficient production of naturally-occurring oligosaccharides. The Company, with Abbott Laboratories ("Abbott"), a leading provider of infant formula in the United States, is applying its MTR technology to the development of breast milk oligosaccharides as additives to infant formula. Breast milk oligosaccharides are believed to play an important anti-infective role in infants. In its therapeutic development programs, the Company is using its technology to develop complex carbohydrates as pharmaceuticals to treat various bacterial infections, such as gastrointestinal and pediatric ear infections, and to prevent xenotransplant rejection. All human cell surfaces have complex carbohydrates that serve as specific binding sites for other molecules and cells, including pathogens such as bacteria, viruses, and other infectious microorganisms. In addition, soluble oligosaccharides (oligosaccharides not bound to cells) produced by the body are found in many body fluids. These soluble complex carbohydrates are identical to the complex carbohydrates on cell surfaces, and are believed to serve as decoys that bind to pathogens, preventing the pathogens from binding to cells and causing disease. The Company believes that naturally-occurring oligosaccharides can be developed into anti-infective pharmaceutical and healthcare products that are less likely to cause adverse side-effects, and less likely to result in resistant strains of infectious agents, than synthetic drugs or traditional antibiotics. Difficulties in producing oligosaccharides efficiently and in sufficient quantities have significantly limited their development and commercialization as pharmaceutical or healthcare products. Neose's proprietary MTR technology utilizes enzymes as part of a molecular assembly line to synthesize a wide variety of oligosaccharides. These enzymes, or glycosyltransferases, are catalysts that join monosaccharides together in highly specific ways. Neose has developed various methods to obtain the glycosyltransferases necessary to manufacture many naturally-occurring oligosaccharides. Utilizing its proprietary MTR technology, the Company believes it can produce these naturally-occurring complex carbohydrates in commercial quantities on a cost-effective basis. These compounds can then be used as lead compounds for pharmaceutical development and for other healthcare applications. Neose is applying its proprietary technologies to develop the following products: Nutritional Additives. Breast milk contains more than two dozen soluble oligosaccharides that are believed to play an important anti-infective role in infants by preventing the attachment of certain bacteria to gastrointestinal, respiratory, and urinary tract cells. The Company has entered into a strategic alliance with Abbott for the commercialization of breast milk oligosaccharides for nutritional applications. Abbott, through its Similac(R) and Isomil(R) products, is a leading provider of infant formula in the United States. The Company's first oligosaccharide, NE-1340, is being developed as an additive to Abbott's infant formula products. The Company believes that the development and commercialization of this additive may occur more rapidly than pharmaceutical product development. 3 Pharmaceuticals. In its pharmaceutical discovery and development efforts, the Company is targeting diseases or indications that are mediated by complex carbohydrates located on cell surfaces, and that affect large patient populations. The Company is currently developing pharmaceutical products for the following indications: o Gastritis and Peptic Ulcers. The Company is developing NE-0080, a naturally-occurring human gastrointestinal oligosaccharide, to treat gastritis and peptic ulcers caused by Helicobacter pylori ("H. pylori") infections. An estimated four million people suffer from active peptic ulcers each year in the United States, and approximately 500,000 new cases are diagnosed annually. The Company completed Phase IA and Phase IB clinical trials involving 24 healthy subjects in an ascending single dose study and 32 subjects with asymptomatic H. pylori infections in a 10-day repeat dose study, respectively. The results of these studies indicated that NE-0080 was well-tolerated and did not cause any adverse side-effects. A Phase IC study, involving a 28-day repeat dose study in 11 subjects with asymptomatic H. pylori infections, was completed in November 1996. Although the study was designed primarily to test safety, the Company also used the non-invasive, urea breath test ("UBT") to measure H. pylori loads in the subjects over an eight-week period. NE-0080 caused a statistically significant decrement in UBT values. The Company plans to initiate Phase II studies on NE-0080 in early 1997. Neose also is developing NE-1327, a polyvalent configuration of NE-0080 that is significantly more effective than the natural monovalent molecule in inhibiting in vitro binding of H. pylori bacteria to human stomach cells. o Pediatric Ear Infections. Neose is developing NE-1530, a naturally-occurring human airway oligosaccharide, for the treatment of pediatric ear infections. Middle ear infections, one of the most frequent reasons for pediatrician visits, cause an estimated 30 million office visits and prescriptions each year. Preclinical studies using animal models have indicated that NE-1530 inhibits and reversesthe attachment of bacteria that cause ear infections and other respiratory diseases. Neose is currently conducting additional preclinical studies and plans to file in late 1997 an investigational new drug ("IND") application for the treatment of pediatric ear infections. Most bacteria involved in pediatric ear infections also cause acute infections associated with chronic bronchitis and pneumonia. Although the Company has chosen initially to develop NE-1530 to treat pediatric ear infections, the Company also may develop this compound in the future for such other indications. o Xenotransplant Rejection. An estimated 20,000 human organ transplants were performed in the United States in 1995 and many times that number of patients are believed to die each year due to the lack of available human organs. At the end of 1995, the waiting list for humans awaiting human organs was approximately 44,000, and that list has grown significantly each year. Although substantial resources have been committed to develop animal organs for human transplants, hyperacute rejection ("HAR"), in which the transplanted organ is rejected within minutes of transplantation, remains one of the most critical obstacles to xenotransplantation. HAR results from an antibody-mediated response against an oligosaccharide found on the cell surface of most mammals but absent in humans. The Company is developing NE-0501 to neutralize, or to remove, the human antibodies against the mammalian oligosaccharide. During 1996, the Company conducted preclinical studies in which unmodified pig hearts were grafted into two baboons receiving NE-0501 intravenously to neutralize the target antibodies. These studies demonstrated that NE-0501, while present in the bloodstream in adequate concentrations, allows the in vivo survival of the transplanted organ and neutralizes the antibodies that initiate HAR. The Company is collaborating with other companies that are pursuing xenotransplantation with several different approaches, including transgenic modification of pig organs, and chimeric tolerization of donor organs. The Company believes that the use of oligosaccharides may be an important part of the therapies that will ultimately be utilized in the possible commercialization of xenotransplantation in the future. Neose seeks to complement its internal research and development resources through collaborations with corporate partners and research institutions. Under Neose's strategic alliance with Abbott, Abbott has invested $6.0 million in the Company and has paid the Company $5.2 million in contract payments, license fees, and milestone payments, and has agreed to pay further milestone payments and ongoing fees upon the successful commercialization of an infant formula product that includes the Company's compound. In September 1995, Neose entered into an exclusive research collaboration with Bracco Research USA Inc. ("Bracco"), a world leader in diagnostic imaging products and formerly the 4 diagnostics division of Bristol-Myers Squibb Company, to test the effectiveness of oligosaccharides for in vivo imaging purposes. The Company's objective is to be the leader in the discovery, development, and manufacture of complex carbohydrates for a wide range of nutritional and healthcare applications. The key elements of the Company's strategy include: (i) continuing development of nutritional additives; (ii) leveraging its core technology to discover and develop pharmaceutical products to treat carbohydrate-mediated diseases; (iii) establishing strategic alliances and research and development collaborations; (iv) continuing to develop its manufacturing capabilities; and (v) pursuing additional applications of its core technology. The Company was incorporated in New York in January 1989, commenced operations in 1990 and was reincorporated in Delaware in June 1991 under the name Neose Pharmaceuticals, Inc. In April 1995, the Company changed its name to Neose Technologies, Inc. The Company completed its initial public offering of 2,587,500 shares of Common Stock in February 1996, raising net proceeds of $29.1 million. The Company's executive offices are located at 102 Witmer Road, Horsham, Pennsylvania 19044, and its telephone number is (215) 441-5890. 5 The Offering
Common Stock offered................................................................... 1,250,000 shares Common Stock to be outstanding after the offering...................................... 9,468,607 shares (1) Use of proceeds........................................................................ Research and development activities, capital expenditures, working capital, and general corporate purposes, including possible acquisitions. See "Use of Proceeds." Nasdaq National Market Symbol.......................................................... NTEC
Summary Financial Information (in thousands, except per share data)
Period Period from from Nine Months inception inception Ended (January 17, (January 17, Year Ended December 31, September 30, 1989) to 1989) to ---------------------------------------- ------------- December 31, September 30, 1991 1992 1993 1994 1995 1995 1996 1995 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- Statement of Operations Data: Revenues from collaborative agreements...................... $ -- $ -- $ 2,600 $ 48 $ 1,199 $ 876 $ 1,006 $ 3,846 $ 4,852 Research and development expenses........................ 1,055 1,941 3,399 5,004 4,733 3,426 4,900 16,476 21,376 General and administrative expenses........................ 703 1,324 1,577 1,319 1,665 1,172 1,788 6,689 8,477 Interest income (expense), net..... (107) (90) (47) 63 132 73 1,082 (63) 1,019 Net loss........................... (1,865) (3,355) (2,423) (6,212) (5,067) (3,649) (4,600) (19,382) (23,982) Pro forma net loss per share (2)... $ (1.06) $ (0.60) Shares used in computing pro forma net loss per share (2).......... 4,761 7,728
As of September 30, 1996 ------------------------------- Actual As Adjusted(3) -------- -------------- Balance Sheet Data: Cash and cash equivalents............................. $ 35,717 $56,638 Total assets.......................................... 39,032 59,953 Long-term debt (4).................................... 683 683 Deficit accumulated during the development stage...... (23,982) (23,982) Total stockholders' equity............................ 36,512 57,433
- ------------ (1) Does not include, as of January 6, 1997, (i) 147,690 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price per share of $11.18, (ii) 1,199,643 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $10.04 per share, (iii) 260,729 shares of Common Stock reserved for future option grants under the Company's stock option plans, and (iv) 94,369 shares of Common Stock reserved for issuance pursuant to the Company's employee stock purchase plan. See "Management -- 1995 Stock Option/Stock Issuance Plan," "Management -- Employee Stock Purchase Plan," "Description of Capital Stock," and Note 7 of Notes to Financial Statements. (2) See Note 2 of Notes to Financial Statements. (3) Adjusted to give effect to the sale of the Common Stock offered hereby (at an assumed public offering price of $18.00 per share) and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds." (4) The "As Adjusted" amount does not include the long-term debt financing contemplated in connection with the Company's planned purchase of its facility and Good Manufacturing Practices manufacturing expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." ---------- This Prospectus also includes trademarks and trade names of companies other than the Company. 6 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be carefully considered by potential investors in evaluating an investment in the shares of Common Stock offered hereby. These factors may cause actual results, events or performance to differ materially from those expressed in any forward-looking statements made by the Company in this Prospectus. Early Stage of Development; Uncertainty of Product Development; Technological Uncertainty; Novel Therapeutic Approach. The Company was founded in 1989 and is at an early stage of development. The Company has not yet completed the development of any of its products and, accordingly, has not begun to market or generate revenues from the commercialization of products. It will be a number of years, if ever, before the Company will recognize significant revenues from product sales or royalties. Substantially all of the Company's revenues received to date have resulted from payments received under its strategic alliance with Abbott. The Company expects that substantially all of its revenues for the foreseeable future will result from payments under its strategic alliance with Abbott, license fees, payments from future strategic alliances and collaborative arrangements, if any, and interest income. Such revenues will be subject to significant fluctuations in both timing and amount. There can be no assurance that the Company will receive royalty revenues from Abbott or that the Company will be successful in entering into other strategic alliances or collaborative arrangements that will result in significant revenues. The Company's products under development will require significant time-consuming and costly research, development, preclinical studies, clinical testing, regulatory approval, and significant additional investment prior to their commercialization, which may never occur. Moreover, the development and commercialization of complex carbohydrates for pharmaceutical applications have been pursued successfully by few companies. There can be no assurance that the Company's research and development programs will be successful, that its oligosaccharide products will exhibit the expected biological activities in humans, that its nutritional additive will be successfully commercialized, that its pharmaceutical products, if developed, will prove to be safe and efficacious in clinical trials, that the Company or its collaborators will obtain the necessary regulatory approvals for its products, or that the Company or its collaborators will be successful in obtaining market acceptance of any of its products. The Company or its collaborators may encounter problems and delays relating to research and development, regulatory approval, manufacturing, and marketing. The failure by the Company to address such problems and delays successfully would have a material adverse effect on the Company's business, financial condition, and results of operations. In addition, although several companies are focusing research and development efforts in the area of xenotransplantation-based products, such products represent a novel therapeutic approach that has not yet been subject to extensive clinical testing. No xenogeneic organ or living tissue has been approved by the United States Food and Drug Administration ("FDA") for use in humans. There can be no assurance that any xenotransplantation-based products, including the Company's NE-0501 oligosaccharide, will be approved by the FDA or other regulatory authorities, or that, even if so approved, will be accepted by the medical community or third-party payors. Dependence on Abbott; Dependence on Other Collaborative Partners. The Company's strategic alliance with Abbott provides, in part, for the receipt by the Company of certain license fees, milestone payments, and, if commercialization occurs, royalty payments. The Company has derived substantially all of its revenues to date from its strategic alliance with Abbott and anticipates that payments from Abbott will constitute all or a substantial portion of its revenues for the next several years. Abbott has the option at any time prior to the first commercial sale, if any, of infant formula containing the Company's nutritional additive, to elect to make the underlying license agreement with the Company non-exclusive, in which event the license fees payable to the Company after commercialization would be reduced by 50%, and Abbott's obligations to make contract and milestone payments would be terminated. Abbott also has the right to terminate the underlying license agreement upon 60 days' notice, in which event it would have no further funding obligations to the Company. In addition, under the terms of the Abbott agreement, if Abbott fails to make appropriate regulatory filings with the FDA for the addition of Neose oligosaccharides in infant formula prior to December 31, 1997, Neose, at its option, may elect to convert the license of Neose technology to a non-exclusive license to Abbott, in which event the license fees 7 payable by Abbott after commercialization would be reduced by 50%, and Abbott's obligations to make contract and milestone payments would be terminated. The success of the strategic alliance will depend on Abbott's own competitive, marketing and strategic considerations, including the relative advantages of alternative products being developed or marketed by competitors. The amount and timing of resources Abbott commits to these activities are entirely within Abbott's control. There can be no assurance that Abbott will pursue the development and commercialization of this product or that Abbott will perform its obligations as expected. No assurance can be given that the strategic alliance will result in the successful commercialization of the Company's nutritional additive or that any future milestone payments or fees will be received by the Company. The suspension or termination of the Company's strategic alliance with Abbott, the failure of the strategic alliance to be successful, or the delay in the development or commercialization of the nutritional additive by Abbott would have a material adverse effect on the Company's business, financial condition, and results of operations. See "Business -- Strategic Alliance with Abbott." The Company's strategy for the development and commercialization of its pharmaceutical product candidates involves entering into collaborative agreements with pharmaceutical and other companies. The Company may in the future grant to its collaborative partners rights to license and commercialize any products developed under these collaborative agreements, and such rights would limit the Company's flexibility in considering alternatives for the commercialization of such products. Under such agreements, the Company may rely on its collaborative partners to conduct research and development efforts and clinical trials on, obtain regulatory approvals for, and manufacture, market, and commercialize certain of the Company's products. The amount and timing of resources devoted to these activities generally will be controlled by each such individual partner. To date, the Company has only entered into a limited number of these collaborative arrangements, and none with respect to pharmaceutical product candidates. There can be no assurance that the Company will be successful in establishing any additional collaborative arrangements, that existing or future collaborative arrangements will be successful in commercializing products, or that the Company will derive any revenues from such arrangements. In addition, the Company's strategy involves entering into multiple, concurrent strategic alliances to pursue pharmaceutical discovery in different disease areas. There can be no assurance that the Company will be able to manage simultaneous programs successfully. With respect to existing and potential future strategic alliances and collaborative arrangements, the Company will be dependent upon the expertise and dedication of sufficient resources by these outside parties to develop, manufacture, or market products. Should a strategic alliance or collaborative partner fail to develop or commercialize a product to which it has rights, the Company's business, financial condition, and results of operations could be materially and adversely affected. See "Business - -- Other Collaborative Relationships." History of Operating Losses; Uncertainty of Future Profits. The Company has not generated any revenues from operations, except for interest income and revenues from strategic alliances. The Company has incurred losses since its inception and, as of September 30, 1996, had a deficit accumulated during the development stage of approximately $24 million for the period since inception. The Company anticipates incurring additional losses over at least the next several years. Such losses may fluctuate significantly from quarter to quarter and are expected to increase as the Company expands its research and development activities. To achieve profitability, the Company, alone or with others, must successfully commercialize its nutritional additive, develop its pharmaceutical products, conduct preclinical studies and clinical trials, obtain required regulatory approvals and successfully manufacture, introduce, and market such products. In addition, to the extent the Company relies upon others for research, development, and commercialization activities, the Company's ability to achieve profitability will be dependent upon the success of such outside parties. The time required to reach profitability is highly uncertain, and there can be no assurance that the Company will be able to achieve profitability on a sustained basis, if at all. See "Management's Discussion and Analysis of Financial Condition and Result of Operations." 8 Additional Financing Requirements; Access to Capital. The Company has incurred negative cash flows from operations since its inception, and has expended, and expects to continue to expend in the future, substantial funds to continue its research and development programs. The Company expects that its existing capital resources, together with the net proceeds of this offering and the interest earned thereon, will be adequate to fund its capital requirements through 1999. No assurance can be given that there will be no change that would consume available resources significantly before such time. The Company's future capital requirements and the adequacy of available funds will depend on many factors, including progress in its research and development activities, including its pharmaceutical discovery and development programs, the magnitude and scope of these activities, progress with preclinical studies and clinical trials, the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in existing collaborative research relationships and strategic alliances, the ability of the Company to establish additional collaborative arrangements for product development, the cost of manufacturing scale-up and developing effective marketing activities and arrangements, and the ability of the Company to obtain long-term financing with respect to its planned manufacturing expansion. The Company has made and expects to make capital expenditures in late 1996 and 1997 totaling approximately $7.5 million to expand FDA Good Manufacturing Practices ("GMP") manufacturing capabilities for its compounds under development. In addition, the Company has entered into a non-binding letter of intent with the owner of its leased facility to purchase the facility for a total of approximately $3.8 million contingent upon, among other things, the Company's obtaining financing for the acquisition. Additional funds will be needed by the Company to expand its manufacturing capacity to manufacture commercial quantities of its potential products. The Company is exploring alternatives for long-term financing in connection with its planned GMP manufacturing expansion and the purchase of its facility, including the issuance of taxable and tax exempt bonds. The Company does not currently have any committed sources of additional financing and no commitments have been received by the Company for long-term financing to support the expansion and purchase. To the extent that funds generated from the Company's operations, together with its existing capital resources and the net proceeds of this offering and the interest earned thereon, are insufficient to meet current or planned operating requirements, it is likely that the Company will seek to obtain additional funds through equity or debt financings, collaborative or other arrangements with corporate partners and others, and from other sources. The terms and prices of any such financings may be significantly more favorable to investors than those of the Common Stock sold in this offering, which could have the effect of diluting or adversely affecting the holdings or the rights of existing stockholders of the Company, including investors acquiring Common Stock in this offering. There can be no assurance that additional financing will be available when needed or on terms acceptable to the Company. If adequate additional funds are not available for these purposes or otherwise, the Company may be required to delay, scale back, or eliminate certain of its research and product development activities or certain other aspects of its business or attempt to obtain funds through collaborative arrangements that may require the Company to relinquish some or all of its rights to certain of its intellectual property, product candidates, or products. If adequate funds are not available, the Company's business, financial condition, and results of operations will be materially and adversely affected. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments ." Uncertainty Regarding Patents and Proprietary Rights. The Company's success will depend in part on its ability to obtain patent protection for its products, preserve its trade secrets, and operate without infringing the proprietary rights of other parties. Because of the substantial length of time and expense associated with bringing new products through development to the marketplace, the pharmaceutical and biotechnology industries place considerable importance on obtaining and maintaining patent and trade secret protection for new technologies, products, and processes. The Company has an exclusive license from the University of Pennsylvania ("Penn") to two U.S. patents as well as certain related foreign patents and patent applications, subject to Penn's reserved right of use, and right to permit use by non-profit organizations, solely for educational and research purposes. Such license terminates upon the expiration of the last to expire licensed patent in each country. The licensor 9 may, at its option, terminate the license upon 60 days' notice if the Company is not using its continuing best efforts to develop or sell a product using the licensed technology. In addition, the Company owns three U.S. patents and has licensed two other U.S. patents, and the Company and its licensors have filed a number of U.S. and foreign patent applications. The Company may be dependent on licensors or collaborators to prosecute certain of the Company's patent applications and may be dependent on such parties to protect such patent rights if patents issue. Legal standards relating to the scope of claims and the validity of patents in the biotechnology field are uncertain and still evolving. There can be no assurance that patent applications to which the Company holds rights will result in the issuance of patents, that any patents issued or licensed to the Company will not be challenged and held to be invalid, or that any such patents will provide commercially significant protection to the Company's technology, products, and processes. In addition, there can be no assurance that others will not independently develop substantially equivalent proprietary information not covered by patents to which the Company owns rights or obtain access to the Company's know-how or that others will not be issued patents which may prevent the sale of one or more of the Company's products, or require licensing and the payment of significant fees or royalties by the Company to third parties in order to enable the Company to conduct its business. Defense and prosecution of patent claims can be expensive and time consuming, regardless of whether the outcome is favorable to the Company, and can result in the diversion of substantial financial, management, and other resources from the Company's other activities. An adverse outcome could subject the Company to significant liabilities to third parties, require the Company to obtain licenses from third parties, or require the Company to cease any related research and development activities or product sales. In addition, the laws of certain countries may not protect the Company's intellectual property. No assurance can be given that any licenses required under any such third-party patents or proprietary rights would be made available on acceptable terms, if at all. The Company's success is also dependent upon the skills, knowledge, and experience of its scientific and technical personnel. To help protect its rights, the Company requires all employees, consultants, advisors, and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside the Company, and require disclosure and assignment to the Company of their ideas, developments, discoveries, and inventions. There can be no assurance, however, that these agreements will provide adequate protection for the Company's trade secrets, know-how, or other proprietary information in the event of any unauthorized use or disclosure. See "Business -- Patents and Proprietary Rights." Substantial Competition; Risk of Technological Obsolescence. The Company is engaged in highly competitive industries. The Company competes with many public and private companies, including well-known nutritional products manufacturers, pharmaceutical companies, chemical companies, specialized biotechnology companies, and academic institutions. Many of the Company's competitors have significantly greater financial, scientific, and technical resources, and manufacturing and marketing capabilities than the Company. In addition, many of the Company's competitors have significantly greater experience conducting preclinical studies and clinical trials of new pharmaceutical products, and in obtaining regulatory approvals for pharmaceutical products. The Company is relying on Abbott to develop and commercialize its nutritional additive. As a result, the success of the Company's nutritional additive will depend, in significant part, on Abbott's ability to compete in the highly competitive infant formula market. Abbott's principal competitors in this market include Bristol-Myers Squibb Company, American Home Products Corp., Nestle S.A., and Gerber Products Co. Competitors of the Company and its collaborators may develop products that compete successfully with the Company's products and may develop and commercialize such products more rapidly than the Company and its collaborators. In addition, the Company's products may be subject to competition from related products developed by competitors or different products developed using techniques other than those developed by the Company or based on advances that may render the Company's products less competitive or obsolete, uneconomical or otherwise less competitive. Competition may increase further as a result of potential advances from the study of complex carbohydrates and greater availability of capital for investment in this field. There can be no assurance that the Company's 10 competitors will not succeed in developing technologies and products that are more effective than any being developed by the Company, or that would render the Company's technology and products obsolete or noncompetitive. See "Business -- Competition." Government Regulation; No Assurance of Product Approval. The Company's product candidates are subject to stringent regulation by a number of government authorities in the United States and other countries, including the FDA. NE-1340, the Company's infant formula ingredient, may be subject to FDA review as a food additive. Substances that are generally recognized as safe ("GRAS") are excluded from the definition of food additives. Information supporting the safety of a food additive is submitted to the FDA in the form of a food additive petition. The food additive petition process is generally expensive and lengthy, frequently requiring several years after the petition is submitted to the FDA. No assurance can be given that, if submitted, the FDA will accept the petition or permit desired labeling claims and that, if accepted, such petition will not result in the establishment of regulations which necessitate costly and time-consuming compliance procedures. This process could be time-consuming and expensive and would have a material adverse effect on the Company's business, financial condition, and results of operations. The FDA has by regulation affirmed a number of substances as GRAS, although it is not required that a substance be affirmed as GRAS by regulation in order to be GRAS. A manufacturer may make an independent determination that there is general recognition of safety of a substance by qualified experts when used for a particular use. There can be no assurance that Abbott will make such a determination or that the FDA will agree with such a determination, if Abbott were to elect to make such a determination. Accordingly, there is a risk that the FDA will disagree with the determination. In such a circumstance the manufacturer must submit a GRAS affirmation petition for the FDA to review and affirm GRAS status by regulation in order to market and sell the additive or formula containing the additive. This process could be time-consuming and expensive and would have a material adverse effect on the Company's business, financial condition, and results of operations. If the Company's technology is incorporated in products claiming a therapeutic benefit, such products could be regulated as a drug rather than as a food. Regulation of these products as a drug would require extensive clinical testing and review by the FDA to support the claims made for the product. The uncertainty regarding the regulatory status of this type of product could have a material adverse effect on the Company's business, financial condition, and results of operations. Any infant formula containing the Company's nutritional additive will be subject to the provisions of the United States Infant Formula Act, which amended the Food, Drug and Cosmetic Act (the "FDC Act") and established detailed requirements for infant formulas, including their manufacture, composition, and labeling. Pursuant to the Company's agreement with Abbott, Abbott is responsible for all regulatory activities relating to the infant formula additive. There can be no assurance that Abbott will be able to satisfy all applicable regulatory requirements. Abbott may also market infant formula containing the additive in foreign countries. Infant formula regulatory requirements vary widely from country to country, and may be more or less stringent than FDA requirements. The time required to obtain clearances, if required, in foreign countries may be longer or shorter than that required in the United States. Prior to marketing, any pharmaceutical product candidates developed by the Company must undergo an extensive regulatory approval process required by the FDA and by comparable agencies in other countries. This process, which includes preclinical studies and clinical trials of each compound to establish its safety and effectiveness and requires compliance with FDA good laboratory, clinical, and manufacturing practices during testing and manufacturing, can take many years, requires the expenditure of substantial resources, and gives larger companies with greater financial resources a competitive advantage over the Company. Failure to comply with applicable requirements can result in fines, recall, or seizure of products, total or partial suspension of production, withdrawal of existing product approvals, refusal to approve new drug applications, and criminal prosecution. To date, no pharmaceutical product candidate being developed by the Company has been submitted for approval or has been approved by the FDA or any other regulatory authority for marketing, and there can be no assurance that any such product will ever be approved for 11 marketing, or that the Company will be able to obtain the labeling claims desired for its products. The Company is and will continue to be dependent upon and require that the laboratories and medical institutions conducting its preclinical studies and clinical trials maintain both good laboratory and good clinical practices and that the manufacturers of its compounds maintain compliance with current GMP. Data obtained from preclinical studies and clinical trials are subject to varying interpretations that could delay, limit, or prevent FDA regulatory approval. Delays or rejections may be encountered based upon changes in FDA policy for drug approval during the period of development and FDA regulatory review. Similar delays also may be encountered in foreign countries. Any delay in obtaining, or failure to obtain, such approvals would adversely affect the Company's ability to generate product revenues or royalties. There can be no assurance that regulatory approval will be obtained for any product developed by the Company. Moreover, even if approval is granted, such approval may entail commercially unacceptable limitations on the labeling claims for which a product may be marketed. Even if such regulatory approval is obtained, a marketed drug or compound and its manufacturer are subject to continual review and inspection, and later discovery of previously unknown problems with the product or manufacturer may result in restrictions or sanctions on such product or manufacturer, including withdrawal of the product from the market, and other enforcement actions. Additional governmental regulations may be promulgated that would delay regulatory approval of the Company's potential products. The Company cannot predict the impact of adverse governmental action that might arise from future legislative and administrative action. See "Business -- Government Regulation." No Commercial Manufacturing Capability or Experience. To be successful, the Company's products must be manufactured in commercial quantities under GMP prescribed by the FDA and at acceptable costs. The Company has not yet manufactured any products in commercial quantities and currently does not have the facilities to manufacture any products in commercial quantities under GMP. Existing facilities of the Company are not adequate for commercial scale manufacturing. Therefore, the Company will need to develop its own commercial scale GMP manufacturing facility and/or depend on its collaborators, licensees, or contract manufacturers for the commercial manufacture of its products. In the event the Company determines to establish a manufacturing facility, it will require substantial additional funds, the hiring and retention of significant additional personnel and compliance with extensive regulations applicable to such a facility. The Company has no experience in such commercial manufacturing, and there can be no assurance that the Company will be able to establish such a facility successfully and, if established, that it will be able to manufacture products in commercial quantities for sale at competitive prices. If the Company determines to rely on collaborators, licensees, or contract manufacturers for the commercial manufacture of its products, the Company will be dependent on such corporate partners or other entities for, and will have only limited control over, the commercial manufacturing of its products. There can be no assurance that the Company will be able to enter into any such manufacturing arrangements on acceptable terms, if at all. If the Company is not able to enter into commercial manufacturing agreements, it could encounter delays in introducing its products into certain markets, or find that the manufacture of its products in these markets is adversely affected. There can be no assurance that the parties to the Company's future commercial manufacturing agreements will perform their obligations as expected, or that any revenue will be derived from these commercial manufacturing agreements. See "Business -- Manufacturing." Limited Clinical Trial Experience; No Marketing or Sales Capability or Experience. Before obtaining required regulatory approvals for the commercial sale of its pharmaceutical product candidates, the Company must demonstrate through human clinical trials that such products are safe and efficacious for use. To date, the Company has very limited experience in conducting clinical trials. The Company will either need to rely on third parties to design and conduct any required clinical trials or expend resources to hire additional personnel to administer such clinical trials. There can be no assurance that the Company will be able to find appropriate third parties to design and conduct clinical trials or that it will have the resources to hire personnel to administer clinical trials in-house. The Company has no experience in marketing, distributing, or selling nutritional additives or pharmaceutical products, and will have to develop a sales force and/or rely on its collaborators, licensees, or arrangements with 12 others to provide for the marketing, distribution, and sales of its products. There can be no assurance that the Company will be able to establish marketing, distribution, and sales capabilities or make arrangements with third parties to perform such activities on acceptable terms, if at all. See "Business -- Marketing, Distribution, and Sales." Risks Associated with the Infant Formula Industry. To the extent NE-1340 is added to infant formula, the Company is subject to the risks generally associated with the infant formula industry. These risks include: (i) product tampering or production defects may occur requiring a recall of infant formula containing NE-1340, or may reduce the demand for such infant formula; (ii) an ingredient in such formula, including NE-1340, may be banned or its use limited or declared unhealthful; and (iii) sales of infant formula may decline or use of NE-1340 may be limited or discontinued due to real or perceived health concerns, adverse publicity, or other reasons beyond the control of the Company. Dependence on Key Personnel. The Company is highly dependent upon the efforts of its senior management and scientific team. The loss of the services of one or more members of the senior management and scientific team could significantly impede the achievement of the Company's business and product development objectives. Due to the specialized scientific nature of the Company's business, the Company is also highly dependent upon its ability to attract and retain qualified scientific, technical, and key management personnel. The number of qualified scientific personnel is limited, and there is intense competition for such persons and for other qualified personnel in the areas of the Company's activities. There can be no assurance that the Company will be able to continue to attract and retain the qualified personnel necessary for the development of its existing business and its expansion into areas and activities requiring additional expertise, such as production and marketing. The Company may need to hire additional personnel or outside consultants skilled in clinical testing and regulatory compliance as it develops its products. There can be no assurance that the Company will be able to hire or retain such personnel. The loss of, or failure to recruit scientific, technical and managerial personnel could have a material adverse effect on the Company. In addition, the Company relies on members of its Scientific Advisory Board and consultants to assist the Company in formulating its research and development strategy. All of the members of the Scientific Advisory Board and all of the Company's consultants are employed by other employers, and each such member or consultant may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to the Company. See "Business - -- Scientific Advisory Board," "Business -- Employees," and "Management." Third-Party Reimbursement; Uncertainty of Healthcare Reform Measures. Successful commercialization of any pharmaceutical products the Company may develop will depend in part upon the availability of reimbursement for the costs of such products or funding from third-party healthcare payors such as government and private insurance plans. Third-party payors are continuing their efforts to contain or reduce the costs of healthcare through various means. For example, third-party payors are increasingly challenging the coverage of and prices charged for medical products and services. In addition, significant uncertainty exists as to the coverage and reimbursement status of newly approved pharmaceutical products. There can be no assurance that third-party reimbursement or funding will be available or will permit price levels sufficient to realize an appropriate return on the Company's investment in its pharmaceutical product development. The U.S. Congress is considering a number of legislative and regulatory reforms that may affect companies engaged in the healthcare industry in the United States. Although the Company cannot predict whether these proposals will be adopted or the effects such proposals may have on its business, the existence and pendency of such proposals could have a material adverse effect on the Company in general. In addition, the Company's ability to commercialize potential pharmaceutical products may be adversely affected to the extent that such proposals have a material adverse effect on other companies that are prospective collaborators with respect to any of the Company's pharmaceutical product candidates. Product Liability; Lack of Product Liability Insurance. The Company's business may be adversely affected by potential product liability risks which are inherent in the testing, manufacturing, and marketing of the Company's products which it has developed or which it may develop. There can be no 13 assurance that product liability claims will not be asserted against the Company, its collaborators, or licensees. In addition, the use of pharmaceutical products developed by the Company through collaborative or licensing arrangements in clinical trials and the subsequent sale of such products is likely to cause the Company to bear all or a portion of those potential product liability risks. The Company does not currently have product liability insurance. There can be no assurance that it will be able to obtain or maintain adequate product liability insurance on acceptable terms or that such insurance will provide adequate coverage against potential liabilities. Furthermore, there can be no assurance that any collaborators or licensees of the Company will agree to indemnify the Company, be sufficiently insured, or have a net worth sufficient to satisfy the product liability claims. As a result, a product liability claim or recall could have a material adverse effect on the Company's business, financial condition, and results of operations. Hazardous Materials; Compliance with Environmental Regulations. The Company's research and development activities involve the controlled use of hazardous materials, chemicals, and radioactive compounds. 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 resulting damages, and any such liability could exceed the resources of the Company which would have a material adverse effect on the Company's business, financial condition, and results of operations. The Company may incur substantial additional costs to comply with environmental regulations if the Company develops pharmaceutical manufacturing capacity. See "Business -- Government Regulation." Control by Existing Management and Stockholders. Upon completion of this offering, the Company's directors, executive officers, and certain principal stockholders affiliated with members of the Board of Directors and their affiliates will beneficially own approximately 12.2% of the Common Stock. Accordingly, such stockholders, if acting together, may have the ability to exert significant influence over the election of the Company's Board of Directors and other matters submitted to the Company's stockholders for approval. The voting power of these holders may discourage or prevent tender offers for the Common Stock unless the terms are approved by such holders. See "Principal Stockholders." Possible Volatility of Common Stock Price; Dilution. The market price of the Common Stock could be subject to wide fluctuations in response to quarterly variations in operating results, announcements by the Company, its collaborative partners or the Company's present or potential competitors regarding technological innovations or new commercial products or services, regulatory developments, including the results of preclinical testing and clinical trials, arrangements with collaborative partners, the achievement of or failure to achieve certain milestones, developments or disputes concerning patent or proprietary rights, government regulations, healthcare reform measures or public concern regarding the safety or efficacy of the products to be developed by the Company or its collaborators, and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations. This volatility has significantly affected the market prices of securities of many biotechnology and pharmaceutical companies for reasons frequently unrelated to or disproportionate to the performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Common Stock. Purchasers of the shares of Common Stock offered hereby will experience immediate and substantial dilution in the pro forma net tangible book value of their investment of $11.92 per share. Additional dilution will occur upon exercise of outstanding options and warrants. See "Dilution." Shares Eligible for Future Sale. Sales of substantial amounts of Common Stock in the public market after the offering, or the possibility of such sales occurring, could adversely affect prevailing market prices for the Common Stock or the future ability of the Company to raise capital through an offering of equity securities. Of the 9,468,607 shares to be outstanding after the offering, the 1,250,000 shares of Common Stock offered hereby and an additional 6,212,809 shares of Common Stock outstanding will be freely tradable without restriction in the public market unless such shares are held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). However, approximately 978,286 of these shares are subject to a stockholders agreement whereby each holder who has signed the stockholders agreement has agreed, until December 30, 1997, not to offer, sell 14 or otherwise dispose of, directly or indirectly, more than 2% per month, on a cumulative basis, of the aggregate amount of shares held by such holder as of the Company's initial public offering in February 1996, subject to certain conditions. The remaining 2,005,798 shares of Common Stock are restricted securities under the Securities Act and may be sold in the public market only if they are registered or if they qualify for exemption from registration under Rule 144 under the Securities Act. Pursuant to "lock-up" agreements, all of the Company's executive officers and directors, who collectively hold 927,490 of such restricted securities, have agreed not to offer, sell or otherwise dispose of any of their restricted securities for a period of 90 days from the date of this Prospectus without the prior written consent of Vector Securities International, Inc. The Company also has agreed that it will not offer, sell or otherwise dispose of Common Stock for a period of 90 days from the date of this Prospectus, other than pursuant to outstanding warrants, existing stock option and employee stock purchase plans, and in connection with potential corporate collaborations and acquisitions, without the prior written consent of Vector Securities International, Inc. Upon termination of such lock-up agreements, approximately 908,906 of the "locked-up" restricted securities will be eligible for immediate sale, beginning 90 days after the date of this Prospectus, in the public market subject to certain volume, manner of sale and other limitations under Rule 144. Vector Securities International, Inc. may, at its sole discretion and at any time without notice, release all or any portion of the shares subject to such lock-up agreements. The Securities and Exchange Commission (the "Commission") has proposed revisions to Rule 144, the effect of which would be to shorten the holding periods under Rule 144. If enacted, these proposed revisions would increase, potentially substantially, the number of shares that would be available for sale in the public market following the expiration of the lock-up agreements. As of January 6, 1997, options to purchase a total of 1,199,643 shares of Common Stock were outstanding, of which options to purchase 415,694 shares were exercisable. Of such shares subject to options, approximately 708,963 shares are subject to lock-up agreements for a period of 90 days from the date of this Prospectus. As of January 6, 1997, an additional 355,098 shares were available for future option grants and employee stock purchases under the Company's stock option and employee stock purchase plans. All of the shares issued, issuable or reserved for issuance under the Company's stock option and employee stock purchase plans or upon the exercise of options issued or issuable under such plans are covered by an effective registration statement. Such shares may be sold in the open market, subject, in the case of certain holders, to the Rule 144 limitations applicable to affiliates, the above-referenced lock-up agreements and vesting restrictions imposed by the Company. After the offering, holders of an aggregate of 3,236,423 shares of Common Stock will be entitled to certain rights with respect to the registration of such shares for resale under the Securities Act. In addition, the 147,690 shares issuable upon exercise of outstanding warrants have similar registration rights. If such registrations cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. See "Management -- 1995 Stock Option/Stock Issuance Plan," "Management -- Employee Stock Purchase Plan," "Description of Capital Stock -- Registration Rights of Certain Holders," "Shares Eligible for Future Sale," and "Plan of Distribution." Anti-Takeover Effect of Charter and By-Law Provisions and Delaware Law. The Company's Second Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") authorizes the Board of Directors to issue, without stockholder approval, 5,000,000 shares of Preferred Stock with voting, conversion, and other rights and preferences that could materially and adversely affect the voting power or other rights of the holders of Common Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. The Company's By-Laws contain procedural restrictions on director nominations by stockholders and the submission of other proposals for consideration at stockholder meetings. The possible issuance of Preferred Stock and the procedures required for director nominations and stockholder proposals could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Common Stock, or limit the price that investors might be willing to pay in the future for shares of the Common Stock. In addition, certain provisions of Delaware law applicable to the Company could also delay or make more difficult a merger, tender offer, or proxy contest involving the Company. See "Description of Capital Stock." 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,250,000 shares of Common Stock offered hereby are estimated to be approximately $20.9 million, assuming an offering price of $18.00 per share, and after deducting the Placement Agent's fee and other estimated offering expenses payable by the Company. The Company intends to use approximately $7.0 million of the net proceeds of this offering to fund its research and product development activities, approximately $2.0 million for capital expenditures, and the balance for working capital and general corporate purposes, including possible acquisitions of or investments in technology, licenses, proprietary rights, or companies that complement the business of the Company. There are currently no agreements or other arrangements regarding any such acquisitions by the Company. The amount and timing of expenditures for each purpose will depend on a number of factors, including progress of the Company's research and development programs, the number and breadth of these programs, the progress of the development and commercialization efforts of the Company and Abbott, the overall success of the Company's strategic alliance with Abbott, the ability of the Company to establish and maintain additional strategic alliances and licensing arrangements, competing technological and marketing developments, the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other proprietary rights, progress in the regulatory process, and other factors. The Company believes that the net proceeds from this offering, together with interest thereon, and the Company's existing capital resources will be sufficient to fund its capital requirements through 1999. Pending such uses, the net proceeds will be invested in investment grade instruments, certificates of deposit, or direct or guaranteed obligations of the United States. DIVIDEND POLICY The Company currently anticipates that it will retain all available funds for use in the operation of its business and for potential acquisitions, and therefore does not anticipate paying any cash dividends on its Common Stock for the foreseeable future. The Company paid to certain holders of its Preferred Stock cash dividends accrued thereon in the amount of $18,000 for the year ended December 31, 1995. The Company has not otherwise declared or paid cash dividends on its capital stock since 1992. PRICE RANGE OF COMMON STOCK The Company's Common Stock is quoted on the Nasdaq National Market under the symbol "NTEC." The following table sets forth, for the periods indicated, the high and low closing sales price per share of the Common Stock, as reported on the Nasdaq National Market, since the Company's initial public offering in February 1996. High Low ---- --- 1996 First Quarter (from February 15, 1996)............ $22.750 $12.500 Second Quarter.................................... 24.000 18.375 Third Quarter..................................... 20.875 11.625 Fourth Quarter.................................... 19.625 14.500 1997 First Quarter (through January 10, 1997).......... $18.625 $18.000 16 CAPITALIZATION The following table sets forth as of September 30, 1996 (i) the capitalization of the Company and (ii) such capitalization as adjusted to give effect to the sale of the 1,250,000 shares of Common Stock offered hereby (at an assumed public offering price of $18.00 per share) and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds."
As of September 30, 1996 -------------------------- Actual As Adjusted ------ ----------- (In thousands) Long-term debt (1)................................................... $ 683 $ 683 --------- --------- Stockholders' equity: Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued or outstanding..................................... -- -- Common stock, $0.01 par value; 30,000,000 shares authorized; 8,203,616 shares issued and outstanding, actual; and 9,453,616 shares issued and outstanding, as adjusted (2)................. 82 95 Additional paid-in capital....................................... 60,705 81,613 Deferred compensation............................................ (293) (293) Deficit accumulated during the development stage................. (23,982) (23,982) ------- ------- Total stockholders' equity..................................... 36,512 57,433 ------- ------- Total capitalization...................................... $37,195 $58,116 ======= =======
- ---------- (1) Does not include the long-term debt financing contemplated in connection with the Company's planned purchase of its facility and GMP manufacturing expansion. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." (2) Does not include, as of January 6, 1997, (i) 147,690 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price per share of $11.18, (ii) 1,199,643 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $10.04 per share, (iii) 260,729 shares of Common Stock reserved for future option grants under the Company's stock option plans, and (iv) 94,369 shares of Common Stock reserved for issuance pursuant to the Company's employee stock purchase plan. See "Management -- 1995 Stock Option/Stock Issuance Plan," "Management -- Employee Stock Purchase Plan," "Description of Capital Stock," and Note 7 of Notes to Financial Statements. 17 DILUTION The net tangible book value of the Company at September 30, 1996 was $36,512,000, or $4.45 per share. Net tangible book value per share is equal to the Company's net tangible assets (tangible assets of the Company less total liabilities) divided by the number of shares of Common Stock outstanding. After giving effect to the sale by the Company of the 1,250,000 shares of Common Stock offered hereby (based on an assumed public offering price of $18.00 per share and after deducting the Placement Agent's fee and the estimated expenses of the offering), the net tangible book value of the Company as of September 30, 1996 would have been approximately $57,433,370, or $6.08 per share. This represents an immediate increase in net tangible book value of $1.63 per share to existing holders and immediate dilution in net tangible book value of $11.92 per share to new investors. The following table sets forth the per share dilution to new investors in the offering.
Assumed offering price per share.................................................... $18.00 Net tangible book value per share as of September 30, 1996........................ $4.45 Increase per share attributable to new investors.................................. 1.63 ----- Net tangible book value per share after the offering................................ 6.08 ------ Dilution per share to new investors................................................. $11.92 ======
The following table summarizes, on a pro forma basis as of September 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by existing stockholders and by new investors (based on an assumed public offering price of $18.00 per share):
Shares Purchased Total Consideration --------------------------- ----------------------------- Average Price Number Percent Amount Percent Per Share ------------- ---------- -------------- ---------- -------------- Existing stockholders.......... 8,203,616 86.8% $66,190,000 74.6% $ 8.07 New investors.................. 1,250,000 13.2 22,500,000 25.4 18.00 --------- ----- ---------- ----- Total........ 9,453,616 100.0% $88,690,000 100.0% ========= ===== =========== =====
The foregoing tables do not include, as of January 6, 1997, (i) 147,690 shares of Common Stock issuable upon exercise of outstanding warrants at a weighted average exercise price per share of $11.18, (ii) 1,199,643 shares of Common Stock issuable upon exercise of outstanding options at a weighted average exercise price of $10.04 per share, (iii) 260,729 shares of Common Stock reserved for future option grants under the Company's stock option plans, and (iv) 94,369 shares of Common Stock reserved for issuance pursuant to the Company's employee stock purchase plan. The exercise of such warrants and options will result in further dilution to new investors. See "Management -- 1995 Stock Option/Stock Issuance Plan," "Management -- Employee Stock Purchase Plan," "Description of Capital Stock," and Note 7 of Notes to Financial Statements. 18 SELECTED FINANCIAL DATA The selected financial data set forth below as of and for the years ended December 31, 1991, 1992, 1993, 1994, and 1995, and for the period from inception (January 17, 1989) to December 31, 1995, have been derived from the Company's audited financial statements. The financial statements of the Company for each of the three years in the period ended December 31, 1995, and for the period from inception (January 17, 1989) to December 31, 1995, and the related balance sheets at December 31, 1994 and 1995 included elsewhere in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants. The balance sheet data at September 30, 1996 and the statement of operations data for the nine month periods ended September 30, 1995 and 1996 and for the period from inception (January 17, 1989) to September 30, 1996, have been derived from unaudited financial statements of the Company that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial condition and results of operation for those periods. The statement of operations data for interim periods is not necessarily indicative of results for subsequent periods or the full year. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
Period from Period from Nine Momths Inception Inception Ended (January 17, (January 17, Year Ended December 31, September 30, 1989) to 1989) to ---------------------------------------- --------------- December 31, September 30, 1991 1992 1993 1994 1995 1995 1996 1995 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- (in thousands, except per share data) Statement of Operations Data: Revenue from collaborative agreements....... $ -- $ -- $ 2,600 $ 48 $1,199 $ 876 $ 1,006 $ 3,846 $ 4,852 ------ ------ ------- ------- ------ ------ -------- ---------- ---------- Operating expenses: Research and development...... 1,055 1,941 3,399 5,004 4,733 3,426 4,900 16,476 21,376 General and administrative... 703 1,324 1,577 1,319 1,665 1,172 1,788 6,689 8,477 ------- ------- ------- ------- ------- ------- ------- -------- -------- Total expenses.. 1,758 3,265 4,976 6,323 6,398 4,598 6,688 23,165 29,853 ------- ------- ------- ------- ------- ------- ------- -------- -------- Interest income (expense), net.............. (107) (90) (47) 63 132 73 1,082 (63) 1,019 ------- ------- ------- ------- ------- ------- ------- -------- -------- Net loss............ $(1,865) $(3,355) $(2,423) $(6,212) $(5,067) $(3,649) $(4,600) $(19,382) $(23,982) ======= ======= ======= ======= ======= ======= ======= ======== ======== Pro forma net loss per share (1)....... $ (1.06) $ (0.60) ======= ======== Shares used in computing pro forma net loss per share(1).............. 4,761 7,728 ======= ========
As of As of December 31, September 30, ----------------------------------------------- -------------- 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- Balance Sheet Data: (in thousands) Cash and cash equivalents................. $ 3,401 $ 820 $ 1,500 $ 5,363 $11,189 $35,717 Total assets.............................. 3,537 2,743 3,534 8,196 14,639 39,032 Long-term debt............................ -- 368 1,010 736 1,235 683 Deficit accumulated during the development stage................................... (2,325) (5,680) (8,103) (14,315) (19,382) (23,982) Total stockholders' equity................ 2,193 1,887 1,448 6,352 11,733 36,512
- ---------- (1) See Note 2 of Notes to Financial Statements. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Overview Neose, a development-stage company, commenced operations in 1990, and has devoted substantially all of its resources to the development of its enzymatic carbohydrate synthesis technology and to the discovery and development of complex carbohydrates for a variety of applications, including nutritional additives and pharmaceuticals. The Company does not anticipate receiving revenues from product sales for at least the next several years. The Company anticipates that its sources of revenue for the next several years will be payments under its strategic alliance with Abbott and other collaborative arrangements, license fees, payments from future strategic alliances and collaborative arrangements, if any, and interest income. Payments under strategic alliances and collaborative arrangements will be subject to significant fluctuation in both timing and amount. Therefore, the Company's results of operations for any period may not be comparable to the results of operations for any other period. In December 1992, the Company entered into its strategic alliance with Abbott for the development of breast milk oligosaccharides as nutritional additives. The Company has received approximately $5.2 million in contract payments, license fees, and milestone payments from its strategic alliance with Abbott. See "Business -- Strategic Alliance with Abbott." The Company has not generated any revenues from operations, except for interest income and revenues from strategic alliances. The Company has incurred losses since its inception and, as of September 30, 1996, had a deficit accumulated during the development stage of approximately $24 million for the period since inception. The Company anticipates incurring additional losses over at least the next several years. Such losses may fluctuate significantly from quarter to quarter and are expected to increase as the Company expands its research and development programs, including preclinical studies and clinical trials for its pharmaceutical product candidates under development, and as the Company expands its manufacturing capabilities. Results of Operations Three and Nine Months Ended September 30, 1995 and 1996 Revenues from collaborative agreements for the three and nine months ended September 30, 1996, were $313,000 and $1.0 million, respectively, compared to $376,000 and $876,000, respectively, for the corresponding periods in 1995. The decrease for the comparable three month period was due to non-recurring revenues received during the 1995 period. The increase for the comparable nine month period was primarily attributable to increased revenues from the Company's collaborative research agreements with Abbott and Bracco. Research and development expenses for the three and nine months ended September 30, 1996, were $1.5 million and $4.9 million, respectively, compared to $1.2 million and $3.4 million, respectively, for the corresponding periods in 1995. The increases were primarily attributable to the hiring of additional scientific personnel, increased purchases of laboratory supplies and services, increased clinical trial expenditures for NE-0080, and increased funding of external research. General and administrative expenses for the three and nine months ended September 30, 1996, were $597,000 and $1.8 million, respectively, compared to $290,000 and $1.2 million, respectively, for the 20 corresponding periods in 1995. The increases were primarily attributable to increased patent and business development expenses, and expenses associated with being a public company. Interest income for the three and nine months ended September 30, 1996, was $483,000 and $1.3 million, respectively, compared to $76,000 and $199,000, respectively, for the corresponding periods in 1995. The increases were primarily attributable to higher average cash balances resulting from the closing of a private placement of equity securities in the third and fourth quarters of 1995 and the Company's initial public offering in February 1996. Interest expense for the three and nine months ended September 30, 1996, was $58,000 and $196,000, respectively, compared to $60,000 and $126,000, respectively, for the corresponding periods in 1995. The increases were due to higher average loan balances during the three and nine months ended September 30, 1996, as compared to the corresponding periods in 1995. Years Ended December 31, 1995 and 1994 Revenues from collaborative agreements increased to $1.2 million in 1995 from $48,000 in 1994 due to the timing and size of milestone payments and license fees received from Abbott. The Company's research and development expenses decreased to $4.7 million in 1995 from $5.0 million in 1994. The decrease was primarily attributable to a decrease in expenses connected with the Company's strategic alliance with Abbott resulting from the licensing in 1995 of certain manufacturing rights to Abbott, which was partially offset by increases in other research and development activities. General and administrative expenses increased to $1.7 million in 1995 from $1.3 million in 1994. The increase reflected additional management expenses associated with a general increase in the level of the Company's activities. Interest income increased to $322,000 in 1995 from $257,000 in 1994 due to higher average cash balances during 1995. Interest expense decreased to $190,000 in 1995 from $194,000 in 1994 due to slightly lower average loan balances during 1995. Years Ended December 31, 1994 and 1993 Revenues from collaborative agreements decreased to $48,000 in 1994 from $2.6 million in 1993 due to the timing of milestone payments received from Abbott. Research and development expenses increased to $5.0 million in 1994 from $3.4 million in 1993. The increase was primarily attributable to the hiring of additional research and development personnel, related increased purchases of laboratory supplies and services, and increased equipment depreciation and facilities expenses. General and administrative expenses decreased to $1.3 million in 1994 from $1.6 million in 1993, primarily due to the payment of a onetime bonus to the Company's former President and Chief Executive Officer in 1993, and the higher level of professional fees related to financing activities and the negotiation of the Company's strategic alliance with Abbott incurred in 1993. Interest income increased to $257,000 in 1994 from $60,000 in 1993 due to higher average cash balances during 1994. Interest expense increased to $194,000 in 1994 from $106,000 in 1993 due to expenses related to equipment financing transactions. 21 Liquidity and Capital Resources From inception through September 30, 1996, the Company has incurred a cumulative net loss of approximately $24.0 million, and has financed its operations through private and public offerings of its securities and revenues from its strategic alliances. The Company had $35.7 million in cash and cash equivalents at September 30, 1996, compared to $11.2 million at December 31, 1995. This increase is primarily attributable to the receipt of net proceeds from the Company's initial public offering in February 1996. In February and March 1996, the Company sold 2,587,500 shares of Common Stock to the public at a price per share of $12.50. The Company received proceeds of approximately $29.1 million after deducting underwriting commissions and offering expenses. The Company and Abbott have entered into collaborative agreements to develop breast milk oligosaccharides as additives to infant formula and other nutritional products. Under this strategic alliance, the Company has received approximately $5.2 million in contract payments, license fees, and milestone payments. In addition, Abbott is obligated to make an additional payment of $5.0 million to Neose within 60 days of the first commercial sale, if any, of infant formula containing the Company's nutritional additive. Abbott may (i) at any time prior to the first commercial sale, if any, of infant formula containing the Company's nutritional additive, elect to make its license agreement non-exclusive, in which event the license fees payable by Abbott after commercialization would be reduced by 50%, and Abbott's obligations to make contract and milestone payments, including the $5.0 million milestone payment, would be terminated, or (ii) elect to terminate the license agreement and return the licensed technology to Neose upon 60 days' notice, in which event it would have no further funding obligation to the Company, including no obligation to make the $5.0 million milestone payment. In addition, under the terms of the Abbott agreement, if Abbott fails to make appropriate regulatory filings with the FDA for the addition of Neose oligosaccharide in infant formula prior to December 31, 1997, Neose, at its option, may elect to convert the license of Neose technology to a non-exclusive license to Abbott, in which event the license fees payable by Abbott after commercialization would be reduced by 50%, and Abbott's obligations to make contract and milestone payments, including the $5.0 million milestone payment, would be terminated. The Company expects to make additional capital expenditures totaling approximately $7.5 million in connection with its planned GMP manufacturing expansion and has entered into a non-binding letter of intent to acquire its facility for a total of approximately $3.8 million. The Company presently leases its facility. The Company's minimum lease obligation for the year ended December 31, 1996 was approximately $310,000. See "-- Recent Developments." The Company has entered into a capital lease agreement with an equipment finance company that provides for up to $1.5 million of financing, of which approximately $1.4 million had been drawn on as of September 30, 1996. During 1993, 1994, 1995, and during the nine months ended September 30, 1995 and 1996, the Company purchased approximately $491,000, $975,000, $875,000, $613,000, and $667,000 of capital equipment and leasehold improvements. The Company also has obligations to certain of its employees under employment agreements. See "Management -- Employment Agreements." The Company has incurred negative cash flows from operations since its inception, and has expended, and expects to continue to expend in the future, substantial funds to continue its research and development programs. The Company expects that its existing capital resources, together with the net proceeds of this offering and the interest earned thereon, will be adequate to fund its capital requirements through 1999. No assurance can be given that there will be no change that would consume available resources significantly before such time. The Company's future capital requirements and the adequacy of available funds will depend on many factors, including progress in its research and development activities, 22 including its pharmaceutical discovery and development programs, the magnitude and scope of these activities, progress with preclinical studies and clinical trials, the costs involved in preparing, filing, prosecuting, maintaining, and enforcing patent claims and other intellectual property rights, competing technological and market developments, changes in existing collaborative research relationships and strategic alliances, the ability of the Company to establish additional collaborative arrangements for product development, the cost of manufacturing scale-up and developing effective marketing activities and arrangements, and the ability of the Company to obtain long-term financing with respect to its planned manufacturing expansion. The Company has made and expects to make capital expenditures in late 1996 and 1997 totaling approximately $7.5 million to expand GMP manufacturing capabilities for its compounds under development. In addition, the Company has entered into a non-binding letter of intent with the owner of its leased facility to purchase the facility for a total of approximately $3.8 million contingent upon, among other things, the Company's obtaining financing for the acquisition. Additional funds will be needed by the Company to expand its manufacturing capacity to manufacture commercial quantities of its potential products. The Company is exploring alternatives for long-term financing in connection with its planned GMP manufacturing expansion and the purchase of its facility, including the issuance of taxable and tax exempt bonds. The Company does not currently have any committed sources of additional financing and no commitments have been received by the Company for long-term financing to support the expansion and purchase. To the extent that funds generated from the Company's operations, together with its existing capital resources and the net proceeds of this offering and the interest earned thereon, are insufficient to meet current or planned operating requirements, it is likely that the Company will seek to obtain additional funds through equity or debt financings, collaborative or other arrangements with corporate partners and others, and from other sources. The terms and prices of any such financings may be significantly more favorable to investors than those of the Common Stock sold in this offering, which could have the effect of diluting or adversely affecting the holdings or the rights of existing stockholders of the Company, including investors acquiring Common Stock in this offering. There can be no assurance that additional financing will be available when needed or on terms acceptable to the Company. If adequate additional funds are not available for these purposes or otherwise, the Company may be required to delay, scale back, or eliminate certain of its research and product development activities or certain other aspects of its business or attempt to obtain funds through collaborative arrangements that may require the Company to relinquish some or all of its rights to certain of its intellectual property, product candidates, or products. If adequate funds are not available, the Company's business, financial condition, and results of operations will be materially and adversely affected. See "-- Recent Developments." Recent Developments The Company expects to make additional capital expenditures in the total amount of approximately $7.5 million, which began in the fourth quarter of 1996, to expand GMP manufacturing capabilities for NE-0080, and to establish GMP manufacturing capabilities for NE-1530 and NE-0501. In each case, the Company believes that the planned GMP capacity will be adequate to complete clinical trials for the respective compounds. In addition, the Company believes that the planned expansion will give it capacity to manufacture under GMP conditions certain amounts of these and other carbohydrates for third parties. In connection with the planned capital expenditures, the Company is exploring various long-term financing alternatives as discussed below. In connection with the planned GMP manufacturing expansion described above, the Company has entered into a non-binding letter of intent with the owner of the facility to purchase the facility for a total of approximately $3.8 million. The Company is currently negotiating a definitive purchase agreement for the facility. In connection with the planned $7.5 million GMP manufacturing expansion and the planned $3.8 million purchase of its facility, the Company is exploring various alternatives for long-term financing. The Company plans to make application to the Montgomery County (Pennsylvania) Industrial Development Authority for the issuance of approximately $10.0 million total in taxable and tax exempt bonds to support 23 this project. The bonds are expected to be supported by a AA-rated letter of credit, and a reimbursement agreement from the Company's bank, Jefferson Bank, to the letter of credit issuer. To provide credit support for this arrangement, the Company is prepared to offer a first mortgage on the land, building, improvements, and certain machinery and equipment to Jefferson Bank, and to provide certain covenants for the maintenance of minimum cash and short-term investment balances. See "Certain Transactions." 24 BUSINESS The statements in this Prospectus that relate to future plans, events or performance are forward-looking statements. Actual results could differ materially due to a variety of factors, including the factors described under "Risk Factors" and the other risks described in this Prospectus. Neose is focused on the enzymatic synthesis of complex carbohydrates (oligosaccharides), and the discovery and development of complex carbohydrates for nutritional and pharmaceutical uses. Complex carbohydrates serve as attachment sites for many pathogens that cause infectious diseases. Present on all cells, these compounds also play a critical role in the immune response. Due to their complexity, oligosaccharides are difficult and expensive to produce, and their commercial development has been significantly limited despite the role they play in human diseases. The Company believes that its proprietary MTR technology enables, for the first time, the rapid and cost-efficient production of naturally-occurring oligosaccharides. The Company, with Abbott, a leading provider of infant formula in the United States, is applying its MTR technology to the development of breast milk oligosaccharides as additives to infant formula. Breast milk oligosaccharides are believed to play an important anti-infective role in infants. In its therapeutic development programs, the Company is using its technology to develop complex carbohydrates as pharmaceuticals to treat various bacterial infections, such as gastrointestinal and pediatric ear infections, and to prevent xenotransplant rejection. Background All human cell surfaces have complex carbohydrates that serve as specific binding sites for other molecules and cells, including pathogens such as bacteria, viruses, and other infectious microorganisms. The first step in the development of many infectious diseases is the attachment of the bacterium, virus, or other pathogen to the human cell. This attachment often occurs when a specific receptor protein on the pathogen recognizes a specific carbohydrate on the human cell. The protein/carbohydrate interaction, which allows the pathogen to initiate the disease process, is highly dependent on the complementary shapes of the protein and the carbohydrate. Oligosaccharides are not, however, located only on cell surfaces. Soluble oligosaccharides (oligosaccharides not bound to cells) produced by the body are found in many body fluids, including breast milk, tears, urine, and respiratory and gastrointestinal secretions. These soluble complex carbohydrates are identical to the complex carbohydrates on cell surfaces, and are believed to serve as decoys that bind to pathogens, preventing the pathogens from binding to cells and causing disease. The pathogens are then expelled from the body in respiratory and gastrointestinal secretions. For example, breast milk contains a number of soluble oligosaccharides that are believed to prevent the attachment of certain bacteria and viruses to gastrointestinal, respiratory, and urinary tract cells in infants. Soluble oligosaccharides are, therefore, thought to be one of the body's natural anti-infective agents (which also include white blood cells and antibodies). The anti-infective role of oligosaccharides is illustrated below: 25 - ------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] [The following is required for the EDGAR filing and will not appear in the printed prospectus: This diagram depicts schematically two human cells. The first human cell has come in contact with a bacterium and the protein receptors of the bacterium have attached to the cell's surface oligosaccharides. The second human cell has come in contact with a bacterium; however, soluble oligosaccharides have attached to the bacterium, preventing the bacterium from attaching to the cell surface oligosaccharides. The diagram is centered around two human cells, each labeled as a "Human Cell." The cells are depicted by half circles, with the flat side to the bottom of the diagram and the arched side facing towards the top of the diagram. Extending from various points on the arched sides of each human cell are four cell surface oligosaccharides, depicted by a string of five to seven small circles that end with a small box. The human cell on the left side of the diagram has arrows extending from a label "Cell Surface Oligosaccharides" to the two string-like series of cell surface oligosaccharides on its right side. Above the top of the cell surface oligosaccharides is a bacterium, depicted by an oval shape, and labeled as "Bacterium." Extending from the bottom of the bacterium and attached to the top of the two center cell surface oligosaccharides are protein receptors depicted by a vertical line. The bacterium also has two other protein receptors, one on each side, depicted by a line that branches into two parts at its end. Above the human cell on the right side of the diagram are seven soluble oligosaccharides labeled as "Soluble Oligosaccharides," depicted similarly to the cell surface oligosaccharides, but with tails of three small circles. Three of these units are attached to lines (protein receptors) extending out from an oval (the bacterium). The bacterium is not connected in any way to the human cell or cell surface oligosaccharides below it.] Caption: The protein/carbohydrate interaction that allows the pathogens to initiate the disease process is highly dependent on the complementary shapes of the protein and the carbohydrate. Soluble complex carbohydrates are identical to the complex carbohydrates on cell surfaces, and are believed to serve as decoys that bind to pathogens, preventing the pathogens from binding to cells and causing disease. - ------------------------------------------------------------------------------- Oligosaccharides are chains of monosaccharides, or individual sugar molecules, that can be joined in many different combinations. Because there are ten types of individual sugar molecules in humans, and because any two of these may be chemically linked in up to 22 different ways, oligosaccharides are very complex. For example, four different monosaccharides can be arranged to make 35,560 different complex carbohydrates. In contrast, four different amino acids, which are the building blocks of proteins, can be combined to make only 24 distinct peptides. The specific biological properties of an oligosaccharide are dictated by its component monosaccharides and the chemical linkage between those monosaccharides. Because monosaccharide chains can be linked in so many different combinations, with each combination potentially having a different biological activity, synthesis of complex carbohydrates is difficult. Traditional organic chemical synthesis of oligosaccharides is time-consuming, prohibitively expensive, and becomes more complex as the length of a chain increases. Moreover, because oligosaccharides are not directly encoded by genes, they cannot be produced by established recombinant methods. Difficulties in producing oligosaccharides efficiently and in sufficient quantities have significantly limited their development and commercialization. Neose's MTR Technology Neose believes its proprietary MTR technology platform enables, for the first time, the rapid and cost-effective synthesis of commercial quantities of oligosaccharides. The Company's MTR technology utilizes enzymes to synthesize specific chemical linkages among individual sugar molecules. These enzymes, which are referred to as glycosyltransferases, are catalysts that join monosaccharides together in highly specific ways. Generally, each glycosyltransferase attaches a specific sugar molecule to another specific sugar molecule by means of a specific chemical linkage. To synthesize an oligosaccharide, the Company uses its MTR technology to join monosaccharides in a chain. This process, which can be viewed as a molecular assembly line, is illustrated below: 26 - ------------------------------------------------------------------------------- [GRAPHIC APPEARS HERE] [The following is required for the EDGAR filing and will not appear in the printed prospectus: This diagram depicts schematically the process of making the oligosaccharides A-B-C-D from the monosaccharide A. The diagram centers on three cylinder shaped units, labeled in the center of each, from left to right: B-Transferase, C-Transferase and D-Transferase. Extending from the lower right side of each cylinder is a tube extending out horizontally and then dropping down at a ninety degree angle. Several tear shaped drops fall from each tube to a small cylinder below and to the right of each large cylinder, labeled in the center of each cylinder A-B, A-B-C and A-B-C-D, from left to right. The small cylinder labeled A-B is connected by a long arrow up to the top of the large cylinder to its right labeled C-Transferase. The small cylinder labeled A-B-C is connected by a long arrow up to the top of the large cylinder to its right labeled D-Transferase. Above the large cylinder on the left (labeled B-Transferase) is a label "A" with an arrow pointing down to the cylinder. To the right of the label "A" is the label "B-PN" with an arrow also pointing down to the cylinder. Above the large cylinder in the middle (labeled C-Transferase) is the label "C-PN" with an arrow pointing down to the cylinder. Above the large cylinder on the right (labeled D-Transferase) is the label "D-PN" with an arrow pointing down to the cylinder.] Caption: To make the oligosaccharides A-B-C-D, the monosaccharide A, along with a B sugar donor molecule (B-PN), is added to a B-transferase preparation that causes the B sugar molecule to link to A, producing the disaccharide A-B. Then the A-B disaccharide, along with a C sugar donor molecule (C-PN), is added to a C-transferase preparation and the trisaccharide A-B-C is produced. Then the A-B-C trisaccharide, along with a D sugar donor molecule (D-PN), is added to a D-transferase preparation and the tetrasacharide A-B-C-D is produced. This process can be continued to attach additional monosaccharides to the A-B-C-D chain. - ------------------------------------------------------------------------------- Glycosyltransferases synthesize linkages at a very rapid rate. Because glycosyltransferases can work for months before having to be replenished, the Company believes that the correct preparation can generate the desired oligosaccharide in a commercially scalable manner. Nevertheless, the cost of manufacturing a product depends in significant part on the cost of obtaining the glycosyltransferases. Neose has accordingly invested heavily in recombinant methods of producing the glycosyltransferases necessary to manufacture cost-effectively many naturally-occurring oligosaccharides. This procedure has significantly reduced the costs, and increased the efficiencies, of manufacturing certain oligosaccharides. Strategy The Company's objective is to be the leader in the discovery, development, and manufacture of complex carbohydrates for a wide range of nutritional and healthcare applications. The key elements of the Company's strategy include: Continuing Development of Nutritional Additives. Through its strategic alliance with Abbott, the Company is developing a breast milk oligosaccharide for use as an additive to infant formula. The Company believes that the development and commercialization of this additive may occur more rapidly than pharmaceutical product development. The Company intends to continue to develop this product and enhance production capacity in conjunction with Abbott. There are more than two dozen oligosaccharides found in breast milk. The Company, together with Abbott, has developed one breast milk oligosaccharide, and is exploring the development of additional breast milk oligosaccharides for use in infant formula and in adult nutritional supplement products. In addition, the Company is exploring with other collaborators the development of other oligosaccharides for other nutritional and non-prescription products. Leveraging Core Technology for Pharmaceutical Product Development. Using its core technology, the Company is currently developing pharmaceutical products for the treatment of gastritis and peptic ulcers, pediatric ear infections, and for the prevention of xenotransplant rejection. The Company has also identified 27 a number of other diseases and indications that are potential targets for carbohydrate-based pharmaceutical product development. Establishing Additional Strategic Alliances and Research Collaborations. The Company generally intends to develop its pharmaceutical products through preclinical development and initial clinical trial phases and to use strategic alliances to supplement its internal clinical development and regulatory resources. The Company seeks to establish strategic alliances with pharmaceutical companies to conduct late-stage clinical trials, to obtain regulatory approvals, and to market and sell the Company's products, in exchange for license fees, milestone payments, and royalties. The Company also intends to continue to enter into research collaborations with corporate partners and with academic research institutions to enhance and further develop its technology platform. Continuing to Develop Manufacturing Capabilities. The Company intends to continue to develop and refine its MTR technology to reduce costs, increase output, and improve production speed. The Company intends to develop its manufacturing capabilities to support clinical development, and ultimately, commercial introduction, of its pharmaceutical products. In addition, on a selective basis, the Company intends to develop capabilities to manufacture oligosaccharide products for third parties. Pursuing Additional Applications of Its Core Technologies. The Company believes that its proprietary MTR technology has broad applications in a wide range of industries. Through its research collaboration with Bracco, the Company is testing the effectiveness of oligosaccharides for in vivo imaging purposes. The Company intends to pursue other applications as time and resources permit. Products in Development Neose has focused its initial research and development efforts on (i) a nutritional additive product, NE-1340, a breast milk oligosaccharide that is being developed in conjunction with Abbott for inclusion in its infant formula products, and (ii) potential carbohydrate-based therapeutic products for the treatment of chronic gastritis and peptic ulcers, pediatric ear infections, and the prevention of xenotransplant rejection. The following table sets forth the development status of each of the Company's product candidates: - ------------------------------------------------------------------------------- Product Application/Indication Development Status (1) - ------- ---------------------- ---------------------- NE-1340 Infant formula additive Manufacturing scale-up(2) NE-0080 Gastritis and peptic ulcers (monovalent) Completed Phase IC trial; Phase II trial planned in early 1997 NE-1530 Pediatric ear infections Preclinical studies; IND planned in late 1997 NE-0501 Prevention of xenotransplant rejection Preclinical studies NE-1327 Gastritis and peptic ulcers (polyvalent) Preclinical studies - ------------ (1) See "Business -- Government Regulation" for a description of the various regulatory requirements. (2) At least 90 days prior to marketing, the manufacturer of a reformulated infant formula must submit to the FDA the description of any major reformulation or change in processing and assurances that the reformulated infant formula will not be marketed without complying with nutrient and quality factor requirements and GMP control requirements. In the case of NE-1340, the manufacturer must either submit a GRAS petition or food additive petition prior to such FDA submission, or self-affirm GRAS, which may be the fastest route to commercialization, at the time of such submission. If the FDA does not object within 90 days of such submission, the manufacturer may commence commercial sales of infant formula containing the Company's additive in the United States. Approval of the reformulated infant formula also will be necessary in a number of foreign countries. See "Business -- Government Regulation." - ------------------------------------------------------------------------------- 28 Nutritional Additives Breast milk contains more than two dozen complex carbohydrates that are believed to provide infants with protection against bacterial and viral infections. Commercial infant formula products, which are based on either cow's milk or soy extracts, do not contain breast milk oligosaccharides. Studies indicate that breast-fed infants have fewer bacterial and viral infections than formula-fed infants. The Company believes that this is due, in part, to the presence of oligosaccharides in breast milk. Neose is using its core technology to develop breast milk oligosaccharides for inclusion as additives to commercial infant formula. Neose has entered into an exclusive license agreement with Abbott, a leading provider of infant formula in the United States, to commercialize the Company's nutritional additives. Infant formula marketing strategies are designed to convince pediatricians and hospitals to recommend the brand of choice to new parents. Barring complications, switching brands of infant formula is uncommon, and price competition has not played a significant role in brand selection. The Company believes that infant formula manufacturers are increasingly seeking ways to differentiate their products, and to provide an impetus to switch brands of infant formula. The Company's breast milk oligosaccharide additive is intended to provide effective product differentiation without requiring significant pricing adjustments. Utilizing Neose's MTR technology, Abbott is currently developing the capability to manufacture the infant formula additive in commercial quantities. At least 90 days prior to marketing, the manufacturer of a reformulated infant formula must submit to the FDA the description of any major reformulation or change in processing, and assurances that the reformulated infant formula will not be marketed without complying with nutrient and quality factor requirements and GMP control requirements. In the case of NE-1340, the manufacturer must either submit a GRAS petition or food additive petition prior to such FDA submission, or self-affirm GRAS, which may be the fastest route to commercialization, at the time of such submission. If the FDA does not object within 90 days of such submission, the manufacturer may commence commercial sales of infant formula containing the Company's additive in the United States. Approval of the reformulated infant formula also will be necessary in a number of foreign countries. See "Business -- Strategic Alliance with Abbott" and "Business -- Government Regulation." Additionally, the Company and Abbott are exploring the development of additional breast milk oligosaccharides for use in infant formula, and the inclusion of breast milk oligosaccharides in nutritional supplement products for the elderly, or for nutritionally-compromised adults. In addition, the Company is exploring with other collaborators the development of other oligosaccharides for other nutritional and non-prescription healthcare products. Pharmaceuticals Neose's initial pharmaceutical development programs are targeted at the discovery and development of novel oligosaccharide anti-infectives, specifically anti-bacterials. The Company believes that oligosaccharide anti-infectives will have substantial benefits as compared with conventional antibiotics. Oligosaccharides are naturally-occurring, are cost-effective to produce utilizing the Company's technology, have relatively low toxicity, and are less likely to cause adverse side-effects. Conventional antibiotics, currently the primary treatment for bacterial infections, act by killing bacteria and do not interfere with the initial step of infection. In addition, bacteria are increasingly becoming resistant to existing antibiotics, severely limiting their effectiveness. Antibiotics, which act by killing pathogens, select for, and consequently facilitate the proliferation of strains of the pathogen that are resistant to the antibiotics. Because the Company's anti-infective product candidates do not act by killing pathogens, but rather by preventing attachment of pathogens to cell surfaces, the Company believes that use of its anti-infectives is less likely to result in the development of resistant strains. 29 Two of the Company's initial drug discovery and development efforts are targeted to develop treatments for gastritis and peptic ulcers caused by H. pylori infections and pediatric ear infections. Gastritis and Peptic Ulcers. Neose is developing a naturally-occurring human gastrointestinal oligosaccharide to treat gastritis and peptic ulcers caused by H. pylori infections. H. pylori has been acknowledged to be the cause of gastritis and over 80% of all peptic ulcer cases. An estimated four million people suffer from active peptic ulcers each year in the United States, and approximately 500,000 new cases are diagnosed annually. The Company estimates that the direct medical costs of treating peptic ulcers in the United States exceed $2.0 billion per year. Until recently, treatment of gastritis and peptic ulcers focused on the use of antagonists of acid secretion, such as the H-2 antagonists, Tagamet(R) (cimetidine) and Zantac(R) (ranitidine), and the proton pump inhibitors, Prilosec(R) (omeprazole) and Prevacid(R) (lansoprazole). While assisting in the healing of gastritis and peptic ulcers, these drugs acting alone do not cure the underlying H. pylori infection. Consequently, high rates of recurrence and the need for chronic therapy are associated with these treatment regimes. One approach currently used to treat gastritis and recurrent peptic ulcers involves the administration of antibiotics, in combination with other drugs. Even the most effective antibiotic treatments, however, may be complicated by (i) the need to treat for prolonged periods with multiple drugs, (ii) side-effects and problems with patient compliance, (iii) relapses if treatment is interrupted, and (iv) the development of antibiotic-resistant strains of H. pylori. NE-0080, Neose's product candidate for the treatment of H. pylori infections, is a carbohydrate molecule that is identical to a human stomach cell carbohydrate utilized by H. pylori to attach to its target cells. In in vitro preclinical studies, NE-0080 prevented the attachment of H. pylori to human stomach cell lines, and dislodged previously bound H. pylori bacteria from such cells. Studies in two different animal models have shown that NE-0080 decreased H. pylori levels. In November 1994, Neose completed preclinical studies of NE-0080. The Company filed an IND with the FDA in December 1994 and completed Phase IA and Phase IB clinical trials involving 24 healthy subjects in an ascending single dose study in April 1995 and 32 subjects with asymptomatic H. pylori infections in a 10-day repeat dose study in March 1996, respectively. The results of these studies indicated that NE-0080 was well-tolerated and did not cause any adverse side-effects. A Phase IC study, involving a 28-day repeat dose study in 11 subjects with asymptomatic H. pylori infections, was completed in November 1996. Although the study was designed primarily to test safety, the Company also used the non-invasive UBT test to measure H. pylori loads in the subjects over an eight-week period. NE-0080 caused a statistically significant decrement in UBT values. The Company plans to initiate Phase II studies on NE-0080 in early 1997. Neose also is developing NE-1327, a polyvalent configuration of NE-0080 that is significantly more effective than the natural monovalent molecule in inhibiting in vitro binding of H. pylori bacteria to human stomach cells. Pediatric Ear Infections. Neose is developing NE-1530, a naturally-occurring human airway oligosaccharide, for the treatment of pediatric ear infections. Middle ear infections are one of the most frequent reasons for pediatrician visits. According to an industry report, there are an estimated 30 million office visits and prescriptions each year attributable to middle ear infections. Healthcare costs in the United States associated with middle ear infections exceed $2.0 billion annually. Current antibiotic therapies are losing their effectiveness due to the development of resistant strains of the bacteria that cause these infections. NE-1530 contains a sugar sequence identical to that of airway carbohydrates to which respiratory disease-causing bacteria attach, and subsequently initiate colonization. In in vitro tests, the compound blocked the attachment to human airway cells of Streptococcus pneumoniae, Hemophilus influenzae, and Moraxella catarrhalis, the bacteria most frequently associated with a variety of respiratory infections, including pediatric ear infections, acute infections associated with chronic bronchitis, and pneumonia. In addition, results of animal studies indicate that this compound inhibits and reverses the attachment of these bacteria. The Company is developing a formulation of NE-1530 for nasal administration, is conducting further 30 preclinical studies, and intends to file an IND application in late 1997. Although the Company has chosen initially to develop NE-1530 for pediatric ear infections, the Company also may develop this compound in the future for other indications, such as acute infections associated with chronic bronchitis and pneumonia. Xenotransplant Rejection. An estimated 20,000 human organ transplants were performed in the United States in 1995 and many times that number of patients are believed to die each year due to the lack of available human organs. At the end of 1995, the waiting list for humans awaiting human organs was approximately 44,000, and that list has grown significantly each year. There have been efforts in the past to utilize animal organs, particularly pig organs due to their size, availability, and physiological similarities to humans, to address the shortage of human organs. These efforts, however, have not been successful. Although substantial resources have been committed to develop animal organs for human transplants, HAR, in which the transplanted organ is rejected within minutes of transplantation, remains one of the most critical obstacles to xenotransplantation. HAR results from an antibody-mediated response against an oligosaccharide found on the cell surface of most mammals, but absent in humans. In vitro studies and limited in vivo surgeries indicate that it may be possible to prevent, to some extent, HAR by administering sufficient quantities of the Company's specific oligosaccharide prior to and following surgery to bind and neutralize the circulating antibodies. Animal studies have demonstrated that the administration of the appropriate oligosaccharide may prevent HAR to a sufficient degree, and for a sufficient period of time, to allow the recipient to accommodate the grafted organ. Once HAR is overcome, existing immunosuppressive pharmaceuticals are available to help the physician manage the ongoing accommodation of the new organ in most patients. Neose has synthesized significant quantities of the oligosaccharide that is the target of the antibody responsible for HAR, and has collaborated with a leading transplant surgeon in preclinical studies of this compound, designated NE-0501, as a preventive agent for HAR in xenotransplants utilizing pig organs. During 1996, the Company conducted preclinical studies in which unmodified pig hearts were grafted into two baboons receiving NE-0501 intravenously to neutralize the target antibodies. These studies demonstrated that NE-0501, while present in the bloodstream in adequate concentrations, allows the in vivo survival of the transplanted organ and neutralizes the antibodies that initiate HAR. The Company is collaborating with other companies that are pursuing xenotransplantation with several different approaches, including transgenic modification of pig organs, and chimeric tolerization of donor organs. The Company believes that the use of oligosaccharides may be an important part of the therapies that will ultimately be utilized in the possible commercialization of xenotransplantation in the future. Other Potential Products Other clinically important infections mediated by complex carbohydrates include dental and periodontal infections, vaginitis, tuberculosis, sexually transmitted diseases, diarrhea, urinary tract infections, and corneal ulcers. To the extent funding and other resources become available for research and development, the Company intends to target compounds in the following three areas: (i) oral hygiene (compounds that would inhibit the activity of plaque and gingivitis-causing bacteria), (ii) urinary tract infections, and (iii) anti-fungals (compounds that would inhibit the attachment of Candida albicans, the fungus that causes common vaginal infections). Using its proprietary technology, Neose believes it can manufacture complex carbohydrates for eventual development as novel anti-infective drugs to combat one or more of these infectious diseases. The Company, in conjunction with Bracco, is also exploring the use of complex carbohydrates for development as in vivo diagnostic imaging agents. See "Business -- Other Collaborative Relationships -- Bracco." The Company also intends to explore the use of its core technology to create structural molecules for food industry applications, and to target compounds that would have anti-bacterial and anti-inflammatory applications in the cosmetics industry. 31 Strategic Alliance with Abbott The Company and Abbott entered into collaborative agreements to develop breast milk oligosaccharides as additives to infant formula and other nutritional products. Abbott has manufacturing rights and manufacturing development responsibilities for the nutritional additives. Under this strategic alliance, Abbott has invested $6.0 million in Neose and Neose has received approximately $5.2 million in contract payments, license fees, and milestone payments from Abbott. In addition, Neose is to receive $5.0 million within 60 days of the first commercial sale, if any, of infant formula containing the Company's nutritional additive. Abbott will manufacture the nutritional additive for its own use and has agreed to pay Neose ongoing fees based on the dry weight of the infant formula sold containing the nutritional additive. The Company is required to credit $3.75 million of the license fees against the ongoing fees in equal amounts over four years. In addition, Abbott has agreed to renegotiate the fees due Neose on the sale of products containing the nutritional additive in any case where Neose has made a contribution that both parties agree will result in a substantial commercial advantage. Abbott is considering the utilization of other proprietary technology exclusively licensed to Neose that may further significantly reduce the cost of manufacture of the oligosaccharide additives to infant nutritional formula. If Abbott determines to adopt this technology in its manufacturing processes, Abbott has acknowledged to Neose that it would be obligated under that provision of its agreement to renegotiate the financial terms. There can be no assurance that Abbott will determine to utilize the Neose technology in its manufacturing processes. Under the terms of the Abbott agreements, if Abbott fails to make appropriate regulatory filings with the FDA for the addition of Neose oligosaccharides in infant formula prior to December 31, 1997, Neose, at its option, may elect to convert the license of Neose technology to a non-exclusive license to Abbott, in which event the license fees payable by Abbott after commercialization would be reduced by 50%, and Abbott's obligations to make contract and milestone payments, including the $5.0 million milestone payment, would be terminated. Abbott may, at any time prior to the first commercial sale, if any, of infant formula containing the Company's nutritional additive, elect to make its license agreement non-exclusive, in which event the license fees payable by Abbott after commercialization would be reduced by 50%, and Abbott's obligations to make contract and milestone payments, including the $5.0 million milestone payment, would be terminated. Abbott also has the right to cancel the underlying license agreement upon 60 days' written notice and return the technology, in which event it would have no further funding obligations to the Company. The Company anticipates that its manufacturing arrangement with Abbott will assist the Company in developing its own manufacturing capability. Other Collaborative Relationships Neose seeks to complement its internal resources through the formation of relationships with universities and other companies. The Company has formed several such collaborative relationships to date, and intends to enter into additional relationships in the future. The Company's other collaborative relationships are described below. Bracco Neose has entered into a collaborative research agreement with Bracco Research USA Inc., a unit of Bracco Industria SpA and formerly the diagnostics division of Bristol-Myers Squibb Company. Under the terms of the agreement, Neose will supply Bracco with complex carbohydrates, which Bracco will attach to diagnostically useful agents. If the resulting new molecules can highlight specific targets, they may be promising candidates for development as human in vivo imaging agents. Under the terms of the three-year agreement, Bracco has paid Neose $375,000 to date and is obligated to pay Neose $375,000 over the next 18 months to fund research and development. This agreement is terminable at any time upon 60 days' notice, in which event Bracco would have no further funding obligations to the Company. 32 The Rockefeller University In October 1995, Neose licensed from The Rockefeller University proprietary technology for a group of gene sequences that allow the recombinant production of highly active and efficient enzymes involved in the synthesis of carbohydrates. Neose expects that these enzymes will substantially reduce the cost of manufacture of certain carbohydrates. In addition, The Rockefeller University scientists have collaborated with Neose in the area of carbohydrates involved in upper respiratory infections. Neose has licensed one issued patent and one patent application from The Rockefeller University directed toward the therapeutic uses of certain oligosaccharides in these areas. University of Pennsylvania Neose has entered into an exclusive license agreement with the University of Pennsylvania for the use, development, and commercialization of patent and technology rights relating to the Company's proprietary MTR technology substantially developed by Dr. Stephen A. Roth, the Company's Chairman and Chief Executive Officer, while Professor of Biology at Penn. Penn beneficially owns approximately 1.8% of the Common Stock and upon completion of this offering, Penn will beneficially own approximately 1.6% of the Common Stock. Research and Development The Company conducts the majority of its research and development activities through its own staff and facilities. The Company has assembled a scientific staff with multidisciplinary skills in advanced research technologies, including biochemistry, organic chemistry, analytic chemistry, molecular biology, cell biology, microbiology, and enzymology. The Company currently has 40 employees engaged in research and development. The Company's research facilities include laboratories for each of the scientific staff's disciplines, in vitro testing facilities, and formulation facilities. In addition to its in-house research programs, the Company collaborates with academic and research institutions to support research in areas of interest to the Company. Usually, such research assistance is performed in conjunction with additional in-house research. The faculty member supervising the outside research effort may also participate as a consultant to the Company. Patents and Proprietary Rights The Company relies on patent rights, trade secrets, trademarks, and nondisclosure agreements to establish and protect its proprietary rights in its technologies and products. Despite these precautions, it may be possible for unauthorized third parties to utilize the Company's technology or to obtain and use information that the Company regards as proprietary. The Company may be dependent on licensors or collaborators to prosecute certain of the Company's patent applications and may be dependent on such parties to protect such patent rights if patents issue. The laws of some foreign countries do not protect the Company's proprietary rights in its technologies and products to the same extent as do the laws of the United States. To date, the Company, through its license with Penn, has obtained exclusive, worldwide rights to two issued U.S. patents. Both patents expire in 2010. The first patent, for which certain corresponding foreign patents have issued and other foreign patent applications are pending, is directed to an apparatus for synthesizing carbohydrates or carbohydrate-containing compounds utilizing three or more different glycosyltransferases. The second U.S. patent is directed to an apparatus containing a specific pair of enzymes to synthesize a breast milk oligosaccharide and to other apparatuses containing multiple glycosyltransferases. In addition, the Company, through its license with Penn, has received rights to a patent 33 application directed to a process for obtaining glycosyltransferases from natural sources. The Penn license terminates upon the expiration of the last to expire licensed patent in each country. Penn may, at its option, terminate the license upon 60 days' notice if the Company is not using its continuing best efforts to develop or sell a product using the licensed technology. The Company also has licensed from The Rockefeller University two issued patents and one patent application. These are directed toward certain gene sequences and therapeutic uses of certain oligosaccharides. In addition to the licensed patents, three U.S. patents have issued to the Company within the past year. These patents are directed toward manufacturing processes for, and therapeutic uses of, oligosaccharides. The Company, both independently and through its licenses, has rights to a number of U.S., and corresponding foreign, patent applications. No assurance can be given that the U.S. Patent and Trademark Office or any foreign patent office will grant patent protection for the subject matter of any pending patent applications, or that present or future patents will provide meaningful protection to the Company's present or future technologies, products, or processes. Furthermore, no assurance can be given that others will not independently develop substantially equivalent proprietary information or obtain access to the Company's know-how or that others will not be issued patents that may prevent the sale of one or more of the Company's products, or require licensing and the payment of significant fees or royalties by the Company to third parties in order to enable the Company to conduct its business. Legal standards relating to the scope of claims and the validity of patents in the biotechnology field are still evolving, and no assurance can be given as to the degree of protection any patents issued or licensed to the Company will afford, the validity of any such patents, or the Company's ability to avoid violating or infringing any patents issued to others. There can be no guarantee that any patents issued to or licensed by the Company will not be infringed by the products of others. Defense and prosecution of patent claims can be expensive and time-consuming, even in those instances in which the outcome is favorable to the Company, and can result in the diversion of substantial resources from the Company's other activities. An adverse outcome could subject the Company to significant liabilities to third parties, require the Company to obtain licenses from third parties, or require the Company to cease any related research and development activities or product sales. In addition, the laws of certain countries may not protect the Company's intellectual property. The Company's success is also dependent upon the skills, knowledge, and experience of its scientific and technical personnel. To help protect its rights, the Company requires all employees, consultants, advisors, and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to anyone outside the Company, and requires disclosure and assignment to the Company of their ideas, developments, discoveries, and inventions. There can be no assurance, however, that these agreements will provide adequate protection for the Company's trade secrets, know-how, or other proprietary information in the event of any unauthorized use or disclosure. NEOSE is a trade name of the Company. The Company's management and scientific personnel have been recruited primarily from other scientific companies, pharmaceutical companies, and academic institutions. In some cases, these individuals may be continuing research in the same areas with which they were involved prior to joining the Company. As a result, the Company could be subject to allegations of violation of trade secrets and similar claims. The Company has not received any notice of any such claims and knows of no basis of any such claims. See "Risk Factors -- Uncertainty Regarding Patents and Proprietary Rights." Government Regulation The Company's product candidates and manufacturing facilities are subject to stringent regulation by a number of government authorities in the United States and other countries, including the FDA, pursuant to the FDC Act and regulations thereunder. The Company's infant formula additive may be subject to FDA review as a food additive, and the infant formula containing this additive will be subject to the provisions of the United States Infant Formula Act. The Company is also subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, 34 the Resource Conservation and Recovery Act, and other similar federal, state and local laws, rules, and regulations governing laboratory activities, waste disposal, handling of toxic, dangerous or radioactive materials, and other matters. The Company is unable to predict whether any governmental agency will adopt requirements, including regulations, which would have a material and adverse effect on any future product applications involving biotechnology. The Company currently voluntarily complies with the National Institutes of Health Guidelines for Research Involving Recombinant DNA Technologies. Although the Company believes that it is in compliance with all applicable laws, rules, and regulations, these laws, rules, and regulations change frequently, and there can be no assurance that federal or state governments will not impose upon all or a portion of the Company's activities additional restrictions which might adversely affect the Company's business, prospects, financial condition, or results of operations. See "Risk Factors -- Government Regulation; No Assurance of Product Approval." Regulation of Infant Formula Additives Food and food ingredients are subject to the provisions of the FDC Act regarding adulteration and misbranding of food. Food additives are broadly defined as any substances that may become a component, or otherwise affect the characteristics, of food, and the safety of which is established by regulation rather than general recognition among experts. All new food additives require premarket clearances. The Company's breast milk oligosaccharide, which is intended to be marketed as an additive for infant formula, may be subject to the extensive and lengthy FDA review process for food additives. Information supporting the safety of a food additive is submitted to the FDA in the form of a food additive petition. Such a petition is required to contain reports of safety investigations of the food additive and details regarding its physical, chemical, and biological properties. All product safety studies submitted to the FDA usually must be conducted in accordance with FDA Good Laboratory Practices ("GLP") requirements. Submission of a food additive petition does not assure that the FDA will issue a food additive regulation. The information must establish to a reasonable certainty that the food additive is safe for its intended use at the level specified in the petition. The food additive petition process generally is expensive and lengthy, frequently requiring several years after the petition is submitted to the FDA. No assurance can be given that the FDA will accept the petition or that, if accepted, such petition will not result in the establishment of regulations concerning the use of the product. Substances that are GRAS are excluded from the definition of food additives. A manufacturer may make an independent determination that qualified experts would generally agree that a substance is GRAS for a particular use. Alternatively, a GRAS affirmation petition may be submitted for the FDA to review and affirm GRAS status by regulation. There can be no assurance that Abbott will make an independent determination or that the FDA will agree with such independent determination, if Abbott were to elect to make such a determination. Accordingly, there is a risk that the FDA will disagree with the independent determination. In such a circumstance, the manufacturer must submit a GRAS affirmation petition for the FDA to review and affirm GRAS status by regulation in order to market and sell the additive or formula containing the additive. This process could be time-consuming and expensive and would have a material adverse effect on the Company's business, financial condition, and results of operations. Furthermore, a company's decision to rely on an independent determination may limit the marketability of that company's products as to food manufacturers, many of whom require confirmation of GRAS status from the FDA before they will purchase substances for use in foods from third parties. The infant formula into which the Company's breast milk oligosaccharide is introduced will be subject to review and approval under the Infant Formula Act, which has detailed requirements for the manufacture, composition, and labeling of infant formulas. Under the Infant Formula Act, infant formula manufacturers are required to notify the FDA of any intent to revise, add, or substitute any protein, fat, or carbohydrate in infant formula 90 days prior to the intended date of commercial distribution. The submission must contain the quantitative formulation of the new infant formula, a description of any reformulation or change in processing, and assurances that the new infant formula will not be marketed without complying 35 with the nutrient and quality factor requirements and GMP control requirements. Upon notification, the FDA has a 90-day period in which to request additional information, or deny marketing rights for the new formula. If no response is forthcoming from the FDA within 90 days of notification, the manufacturer may proceed with commercial sales of the newly formulated product. Pursuant to the Company's agreements with Abbott, Abbott is responsible for all regulatory activities relating to the infant formula additive. There can be no assurance that Abbott will be able to satisfy all applicable regulatory requirements. In addition, Abbott may market infant formula containing the additive in foreign countries. Infant formula regulatory requirements vary widely from country to country, and may be more or less stringent than FDA requirements. The time required to obtain required clearances, if required, in foreign countries may be longer or shorter than that required in the United States. If the Company's technology is incorporated in products claiming a therapeutic benefit, such products could be regulated as a drug rather than as a food. Regulation of these products as a drug would require extensive clinical testing and review by the FDA to support the claims made for the product. The uncertainty regarding the regulatory status of this type of product could have a material adverse effect on the Company's business, financial condition, and results of operations. Regulation of Pharmaceutical Products The Company's research and development activities regarding, and the future manufacturing and marketing of, its pharmaceutical products will be subject to significant regulation by numerous government authorities in the United States and other countries. Pharmaceutical products intended for therapeutic use in humans are governed principally by the FDC Act and by FDA regulations in the United States and by comparable laws and regulations in foreign countries. The FDC Act and other federal statutes and regulations govern the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising, and promotion of such products. Failure to comply with applicable requirements can result in fines, recall, or seizure of products, total or partial suspension of production, withdrawal of existing product approvals, refusal to approve new drug applications, and criminal prosecution. The process of completing clinical testing and obtaining FDA approval for a new drug or biological product requires a number of years and the expenditure of substantial resources and there can be no assurance that approval will be granted. Following drug discovery, the steps required before a new pharmaceutical product may be marketed in the United States include: (1) preclinical laboratory and animal tests; (2) the submission to the FDA of an IND application; (3) clinical and other studies to assess safety and parameters of use; (4) adequate and well-controlled clinical trials to establish the safety and effectiveness of the drug; (5) the submission of a New Drug Application ("NDA") to the FDA; and (6) FDA approval of the NDA prior to any commercial sale or shipment of the drug. Typically, preclinical studies are conducted in the laboratory and in animal model systems to gain preliminary information on the drug's pharmacology and toxicology and to identify the potential safety problems that would preclude testing in humans. The results of these studies are submitted to the FDA as part of the IND application and are reviewed by the FDA prior to authorizing the sponsor to conduct clinical trials in human subjects. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. Clinical trials of an investigational product in human subjects typically are conducted in three phases and are subject to specific protocols that are particularly detailed in Phases II and III. Each protocol indicating how the clinical trial will be conducted must be submitted for review to the FDA as part of the IND. Clinical trials using xenotransplants raise unique safety issues and the FDA has developed and is expected to continue to develop additional requirements for INDs for these types of trials. The FDA's review of a study protocol does not necessarily mean that if the study is successful it will constitute proof of efficacy or safety. 36 The FDA may require changes in a protocol both prior to and after the commencement of a trial. There is no assurance that the FDA will permit a study to go forward or, once started, to be completed. Phase I clinical trials are designed to determine the metabolic and pharmacologic effects of the drug in humans, the side-effects associated with increasing doses, and possibly, to obtain early indications of efficacy. These studies generally involve a small number of healthy volunteer subjects, but may be conducted on people with the disease the drug is intended to treat. Phase II studies are conducted to evaluate the effectiveness of the drug for a particular indication and thus involve patients with the disease under study. These studies also provide evidence of the short term side-effects and risks associated with the drug. Phase III studies are generally designed to provide the substantial evidence of safety and effectiveness of a drug required to obtain FDA approval. They often involve a substantial number of patients in multiple study centers and may include chronic administration of the drug in order to assess the overall benefit-risk relationship of the drug. A clinical trial may combine the elements of more than one phase and typically two or more Phase III studies are required. Typical estimates of the total time required for completing such clinical testing vary between four and ten years. Reports of results of the preclinical studies and clinical trials for non-biologic drugs are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment. This application also includes details of the manufacturing and testing processes, as well as proposed product packaging and labeling. FDA approval of the NDA is required before the applicant may market the new product in the United States. The clinical testing and FDA review process for new drugs are likely to require substantial time, effort, and expense. The FDA may refuse to approve an NDA if applicable statutory and/or regulatory criteria are not satisfied, or may require additional testing or information. The Company has not submitted an NDA to the FDA or received approval from any other regulatory authority to market any of its product candidates, and there can be no assurance that any such product will ever be approved for marketing, or that the Company will be able to obtain the labeling claims desired for its products. The Company is and will continue to be dependent upon and require that the laboratories and medical institutions conducting its preclinical studies and clinical trials maintain both good laboratory and good clinical practices and that the manufacturers of its compounds maintain compliance with current GMP requirements. Data obtained from preclinical studies and clinical trials are subject to varying interpretations that could delay, limit, or prevent FDA regulatory approval. Delays or rejections may be encountered based upon changes in FDA policy for drug approval during the period of development and FDA regulatory review. Similar delays also may be encountered in foreign countries. Any delay in obtaining, or failure to obtain, such approvals would adversely affect the Company's ability to generate product revenues or royalties. There can be no assurance that regulatory approval will be obtained for any product developed by the Company. Moreover, even if approval is granted, such approval may entail commercially unacceptable limitations on the labeling claims for which a product may be marketed. Even after initial FDA approval has been obtained, further studies may be required to provide additional data on safety, or to gain approval for the use of a product as a treatment in clinical indications other than those for which the product was initially tested. The FDA may also require post-marketing testing and surveillance programs to monitor the drug's effects. Side-effects resulting from the use of pharmaceutical products may prevent or limit the further marketing of products. Once the sale of a product is approved, the FDA regulates production, manufacturing, marketing, and other activities to ensure compliance with the FDC Act and the FDA's implementing regulations. Product approvals may be withdrawn, or other actions may be ordered, or sanctions imposed if compliance with regulatory requirements is not maintained. Other countries in which any products developed by the Company or its licensees may be marketed impose a similar regulatory process. The Company cannot predict the impact of adverse governmental action that might arise from future legislative and administrative action. 37 For marketing outside the United States, the Company will be subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs and devices. The requirements relating to the conduct of clinical trials, product licensing, pricing, and reimbursement vary widely from country to country. Competition The Company is engaged in highly competitive industries. The Company competes with many public and private companies, including well-known nutritional products manufacturers, pharmaceutical companies, chemical companies, specialized biotechnology companies, and academic institutions. Many of the Company's competitors have significantly greater financial, scientific, and technical resources, and manufacturing and marketing capabilities than the Company. In addition, many of the Company's competitors have significantly greater experience conducting preclinical studies and clinical trials of new pharmaceutical products, and in obtaining regulatory approvals for pharmaceutical products. The Company is relying on Abbott to develop and commercialize its infant formula additive. As a result, the success of the Company's infant formula additive will depend, in significant part, on Abbott's ability to compete in the highly competitive infant formula market. Abbott's principal competitors in this market include Bristol-Myers Squibb Company, American Home Products Corp., Nestle S.A., and Gerber Products Co. Competitors of the Company and its collaborators may develop products that compete successfully with the Company's products and may develop and commercialize such products more rapidly than the Company and its collaborators. Competition may increase further as a result of potential advances from the study of complex carbohydrates, and greater availability of capital for investment in this field. There can be no assurance that the Company's competitors will not succeed in developing technologies and products that are more effective than any being developed by the Company, or that would render the Company's technology and products obsolete or noncompetitive. Although Neose is not aware of any companies that are developing breast milk oligosaccharides as additives to infant formula, other companies are investigating potential infant formula additives. Such compounds may compete as additives to infant formula, but are not directly substitutable for, or competitive with, carbohydrate additives. The anti-H. pylori market is currently dominated by large pharmaceutical companies with products that generally kill bacteria on a non-specific basis. In response to recent evidence that infection with the bacterium H. pylori is the major cause of peptic ulcers, certain of these pharmaceutical companies and others have initiated or expanded research programs aimed at the eradication of H. pylori. However, many of these research programs are focusing on conventional antibiotic agents, each of which has reported incidences of side-effects and resistance. To date, no single product has alone received FDA approval of a labeling indication for H. pylori, although the FDA has approved several combinations of multiple products with a specific labeling indication for eradication of H. pylori. The market for treatment of respiratory infections and otitis media is currently dominated by large pharmaceutical companies with antibiotics that kill bacteria non-specifically. The use of antibiotics often results in the development of side-effects and resistance. Due to the significant commercial opportunities for respiratory infection and otitis media therapeutics, many pharmaceutical and biotechnology companies are believed to be developing alternative therapeutics and vaccines for the treatment and prevention of respiratory infections and otitis media. Due to the limited supply of human organs, there is a developing need for alternatives. The Company is aware of several other pharmaceutical companies that are doing work in the area of xenotransplants. Several companies are developing oligosaccharide therapeutics, and one company produces by enzymatic means a limited number of oligosaccharides and oligosaccharide precursors. The Company believes that none of these companies has the ability currently to manufacture a wide variety of human oligosaccharide products in quantities sufficient for commercialization. Other companies, however, that are developing non-human oligosaccharides may have the capability to produce, via fermentation, quantities sufficient for clinical studies and commercialization. In addition, some companies are investigating novel methods of organic synthesis, sometimes in combination with enzymatic steps, in order to produce 38 commercial quantities of complex carbohydrates. There can be no assurance that these and other efforts by potential competitors will not be successful, or that other methods of carbohydrate synthesis will not be developed to compete with the Company. Manufacturing To be successful, the Company's products must be manufactured in commercial quantities under GMP prescribed by the FDA, and at acceptable costs. The Company has not yet manufactured any products in commercial quantities and currently does not have the facilities to manufacture any products in commercial quantities under GMP. Although the Company is formulating amounts sufficient to conduct initial clinical trials of one pharmaceutical product candidate under GMP conditions, existing facilities of the Company are not adequate for commercial scale manufacturing. The Company plans to construct GMP manufacturing facilities in its current Horsham facility during the first half of 1997 adequate to provide Neose capacity for the GMP production of amounts of NE-0080, NE-1530, and NE-0501 necessary for the conduct of anticipated clinical trials of those compounds. In addition, the expanded facility is expected to give Neose the capacity to manufacture limited amounts of GMP carbohydrate materials for third parties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" for a description of the anticipated financial aspects of this manufacturing expansion. The Company will need to develop its own GMP manufacturing facility and/or depend on its collaborators, licensees, or contract manufacturers for the commercial manufacture of its products. In the event the Company determines to establish a manufacturing facility, it will require substantial additional funds, the hiring and retention of significant additional personnel and compliance with extensive regulations applicable to such a facility. The Company has no experience in such commercial manufacturing, and there can be no assurance that the Company will be able to establish such a facility successfully and, if established, that it will be able to manufacture products in commercial quantities for sale at competitive prices. If the Company determines to rely on collaborators, licensees, or contract manufacturers for the commercial manufacture of its products, the Company will be dependent on such corporate partners or other entities for, and will have only limited control over the commercial manufacturing of, its products. There can be no assurance that the Company will be able to enter into any such manufacturing arrangements on acceptable terms, if at all. If the Company is not able to enter into commercial manufacturing agreements, it could encounter delays in introducing its products into certain markets, or find that the manufacture of its products in these markets is adversely affected. There can be no assurance that the parties to the Company's future commercial manufacturing agreements will perform their obligations as expected, or that any revenue will be derived from these commercial manufacturing agreements. See "Risk Factors -- No Commercial Manufacturing Capability or Experience." Marketing, Distribution, and Sales The Company has no experience in marketing, distributing, or selling nutritional additives or pharmaceutical products, and will have to develop a sales force and/or rely on its collaborators or licensees, or on arrangements with others to provide for the marketing, distribution, and sales of its products. There can be no assurance that the Company will be able to establish marketing, distribution, and sales capabilities or make arrangements with third parties to perform such activities on acceptable terms, if at all. See "Risk Factors -- Limited Clinical Trial Experience; No Marketing or Sales Capability or Experience." Scientific Advisory Board The Company has assembled a Scientific Advisory Board (the "SAB") composed of eight members (the "Scientific Advisors") who are leaders in certain of the Company's core disciplines, and who review the Company's research, development, and clinical activities. Scientific Advisors are available for consultation with the Company's management. The SAB meets as a group at scheduled semi-annual meetings, and some Scientific Advisors meet more frequently, on an individual basis, with the Company's scientific personnel and management to discuss the Company's ongoing research and development projects. 39 Upon election to the SAB, Scientific Advisors receive a onetime grant of an option to purchase 6,666 shares of Common Stock at fair market value, vesting over a four-year period. Each member of the SAB is eligible to receive $2,000 per day as compensation for consulting services, up to a maximum of $24,000 per year. In addition, each Scientific Advisor was granted an option to purchase 1,500 shares of Common Stock during 1996. Each member of the SAB has agreed to transfer to the Company the rights to all technology invented that is related to the business of the Company and that was derived directly or indirectly from the proprietary information of the Company, and has further agreed not to compete with the Company for a period of one year following termination of his or her membership. The current members of the SAB are as follows: Baruch S. Blumberg, M.D., Ph.D., Neose's SAB Chairman, was Master of Balliol College, Oxford University, and is the Fox Chase Distinguished Scientist and Senior Advisor to the President, Fox Chase Cancer Center in Philadelphia, and University Professor of Medicine and Anthropology, University of Pennsylvania. Dr. Blumberg received the Nobel Prize for Physiology or Medicine in 1976 for his research on the hepatitis B virus, for his invention of the hepatitis B vaccine, and for his discoveries of mechanisms relating to the origins and dissemination of infectious diseases. Dr. Blumberg has received 22 honorary degrees, more than 25 distinguished scientific awards and, in addition to his numerous current appointments, has published over 400 scientific articles and abstracts. Merton Bernfield, M.D. is Chief of Newborn Medicine at the Children's Hospital in Boston, chairs the Department of Newborn Medicine at the Brigham & Women's and Beth Israel Hospitals, and serves as the Clement A. Smith Professor of Pediatrics and Professor of Cell Biology at Harvard Medical School. Dr. Bernfield has had numerous senior academic and administrative appointments as well as an extensive list of awards and honors. Dr. Bernfield currently serves on the editorial boards of six scientific peer review journals, is a member of the Institute of Medicine of the National Academy of Sciences, and has authored and co-authored over 140 scientific publications. Harold C. Neu, M.D. is Professor of Medicine and Pharmacology, and was Chief, Division of Infectious Diseases at Columbia University. Dr. Neu is a member of the Scientific Committee of the International Society for Chemotherapy, was the Chairman of the Subcommittee on Infectious Diseases, and served on the Committee on Public Health of the New York Academy of Medicine. Dr. Neu currently serves on the editorial boards of more than 20 peer review journals and has received several awards for his scientific accomplishments. Harry Schachter, M.D., Ph.D., FRSC is an expert of international repute in glycoconjugates, and has served as Professor and Chairman of the Department of Biochemistry at the University of Toronto and as Head of the Division of Biochemistry Research at Toronto's Hospital for Sick Children. Dr. Schachter has been awarded numerous honors, and has authored over 120 scientific publications related to glycoconjugates. He has served as the President of the International Glycoconjugate Organization, and serves on the editorial boards of several journals. Stanton Segal, M.D. is Director of the Division of Biochemical Development and Molecular Diseases at the Children's Hospital of Philadelphia and Professor of Pediatrics and Medicine at the University of Pennsylvania School of Medicine. Dr. Segal has published over 375 scientific articles on all aspects of carbohydrate metabolism and metabolic defects. He has served on many national committees, and is on the editorial board of both Metabolism and Enzyme and Protein. Barry D. Shur, Ph.D. is Professor and Chairman, Department of Anatomy and Cell Biology, Emory University School of Medicine. Dr. Shur serves on the editorial board of Glycobiology and Developmental Biology, and has authored or co-authored over 100 scientific publications. 40 Elaine Tuomanen, M.D. is Associate Professor and Head of the Laboratory of Molecular Infectious Diseases at The Rockefeller University, New York, where she has been engaged in full-time research since 1981. Dr. Tuomanen is the author or co-author of over 100 publications, and her work has been recognized by awards from the American Society of Microbiology, the American Lung Association, the Society for Pediatric Research, and the Infectious Diseases Society of America. George Whitesides, Ph.D. is Mallinckrodt Professor of Chemistry at Harvard University and the former Chairman of the Department of Chemistry at Harvard. The recipient of many scientific awards and accolades, Dr. Whitesides serves in numerous national advisory positions and on the editorial boards of several peer review journals. Employees As of December 31, 1996, Neose had 49 employees (13 of whom held Ph.D., Pharm.D., or M.D. degrees), consisting of 40 employees engaged in research and development activities and nine employees devoted to business development, finance, and administrative activities. The Company's staff includes carbohydrate biochemists as well as scientists with expertise in organic chemistry, analytic chemistry, molecular biology, microbiology, cell biology, scale-up manufacture, and regulatory affairs. A significant number of the Company's management and professional employees have prior experience with pharmaceutical or biotechnology companies, and many have specialized training in carbohydrate technology. None of the Company's employees is covered by collective bargaining agreements, and Neose believes that it maintains good relations with its employees. Facilities The Company currently leases approximately 45,000 square feet of laboratory and office space in Horsham, Pennsylvania. Build-out has been completed on approximately 25,000 square feet of this facility with approximately 80% of such space being devoted to research and development. The Company intends during the first half of 1997 to complete build-out of the remaining approximately 20,000 square feet for use as pilot-scale manufacturing and offices. In connection with the remaining build-out, the Company expects to make capital expenditures in the total amount of approximately $7.5 million, which began in the fourth quarter of 1996, to expand GMP manufacturing capabilities for the Company's compounds under development. The Company's lease terminates in 2002. The Company has the option to extend the lease for an additional five years or to terminate the lease early, in either 1997 or 1999. The Company has entered into a non-binding letter of intent with the owner of its facility for the purchase of the facility, and is currently negotiating a definitive purchase agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments" for a discussion of the manufacturing expansion and anticipated financial aspects of the facility purchase. The Company believes that its facility is adequate to meet the Company's purposes for at least the next two years. Legal Proceedings The Company is not a party to any legal proceedings. 41 MANAGEMENT Directors, Executive Officers and Key Employees The following table sets forth certain information with respect to the directors, executive officers, and key employees of the Company:
Name Age Position ---- --- -------- Stephen A. Roth, Ph.D................................ 54 Chairman, Chief Executive Officer, and Director P. Sherrill Neff..................................... 45 President, Chief Financial Officer, and Director Edward J. McGuire, Ph.D.............................. 59 Vice President, Research and Development David A. Zopf, M.D................................... 54 Vice President, Drug Development Robert L. Fleming.................................... 62 Director of Manufacturing and Operations Marjorie Hurley, Pharm.D............................. 37 Director of Regulatory Affairs Paul M. Simon, Ph.D.................................. 45 Director of Drug Development William F. Hamilton, Ph.D. (1)(2).................... 57 Director Douglas J. MacMaster, Jr. (2)........................ 66 Director Lindsay A. Rosenwald, M.D. (2)....................... 41 Director Lowell E. Sears (1).................................. 45 Director Jerry A. Weisbach, Ph.D.............................. 63 Director
- ------------------ (1) Member of the Audit Committee. (2) Member of the Compensation Committee. Dr. Roth has served as a director of the Company since December 1989 and as its Chairman and Chief Executive Officer since August 1994. Dr. Roth co-founded the Company, and from April 1992 until August 1994, he served as Senior Vice President, Research and Development and Chief Scientific Officer of the Company. Prior to joining the Company, he was a consultant to the Company. Dr. Roth was on the faculty of the University of Pennsylvania from 1980 to 1994 and was Chairman of Biology from 1982 to 1987. Dr. Roth serves on the Editorial Board of Current Research in Developmental Biology, The Quarterly Review of Biology, and The Journal of Molecular Recognition. Dr. Roth received his A.B. in biology from The Johns Hopkins University, his Ph.D. in developmental biology from the Case Western Reserve University and completed his post-doctorate training in carbohydrate chemistry at The Johns Hopkins University. Mr. Neff has served as President, Chief Financial Officer, and a director of Neose since December 1994. From February 1993 to December 1994, Mr. Neff was Senior Vice President, Corporate Development at U.S. Healthcare, Inc., a managed healthcare company, where Mr. Neff had responsibility for managing the growth of several subsidiary companies, and sustaining growth through strategic acquisitions, investments, and partnerships. From March 1984 to February 1993, Mr. Neff worked at Alex. Brown & Sons Incorporated, an investment banking firm, where he was Managing Director and Co-Head of the Financial 42 Services Group. Mr. Neff received his B.A. in religion from Wesleyan University and his J.D. from the University of Michigan Law School. Mr. Neff is a director of JeffBanks, Inc., a publicly traded bank holding company. Mr. Neff has been a member of the Pennsylvania Bar since 1980. Dr. McGuire has served as Vice President, Research and Development of the Company since April 1990. He is responsible for leading the oligosaccharide synthesis team. Dr. McGuire was on the faculty of the University of Pennsylvania from 1985 to April 1990. From 1984 to 1985, Dr. McGuire served as a Senior Researcher at Genetic Engineering, Inc., a biotechnology company, and from 1972 to 1984 he was a Research Biochemist at the National Jewish Hospital. Dr. McGuire received his B.A. in biology from Blackburn College, his Ph.D. in biochemistry/chemistry from the University of Illinois Medical School, and held a National Institutes of Health ("NIH") post-doctoral fellowship at the University of Michigan and The Johns Hopkins University. Dr. Zopf has served as Vice President, Drug Development of the Company since April 1992. From August 1991 to March 1992, Dr. Zopf was a consultant to the Company on the biomedical applications of complex carbohydrates. From April 1988 to July 1991, Dr. Zopf served as Vice President and Chief Operating Officer of BioCarb, Inc., a biotechnology company and the U.S. subsidiary of BioCarb AB, where he managed the research and development programs of novel carbohydrate-based diagnostics and therapeutics. Dr. Zopf worked at NIH from 1971 to 1988, most recently as Chief, Section on Biochemical Pathology at the National Cancer Institute. Dr. Zopf currently serves on the editorial board of Archives of Biochemistry and Biophysics. Dr. Zopf received his A.B. in zoology from Washington University and his M.D. from Washington University School of Medicine. Mr. Fleming has served as Director of Manufacturing and Operations of the Company since February 1993. Mr. Fleming served as Director, Production and Facilities at Vestar Inc., a drug distribution and manufacturing company, from 1986 to February 1993 and from 1979 to 1986, he served as Vice President, Operations for Adria Laboratories Inc., a pharmaceutical company. Prior to joining Adria Laboratories Inc., Mr. Fleming held a number of positions, including Plant Manager, at the Mead-Johnson division of Bristol-Myers Squibb Company from 1957 to 1979. Mr. Fleming received his B.S. in chemical engineering from Purdue University and his M.B.A. from the University of Evansville. Dr. Hurley has served as Director of Regulatory Affairs of the Company since November 1993. From 1987 to November 1993, Dr. Hurley served in various positions, including as Assistant Director, Regulatory Affairs at Cytogen Corp., a biotechnology company. From 1984 to 1987, she held several positions, including project coordinator at the Wyeth-Ayerst Laboratories division of American Home Products Corp. Dr. Hurley received her B.S. in pharmacy and her Pharm.D. from the University of Michigan. Dr. Simon has served as Director of Drug Development of the Company since November 1992 and has been responsible for in vitro and in vivo preclinical testing of Neose compounds. From March 1983 to September 1992, he was a research immunologist in the cellular immunology of cancer, AIDS, transplantation, and autoimmune diseases at E.I. DuPont ("DuPont") and DuPont Merck Pharmaceuticals. Prior to joining DuPont, Dr. Simon trained as a post-doctoral fellow at the University of California at Los Angeles and at the Dana Farber Cancer Institute, Harvard Medical School. Dr. Simon received his B.S. in mathematics from City College of New York and received his Ph.D. in biology from Syracuse University. Dr. Hamilton has served as a director of the Company since September 1991. Dr. Hamilton has served on the University of Pennsylvania faculty since 1967 and is the Landau Professor of Management and Technology and Director of the Jerome Fisher Program in Management and Technology at The Wharton School and the School of Engineering and Applied Science at the University of Pennsylvania. Dr. Hamilton serves as a director of Centocor, Inc., a biopharmaceutical company, Hunt Manufacturing Co., a manufacturer of art and office supplies, and Marlton Technologies, Inc., a trade show supply company. Dr. Hamilton received his B.S. and his M.S. in chemical engineering and his M.B.A. from the University of Pennsylvania and his Ph.D. in applied economics from the London School of Economics. 43 Mr. MacMaster has served as a director of the Company since May 1993. Mr. MacMaster served as Senior Vice President of Merck & Co., Inc. ("Merck") from July 1988 to January 1992, where he was responsible for worldwide chemical and pharmaceutical manufacturing, the Agvet Division, and the Specialty Chemicals Group. From 1985 to 1988, Mr. MacMaster was President of the Merck Sharp Dohme Division of Merck, with responsibility for the U.S. human healthcare business. Mr. MacMaster was an employee of Merck for 30 years. Mr. MacMaster serves as a director of American Precision Industries, Inc., a heat transfer and precision equipment manufacturing company, Flamel Technologies, S.A., a polymer chemistry and drug delivery company, Martek Biosciences Corp., a biological products manufacturing company, Oravax, Inc., a biopharmaceutical company, and United States Bioscience Inc., a biotechnology company, and is also on the Board of Trustees of Thomas Jefferson University and Martha's Vineyard Hospital Foundation. Mr. MacMaster received his B.A. from St. Francis Xavier University and his J.D. from Boston College Law School. Dr. Rosenwald has served as a director of the Company since January 1989, and served as its Chairman until August 1994. Dr. Rosenwald is a founder of several biopharmaceutical companies, including Neose and Interneuron Pharmaceuticals, Inc. In August 1991, Dr. Rosenwald founded the Castle Group, Ltd., a New York-based venture capital and merchant banking firm and in March 1992 he founded Paramount Capital, Inc., an investment bank specializing in the biopharmaceutical industry. In June 1994, Dr. Rosenwald founded Aries Financial Services, Inc., a money management firm specializing in the health sciences industry. Dr. Rosenwald served as a Managing Director of Corporate Finance at the investment banking firm of D.H. Blair & Co., Inc. from June 1987 to February 1992, and as a Senior Securities Analyst at the investment banking firm of Ladenburg, Thalmann & Co. Inc., from September 1986 to June 1987. Dr. Rosenwald is also Chairman of the Board of Directors of Interneuron Pharmaceuticals, Inc., and a director of BioCryst Pharmaceuticals, Inc., Sparta Pharmaceuticals, Inc., and Atlantic Pharmaceuticals, Inc., which are pharmaceutical companies, and Ansan, Inc., Xenometrix, Inc., Titan Pharmaceuticals, Inc., and Boston Life Sciences, Inc., which are biotechnology companies. Dr. Rosenwald received his B.A. in finance from Pennsylvania State University and his M.D. from Temple University School of Medicine. Mr. Sears has served as a director of the Company since September 1994. Mr. Sears has been a private investor involved in portfolio management and life sciences venture capital since April 1994. From October 1988 until April 1994, Mr. Sears was Chief Financial Officer of Amgen Inc., a pharmaceutical company, and from September 1992 until January 1994, Mr. Sears also served as Senior Vice President responsible for the Asia-Pacific region. From August 1986 until October 1988, Mr. Sears was Treasurer and Director of Planning for Amgen Inc. From July 1976 to April 1986, Mr. Sears held senior financial and planning positions at Atlantic Richfield Co. Mr. Sears is Chairman of the Board of Directors of CoCensys, Inc., a neuropharmaceuticals company, and is a director of Techne Corp., a biological products manufacturing company and Activated Cell Therapy, Inc., a cell processing company. Mr. Sears received his B.A. in economics from Claremont McKenna College and his M.B.A. from Stanford University. Dr. Weisbach has served as a director of the Company since May 1993. From 1988 to July 1994, Dr. Weisbach served as Director of Technology Transfer and Adjunct Professor at The Rockefeller University where he was responsible for the licensing of technology. Dr. Weisbach served as Vice President of Warner-Lambert Company from 1981 to 1987 and President, Pharmaceutical Research Division from 1979 to 1987, where he was responsible for all pharmaceutical research and development activities. Prior to joining Warner-Lambert, Dr. Weisbach served at SmithKline and French Laboratories from 1960 to 1979, where he was Vice President, Research from 1977 to 1979. Dr. Weisbach serves as a Director of Hybridon, Inc., Xytronyx, Inc., and Exponential Biotherapies, Inc., which are biotechnology companies, Synthon Corporation, a chemical intermediation company, and CIMA Laboratories, Inc., a drug delivery company. Dr. Weisbach is also a member of the Scientific Advisory Boards of Magainin Pharmaceuticals, Inc., Myco Pharmaceuticals Inc., and Receptor Laboratories, Inc. Dr. Weisbach received his B.S. in chemistry from Brooklyn College and his M.A. and his Ph.D. in chemistry from Harvard University. 44 All directors hold office until the next annual meeting of stockholders or until their successors have been elected and qualified. The Audit Committee was established in January 1992 and reviews, acts on, and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the Company's auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of the Company's independent auditors, and the accounting practices of the Company. The Compensation Committee was established in October 1991 and determines the salaries and incentive compensation of the officers of the Company and provides recommendations for the salaries and incentive compensation of the other employees and the consultants of the Company. The Compensation Committee also administers various incentive compensation, stock, and benefit plans. Director Compensation Effective January 1, 1997, non-management members of the Board of Directors, other than Dr. Rosenwald, receive an annual retainer of $14,000 as consideration for their services as directors of the Company and are reimbursed for reasonable travel expenses incurred in connection with their attendance at such meetings. Non-management directors, other than Dr. Rosenwald, may also receive consulting fees of $2,000 per day of additional service. Non-management directors appointed or elected to the Board of Directors on or after February 15, 1996, will receive an option grant under the Company's 1995 Stock Option/Stock Issuance Plan to purchase 16,666 shares of Common Stock, at the fair market value at the date of the grant, vesting over a four-year period upon each anniversary of the date of grant. In addition, on the date of each annual meeting of stockholders held after February 15, 1996, each non-management director who will continue to serve as a director for the following year, and also has served as a director for at least six months prior to the date of the annual meeting, shall receive an option to purchase 3,333 shares of Common Stock, at the fair market value at the date of the grant, vesting over a one-year period. Additionally, under the Director Fee Option Grant Program of the Company's 1995 Stock Option/Stock Issuance Plan, the non-management directors may elect to apply their annual retainer fees towards the acquisition of options to purchase shares of Common Stock. Dr. Rosenwald receives no compensation for his services as a director of the Company. Compensation Committee Interlocks and Insider Participation The Compensation Committee consists of Dr. Hamilton, Mr. MacMaster, and Dr. Rosenwald. Certain members of the Compensation Committee are parties to transactions with the Company. See "Certain Transactions." 45 Executive Compensation The following table sets forth all compensation earned in 1996 and 1995 by the Company's Chief Executive Officer and the Company's four other most highly compensated executive officers in 1996 (together, the "Named Executive Officers"). Summary Compensation Table
Long-term Compensation ------------ Annual Compensation Securities --------------------- Underlying All Other Name and Principal Position Year Salary Bonus Options(#) Compensation - ---------------------------------------- -------- ---------- -------- --------------- ---------------- Stephen A. Roth..................... 1996 $230,000 $52,500 90,000 $5,172(1)(2) Chief Executive Officer 1995 200,000 50,000 90,000 5,172(1)(2) P. Sherrill Neff.................... 1996 225,000 52,500 90,000 5,235(1)(3) President, Chief Financial Officer 1995 225,000 50,000 90,000 5,172(1)(3) Edward J. McGuire................... 1996 129,600 40,000 15,000 3,855(1)(4) Vice President, Research and 1995 120,000 35,000 10,000 3,745(1)(4) Development David A. Zopf....................... 1996 151,200 40,000 15,000 4,372(1)(5) Vice President, Drug Development 1995 144,000 30,000 6,666 5,046(1)(5) David F. Pritchard(6)............... 1996 118,656 -- -- 3,518(1)(7) Vice President, Business 1995 115,200 10,000 7,000 3,504(1)(7) Development
- ------------------ (1) Includes $552 in premiums paid for group term life insurance policy. (2) Includes $4,620 in matching contributions in each of 1995 and 1996 to the Company's tax-qualified employee savings and retirement plan (the "401(k) Plan"). (3) Includes $4,683 and $4,620 in 1996 and 1995, respectively, in matching contributions to the 401(k) Plan. (4) Includes $3,303 and $3,193 in 1996 and 1995, respectively, in matching contributions to the 401(k) Plan. (5) Includes $3,820 and $4,494 in 1996 and 1995, respectively, in matching contributions to the 401(k) Plan. (6) Mr. Pritchard ceased being an executive officer of the Company effective as of November 22, 1996, and ceased being an employee effective as of January 2, 1997. Effective as of January 2, 1997, Mr. Pritchard and the Company entered into a separation and consulting agreement and general release. See "-- Employment Agreements." (7) Includes $2,966 and $2,952 in 1996 and 1995, respectively, in matching contributions to the 401(k) Plan. Stock Option Information The following table sets forth certain information concerning grants of stock options made during 1996 to each of the Named Executive Officers. No stock appreciation rights were granted to any Named Executive Officer during fiscal year 1996. 46 Option Grants in 1996
Individual Grants ----------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Number of Percentage of Stock Price Appreciation for Securities Total Option Term(3) Underlying Options Exercise Expiration -------------------------- Name Options Granted(1) Granted(2) Price Date 5% 10% - ---- ------------------ -------------- -------- ----------- --- --- Stephen A. Roth....... 90,000 26.6% $15.125 12/02/06 $856,083 $2,169,482 P. Sherrill Neff...... 90,000 26.6 15.125 12/02/06 856,083 2,169,482 Edward J. McGuire..... 15,000 4.4 15.125 12/02/06 142,680 361,580 David A. Zopf......... 15,000 4.4 15.125 12/02/06 142,680 361,580 David F. Pritchard.... -- -- -- -- -- --
- ------------- (1) These options are exercisable in four annual installments commencing on the first anniversary of the date of grant. (2) Based on an aggregate of 338,850 options granted to employees in 1996, including options granted to the Named Executive Officers. (3) Potential realizable value is based on the assumption that the price per share of Common Stock appreciates at the assumed annual rate of stock appreciation for the option term. The assumed 5% and 10% annual rates of appreciation (compounded annually) over the term of the option are set forth in accordance with the rules and regulations adopted by the Commission and do not represent the Company's estimate of stock price appreciation. The following table sets forth certain information concerning the number and value of unexercised options held by each of the Named Executive Officers on December 31, 1996. No stock appreciation rights were outstanding on December 31, 1996. No stock appreciation rights were exercised during the fiscal year ended December 31, 1996 by any of the Named Executive Officers. Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Number of Securities Shares Underlying Unexercised Value of Unexercised Acquired Value Options(#) In-The-Money Options ($) On Realized ---------------------------- -------------------------- Name Exercise(#) ($) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- Stephen A. Roth....... -- -- 29,901 161,666 $249,839 $ 696,351 P. Sherrill Neff...... -- -- 82,500 197,500 860,850 1,119,300 Edward J. McGuire..... 2,000 $25,350(1) 40,500 22,500 632,400 110,625 David A. Zopf......... -- -- 30,366 21,665 480,872 116,605 David F. Pritchard.... 3,333 54,495(2) 8,417 8,583 133,881 116,619
- -------------- (1) Based on the sales price of the Common Stock on the exercise date, less the exercise price payable for such shares. (2) Based on the fair value of the Common Stock at the exercise date, less the exercise price payable for such shares. Pursuant to the terms of a separation and consulting agreement and general release effective January 2, 1997 between Mr. Pritchard and the Company, effective January 2, 1997, the vesting of options to purchase 7,083 shares of Common Stock held by Mr. Pritchard accelerated and such options became immediately exercisable, unvested options to purchase 1,500 shares of Common Stock were canceled, and all vested options not exercised will terminate 90 days after January 2, 1997. 47 1995 Stock Option/Stock Issuance Plan The Company's 1995 Stock Option/Stock Issuance Plan (the "1995 Plan") was adopted by the Board of Directors on March 23, 1995 and approved by the stockholders on April 12, 1995. On December 6, 1995, the Board of Directors approved an increase in the aggregate number of shares of Common Stock available for issuance under the 1995 Plan. Stockholder approval of the increase was obtained on December 19, 1995. On March 16, 1996, the Board of Directors approved an amendment to the 1995 Plan to implement a Director Fee Option Grant Program (the "Director Fee Program") pursuant to which non-employee members of the Company's Board of Directors may elect to receive their annual retainer fee in stock options rather than cash, effective as of January 1, 1997. Stockholder approval of the amendment was obtained on June 14, 1996 at the Company's 1996 Annual Meeting of Stockholders. The 1995 Plan is intended to serve as the successor equity incentive program to the Company's 1991 and 1992 Stock Option Plans (the "Predecessor Plans"). The 1995 Plan became effective on the date of its adoption by the Board, except that the Automatic Option Grant Program described below became effective on the date of the Company's initial public offering, February 15, 1996, and the Director Fee Program became effective on June 14, 1996. As of January 6, 1997, a total of 1,390,374 shares of Common Stock are authorized for issuance under the 1995 Plan. This amount includes (i) the shares which remained available for issuance under the Predecessor Plans on the effective date of the 1995 Plan, including the shares subject to outstanding options thereunder, plus (ii) an increase of 333,333 shares authorized by the Board of Directors on March 23, 1995, and (iii) an increase of 600,000 shares authorized by the Board of Directors on December 6, 1995. In no event may any one participant in the 1995 Plan receive option grants, separately exercisable stock appreciation rights, or direct stock issuances for more than 250,000 shares over the term of the 1995 Plan. The 1995 Plan is divided into four separate components: (i) the Discretionary Option Grant Program under which employees, non-employee directors (other than the members of the Compensation Committee), and consultants may, at the discretion of the plan administrator, be granted options to purchase shares of Common Stock at an exercise price not less than 85% of the fair market value of the Common Stock on the grant date, (ii) the Stock Issuance Program under which such persons may, at the plan administrator's discretion, be issued shares of Common Stock directly, through the purchase of such shares at a price not less than 85% of the fair market value of the Common Stock at the time of issuance or as a bonus tied to the performance of services, (iii) the Automatic Option Grant Program under which option grants will automatically be made at periodic intervals to eligible non-employee directors to purchase shares of Common Stock at an exercise price equal to 100% of the fair market value of the Common Stock on the grant date, and (iv) the Director Fee Program under which non-employee Board members may elect to apply all or a portion of their annual retainer fees otherwise payable in cash to the acquisition of a special option grant. The Discretionary Option and the Stock Issuance Programs are administered by a Compensation Committee appointed by the Board (the "Compensation Committee"). The Compensation Committee, as plan administrator, has complete discretion to determine which eligible individuals are to receive option grants, stock appreciation rights or stock issuances, the time or times when such option grants or stock issuances are to be made, the number of shares subject to each such grant or issuance, the status of any granted option as either an incentive stock option or a non-statutory stock option under the Federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance, and the maximum term for which any granted option is to remain outstanding. All grants under the Automatic Option Grant Program and the Director Fee Program will be made in strict compliance with the express provisions of that program, and no administrative discretion is exercised by the Compensation Committee with respect to those grants. In the event that the Company is a party to certain corporate transactions (as defined in the 1995 Plan), including, under certain circumstances, a merger or asset sale, each outstanding option and unvested stock issuance will, under certain circumstances, automatically accelerate in full. Options and stock issuances that do not accelerate at the time of the acquisition will accelerate in the event the individual's service is terminated, whether involuntarily or through a resignation for good reason, within 18 months following the acquisition. The plan administrator may also accelerate options and unvested stock issuances upon a change 48 in control (as defined in the 1995 Plan) of the Company or the termination of the individual's service, whether involuntarily or through a resignation for good reason, within a specified period following the change in control. Options currently outstanding under the Predecessor Plans contain different acceleration provisions in connection with an acquisition of the Company. Options outstanding under the 1992 Stock Option Plan may, under certain circumstances, accelerate upon a change in control but the options outstanding under the 1991 Stock Option Plan do not contain any acceleration provisions in connection with such a change in control. The plan administrator has the discretion, however, to extend the acceleration provisions of the 1995 Plan to outstanding options under the Predecessor Plans which are incorporated into the 1995 Plan. Stock appreciation rights may be issued under the Discretionary Option Grant Program which will allow the holders to surrender their outstanding options for an appreciation distribution from the Company equal to the excess of (i) the fair market value of the vested shares of Common Stock subject to the surrendered option over (ii) the aggregate exercise price payable for such shares. Such appreciation distribution may be made in cash or in shares of Common Stock. The plan administrator has the authority to effect the cancellation of outstanding options under the Discretionary Option Grant Program (including options incorporated from the Predecessor Plan) in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the Common Stock on the new grant date. Under the Automatic Option Grant Program, each non-employee director first elected or appointed to the Board of Directors after the effective date of that program will automatically be granted an option for 16,666 shares of Common Stock on the date of his or her election or appointment to the Board of Directors, provided such individual has not been previously employed by the Company. In addition, at each annual stockholders meeting held after the date of the Company's initial public offering, February 15, 1996, each individual with at least six months of Board service who is to continue to serve as a non-employee director following the meeting will automatically be granted an option for 3,333 shares of Common Stock, even if such individual has been previously employed by the Company or joined the Board of Directors prior to the offering. Each automatic grant will have a term of 10 years, subject to earlier termination following the optionee's cessation of service on the Board of Directors. Each automatic option will be immediately exercisable; however, any shares purchased upon exercise of the option will be subject to repurchase should the optionee's service as a non-employee director cease prior to vesting of the shares. The initial 16,666 share grant will vest in successive equal annual installments over the optionee's initial four-year period of Board service. Each additional 3,333 share grant will vest upon the optionee's completion of one year of service on the Board of Directors, as measured from the grant date. However, each outstanding option will immediately vest upon certain changes in the ownership or control of the Company. Under the Director Fee Program, each non-employee Board member may elect to apply all or a portion of his or her annual retainer fee otherwise payable in cash to the acquisition of a special option grant under the Director Fee Program. Such election must be filed with the Company prior to the start of the calendar year of participation. The option grant will automatically be made on the first trading day in January following the filing of the option-in-lieu of cash election and will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date. The number of option shares will be determined by dividing the amount of the retainer fee applied to the program (effective January 1, 1997, the non-employee directors will receive a $14,000 annual retainer) by two-thirds of the fair market value per share of Common Stock on the grant date. As a result, the total spread on the option (the fair market value of the option shares on the grant date less the aggregate exercise price payable for those shares) will be equal to the portion of the retainer fee subject to the director's election. 49 The option will become exercisable for the option shares in a series of twelve successive equal monthly installments upon the optionee's completion of each month of Board service during the calendar year for which the option grant is made. The option will remain exercisable for such shares until the earlier of (i) the expiration of the ten-year option term or (ii) the end of the three-year period measured from the date of the optionee's cessation of Board service. Should the optionee die or become disabled during his or her period of Board service, then the option shares will immediately vest in full. In addition, upon certain changes in the ownership or control of the Company, each outstanding option will immediately vest in full. The 1995 Plan will terminate on the earlier of (i) February 28, 2005 or (ii) the date on which all shares for issuance under the Plan have been issued. Employee Stock Purchase Plan The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors on December 6, 1995 and was approved by the stockholders on December 19, 1995. The Purchase Plan is designed to allow eligible employees of the Company and participating subsidiaries to purchase shares of Common Stock, at semi-annual intervals, through periodic payroll deductions under the Purchase Plan, and a reserve of 100,000 shares of Common Stock has been established for this purpose. The Purchase Plan will be implemented in a series of successive offering periods, each with a maximum duration of 24 months. However, the initial offering period began on February 15, 1996 and will end on the last business day in January 1998. Each offering period will be comprised of successive purchase intervals, each of a duration of six months. Shares of Common Stock will be purchased for each participant at the end of each purchase interval during the offering period. On July 31, 1996, participants in the Purchase Plan acquired 5,631 shares of Common Stock under the Purchase Plan. Payroll deductions may not exceed 10% of the participant's total cash earnings each semi-annual period. The purchase price per share will be eighty-five percent (85%) of the lower of (i) the fair market value of the Common Stock on the participant's entry date into the offering period or (ii) the fair market value on the semi-annual purchase date. Employment Agreements In December 1994, the Company entered into an employment agreement for an initial period of three years, which may be extended for additional one-year periods, with P. Sherrill Neff (the "Neff Agreement") whereby Mr. Neff is employed as President and Chief Financial Officer of the Company. Pursuant to the Neff Agreement, Mr. Neff receives a minimum base salary of $225,000 per year and a performance incentive bonus of up to 50% of base salary at the discretion of the Board of Directors or the Compensation Committee thereof. In connection with the Neff Agreement, the Company granted to Mr. Neff options to purchase 100,000 shares of Common Stock at an exercise price of $5.70 per share, 20,000 of which vested immediately with the remainder vesting ratably over four years. Pursuant to the terms of the Neff Agreement, Mr. Neff has entered into a standard noncompetition and confidentiality agreement with the Company. In addition, if Mr. Neff is involuntarily terminated without "cause" (as defined in the Neff Agreement) or terminated voluntarily or involuntarily following certain changes of control of the Company or a sale of all or substantially all of the Company's assets in a complete liquidation or dissolution, the Company is required to continue to pay Mr. Neff for 12 months after termination or such shorter amount of time remaining in his employment term. In April 1992, the Company entered into a one-year employment agreement extendable in one-year increments, with David A. Zopf (the "Zopf Agreement") whereby Dr. Zopf is employed as Vice President, Drug Development. The Zopf Agreement provides for an annual base salary of $151,200 and a bonus of up to 25% of base salary at the discretion of the Chief Executive Officer. In connection with the Zopf Agreement, the Company granted to Dr. Zopf options to purchase 26,666 shares of Common Stock at fair market value, 50 which options vest in four equal annual installments commencing on the first anniversary of the Zopf Agreement. The Zopf Agreement contains certain restrictive covenants, including provisions relating to noncompetition, nonsolicitation, and the nondisclosure of proprietary information during his employment with the Company and for specified periods thereafter. Effective January 2, 1997, a separation and consulting agreement and general release was entered into between the Company and David F. Pritchard, the Company's former Vice President, Business Development. The agreement provided for a lump-sum severance payment to Mr. Pritchard of approximately $50,000 on that date and total consulting fees of approximately $60,000 during a six-month consulting period beginning at the end of Mr. Pritchard's severance period (May 31, 1997) and ending on November 30, 1997, subject to reduction or termination upon Mr. Pritchard's employment by or receipt of compensation for services from another person before or during the consulting period. In addition, effective January 2, 1997, the vesting of options to purchase 7,083 shares of Common Stock held by Mr. Pritchard accelerated and such options became immediately exercisable. All vested options not exercised will terminate 90 days after January 2, 1997. 401(k) Plan In July 1991, the Company adopted a tax-qualified employee savings and retirement plan (the "401(k) Plan") covering all of the Company's eligible employees. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 15% of eligible compensation or the annual limit prescribed by statute and have the amount of such reduction contributed to the 401(k) Plan. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in any of six investment options. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees to the 401(k) Plan, and income earned on plan contributions, are not taxable to employees until withdrawn, and so that the contributions by employees will be deductible by the Company when made. The 401(k) Plan provides for matching cash contributions to the 401(k) Plan by the Company equal to 50% of the amount deferred up to 5% of compensation. The Company made matching contributions of approximately $61,000, $62,000, $53,000, and $28,000 to the 401(k) Plan in 1996, 1995, 1994, and 1993, respectively. Matching contributions vest over a four-year period. Limitation of Liability and Indemnification Matters The Company's Certificate of Incorporation provides that, except to the extent prohibited by the Delaware General Corporation Law, its directors shall not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as directors of the Company. Under Delaware law, the directors have a fiduciary duty to the Company which is not eliminated by this provision of the Certificate of Incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available. In addition, each director will continue to be subject to liability under Delaware law for breach of the directors' duty of loyalty to the Company, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by Delaware law. This provision also does not affect the directors' responsibilities under any other laws, such as the Federal securities laws or state or Federal environmental laws. In addition, the Company has obtained liability insurance for its officers and directors. The Certificate of Incorporation also provides that the Company shall indemnify, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, all of its present and former officers and directors, and any party agreeing to serve as an officer, director, or trustee of any entity at the Company's request, in connection with any civil or criminal proceeding threatened or instituted against such party by reason of actions or omissions while serving in such capacity. Indemnification by the Company includes payment of expenses in defense of the indemnified party in advance of any proceeding or final disposition thereof if the indemnified party undertakes to repay the Company upon an ultimate determination that the 51 indemnified party was not entitled to indemnification by the Company. This provision also requires board of director approval as a precondition to any indemnification by the Company for proceedings instituted by the indemnified party. The rights to indemnification provided in this provision do not preclude the exercise of any other indemnification rights by any party pursuant to any law, agreement, or vote of the stockholders or the disinterested directors of the Company. Section 145 of the Delaware General Corporation Law generally allows the Company to indemnify the parties described in the preceding paragraph for all expenses, judgments, fines, and amounts in settlement actually paid and reasonably incurred in connection with any proceedings so long as such party acted in good faith and in a manner reasonably believed to be in or not opposed to the Company's best interests and, with respect to any criminal proceedings, if such party had no reasonable cause to believe his or her conduct to be unlawful. Indemnification may only be made by the Company if the applicable standard of conduct set forth in Section 145 has been met by the indemnified party upon a determination made (1) by the board of directors by a majority vote of a quorum of directors who are not parties to such proceedings, or (2) if such a quorum is not obtainable or if directed by a quorum of disinterested directors, by independent legal counsel in a written opinion, or (3) by the stockholders. 52 CERTAIN TRANSACTIONS In connection with this offering, Paramount Capital, Inc. ("Paramount") is entitled to receive 2.875% of the proceeds obtained from investors in the offering who are directed to the Placement Agent by Paramount, up to a maximum of $287,500. Lindsay A. Rosenwald, the sole stockholder of Paramount, is a director of the Company. During 1995, the Company paid $435,179 in commissions and expenses to Paramount, which acted as placement agent in connection with the sale of a portion of the Series F Convertible Preferred Stock of the Company ("Series F Stock"). In December 1995, the Company granted to an employee of Paramount options to purchase an aggregate of 49,999 shares of Common Stock at a weighted average exercise price of $17.94, vesting in various amounts over five years, for financial advisory services. In connection with the private placement of the Series E Convertible Preferred Stock of the Company ("Series E Stock") during 1994, the Company paid $1,246,505 in commissions and expenses to Paramount, the placement agent. Additionally, Paramount received warrants which are currently exercisable for 119,961 shares of Common Stock. In February 1994, Dr. Rosenwald advanced the Company $440,000 to fund the Company's restricted funds account held in escrow pursuant to the Company's facility lease. The Company repaid the full amount of the advance in April 1994. See "Plan of Distribution." In connection with the potential acquisition by the Company of its leased facility, the Company intends to obtain credit support for the transaction from Jefferson Bank and will pay the bank fees in connection therewith. Mr. Neff, the Company's President and Chief Financial Officer, is a director of JeffBanks, Inc., the parent holding company of Jefferson Bank. The Company believes that the terms of the credit support arrangement generally will be no less favorable than those that could be obtained from other lending institutions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments." In connection with the private placement of the Series F Stock during 1995, the following directors and persons affiliated with directors made purchases of Series F Stock at a price equivalent to $12.00 per share of Common Stock on an as-converted basis as set forth in the table below. All outstanding shares of Preferred Stock of the Company were automatically converted into shares of Common Stock upon the closing of the Company's initial public offering in February 1996.
Common Stock Number of Shares issued upon Directors and Persons Affiliated with Directors of Series F Stock conversion - ----------------------------------------------- ----------------- ------------- Stephen A. Roth .......................................... 2,500 834 P. Sherrill Neff(1) ...................................... 37,500 12,501 William F. Hamilton ...................................... 6,250 2,084 Douglas J. MacMaster, Jr ................................. 25,000 8,334 Lindsay A. Rosenwald ..................................... 6,250 2,084 Sears Family Living Trust ................................ 10,000 3,334 Jerry A. Weisbach ........................................ 6,250 2,084
- ------------------ (1) Includes 25,000 shares of Series F Stock, which were converted into 8,334 shares of Common Stock, purchased by Mr. Neff's father-in-law. In June 1994, the Company sold 22,750 shares of Series E Stock at $4.75 per share to the Sears Family Living Trust, a trust for which Lowell E. Sears, a director, is the trustee, and 421,053 shares of Series E Stock at $4.75 per share to U.S. Healthcare, Inc. Mr. Neff was Senior Vice President, Corporate Development of U.S. Healthcare at such time. 53 From January 1, 1994 through December 31, 1996, the Company granted its current directors and executive officers options to purchase a total of 608,327 shares of Common Stock at exercise prices ranging from $1.425 to $21.00 per share. See "Management." For information regarding employment agreements with Named Executive Officers, see "Management -- Employment Agreements." For information regarding compensation of Directors, see "Management -- Director Compensation." 54 PRINCIPAL STOCKHOLDERS The following table sets forth at January 6, 1997 and as adjusted to reflect the sale by the Company of the shares of Common Stock offered hereby, certain information with respect to the beneficial ownership of the Common Stock (i) by each person who is known by the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock, (ii) by each of the Named Executive Officers, (iii) by each of the directors of the Company, and (iv) by all directors and executive officers of the Company as a group.
Percentage Beneficially Owned --------------------- Number of Shares Beneficially Prior to After Name Owned(1) Offering Offering - ---- ---------------- -------- -------- Lindsay A. Rosenwald, M.D.(2)............................... 606,791 7.4% 6.4% c/o Paramount Capital, Inc. 787 7th Avenue New York, NY 10019 Stephen A. Roth, Ph.D.(3)................................... 233,307 2.8 2.5 P. Sherrill Neff(4)......................................... 87,637 1.1 * Edward J. McGuire, Ph.D.(5)................................. 118,611 1.4 1.2 David A. Zopf, M.D.(6)...................................... 33,985 * * David F. Pritchard(7)....................................... 18,891 * * William F. Hamilton, Ph.D.(8)............................... 29,360 * * Douglas J. MacMaster, Jr.(9)................................ 20,194 * * Lowell E. Sears(10)......................................... 27,188 * * Jerry A. Weisbach, Ph.D.(11)................................ 13,944 * * All current directors and executive officers as a group (10 persons)(12)....................................... 1,189,908 14.0 12.2
- ----------- * Less than one percent. (1) Gives effect to the shares of Common Stock issuable within 60 days of January 6, 1997 upon the exercise of all options and other rights beneficially owned by the indicated stockholders on that date. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned. Beneficial ownership is determined in accordance with the rules of the Commission and includes voting and investment power with respect to shares. (2) Includes (i) 75,624 shares of Common Stock owned by Dr. Rosenwald's wife and (ii) 30,250 shares of Common Stock held by Dr. Rosenwald's wife as custodian for Dr. Rosenwald's children, as to which Dr. Rosenwald disclaims beneficial ownership. (3) Includes (i) 15,758 shares of Common Stock owned by Dr. Roth's daughter and (ii) 29,901 shares of Common Stock issuable upon exercise of stock options. (4) Includes 82,500 shares of Common Stock issuable upon exercise of stock options. (5) Includes 40,500 shares of Common Stock issuable upon exercise of stock options. (6) Includes 30,366 shares of Common Stock issuable upon exercise of stock options. (7) Includes 15,500 shares of Common Stock issuable upon exercise of stock options. (8) Includes 27,276 shares of Common Stock issuable upon exercise of stock options. (9) Includes 11,860 shares of Common Stock issuable upon exercise of stock options. (10) Includes 9,264 shares of Common Stock issuable upon exercise of stock options. Also includes 17,924 shares of Common Stock owned by the Sears Family Living Trust, of which Mr. Sears is the trustee. (11) Includes 11,860 shares of Common Stock issuable upon exercise of stock options. (12) See notes (2) through (11). 55 DESCRIPTION OF CAPITAL STOCK Upon the consummation of this offering, the Company's authorized capital stock will consist of 30,000,000 shares of Common Stock, par value $0.01 per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value $0.01 per share ("Preferred Stock"). Common Stock At January 6, 1997, there were 8,218,607 shares of Common Stock outstanding and held of record by approximately 450 stockholders. At January 6, 1997, there were options outstanding to purchase an aggregate of 1,199,643 shares of Common Stock with a weighted average exercise price of $10.04. Each holder of Common Stock is entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Except as required by applicable law, the holders of the Common Stock will vote together with the holders of each series of outstanding Preferred Stock, who vote on an as converted basis. There is no cumulative voting for the election of directors and, as a consequence, minority stockholders will not be able to elect directors on the basis of their votes alone. Subject to preferences that may be applicable to the then outstanding shares of Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." Upon the liquidation, dissolution or winding up of the Company, the holders of Common Stock then outstanding are entitled to share in the Company's assets remaining after the payment of liabilities and the satisfaction of any liquidation preference granted to the holders of any outstanding shares of Preferred Stock. All shares of Common Stock outstanding and to be outstanding upon completion of this offering are and will be fully paid and nonassessable. Preferred Stock The Company is authorized to issue up to 5,000,000 shares of Preferred Stock with such voting rights, designations, preferences and rights and such qualifications, limitations or restrictions thereof, as may be determined by the Board of Directors. Although the Company has no current plans to issue any shares of Preferred Stock, the issuance of Preferred Stock or of rights to purchase Preferred Stock could be used to discourage an unsolicited acquisition proposal. In addition, the possible issuance of Preferred Stock could discourage a proxy contest, make more difficult the acquisition of a substantial block of the Company's Common Stock or limit the price that investors would be willing to pay in the future for shares of the Company's Common Stock. Such Preferred Stock could be issued with voting and conversion rights that could adversely affect the voting power of holders of the Common Stock. The Company believes that the Preferred Stock provides the Company with increased flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. Having such authorized shares available for issuance allows the Company to issue shares of Preferred Stock without the expense and delay of holding a special stockholders' meeting. The authorized shares of Preferred Stock, as well as shares of Common Stock, will be available for issuance without further action by stockholders of the Company, unless such action is required by applicable law or the rules of any stock exchange or quotation system on which the Company's securities may be listed or quoted. Common Stock Warrants The Company has warrants outstanding for the purchase of 147,690 shares of Common Stock with a weighted average exercise price of $11.18 per share. Warrants to purchase 8,334 shares of Common Stock at $19.50 per share were issued in June 1993 to each of Aberlyn Capital Management Limited Partnership ("ACMLP") and Aberlyn Holding Company, Inc. ("AHC," and together with ACMLP, "Aberlyn") in connection with a Master Lease Agreement and in consideration of certain consulting services to the Company. Such warrants are immediately exercisable and expire in June 1998. Warrants to purchase 3,536 56 shares of Common Stock at $14.85 per share were issued in February 1994 to each of ACMLP and AHC in connection with a Master Lease Agreement and in consideration of certain consulting services to the Company. Such warrants are immediately exercisable and expire in February 1999. Warrants to purchase an aggregate of 119,961 shares of Common Stock at $9.45 per share were issued in July 1994 to various individuals in connection with the offering of Series E Stock, of which warrants to purchase 6,538 shares were exercised during 1996. The remaining warrants issued in connection with the offering of Series E Stock are immediately exercisable and expire in July 1999. Warrants to purchase 10,527 shares of Common Stock at $14.25 per share were issued in June 1995 to Financing for Science International, Inc. ("FSI") in connection with the equipment lease agreement entered into with FSI, which warrants are immediately exercisable and expire in June 2002. The exercise price and number of shares of Common Stock issuable upon exercise of the aforementioned warrants are subject to adjustment upon the occurrence of certain events, including stock splits, stock dividends, reorganization, recapitalization, merger, or sale. The warrants and shares of Common Stock issuable upon exercise of the warrants are subject to certain registration rights as described under "Registration Rights of Certain Holders" below. Registration Rights of Certain Holders After the consummation of this offering, the holders (the "Holders") of 3,236,423 shares of Common Stock and warrants to purchase 147,690 shares of Common Stock (the "Registrable Securities") or their transferees, will be entitled to certain registration rights with respect to the Registrable Securities. These rights are provided under the terms of the Registrable Securities and agreements between the Company and the Holders. Such agreements and Registrable Securities provide that (i) Holders of 2,523,921 shares of Common Stock and warrants to purchase 123,950 shares of Common Stock are entitled, commencing 18 months after the date of the closing of the Company's initial public offering in February 1996, to require the Company to use its best efforts to register their Registrable Securities under the Securities Act and (ii) Holders of 195,591 shares of Common Stock and warrants to purchase 23,740 shares of Common Stock are entitled, commencing one year after the date of the closing of the Company's initial public offering, to require the Company to use its best efforts to register their Registrable Securities under the Securities Act (the "Demand Registration Rights"), provided, however, that Holders of 1,725,018 of these shares will be restricted from exercising such rights until 180 days after the date of this Prospectus. In addition, pursuant to these agreements, Holders of 3,236,423 shares of Common Stock and warrants to purchase 147,690 shares of Common Stock are entitled, subject to certain limitations, to require the Company to use its best efforts to include their Registrable Securities in future registration statements filed by the Company under the Securities Act (the "Piggyback Registration Rights"). Where applicable to this offering, the Company intends to obtain waivers of such Piggyback Registration Rights prior to effectiveness. The Holders of 1,725,018 shares of Common Stock also are entitled, upon the request of any such Holder, subject to certain limitations, to require the Company to use its best efforts to register their shares of Common Stock on Form S-3 once the Company is eligible to use a Form S-3 in connection with such registrations (the "S-3 Registration Rights"), provided, however, that Holders of these shares will be restricted from exercising such rights until 180 days after the date of this Prospectus. Registration of shares pursuant to the exercise of Demand Registration Rights, S-3 Registration Rights or Piggyback Registration Rights under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of such registration. "Shares Eligible for Future Sale." Delaware Takeover Statute The Company is subject to Section 203 of the Delaware General Corporation Law ("Section 203") which, subject to certain exceptions, prohibits a Delaware corporation from engaging in certain business combinations with any "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting 57 stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. Transfer Agent and Registrar The Transfer Agent and Registrar for the Common Stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. 58 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after the offering, or the possibility of such sales occurring, could adversely affect prevailing market prices for the Common Stock or the future ability of the Company to raise capital through an offering of equity securities. After the offering, the Company will have 9,468,607 shares of Common Stock outstanding. Of these shares, the 1,250,000 shares offered hereby and an additional 6,212,809 shares of Common Stock outstanding will be freely tradable in the public market without restriction under the Securities Act, unless such shares are held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. However, approximately 978,286 of these shares are subject to a stockholders agreement whereby each holder who has signed the stockholders agreement has agreed, until December 30, 1997, not to offer, sell or otherwise dispose of, directly or indirectly, more than 2% per month, on a cumulative basis, of the aggregate amount of shares held by such holder as of the Company's initial public offering in February 1996, subject to certain conditions. The remaining 2,005,798 shares of Common Stock outstanding upon completion of the offering will be "restricted securities" as that term is defined in Rule 144 ("Restricted Shares"). The Restricted Shares were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act. Restricted Shares may be sold in the public market only if they are registered or if they qualify for an exemption from registration under the Securities Act, including an exemption under Rule 144, which is summarized below. Pursuant to "lock-up" agreements, all of the Company's executive officers and directors, who collectively hold 927,490 of such Restricted Shares, have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any such shares for a period of 90 days from the date of this Prospectus without the prior written consent of Vector Securities International, Inc. The Company also has agreed that it will not offer, sell or otherwise dispose of Common Stock for a period of 90 days from the date of this Prospectus, other than pursuant to outstanding warrants, existing stock option and employee stock purchase plans, and in connection with potential corporate collaborations and acquisitions, without the prior written consent of Vector Securities International, Inc. Upon termination of such lock-up agreements, approximately 908,906 of the "locked-up" Restricted Shares will be eligible for immediate sale, beginning 90 days after the date of this Prospectus, in the public market subject to certain volume, manner of sale and other limitations under Rule 144. Vector Securities International, Inc. may, at its sole discretion and at any time without notice, release all or any portion of the shares subject to such lock-up agreements. The Commission has recently proposed amendments to Rule 144 and Rule 144(k) that would permit resale of restricted shares under Rule 144 after a one-year, rather than a two-year holding period, subject to compliance with the other provisions of Rule 144, and would permit resale of restricted shares by non-affiliates under Rule 144(k) after a two-year, rather than a three-year holding period. Adoption of such amendments could result in resale of Restricted Shares sooner than would be the case under Rule 144 and Rule 144(k) as currently in effect. In general, under Rule 144 as currently in effect, a person (or persons whose shares of the Company are aggregated) who has beneficially owned Restricted Shares for at least two years (including the holding period of any prior owner who is not an affiliate of the Company) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (approximately 94,686 shares immediately after the offering), or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least three years 59 (including the holding period of any prior owner who is not an affiliate of the Company) is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. As of January 6, 1997, options to purchase a total of 1,199,643 shares of Common Stock were outstanding, of which options to purchase 415,694 shares were exercisable. Of such shares subject to options, approximately 708,963 shares are subject to lock-up agreements for a period of 90 days from the date of this Prospectus. As of January 6, 1997, an additional 355,098 shares were available for future option grants and employee stock purchases under the Company's stock option and employee stock purchase plans. All of the shares issued, issuable or reserved for issuance under the Company's stock option and employee stock purchase plans or upon the exercise of options issued or issuable under such plans are covered by an effective registration statement. Such shares may be sold in the open market, subject, in the case of certain holders, to the Rule 144 limitations applicable to affiliates, the above-referenced lock-up agreements and vesting restrictions imposed by the Company. After the closing of the offering, holders of an aggregate of 3,236,423 shares of Common Stock will be entitled to certain rights with respect to the registration of such shares under the Securities Act. In addition, the 147,690 shares issuable upon exercise of outstanding warrants have similar registration rights. See "Description of Capital Stock -- Registration Rights of Certain Holders," "Risk Factors -- Shares Eligible for Future Sale" and "Risk Factors -- Possible Volatility of Common Stock Price; Dilution." 60 PLAN OF DISTRIBUTION The Common Stock is being offered for sale by the Company on a best efforts, all or nothing, basis to selected institutional investors. Vector Securities International, Inc., the Placement Agent, has been retained pursuant to a placement agency agreement to act as the exclusive agent for the Company in connection with the arrangement of offers and sales of the Common Stock on a best efforts basis. The Placement Agent is not obligated to and does not intend to itself take (or purchase) any of the shares of Common Stock. It is anticipated that the Placement Agent will obtain indications of interest from potential investors for the amount of the offering and that effectiveness of the Registration Statement will not be requested until indications of interest have been received for the amount of the offering. No investor funds will be accepted until indications of interest have been received for the amount of the offering and no investor funds will be accepted prior to effectiveness of the Registration Statement. Confirmations and definitive prospectuses will be distributed to all investors at the time of pricing, informing investors of the closing date, which will be scheduled for three business days after pricing. After the Registration Statement is declared effective and prior to the closing date, all investor funds will promptly be placed in escrow with Citibank, N.A., as Escrow Agent, in an escrow account established for the benefit of the investors. The Escrow Agent will invest such funds in accordance with Rule 15c2-4 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Prior to the closing date, the Escrow Agent will advise the Company that payment for the purchase of the shares of Common Stock offered hereby has been affirmed by the investors and that the investors have deposited the requisite funds in the escrow account at the Escrow Agent. Upon receipt of such notice, the Company will deposit with DTC the shares of Common Stock to be credited to the respective accounts of the investors. Investor funds, together with interest thereon, if any, will be collected by the Company through the facilities of the Escrow Agent on the scheduled closing date. The offering will not continue after the closing date. In the event that investor funds are not received in the full amount necessary to satisfy the requirements of the offering, all funds deposited in the escrow account will promptly be returned. The Company has agreed (i) to pay to the Placement Agent 5.75% of the proceeds of this offering as the selling commission, (ii) to indemnify the Placement Agent against certain liabilities, including liabilities under the Securities Act, and (iii) to reimburse the Placement Agent for up to $80,000 for certain expenses incurred by it in connection with the offering. Paramount, a NASD member firm, will act as a sub-placement agent in connection with the sale of the Common Stock for which it will receive a fee of 2.875% of the proceeds of the sales arranged by it, up to a maximum of $287,500. See "Certain Transactions." The Company has agreed not to issue, and certain officers and directors of the Company have agreed that they will not, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable for, or any rights to purchase or acquire, Common Stock for a period of 90 days from the date of this Prospectus, without the prior written consent of Vector Securities International, Inc. 61 LEGAL MATTERS The validity of the shares of Common Stock being offered hereby will be passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain legal matters in connection with this offering will be passed upon for the Placement Agent by Stroock & Stroock & Lavan, New York, New York. EXPERTS The financial statements of the Company as of December 31, 1994 and 1995, for the years ended December 31, 1993, 1994, and 1995, and for the period from inception (January 17, 1989) to December 31, 1995, included in this Prospectus and in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company is subject to the reporting requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the following regional offices of the Commission: Seven World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material also may be accessed electronically by means of the Commission's home page on the Internet (http://www.sec.gov). In addition, such reports, proxy statements and other information concerning the Company can be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-1, including amendments thereto, under the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which were omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and, in each instance, if such contract or document is filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description, each such statement being qualified in all respects by such reference to such exhibit. The Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's Public Reference Section, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of all or any part of such material may be obtained from the Commission at its principal office above after payment of fees prescribed by the Commission. 62 NEOSE TECHNOLOGIES, INC. INDEX TO FINANCIAL STATEMENTS PAGE ---- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS........................... F-2 BALANCE SHEETS..................................................... F-3 STATEMENTS OF OPERATIONS........................................... F-4 STATEMENTS OF STOCKHOLDERS' EQUITY................................. F-5 STATEMENTS OF CASH FLOWS........................................... F-6 NOTES TO FINANCIAL STATEMENTS...................................... F-8 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Neose Technologies, Inc.: We have audited the accompanying balance sheets of Neose Technologies, Inc. (a Delaware corporation in the development stage), formerly Neose Pharmaceuticals, Inc., as of December 31, 1994 and 1995, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and for the period from inception (January 17, 1989) to December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Neose Technologies, Inc. as of December 31, 1994 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and for the period from inception (January 17, 1989) to December 31, 1995, in conformity with generally accepted accounting principles. Arthur Andersen LLP Philadelphia, Pa., February 22, 1996 F-2 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) BALANCE SHEETS
DECEMBER 31, ------------------------------ SEPTEMBER 30, 1994 1995 1996 -------------- -------------- -------------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents................................. $ 5,362,830 $ 11,189,001 $ 35,717,379 Restricted funds.......................................... 353,920 148,300 110,648 Prepaid expenses and other................................ 56,651 118,680 252,878 -------------- -------------- -------------- Total current assets................................... 5,773,401 11,455,981 36,080,905 PROPERTY AND EQUIPMENT, net................................. 2,199,933 2,685,613 2,935,777 DEFERRED FINANCING COSTS.................................... -- 409,003 -- RESTRICTED FUNDS............................................ 219,199 73,066 -- OTHER ASSETS................................................ 3,400 15,049 15,049 -------------- -------------- -------------- $ 8,195,933 $ 14,638,712 $ 39,031,731 -------------- -------------- -------------- -------------- -------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt......................... $ 369,254 $ 764,552 $ 753,901 Accounts payable.......................................... 218,156 301,023 311,102 Accrued compensation...................................... 369,294 191,318 208,000 Other accrued expenses.................................... 98,587 297,605 130,582 Deferred revenue.......................................... -- 41,667 354,167 -------------- -------------- -------------- Total current liabilities.............................. 1,055,291 1,596,165 1,757,752 OTHER LIABILITIES........................................... 53,060 74,986 79,359 LONG-TERM DEBT.............................................. 736,035 1,234,527 682,500 COMMITMENTS (Note 9) STOCKHOLDERS' EQUITY: Convertible preferred stock............................... 44,762 57,802 -- Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued................................ -- -- -- Common stock, $.01 par value, 30,000,000 shares authorized; 2,523,250, 3,145,256 and 8,203,616 shares issued and outstanding................................. 25,232 31,453 82,036 Additional paid-in capital................................ 20,597,026 31,385,927 60,704,631 Deferred compensation..................................... -- (359,900) (292,419) Deficit accumulated during the development stage...................................... (14,315,473) (19,382,248) (23,982,128) -------------- -------------- -------------- Total stockholders' equity............................. 6,351,547 11,733,034 36,512,120 -------------- -------------- -------------- $ 8,195,933 $ 14,638,712 $ 39,031,731 -------------- -------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these statements. F-3 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) STATEMENTS OF OPERATIONS
PERIOD FROM PERIOD FROM INCEPTION INCEPTION NINE MONTHS ENDED (JANUARY 17, (JANUARY 17, YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1989) TO 1989) TO --------------------------------------- ------------------------- DECEMBER 31 SEPTEMBER 30, 1993 1994 1995 1995 1996 1995 1996 ----------- ----------- ----------- ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) REVENUES FROM COLLABORATIVE AGREEMENTS................... $ 2,600,000 $ 47,500 $ 1,198,863 $ 875,833 $ 1,006,100 $ 3,846,363 $ 4,852,463 ----------- ----------- ----------- ----------- ----------- ------------ ------------ OPERATING EXPENSES: Research and development..... 3,399,444 5,003,780 4,732,788 3,425,864 4,899,734 16,476,557 21,376,291 General and administrative... 1,576,864 1,318,884 1,665,320 1,171,781 1,788,343 6,688,728 8,477,071 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Total operating expenses... 4,976,308 6,322,664 6,398,108 4,597,645 6,688,077 23,165,285 29,853,362 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Operating loss............. (2,376,308) (6,275,164) (5,199,245) (3,721,812) (5,681,977) (19,318,922) (25,000,899) INTEREST INCOME................ 59,534 257,264 322,309 198,910 1,278,245 815,985 2,094,230 INTEREST EXPENSE............... (106,143) (194,349) (189,839) (126,116) (196,148) (879,311) (1,075,459) ----------- ----------- ----------- ----------- ----------- ------------ ------------ NET LOSS....................... $(2,422,917) $(6,212,249) $(5,066,775) $(3,649,018) $(4,599,880) $(19,382,248) $(23,982,128) ----------- ----------- ----------- ----------- ----------- ------------ ------------ ----------- ----------- ----------- ----------- ----------- ------------ ------------ PRO FORMA NET LOSS PER SHARE... $ (1.06) $ (0.60) ----------- ----------- ----------- ----------- PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING............ 4,761,000 7,728,000 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these statements. F-4 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL DEFERRED ---------------------- --------------------- PAID-IN COMPEN- SHARES AMOUNT SHARES AMOUNT CAPITAL SATION --------- ----------- --------- ---------- ----------- ----------- BALANCE, JANUARY 17, 1989 (inception)............ -- $ -- -- $ -- $ -- $ -- Initial issuance of common stock................ -- -- 1,302,000 13,020 (3,020) -- Shares issued for consulting and licensing...... -- -- 325,500 3,255 (1,255) -- Sale of common stock............................ -- -- 133,334 1,333 1,267 -- Shares issued pursuant to antidilutive agreements.................................... -- -- 2,864 29 (29) -- Net loss........................................ -- -- -- -- -- -- --------- ----------- --------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1990....................... -- -- 1,763,698 17,637 (3,037) -- Sale of Series A preferred stock................ 100,000 1,000 -- -- 269,000 -- Sale of Series B preferred stock................ 1,416,695 14,167 -- -- 4,195,952 -- Sale of common stock............................ -- -- 420,284 4,203 33,619 (7,264) Shares issued for consulting services........... -- -- 7,584 76 606 -- Shares issued pursuant to antidilutive agreements.................................... -- -- 137,193 1,372 (1,372) -- Capital contribution............................ -- -- -- -- 9,971 -- Dividends on Series A preferred stock........... -- -- -- -- (18,000) -- Net loss........................................ -- -- -- -- -- -- --------- ----------- --------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1991....................... 1,516,695 15,167 2,328,759 23,288 4,486,739 (7,264) Shares issued pursuant to exercise of stock options....................................... -- -- 8,334 83 16,167 -- Sale of Series C preferred stock................ 235,295 2,353 -- -- 1,847,647 -- Sale of Series D preferred stock................ 25,000 250 -- -- 199,750 -- Shares issued pursuant to redemption of notes payable....................................... -- -- 24,120 241 462,165 -- Exercise of stock warrants pursuant to redemption of notes payable................... -- -- 83,339 833 220,609 -- Shares issued pursuant to exercise of warrants...................................... -- -- 12,501 125 34,562 -- Dividends on Series A preferred stock........... -- -- -- -- (36,000) -- Sale of common stock............................ -- -- 16,989 170 295,458 -- Amortization of deferred compensation........... -- -- -- -- -- 4,843 Net loss........................................ -- -- -- -- -- -- --------- ----------- --------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1992....................... 1,776,990 17,770 2,474,042 24,740 7,527,097 (2,421) Sale of Series D preferred stock................ 250,000 2,500 -- -- 1,997,500 -- Dividends on Series A preferred stock........... -- -- -- -- (36,000) -- Shares issued to the University of Pennsylvania.................................. -- -- 3,482 35 (35) -- Shares issued to Series A preferred stockholder in lieu of cash dividends..................... -- -- 924 9 17,991 -- Amortization of deferred compensation........... -- -- -- -- -- 2,421 Net loss........................................ -- -- -- -- -- -- --------- ----------- --------- ----------- --------- ----------- BALANCE, DECEMBER 31, 1993....................... 2,026,990 20,270 2,478,448 24,784 9,506,553 -- Sales of Series D preferred stock............... 250,000 2,500 -- -- 1,997,500 -- Shares issued pursuant to exercise of stock options....................................... -- -- 35,328 353 13,713 -- Sale of Series E preferred stock................ 2,199,238 21,992 -- -- 9,043,355 -- Dividends on Series A preferred stock........... -- -- -- -- (18,000) -- Shares issued to Series A preferred stockholder in lieu of cash dividends..................... -- -- 9,474 95 53,905 -- Net loss........................................ -- -- -- -- -- -- --------- ----------- --------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1994....................... 4,476,228 44,762 2,523,250 25,232 20,597,026 -- Sale of Series F preferred stock................ 2,720,656 27,207 -- -- 10,064,668 -- Dividends on Series A preferred stock........... -- -- -- -- (36,000) -- Shares issued to Series A preferred stockholder in lieu of cash dividends..................... -- -- 3,158 32 17,968 -- Shares issued pursuant to exercise of stock options....................................... -- -- 15,638 156 30,525 -- Shares issued to employees in lieu of cash compensation.................................. -- -- 7,810 78 44,395 -- Shares issued pursuant to exercise of warrants...................................... -- -- 99,751 998 298,235 -- Deferred compensation related to grant of stock options....................................... -- -- -- -- 359,900 (359,900) Shares issued to stockholder in connection with the offering.................................. -- -- 23,400 234 (234) -- Conversion of Series B preferred stock into common stock.................................. (1,416,695) (14,167) 472,249 4,723 9,444 -- Net loss........................................ -- -- -- -- -- -- --------- ----------- --------- ---------- ----------- ----------- BALANCE, DECEMBER 31, 1995....................... 5,780,189 57,802 3,145,256 31,453 31,385,927 (359,900) Sale of common stock in initial public offering, net of offering costs (unaudited)............. -- -- 2,587,500 25,875 29,101,286 -- Conversion of Series A, C, D, E and F preferred stock into common stock (unaudited)........... (5,780,189) (57,802) 2,410,702 24,107 33,695 -- Shares issued pursuant to exercise of stock options (unaudited)........................... -- -- 52,001 520 141,974 -- Shares issued pursuant to exercise of warrants (unaudited)................................... -- -- 2,526 25 (25) -- Shares issued pursuant to Employee Stock Purchase Plan (unaudited)..................... -- -- 5,631 56 59,774 -- Dividends on Series A Preferred Stock (unaudited)................................... -- -- -- -- (18,000) -- Amortization of deferred compensation (unaudited)................................... -- -- -- -- -- 67,481 Net loss (unaudited)............................ -- -- -- -- -- -- --------- ----------- --------- ---------- ----------- ----------- BALANCE, SEPTEMBER 30, 1996 (unaudited).......... -- $ -- 8,203,616 $ 82,036 $60,704,631 $ (292,419) --------- ----------- --------- ---------- ----------- ----------- --------- ----------- --------- ---------- ----------- ----------- DEFICIT ACCUMULATED DURING THE TOTAL DEVELOPMENT STOCKHOLDERS' STAGE EQUITY ----------- ------------- BALANCE, JANUARY 17, 1989 (inception)............ $ -- $ -- Initial issuance of common stock................ -- 10,000 Shares issued for consulting and licensing...... -- 2,000 Sale of common stock............................ -- 2,600 Shares issued pursuant to antidilutive agreements.................................... -- -- Net loss........................................ (460,307) (460,307) ----------- ----------- BALANCE, DECEMBER 31, 1990....................... (460,307) (445,707) Sale of Series A preferred stock................ -- 270,000 Sale of Series B preferred stock................ -- 4,210,119 Sale of common stock............................ -- 30,558 Shares issued for consulting services........... -- 682 Shares issued pursuant to antidilutive agreements.................................... -- -- Capital contribution............................ -- 9,971 Dividends on Series A preferred stock........... -- (18,000) Net loss........................................ (1,865,026) (1,865,026) ----------- ----------- BALANCE, DECEMBER 31, 1991....................... (2,325,333) 2,192,597 Shares issued pursuant to exercise of stock options....................................... -- 16,250 Sale of Series C preferred stock................ -- 1,850,000 Sale of Series D preferred stock................ -- 200,000 Shares issued pursuant to redemption of notes payable....................................... -- 462,406 Exercise of stock warrants pursuant to redemption of notes payable................... -- 221,442 Shares issued pursuant to exercise of warrants...................................... -- 34,687 Dividends on Series A preferred stock........... -- (36,000) Sale of common stock............................ -- 295,628 Amortization of deferred compensation........... -- 4,843 Net loss........................................ (3,354,974) (3,354,974) ----------- ----------- BALANCE, DECEMBER 31, 1992....................... (5,680,307) 1,886,879 Sale of Series D preferred stock................ -- 2,000,000 Dividends on Series A preferred stock........... -- (36,000) Shares issued to the University of Pennsylvania.................................. -- -- Shares issued to Series A preferred stockholder in lieu of cash dividends..................... -- 18,000 Amortization of deferred compensation........... -- 2,421 Net loss........................................ (2,422,917) (2,422,917) ----------- ----------- BALANCE, DECEMBER 31, 1993....................... (8,103,224) 1,448,383 Sales of Series D preferred stock............... -- 2,000,000 Shares issued pursuant to exercise of stock options....................................... -- 14,066 Sale of Series E preferred stock................ -- 9,065,347 Dividends on Series A preferred stock........... -- (18,000) Shares issued to Series A preferred stockholder in lieu of cash dividends..................... -- 54,000 Net loss........................................ (6,212,249) (6,212,249) ----------- ----------- BALANCE, DECEMBER 31, 1994....................... (14,315,473) 6,351,547 Sale of Series F preferred stock................ -- 10,091,875 Dividends on Series A preferred stock........... -- (36,000) Shares issued to Series A preferred stockholder in lieu of cash dividends..................... -- 18,000 Shares issued pursuant to exercise of stock options....................................... -- 30,681 Shares issued to employees in lieu of cash compensation.................................. -- 44,473 Shares issued pursuant to exercise of warrants...................................... -- 299,233 Deferred compensation related to grant of stock options....................................... -- -- Shares issued to stockholder in connection with the offering.................................. -- -- Conversion of Series B preferred stock into common stock.................................. -- -- Net loss........................................ (5,066,775) (5,066,775) ----------- ----------- BALANCE, DECEMBER 31, 1995....................... (19,382,248) 11,733,034 Sale of common stock in initial public offering, net of offering costs (unaudited)............. -- 29,127,161 Conversion of Series A, C, D, E and F preferred stock into common stock (unaudited)........... -- -- Shares issued pursuant to exercise of stock options (unaudited)........................... -- 142,494 Shares issued pursuant to exercise of warrants (unaudited)................................... -- -- Shares issued pursuant to Employee Stock Purchase Plan (unaudited)..................... -- 59,830 Dividends on Series A Preferred Stock (unaudited)................................... -- (18,000) Amortization of deferred compensation (unaudited)................................... -- 67,481 Net loss (unaudited)............................ (4,599,880) (4,599,880) ----------- ----------- BALANCE, SEPTEMBER 30, 1996 (unaudited)..........($23,982,128) $36,512,120 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these statements. F-5 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) STATEMENTS OF CASH FLOWS
PERIOD FROM PERIOD FROM INCEPTION INCEPTION NINE MONTHS (JANUARY 17, (JANUARY 17, YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, 1989) TO 1989) TO ------------------------------------- ------------------------ DECEMBER 31, SEPTEMBER 30, 1993 1994 1995 1995 1996 1995 1996 ----------- ----------- ----------- ----------- ----------- ------------ ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss..................... $(2,422,917) $(6,212,249) $(5,066,775) $(3,649,018) $(4,599,880) $(19,382,248) $(23,982,128) Adjustments to reconcile net loss to cash used in operating activities -- Depreciation and amortization............. 194,454 309,303 389,331 278,244 484,467 1,175,595 1,660,062 Common stock issued for non-cash charges and other.................... 2,421 -- -- -- -- 34,962 34,962 Changes in operating assets and liabilities -- Restricted funds......... 197,338 (112,466) 351,753 314,850 110,718 (221,366) (110,648) Prepaid expenses and other.................. (14,169) (20,686) (62,030) (65,459) (134,198) (118,681) (252,879) Other assets............. 1,500 416 (11,649) (11,649) -- (15,049) (15,049) Accounts payable......... 145,926 (112,219) 82,868 179,944 10,079 301,024 311,103 Accrued compensation..... 219,418 149,876 (135,880) (177,197) 16,682 13,996 30,678 Other accrued expenses... (32,754) 84,794 201,394 (5,287) (167,023) 519,399 352,376 Deferred revenue......... -- -- 41,667 250,000 312,500 41,667 354,167 Other liabilities........ 186,666 (133,606) 21,926 17,953 4,373 74,986 79,359 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Net cash used in operating activities... (1,522,117) (6,046,837) (4,187,395) (2,867,619) (3,962,282) (17,575,715) (21,537,997) ----------- ----------- ----------- ----------- ----------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.................. (490,894) (975,175) (875,010) (613,072) (667,150) (3,103,307) (3,770,457) Purchase of short-term investments................ -- -- -- -- -- (3,177,000) (3,177,000) Proceeds from sale of short- term investments........... -- -- -- -- -- 3,177,000 3,177,000 Proceeds from sale-leaseback of equipment............... -- -- 1,382,027 829,589 -- 1,382,027 1,382,027 ----------- ----------- ----------- ----------- ----------- ------------ ------------ Net cash provided by (used in) investing activities............... (490,894) (975,175) 507,017 216,517 (667,150) (1,721,280) (2,388,430) ----------- ----------- ----------- ----------- ----------- ------------ ------------
The accompanying notes are an integral part of these statements. F-6 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) STATEMENTS OF CASH FLOWS (CONTINUED)
PERIOD FROM PERIOD FROM INCEPTION INCEPTION NINE MONTHS ENDED (JANUARY 17, (JANUARY 17, YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1989) TO 1989) TO ---------------------------------- ----------------------- DECEMBER 31, SEPTEMBER 30, 1993 1994 1995 1995 1996 1995 1996 ---------- ---------- ----------- ---------- ----------- ------------ ------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of notes................... $ -- $ -- $ -- $ -- $ -- $ 1,225,000 $ 1,225,000 Repayment of notes payable... (150,000) -- -- -- -- (565,250) (565,250) Proceeds from issuance of short-term debt............ -- -- -- -- -- 290,000 290,000 Repayment of short-term debt....................... -- -- -- -- -- (290,000) (290,000) Proceeds from issuance of long-term debt............. 1,010,869 100,000 -- -- -- 1,110,869 1,110,869 Repayment of long-term debt....................... (167,943) (294,324) (488,237) (326,146) (562,678) (998,267) (1,560,945) Proceeds from issuance of preferred stock, net....... 2,000,000 11,065,347 10,091,875 5,352,583 -- 29,497,297 29,497,297 Proceeds from issuance of common stock, net.......... -- -- -- -- 59,830 320,835 380,665 Proceeds from Initial Public Offering, net.............. -- -- (409,003) -- 29,536,164 (409,003) 29,127,161 Proceeds from exercise of warrants, net.............. -- -- 299,233 37,500 -- 333,920 333,920 Proceeds from exercise of stock options.............. -- 14,066 30,681 5,728 142,494 60,997 203,491 Dividends paid............... -- -- (18,000) (18,000) (18,000) (54,000) (72,000) Issuance costs resulting from conversion of notes to common stock............... -- -- -- -- -- (36,402) (36,402) ---------- ---------- ----------- ---------- ----------- ----------- ------------ Net cash provided by financing activities..... 2,692,926 10,885,089 9,506,549 5,051,665 29,157,810 30,485,996 59,643,806 ---------- ---------- ----------- ---------- ----------- ----------- ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS......... 679,915 3,863,077 5,826,171 2,400,563 24,528,378 11,189,001 35,717,379 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 819,838 1,499,753 5,362,830 5,362,830 11,189,001 -- -- ---------- ---------- ----------- ---------- ----------- ----------- ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $1,499,753 $5,362,830 $11,189,001 $7,763,393 $35,717,379 $11,189,001 $ 35,717,379 ---------- ---------- ----------- ---------- ----------- ----------- ------------ ---------- ---------- ----------- ---------- ----------- ----------- ------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest....... $ 128,643 $ 158,575 $ 200,008 $ 141,967 $ 203,125 $ 793,193 $ 996,318 ---------- ---------- ----------- ---------- ----------- ----------- ------------ ---------- ---------- ----------- ---------- ----------- ----------- ------------ Noncash financing activities -- Issuance of common stock for dividends............ $ 18,000 $ 54,000 $ 18,000 $ 18,000 $ -- $ 90,000 $ 90,000 ---------- ---------- ----------- ---------- ----------- ----------- ------------ ---------- ---------- ----------- ---------- ----------- ----------- ------------ Issuance of common stock to employees in lieu of cash compensation........ $ -- $ -- $ 44,473 $ 44,473 $ -- $ 44,473 $ 44,473 ---------- ---------- ----------- ---------- ----------- ----------- ------------ ---------- ---------- ----------- ---------- ----------- ----------- ------------
The accompanying notes are an integral part of these statements. F-7 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 1. BACKGROUND: Neose Technologies, Inc., a development-stage company, formerly Neose Pharmaceuticals, Inc. (the Company), is focused on the enzymatic synthesis of complex carbohydrates and discovers and develops complex carbohydrates for nutritional and pharmaceutical uses. The Company's products in development include breast milk oligosaccharide additives to infant formula, and pharmaceuticals to treat various bacterial infections, such as gastrointestinal and pediatric ear infections and to prevent xenotransplant rejection. The Company has developed proprietary technologies that it believes enables, for the first time, the rapid and cost-efficient production of naturally-occurring oligosaccharides. The Company's initial public offering of common stock (the 'Offering') closed on February 22, 1996. The Company sold 2,587,500 shares, including the exercise of the underwriters' over-allotment option on March 4, 1996, of common stock at a public offering price of $12.50 per share. The net proceeds to the Company from the Offering after the underwriting discount and payment of offering expenses were $29,127,000. In connection with the Offering all outstanding shares of Series A, C, D, E, and F Convertible Preferred Stock converted into 2,410,702 shares of common stock (Note 6). The Company was incorporated in January 1989, and commenced operations in August 1990. Since its inception, the Company has derived substantially all of its revenues from its strategic alliance with Abbott Laboratories (Note 3); no product revenues have been generated to date. The Company has incurred losses since its inception. The Company anticipates incurring additional losses over at least the next several years. Such losses may fluctuate significantly from quarter to quarter and are expected to increase as the Company expands its research and development activities. Substantial financing will be needed by the Company to fund its operations and to commercially develop its products. There is no assurance that such financing will be available when needed. Operations of the Company are subject to certain risks and uncertainties including, among others, uncertainty of product development, technological uncertainty, dependence on Abbott Laboratories and other collaborative partners, uncertainty regarding patents and proprietary rights, substantial competition, risk of technological obsolescence, comprehensive government regulations, no assurance of product approval, no commercial manufacturing, marketing, or sales capability or experience, limited clinical trial experience, and dependence on key personnel. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Interim Financial Statements The financial statements as of September 30, 1996 and for the nine months ended September 30, 1995 and 1996 and the period from inception (January 17, 1989) to September 30, 1996 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial condition and results of operations for these interim periods. The results of operations for the nine months ended September 30, 1996 are not necessarily indicative of the results to be expected for any other interim period or the entire year. F-8 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED) Cash and Cash Equivalents The Company considers all highly liquid investments consisting of purchases with an original maturity of three months or less to be cash equivalents. Cash equivalents at December 31, 1995 and September 30, 1996 consist of $10,114,000 and $35,144,000, respectively of overnight repurchase agreements secured by United States Treasury Notes. Property and Equipment Property and equipment are stated at cost. Property and equipment capitalized under capital leases are recorded at the present value of the minimum lease payments due over the lease term. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets or the lease term, whichever is shorter. The Company uses lives of two to seven years for office, research, and manufacturing equipment. Research and Development Research and development costs are charged to expense as incurred. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, 'Accounting for Income Taxes,' the objective of which is to recognize the amount of current and deferred income taxes payable or refundable at the date of the financial statements as a result of all events that have been recognized in the financial statements as measured by enacted tax laws. At December 31, 1995, the Company had net operating loss carryforwards for federal income tax purposes of approximately $5,953,000. In addition, the Company had federal research and development credit carryforwards of approximately $561,000. The net operating loss and credit carryforwards begin to expire in 2004 and are subject to review and possible adjustment by the Internal Revenue Service. The Tax Reform Act of 1986 contains provisions that may limit the net operating loss carryforwards available to be used in any given year in the event of significant changes in ownership interest. The approximate income tax effect of each type of temporary difference and carryforward is as follows:
DECEMBER 31, ---------------------------- 1994 1995 ------------- ------------- Net operating loss carryforwards...................................... $ 1,569,788 $ 2,024,094 Research and development credit carryforwards......................... 454,727 561,058 Start-up costs........................................................ 1,487,248 2,027,935 Capitalized research and development.................................. 1,497,947 2,109,947 Deferred revenue...................................................... -- 14,167 Nondeductible accruals................................................ 38,284 -- Nondeductible depreciation and amortization........................... 265,395 397,768 Deferred rent......................................................... 18,040 25,495 Valuation allowance................................................... (5,331,429) (7,160,464) ------------- ------------- $ -- $ -- ============= =============
F-9 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (CONTINUED) Due to the uncertainty surrounding the realization of the deferred tax asset, the Company has provided a full valuation allowance against this amount. Revenue Recognition The Company records revenue from collaborative agreements when the specified services are performed or ratably over the respective terms of the agreements. Pro Forma Net Loss Per Share (unaudited) Pro forma net loss per share was computed using the weighted average number of common shares outstanding during the period, and includes all convertible preferred stock which converted into shares of common stock immediately prior to the closing of the Offering as if they were converted into common stock on their original dates of issuance. Common stock equivalents were excluded for all periods presented because they are antidilutive. New Accounting Pronouncements The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, 'Accounting for Stock-Based Compensation.' The Company is required to adopt this standard for the year ending December 31, 1996. The Company has elected to adopt the disclosure requirement of this pronouncement. The adoption of this pronouncement will have no impact on the Company's statements of operations. Recapitalization In December 1995, the Company's stockholders approved the following actions which became effective upon the closing of the Offering: (i) a one-for-three reverse stock split of the Company's common shares, (ii) a change in the number of authorized shares of common stock and preferred stock to 30,000,000 and 5,000,000, respectively, and (iii) a change in the par value of common stock to $.01 per share. All references in the financial statements to the number of common shares, per share amounts, and stock options and warrants exercisable into common stock have been retroactively restated to reflect these changes. 3. AGREEMENTS WITH ABBOTT LABORATORIES: The Company and Abbott Laboratories ('Abbott') entered into collaborative agreements (the 'Abbott Agreements') to develop breast milk oligosaccharides as additives to infant formula and other nutritional products. Abbott has manufacturing rights and further manufacturing development responsibilities for the nutritional additives. Under this strategic alliance, the Company has received approximately $4.7 million in contract payments, license fees, and milestone payments through September 30, 1996. In addition, the Company is to receive $500,000 in January 1997, and $5.0 million within 60 days of the first commercial sale, if any, of infant formula containing the Company's nutritional additive. Abbott will manufacture the nutritional additive for its own use and has agreed to pay the Company ongoing fees based on the dry weight of the infant formula sold containing the nutritional additive. The Company is required to credit $3.75 million of the license fees against the ongoing fees in equal amounts over four years. In addition, Abbott has agreed to renegotiate the fees due the Company on the sale of products containing the nutritional additive in any F-10 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 3. AGREEMENTS WITH ABBOTT LABORATORIES: -- (CONTINUED) case where the Company has made a contribution that both parties agree will result in a substantial commercial advantage. Abbott may, at any time prior to the first commercial sale, if any, of infant formula containing the Company's nutritional additive, elect to make its license agreement non-exclusive, in which event the license fees payable by Abbott after commercialization would be reduced by 50% and Abbott's obligations to make contract and milestone payments, including the January 1997 payment, and the $5.0 million milestone payment would be terminated. Abbott also has the right to cancel the underlying license agreement upon 60 days' written notice and return the technology, in which event it would have no further funding obligations to the Company. Under the terms of the Abbott agreements, if Abbott fails to make appropriate regulatory filings with the FDA for the addition of Neose oligosaccharides in infant formula prior to December 31, 1997, Neose, at its option, may elect to convert the license of Neose technology to a non-exclusive license to Abbott, in which event the license fees payable by Abbott after commercialization would be reduced by 50%, and Abbott's obligations to make contract and milestone payments, including the $5.0 million milestone payment, would be terminated. The Company anticipates that its manufacturing arrangement with Abbott will assist the Company in developing its own manufacturing capability. As part of the strategic alliance, in January 1993, and April 1994, Abbott invested an aggregate of $4.0 million to acquire 500,000 shares of the Company's Series D Convertible Preferred Stock at $8.00 per share. In February 1996, Abbott invested $2.0 million to acquire 160,000 shares of the Company's common stock in the Company's Offering (Note 1). During 1995, Abbott made contractual payments to the Company under the Agreements totaling $1,000,000. In addition, Abbott purchased raw materials from the Company for $105,000 which was included in revenue for the year ended December 31, 1995. In the nine months ended September 30, 1996, Abbott made additional contractual payments to the Company under the Abbott Agreements totaling $1,000,000. 4. PROPERTY AND EQUIPMENT:
DECEMBER 31, ---------------------------- SEPTEMBER 30, 1994 1995 1996 ------------- ------------- -------------- (UNAUDITED) Research equipment.................................................. $ 1,138,253 $ 1,413,646 $ 1,630,868 Leasehold improvements.............................................. 731,504 1,447,100 1,713,428 Construction in progress............................................ 220,709 -- 105,169 Manufacturing equipment............................................. 532,554 601,950 650,938 Computer and office equipment....................................... 173,134 208,469 237,912 ------------- ------------- -------------- 2,796,154 3,671,165 4,338,315 Less -- Accumulated depreciation and amortization................... (596,221) (985,552) (1,402,538) ------------- ------------- -------------- $ 2,199,933 $ 2,685,613 $ 2,935,777 ============= ============= ==============
Depreciation and amortization expense was $194,454, $309,303, $389,331, $278,244 and $416,986 for the years ended December 31, 1993, 1994, and 1995 and for the nine months ended September 30, 1995 and 1996, respectively. During 1995, the Company financed certain property including leasehold improvements, manufacturing equipment and construction in progress, in accordance with the lease F-11 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 4. PROPERTY AND EQUIPMENT: -- (CONTINUED) agreement described in Note 10. Total property and equipment under this capital lease was $1,382,027 at December 31, 1995. Amortization of assets recorded under the capital lease was included with depreciation. Title to this property is owned by the leasing company. At December 31, 1995, other property and equipment totaling $1,116,869 were pledged as collateral for equipment loans (Note 5). 5. LONG-TERM DEBT:
DECEMBER 31, ---------------------------- SEPTEMBER 30, 1994 1995 1996 ------------- ------------- -------------- (UNAUDITED) Tenant improvement loan due to landlord, interest at 10%, monthly principal and interest payments of $10,858 through April 1997...... $ 270,169 $ 162,018 $ 73,537 Equipment loan due to a finance company, interest at 15.5%, monthly principal and interest payments for 48 months subsequent to each drawdown of funds..................... 739,550 496,729 288,414 Equipment loan due to a municipal development corporation, interest at 5%, monthly principal and interest payments of $1,887 through September 1999............................................................... 95,570 77,288 62,965 Capital lease obligation (Note 9).................................... -- 1,263,044 1,011,485 ------------- ------------- -------------- 1,105,289 1,999,079 1,436,401 Less -- Current portion.............................................. (369,254) (764,552) (753,901) ------------- ------------- -------------- $ 736,035 $ 1,234,527 $ 682,500 ============= ============= ==============
The Company entered into a Master Equipment Loan ('Equipment Loan') with a finance company. As of September 30, 1996, $1,010,869 had been borrowed. In connection with the Equipment Loan, the Company granted the finance company warrants to purchase 16,668 and 7,072 shares of common stock at $19.50 and $14.85 per share, respectively (Note 7). Minimum principal repayments of long-term debt as of December 31, 1995, excluding capitalized lease obligations, were as follows: 1996............................................................... $ 421,971 1997............................................................... 273,994 1998............................................................... 23,436 1999............................................................... 16,634 ----------- $ 736,035 ----------- ----------- 6. STOCKHOLDERS' EQUITY: Common Stock The Company's initial public offering closed on February 22, 1996. The Company sold 2,587,500 shares, including the exercise of the underwriters' over-allotment option on March 4, 1996, of common stock at a public offering price of $12.50 per share. The net proceeds to the Company from the Offering after the underwriting discount and payment of offering F-12 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 6. STOCKHOLDERS' EQUITY: -- (CONTINUED) expenses were $29,127,000. In connection with the Offering all outstanding shares of Series A, C, D, E, and F Convertible Preferred Stock converted into 2,410,702 shares of common stock. Certain of these common shares have registration rights. From 1991 through 1995, the Company sold 7,196,884 shares of Convertible Preferred Stock Series A, B, C, D, E and F. On December 7, 1995, all outstanding shares of Series B Convertible Preferred Stock converted into 472,249 shares of common stock. As of December 31, 1995, 5,780,189 shares of convertible preferred stock were outstanding (liquidation preference of $25,629,004 at December 31, 1995). As discussed above, in connection with the Offering, all outstanding shares of Series A, C, D, E and F converted into 2,410,702 shares of common stock (unaudited). In 1991, the Company issued $1,225,000 in subordinated notes, with warrants to purchase 204,180 shares of common stock at $3.00 per share. In 1992 and 1993, the Company redeemed the subordinated notes and accrued interest of $183,750 with the Company's common stock or with cash, at the election of the holder. This redemption resulted in the issuance of 107,459 shares of common stock and the payment of $688,500. During the year ended December 31, 1995, 99,751 shares of common stock were issued at an exercise price of $3.00 per share, pursuant to the exercise of warrants by the noteholders, 8,589 of the noteholders' warrants expired, 7,810 shares of common stock were issued at fair market value of $5.70 per share as payment for bonuses and other compensation, and 23,400 shares of common stock were issued to a stockholder in connection with the Offering. The deemed value of the shares for accounting purposes were recorded as Offering costs. In connection with the issuance of the Series E Convertible Preferred Stock ('Series E'), the Company issued warrants to the placement agent to purchase Series E, which in connection with the Offering converted into warrants to purchase 119,961 shares of common stock at $9.45 per share. During the nine months ended September 30, 1996, 6,538 warrants were exercised to purchase 2,526 shares of common stock via a cashless exercise provision contained in the warrant (Notes 7 and 10). 7. EQUITY PLANS: Stock Option Plans The Company has three Stock Option Plans, the 1991, 1992, and 1995 Plans, under which maximums of 250,000, 333,333 and 933,333 options, respectively, may be granted at prices not less than 100% of the fair market value of the Company's common stock on the date of grant. The 1995 Stock Option Plan (the 'Plan') incorporates the two predecessor plans and provides for the granting of both incentive stock options and non-qualified stock options to employees, officers, directors, and consultants of the Company as well as issuing shares of common stock directly either through the immediate purchase of shares or as a bonus tied to the individual's performance or the Company's attainment of prescribed milestones. In addition, the Plan includes stock appreciation rights to be provided at the Plan administrator's discretion. The stock options are exercisable over a period determined by the Board of Directors, but no longer than ten years after the date of grant. Information with respect to options under the above plans is as follows: F-13 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 7. EQUITY PLANS: -- (CONTINUED)
OPTIONS OUTSTANDING ------------------------------------------ AVAILABLE PRICE AGGREGATE FOR GRANT SHARES PER SHARE PRICE ---------- ---------- --------------- ------------- Balance, December 31, 1992.............................. 191,307 383,692 $ .09-19.50 $ 1,481,128 Granted............................................... (119,659) 119,659 .90-19.50 392,887 Canceled.............................................. 43,832 (43,832) 1.95-19.50 (476,989) ---------- ---------- ------------- Balance, December 31, 1993.............................. 115,480 459,519 .09- 9.00 1,397,026 Granted............................................... (201,750) 201,750 .09- 5.70 810,338 Exercised............................................. -- (35,328) .09- 5.70 (14,066) Canceled.............................................. 113,895 (113,895) .90- 3.75 (321,467) ---------- ---------- ------------- Balance, December 31, 1994.............................. 27,625 512,046 .09- 9.00 1,871,831 Authorized............................................ 933,333 -- -- -- Granted............................................... (349,644) 349,644 5.70-12.54 3,559,636 Granted outside the Plan.............................. -- 69,998 13.80-24.84 1,255,756 Exercised............................................. -- (15,638) .09- 9.00 (30,681) Canceled.............................................. 5,389 (5,389) .09- 9.00 (21,439) ---------- ---------- ------------- Balance, December 31, 1995.............................. 616,703 910,661 .09-24.84 6,635,103 Granted (unaudited)................................... (47,932) 47,932 12.13-21.00 852,060 Exercised (unaudited)................................. -- (52,001) .09- 9.00 (142,494) Canceled (unaudited).................................. 10,998 (10,998) .90-18.25 (92,313) ---------- ---------- ------------- Balance September 30, 1996 (unaudited).................. 579,769 895,594 $ .09-24.84 $ 7,252,356 ========== ========== =============
At December 31, 1995, options for the issuance of 298,630 shares were exercisable at prices ranging from $.09 to $9.00 per share. At September 30, 1996, options for the issuance of 318,962 shares were exercisable at prices ranging from $.09 to $18.00 (unaudited). At December 31, 1995 and September 30, 1996, the aggregate exercise price of these options was $1,150,815 and $1,313,775, respectively. During 1995, options were granted outside of the Plan for 69,998 shares of Common Stock at a weighted average exercise price of $17.94 per share. In December 1995, the Company issued options to employees and recorded deferred compensation of $359,900 for the difference between the deemed value for accounting purposes per share and the exercise price per share and will amortize the deferred compensation amount over the four-year vesting period. Stock Warrants The following table summarizes outstanding warrants at September 30, 1996. All warrants are currently exercisable and the exercise price is subject to adjustment as set forth in the warrant agreement. F-14 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 7. EQUITY PLANS: -- (CONTINUED)
OUTSTANDING EXERCISE WARRANTS PRICE ISSUANCE DATE EXPIRATION DATE - --------- --------- ------------------------ ------------------------ 16,668 $ 19.50 June 30, 1993 June 30, 1998 7,072 14.85 February 16, 1994 February 16, 1999 113,423 9.45 July 31, 1994 July 31, 1999 10,527 14.25 June 30, 1995 June 30, 2002 - --------- 147,690 =========
8. 401(K) PLAN: The Company has a 401(k) Savings Plan (the '401(k) Plan') for employees. Employee contributions are voluntary and are determined on an individual basis with a maximum annual amount equal to the lesser of the maximum amount allowable under federal income tax regulations or 15% of the participant's compensation. The Company matches employee contributions up to specified limits. The Company contributed $28,300, $53,171, $62,270, $48,531, and $47,138 to the 401(k) Plan for the years ended December 31, 1993, 1994, and 1995 and for the nine months ended September 30, 1995 and 1996, respectively. 9. COMMITMENTS: Agreements with the University of Pennsylvania: License Agreement In 1990, the Company entered into an agreement whereby the University of Pennsylvania ('Penn') granted to the Company an exclusive license to use Penn's patent rights and technology to produce certain products. In consideration, the Company issued common stock to Penn pursuant to a Stock Purchase Agreement (see below). In addition, the Company is required to pay Penn royalties based on sales of applicable products. The Company is also required to reimburse Penn for all reasonable fees incident to the acquisition and maintenance of Penn's patent rights. The Company paid $89,530, $70,979, $21,469, $22,201, and $30,563 in patent-related fees on Penn's behalf for the years ended December 31, 1993, 1994, and 1995 and for the nine months ended September 30, 1995 and 1996, respectively. This agreement will terminate upon the expiration of the patent rights. Stock Purchase Agreement Under the Stock Purchase Agreement, the Company in 1991 issued Penn 147,063 shares of the Company's common stock related to the license agreement and for consulting services. Sponsored Research Agreement The Company had an agreement with Penn to support research and development activities relating to oligosaccharides. This agreement expired in 1992. Under the agreement, the Company paid Penn research grants of $206,000 in 1992. F-15 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 9. COMMITMENTS: -- (CONTINUED) Agreement with Bracco Research U.S.A., Inc.: In September 1995, the Company entered into a collaborative research agreement with Bracco Research U.S.A., Inc. ('Bracco'). Under the terms of the agreement, the Company will supply Bracco with complex carbohydrates, which Bracco will attach to diagnostically useful agents. The resulting new molecules will be tested and developed. In consideration, Bracco committed to six semiannual payments to Neose in the amount of $125,000, for a total of $750,000. The Company recognized $83,333, $20,833, and $187,500 of revenue under this agreement for the year ended December 31, 1995 and for the nine months ended September 30, 1995 and 1996, respectively. Employment Agreements In November 1994, the Company entered into a three-year employment agreement with its President and Chief Financial Officer which provides for certain annual base salaries and bonuses of up to 50% of base salary at the discretion of the Compensation Committee of the Board of Directors. In connection with this agreement, the Company granted options to purchase 100,000 shares of common stock at $5.70 per share, 20,000 of which vested immediately with the remainder vesting ratably over four years (Note 7). In April 1996, the Company entered into a one-year employment agreement with its Vice President of Drug Development. The employment agreement provides for an annual base salary and a bonus of up to 25% of base salary at the discretion of the Chief Executive Officer. Leases In January 1992, the Company entered into a ten-year operating lease for office and laboratory facilities effective May 1992. The lease includes escalation clauses and is cancelable by the Company after five or seven years. Pursuant to this lease, the Company is required to maintain an escrow balance which is reduced ratably over the lease term. On August 30, 1996, the Company entered into a construction agreement for the planned expansion of its manufacturing capabilities. For this expansion, the Company expects to make capital expenditures totaling approximately $7.5 million, beginning in the fourth quarter of 1996. In connection with this expansion, on December 5, 1996, the Company entered into a non-binding letter of intent with the owner of the leased facility to purchase the facility for approximately $3.8 million contingent upon, among other things, the Company obtaining financing for the acquisition. In June 1995, the Company entered into a master equipment lease agreement with a finance company which provides for up to $1,500,000 in financing, of which $1,382,027 had been drawn as of September 30, 1996. In connection with the lease, the Company granted the lessor warrants to purchase 10,527 shares of common stock at $14.25 per share (Note 7). F-16 NEOSE TECHNOLOGIES, INC. (A DEVELOPMENT-STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (INFORMATION AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996 AND FOR THE PERIOD FROM INCEPTION (JANUARY 17, 1989) TO SEPTEMBER 30, 1996 IS UNAUDITED) 9. COMMITMENTS: -- (CONTINUED) Future minimum lease payments under the Company's leases as of December 31, 1995 are as follows:
OPERATING CAPITAL LEASES LEASES ----------- ------------- 1996......................................................... $ 310,277 $ 527,382 1997......................................................... 107,862 527,382 1998......................................................... -- 563,695 ----------- ------------- Total minimum lease payments................................. $ 418,139 1,618,459 =========== Less -- Amount representing interest......................... (355,415) ------------- Present value of future minimum lease payments............... 1,263,044 Less -- Current portion...................................... (342,581) ------------- $ 920,463 =============
Rent expense was $220,644, $322,275, $309,249, $231,937, and $231,937 for the years ended December 31, 1993, 1994 and 1995, and for the nine months ended September 30, 1995 and 1996, respectively. In addition, the Company has recorded a deferred rent liability for escalating rent payments in future years of $74,986 at December 31, 1995. 10. RELATED PARTY TRANSACTIONS: In 1994, the Company entered into an agreement with Paramount Capital, Inc. ('Paramount') for the private placement of the Series E. The sole shareholder of Paramount is a member of the Company's Board of Directors. The Company paid $1,246,505 in commissions and expenses pursuant to the agreement. Additionally, Paramount received warrants to purchase 216,780 shares of the Company's Series E at $5.23 per share. In 1995, Paramount acted as a placement agent for a portion of the Series F Convertible Preferred Stock. The Company paid $425,247 in commissions to Paramount in the year ended December 31, 1995. In addition, in December 1995 the Company granted to an employee of Paramount options to purchase 49,999 shares of Common Stock at a weighted average exercise price of $17.94 per share, vesting in various amounts over five years, for financial advisory services. In February 1994, a member of the Company's Board of Directors advanced the Company $440,000 to fund the Company's restricted funds account held in escrow pursuant to the Company's facility lease. In April 1994, the Company repaid this balance. F-17 [This page intentionally left blank] No dealer, sales representative or any other person has been authorized to give any information or to make any representations in connection with this offering, other than those made in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the Company, or the Placement Agent. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities other than the shares of Common Stock to which it relates, or an offer to, or a solicitation of, any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any date subsequent to the date hereof. ------------------------ TABLE OF CONTENTS Page Prospectus Summary.......................................3 Risk Factors.............................................7 Use of Proceeds.........................................16 Dividend Policy.........................................16 Price Range of Common Stock.............................16 Capitalization..........................................17 Dilution................................................18 Selected Financial Data.................................19 Management's Discussion and Analysis of Financial Condition and Results of Operations.........20 Business................................................25 Management..............................................42 Certain Transactions....................................53 Principal Stockholders..................................55 Description of Capital Stock............................56 Shares Eligible for Future Sale.........................59 Plan of Distribution....................................61 Legal Matters...........................................62 Experts.................................................62 Available Information...................................62 Index to Financial Statements..........................F-1 1,250,000 Shares [NEOSE TECHNOLOGIES, INC. LOGO] Common Stock ----------------------- PROSPECTUS ----------------------- Vector Securities International, Inc. , 1997 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth an estimate of the expenses to be incurred by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee. Amount to Be Paid --------- SEC registration fee..................................... $ 7,866.00 NASD filing fee.......................................... 2,728.00 Nasdaq National Market listing fee....................... 17,500.00 Placement Agent out-of-pocket expenses................... 80,000.00 Escrow agent fees........................................ 6,000.00 Printing and engraving................................... 25,000.00 Legal fees and expenses.................................. 100,000.00 Accounting fees and expenses............................. 35,000.00 Blue sky fees and expenses............................... 5,000.00 Miscellaneous............................................ 5,906.00 ------------ Total........................................... $285,000.00 =========== Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's board of directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article IX of the Registrant's Second Amended and Restated Certificate of Incorporation provides for indemnification of its directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. Reference is also made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1 to the Company's Registration Statement on Form S-1 (File No. 33-80693) filed with the Securities and Exchange Commission (the "Commission") on December 21, 1995, as amended, which sets forth certain indemnification provisions. The Registrant has obtained liability insurance for its officers and directors. Item 15. Recent Sales of Unregistered Securities The Registrant has sold and issued the following securities during the past three years: In April 1994, the Registrant issued 250,000 shares of Series D Convertible Preferred Stock to one accredited investor at a price of $8.00 per share. From March 1994 to July 1994, the Registrant issued 2,199,238 shares of Series E Convertible Preferred Stock to various accredited investors at a price of $4.75 per share. II-1 From July 1995 to December 1995, the Registrant issued 2,720,656 shares of Series F Convertible Preferred Stock to various accredited investors at a price of $4.00 per share. The Registrant from time to time has granted stock options to employees, directors, and consultants. The following table sets forth certain information regarding such grants: No. of Range of Shares Exercise Prices ------ --------------- 1992......................................... 275,322 $ 1.95 - 19.50 1993......................................... 119,659 0.90 - 19.50 1994......................................... 201,750 0.90 - 5.70 1995......................................... 419,642 5.70 - 24.84 1996......................................... 369,182 12.125 - 21.00 The Registrant from time to time has issued stock to employees, directors, and consultants who have exercised their stock options. The following table sets forth certain information regarding such issuances: No. of Range of Shares Exercise Prices ------ --------------- 1992......................................... 8,334 $ 1.95 1993......................................... -- -- 1994......................................... 35,328 0.09 - 5.70 1995......................................... 15,638 0.90 - 9.00 1996......................................... 63,009 0.90 - 9.00 The above securities were offered and sold by the Registrant in reliance upon an exemption from registration under either (i) Section 4(2) of the Securities Act as transactions not involving any public offering or (ii) Rule 701 under the Securities Act. No underwriters were involved in connection with the sales of securities referred to in this Item 15. Certain shares of stock issued and issuable upon the exercise of options as set forth above have been registered by the Registrant on a Registration Statement on Form S-8 filed with the Commission on February 15, 1996. Item 16. Exhibits and Financial Statement Schedules (a) Exhibits: The following is a list of exhibits filed as part of this Registration Statement. II-2
Exhibit Number Description - ------- ----------- 1.1* Form of Placement Agency Agreement. 1.2* Form of Escrow Agreement. 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant. (Exhibit 3.1)(1) 3.2 Amended and Restated By-Laws of the Registrant. (Exhibit 3.2)(1) 4.1 Specimen certificate for shares of the Registrant's Common Stock. (Exhibit 4.1)(1) 4.2 See Exhibits 3.1 and 3.2 for provisions of the Second Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of the Registrant defining rights of holders of Common Stock of the Registrant. 5* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of Common Stock being registered. 10.1 Stock Purchase Agreement, dated as of August 28, 1990, between the Registrant and the University of Pennsylvania. (Exhibit 10.1)(1) 10.2 License Agreement, dated as of August 28, 1990, between the Registrant and the University of Pennsylvania, as amended to date. (Exhibit 10.2)(1) 10.3 Form of Common Stock Subscription Agreement. (Exhibit 10.3)(1) 10.4 Form of Series A Preferred Stock Subscription Agreement. (Exhibit 10.4)(1) 10.5 Form of Series B Preferred Stock Subscription and Stock Purchase Agreement. (Exhibit 10.5)(1) 10.6 Form of Series C Preferred Stock Subscription Agreement. (Exhibit 10.6)(1) 10.7 Form of Series D Preferred Stock Subscription Agreement. (Exhibit 10.7)(1) 10.8(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories. (Exhibit 10.8(a))(1) 10.8(b)+ Supply Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories. (Exhibit 10.8(b))(1) 10.8(c)+ Research and License Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories. (Exhibit 10.8(c))(1) 10.8(d)+* Amendment to the Research and License Agreement, dated as of January 18, 1995, between the Registrant and Abbott Laboratories. 10.9 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit 10.9)(1) 10.10 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit 10.10)(1) 10.11 Form of Warrant to Purchase Common Stock, dated as of February 20, 1991. (Exhibit 10.11)(1) 10.12 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993. (Exhibit 10.12)(1) 10.13 Form of Warrant to Purchase Common Stock, dated as of February 16, 1994. (Exhibit 10.13)(1) 10.14 Form of Warrant to Purchase Series E Preferred Stock, dated as of July 29, 1994. (Exhibit 10.14)(1) II-3 10.15 Warrant for the Purchase of Common Stock, dated as of June 30, 1995, between the Registrant and Financing for Science International, Inc. (Exhibit 10.15)(1) 10.16* 1995 Stock Option/Stock Issuance Plan, as amended. 10.17 Employee Stock Purchase Plan. (Exhibit 10.17)(1) 10.18 Lease Agreement dated January 9, 1992 between the Registrant and Pennsylvania Business Campus Delaware, Inc., as amended to date. (Exhibit 10.18)(1) 10.19 Employment Agreement dated December 1, 1994 between the Registrant and P. Sherrill Neff. (Exhibit 10.19)(1) 10.20 Employment Agreement dated April 1, 1992 between the Registrant and David A. Zopf, as amended to date. (Exhibit 10.20)(1) 10.21* Design-Build Agreement dated August 30, 1996 between the Registrant and Irwin & Leighton, Inc. 11* Statement re: Computation of Per Share Earnings. 23.1* Consent of Arthur Andersen LLP. 23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto). 24* Powers of Attorney (included on signature page to this Registration Statement). 27* Financial Data Schedule.
- ------------------ * Filed herewith + Portions of this Exhibit were omitted and filed separately with the Secretary of the Commission pursuant to an order of the Commission granting the Registrant's application for confidential treatment filed pursuant to Rule 406 under the Securities Act. (1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-80693) filed with the Commission on December 21, 1995, as amended. (b) Financial Statement Schedules: Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in Financial Statements or notes thereto. Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Delaware General Corporation Law, the Second Amended and Restated Certificate of Incorporation of the Registrant, the Placement Agency Agreement, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction II-4 the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424 (b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in Horsham, Pennsylvania, on January 13, 1997. NEOSE TECHNOLOGIES, INC. By /s/Stephen A. Roth ------------------------ Stephen A. Roth Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. EACH PERSON IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS STEPHEN A. ROTH AND P. SHERRILL NEFF, AND EACH OF THEM ACTING ALONE, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT, WITH FULL POWER OF SUBSTITUTION, TO EXECUTE AND CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, ANY AND ALL AMENDMENTS AND POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT, AND INCLUDING ANY REGISTRATION STATEMENT FOR THE SAME OFFERING THAT IS TO BE EFFECTIVE UPON FILING PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, WITH EXHIBITS THERETO AND OTHER DOCUMENTS IN CONNECTION THEREWITH, AND HEREBY RATIFIES AND CONFIRMS ALL THAT SAID ATTORNEY-IN-FACT OR HIS SUBSTITUTE OR SUBSTITUTES MAY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
Name Capacity Date ---- -------- ---- /s/Stephen A. Roth Chief Executive Officer and January 13, 1997 ------------------ Chairman of the Board Stephen A. Roth (Principal Executive Officer) /s/P. Sherrill Neff President and Chief January 13, 1997 ------------------- Financial Officer and P. Sherrill Neff Director (Principal Financial and Accounting Officer) /s/William F. Hamilton Director January 13, 1997 ---------------------- William F. Hamilton /s/Douglas J. MacMaster, Jr. Director January 13, 1997 ---------------------------- Douglas J. MacMaster, Jr. /s/Lindsey A. Rosenwald Director January 13, 1997 ----------------------- Lindsey A. Rosenwald /s/Lowell E. Sears Director January 13, 1997 ------------------ Lowell E. Sears /s/Jerry A. Weisbach Director January 13, 1997 -------------------- Jerry A. Weisbach
II-6 EXHIBIT INDEX
Exhibit Sequential Sequential Number Description Page Number - ---------- ----------- ----------- 1.1* Form of Placement Agency Agreement. 1.2* Form of Escrow Agreement. 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant. (Exhibit 3.1)(1) 3.2 Amended and Restated By-Laws of the Registrant. (Exhibit 3.2)(1) 4.1 Specimen certificate for shares of the Registrant's Common Stock. (Exhibit 4.1)(1) 4.2 See Exhibits 3.1 and 3.2 for provisions of the Second Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of the Registrant defining rights of holders of Common Stock of the Registrant. 5* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of Common Stock being registered. 10.1 Stock Purchase Agreement, dated as of August 28, 1990, between the Registrant and the University of Pennsylvania. (Exhibit 10.1)(1) 10.2 License Agreement, dated as of August 28, 1990, between the Registrant and the University of Pennsylvania, as amended to date. (Exhibit 10.2)(1) 10.3 Form of Common Stock Subscription Agreement. (Exhibit 10.3)(1) 10.4 Form of Series A Preferred Stock Subscription Agreement. (Exhibit 10.4)(1) 10.5 Form of Series B Preferred Stock Subscription and Stock Purchase Agreement. (Exhibit 10.5)(1) 10.6 Form of Series C Preferred Stock Subscription Agreement. (Exhibit 10.6)(1) 10.7 Form of Series D Preferred Stock Subscription Agreement. (Exhibit 10.7)(1) 10.8(a)+ Series D Preferred Stock Purchase Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories. (Exhibit 10.8(a))(1) 10.8(b)+ Supply Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories. (Exhibit 10.8(b))(1) 10.8(c)+ Research and License Agreement, dated as of December 30, 1992, between the Registrant and Abbott Laboratories. (Exhibit 10.8(c))(1) 10.8(d)+* Amendment to the Research and License Agreement, dated as of January 18, 1995, between the Registrant and Abbott Laboratories. 10.9 Form of Series E Preferred Stock Investors' Rights Agreement. (Exhibit 10.9)(1) 10.10 Form of Series F Preferred Stock Investors' Rights Agreement. (Exhibit 10.10)(1) 10.11 Form of Warrant to Purchase Common Stock, dated as of February 20, 1991. (Exhibit 10.11)(1) 10.12 Form of Warrant to Purchase Common Stock, dated as of June 30, 1993. (Exhibit 10.12)(1) 10.13 Form of Warrant to Purchase Common Stock, dated as of February 16, 1994. (Exhibit 10.13)(1) 10.14 Form of Warrant to Purchase Series E Preferred Stock, dated as of July 29, 1994. (Exhibit 10.14)(1) 10.15 Warrant for the Purchase of Common Stock, dated as of June 30, 1995, between the Registrant and Financing for Science International, Inc. (Exhibit 10.15)(1) 10.16* 1995 Stock Option/Stock Issuance Plan, as amended. 10.17 Employee Stock Purchase Plan. (Exhibit 10.17)(1) 10.18 Lease Agreement dated January 9, 1992 between the Registrant and Pennsylvania Business Campus Delaware, Inc., as amended to date. (Exhibit 10.18)(1) 10.19 Employment Agreement dated December 1, 1994 between the Registrant and P. Sherrill Neff. (Exhibit 10.19)(1) 10.20 Employment Agreement dated April 1, 1992 between the Registrant and David A. Zopf, as amended to date. (Exhibit 10.20)(1) 10.21* Design-Build Agreement dated August 30, 1996 between the Registrant and Irwin & Leighton, Inc. 11* Statement re: Computation of Per Share Earnings. 23.1* Consent of Arthur Andersen LLP. 23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto). 24* Powers of Attorney (included on signature page to this Registration Statement). 27* Financial Data Schedule.
- ------------------ * Filed herewith + Portions of this Exhibit were omitted and filed separately with the Secretary of the Commission pursuant to an order of the Commission granting the Registrant's application for confidential treatment filed pursuant to Rule 406 under the Securities Act. (1) Filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-80693) filed with the Commission on December 21, 1995, as amended. EX-1.1 2 PLACEMENT AGENCY AGREEMENT NEOSE TECHNOLOGIES, INC. 1,250,000 Shares of Common Stock, $0.01 par value per share FORM OF PLACEMENT AGENCY AGREEMENT January , 1997 Vector Securities International, Inc. 1751 Lake Cook Road, Suite 350 Deerfield, Illinois 60015, As Placement Agent Dear Sir or Madam: Neose Technologies, Inc., a Delaware corporation (the "Company"), proposes to issue and sell 1,250,000 shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock"), to certain investors (collectively, the "Investors"). The Company desires to engage you as its placement agent (the "Placement Agent") in connection with such issuance and sale. The Common Stock, is more fully described in the Registration Statement (as hereinafter defined). The Company hereby confirms as follows its agreements with the Placement Agent. 1. Agreement to Act as Placement Agent. On the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions of this Agreement, the Placement Agent agrees to act as the Company's exclusive placement agent in connection with the issuance and sale, on a best efforts basis, by the Company of the Shares to the Investors. The Company shall pay to the Placement Agent ____% of the proceeds received by the Company from the sale of the Shares as set forth on the cover page of the Prospectus (as hereinafter defined). 2. Delivery and Payment. Concurrently with the execution and delivery of this Agreement, the Company, the Placement Agent, and Citibank N.A., as escrow agent (the "Escrow Agent"), shall enter into an Escrow Agreement substantially in the form of Exhibit A attached hereto (the "Escrow Agreement"), pursuant to which an escrow account will be established, at the Company's expense, for the benefit of the Investors (the "Escrow Account"). Prior to the Closing Date (defined below), (i) each of the Investors will deposit an amount equal to the price per Share as shown on the cover page of the Prospectus (as hereinafter defined) multiplied by the number of Shares purchased by it in the Escrow Account, and (ii) the Escrow Agent will notify the Company and the Placement Agent in writing whether the Investors have deposited in the Escrow Account funds in the amount equal to the proceeds of the sale of all of the Shares offered hereby (the "Requisite Funds") into the Escrow Account. At 10:00 a.m., New York City time, on January , 1997, or at such other time on such other date as may be agreed upon by the Company and the Placement Agent but in no event prior to the date on which the Escrow Agent shall have received all of the Requisite Funds (such date is hereinafter referred to as the "Closing Date"), the Escrow Agent will release the Requisite Funds from the Escrow Account for collection by the Company and the Placement Agent as provided in the Escrow Agreement and the Company shall deliver the Shares to the Investors, which delivery may be made through the facilities of the Depository Trust Company. The closing (the "Closing") shall take place at the office of Stroock & Stroock & Lavan, Seven Hanover Square, New York, New York 10004. All actions taken at the Closing shall be deemed to have occurred simultaneously. Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in such denominations as the Placement Agent shall request by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to delivery to the Investors. 3. Representations and Warranties of the Company. The Company represents and warrants and covenants to the Placement Agent that: (a) A registration statement (Registration No. 333-_______) on Form S-1 relating to the Shares, including a preliminary prospectus relating to the Shares and such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company, under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder, and has been filed with the Commission. The Commission has not issued any order preventing or suspending the use of the Prospectus or the Preliminary Prospectus (as defined below). The term "Preliminary Prospectus" as used herein means a preliminary prospectus relating to the Shares as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules and Regulations included at any time as part of the registration statement. Copies of such registration statement and amendments and of each related Preliminary Prospectus have been delivered to the Placement Agent. If such registration statement has not become effective, a further amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus relating to the Shares containing information permitted to be omitted at the time of effectiveness by Rule 430A will be filed by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations promptly after execution and delivery of this -2- Agreement. The term "Registration Statement" means the registration statement as amended at the time it becomes or became effective (the "Effective Date"), including all material incorporated by reference therein and any information deemed to be included by Rule 430A. The term "Prospectus" means the prospectus relating to the Shares as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus relating to the Shares included in the Registration Statement at the Effective Date, in either case, including all material, if any, incorporated by reference therein. (b) On the date that any Preliminary Prospectus was filed with the Commission, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent to and including the Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement, each Preliminary Prospectus and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply with all applicable provisions of the Act and the Rules and Regulations and did or will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the Registration Statement or any such amendment did or will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. At the Effective Date, at the date the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Company has not distributed any offering material in connection with the offering or sale of the Common Stock, other than the Registration Statement, the Preliminary Prospectus and the Prospectus. (c) The Company is, and at the Closing Date will be, duly organized, validly existing and in good standing under the laws of Delaware. The Company has, and at the Closing Date will have, full power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). The Company is, and at the Closing Date will be, duly licensed or qualified to do business and in good standing as a foreign organization in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified will not have a material adverse effect on the ability of the Company or its Subsidiaries to carry on its business as presently conducted. Except as disclosed or incorporated by reference into the Registration Statement, the Company does not own, and at the Closing Date will not own, directly or indirectly, any shares of stock or any -3- other equity or long-term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. Complete and correct copies of the articles or certificate of incorporation and of the bylaws of the Company and all amendments thereto have been delivered to the Placement Agent, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date. (d) The issued and outstanding shares of capital stock of the Company have been validly issued, are fully paid and nonassessable and, other than as set forth in the Registration Statement, are not subject to any preemptive or similar rights. Except as set forth in the Registration Statement and the Prospectus such shares are not subject to any preemptive or similar rights. The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus as of the dates referred to therein. The description of the securities of the Company in the Registration Statement and the Prospectus is, and at the Closing Date will be, complete and accurate in all respects. Except as set forth in the Registration Statement and the Prospectus, the Company does not have outstanding, and at the Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or exchangeable for, or any contracts or commitments to issue or sell, any shares of capital stock or other securities. (e) This Agreement has been duly authorized and validly executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and equitable principles of general applicability. The Escrow Agreement has been duly authorized and validly executed and delivered by the Company and is a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its terms, subject to the effect of applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and equitable principles of general applicability. (f) The issuance and sale of the Shares have been duly authorized by the Company, and the Shares, when issued and paid for in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable and will not be subject to preemptive or similar rights. The holders of the Shares will not be subject to personal liability by reason of being such holders. The Shares, when issued, will conform to the description thereof set forth in the Prospectus. (g) The financial statements and the related notes and schedules included in the Registration Statement and the Prospectus present fairly the financial condition of the Company as of the dates thereof and the results of operations, stockholders' equity (deficit) and cash flows of the Company at the dates and for the periods covered thereby, all in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the entire period involved, except as otherwise disclosed therein. No other financial statements or schedules of the Company or any other entity are required by the Act or the Rules and Regulations to be included in the Registration Statement or the Prospectus. -4- Arthur Andersen LLP (the "Accountants"), who have reported on such financial statements and schedules, are independent accountants with respect to the Company as required by the Act and the Rules and Regulations. The financial statements of the Company and the related notes and schedules included in the Registration Statement and the Prospectus have been prepared in conformity with the requirements of the Act and the Rules and Regulations and present fairly the information shown therein. (h) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (i) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date, except as set forth in or contemplated by the Registration Statement and the Prospectus, (i) there has not been and will not have been any change in the capitalization of the Company other than non-material changes in the ordinary course of business, or any material adverse change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company arising for any reason whatsoever, (ii) the Company has not incurred nor will it incur any material liabilities or obligations, direct or contingent, nor has the Company entered into nor will it enter into any material transactions other than pursuant to this Agreement, the Registration Statement and the transactions referred to herein and therein and (iii) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock. (j) Any real property and buildings held under lease to the Company are held or leased by the Company under valid, binding and enforceable leases conforming to the description thereof set forth in or incorporated by reference into the Registration Statement and the Prospectus), with such exceptions as do not interfere with the use made and proposed to be made of such property and buildings by the Company. (k) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended (the "Investment Company Act"). (l) Except as set forth in the Registration Statement and the Prospectus, there are no actions, suits or proceedings pending or to the Company's best knowledge, threatened against or affecting the Company or any of its officers in their capacity as such, before or by any Federal or state court, commission, regulatory body, administrative -5- agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding would reasonably be likely to materially adversely affect the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company taken as a whole. (m) The Company has, and at the Closing Date will have, (i) all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as presently conducted except where the failure to have such governmental licenses, permits, consents, orders, approvals and other authorizations would not have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operation of the Company, (ii) complied with all laws, regulations and orders applicable to either it or its business, where the failure to so comply would have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company, and (iii) performed all its obligations required to be performed, and is not, and at the Closing Date will not be, to the Company's best knowledge, in default, under any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement, lease, contract or other agreement or instrument (collectively, a "contract or other agreement") to which it is a party or by which its property is bound or affected, except as otherwise set forth in the Registration Statement and the Prospectus and except where such default would not have a material adverse effect on the business, properties, prospects, condition (financial or otherwise) or results of operations of the Company, and, to the Company's best knowledge, no other party under any contract or other agreement to which it is a party is in default in any respect thereunder. The Company is not in violation of any provision of its organizational or governing documents. (n) The Company has all corporate power and authority to enter into this Agreement and the Escrow Agreement, and to carry out the provisions and conditions hereof and thereof, and all consents, authorizations, approvals and orders required in connection herewith and therewith have been obtained. (o) Neither (i) the issuance, offering and sale of the Shares pursuant hereto, nor (ii) the compliance by the Company with the other provisions hereof require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained, such as may be required under state securities or Blue Sky laws or the bylaws and rules of the National Association of Securities Dealers, Inc. (the "NASD") and, if the Registration Statement is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in either this Agreement) under the Act. (p) Neither the execution of this Agreement or the Escrow Agreement, nor the issuance, offering or sale of the Shares, nor the consummation of any of the transactions contemplated herein or in the Escrow Agreement, nor the compliance by the Company with the terms and provisions hereof or thereof will conflict with, or will result in a breach of, any of the terms and provisions of, or has constituted or will constitute a default -6- under, or has resulted in or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any contract or other agreement to which the Company may be bound or to which any of the property or assets of the Company is subject, except such conflicts, breaches or defaults as may have been waived; nor will such action result in any violation of the provisions of the Company's organizational or governing documents, or any statute or any order, rule or regulation applicable to the Company or of any court or of any federal, state or other regulatory authority or other government body having jurisdiction over the Company. (q) There is no document or contract of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All such contracts to which the Company is a party have been duly authorized, executed and delivered by the Company, constitute valid and binding agreements of the Company, and are enforceable against the Company in accordance with the terms thereof, subject to the effect of applicable bankruptcy, insolvency or similar laws affecting creditors' rights generally and equitable principles of general applicability. (r) No statement, representation or warranty made by the Company in this Agreement or made in any certificate or document required by this Agreement or the Escrow Agreement to be delivered to the Placement Agent, the Investors or the Escrow Agent was or will be, when made, inaccurate, untrue or incorrect in any material respect. (s) The Company and its directors, officers or controlling persons have not taken, directly or indirectly, any action intended, or which might reasonably be expected, to cause or result, under the Act or otherwise, in, or which has constituted, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Stock. (t) No holder of securities of the Company has rights to the registration of any securities of the Company as a result of the filing of the Registration Statement, other than rights which are not exercisable due to the Placement Agent's determination to include only securities sold directly from the Company, except for such rights as have been waived which have been disclosed to the Placement Agent. (u) The Common Stock is currently listed on the Nasdaq National Market (the "NNM"). (v) The Company is not involved in any material labor dispute nor is any such dispute threatened. (w) Neither the Company nor any of its employees or agents has made any payment of funds of the Company received, or retained any funds in violation of any law, rule or regulation of a character required to be disclosed in the Prospectus. -7- (x) The Company is insured as described in the Prospectus. The Company has no reason to believe that its current insurance arrangements are insufficient for the Company to carry on its business as presently conducted. (y) Except as set forth in the Registration Statement and the Prospectus, the business, operations and properties of the Company has been and is being conducted in compliance with all applicable laws, ordinances, rules, regulations, licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, or pollution, or protection of health or the environment (including, without limitation, those relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic substances, materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) of any governmental department, commission, board, bureau, agency or instrumentality of the United States, any state or political subdivision thereof, or any foreign jurisdiction, and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and orders relating thereto, except where the failure to be in such compliance will not, individually or in the aggregate, have a material adverse effect on the ability of the Company to carry on its business as presently conducted; and the Company has not received any notice from any governmental instrumentality or any third party alleging any material violation thereof or liability thereunder (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances and/or damages to natural resources). (z) The Company is not aware of any infringement as to any of its patents, either issued or allowed in the United States or Europe, nor is it aware of any infringement of any confidentiality or non-compete agreement. (aa) Each officer and director of the Company listed on Exhibit B hereto has delivered to the Placement Agent an agreement in the form of Attachment A hereto to the effect that he or she will not, for a period of 90 days after the date hereof, without the prior written consent of the Placement Agent, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of capital stock of the Company or securities convertible into, or exchangeable or exercisable for, shares of capital stock of the Company. (bb) The Company has delivered to the Placement Agent an agreement in the form of Attachment B hereto to the effect that it will not, for a period of 180 days after the date hereof, without the prior written consent of the Placement Agent, offer to sell, sell, contract to sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of capital stock of the Company or securities convertible into, or exchangeable or exercisable for, shares of capital stock of the Company, except with respect to the issuance of shares of Common Stock upon the exercise of stock options and warrants outstanding as of the date hereof and upon the conversion of shares -8- of Preferred Stock outstanding as of the date hereof and the issuance of Common Stock or stock options under any benefit plan of the Company. 4. Agreements of the Company. The Company covenants and agrees with the Placement Agent as follows: (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus would be required by law to be delivered in connection with sales of the Shares by an underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to the Placement Agent within a reasonable period of time prior to the filing thereof and the Placement Agent shall not have objected thereto in good faith. (b) The Company will use its best efforts to cause the Registration Statement to become effective, and will notify the Placement Agent promptly, and will confirm such advice in writing, (1) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective, (2) of any request by the securities or other governmental authority (including, without limitation, the Commission) of any jurisdiction for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by any securities or other governmental authority (including, without limitation, the Commission) of any jurisdiction of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof, (4) of the happening of any event during the period mentioned in the second sentence of Section 4(c) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not misleading and (5) of receipt by the Company or any representative or attorney of the Company of any other communication from the securities or other governmental authority (including, without limitation, the Commission) of any jurisdiction relating to any of the Registration Statement, any Preliminary Prospectus or the Prospectus. If at any time any securities or other governmental authority (including, without limitation, the Commission) of any jurisdiction shall issue any order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. If the Company has omitted any information from the Registration Statement, pursuant to Rule 430A, it will use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to said Rule 430A and to notify the Placement Agent promptly of all such filings. (c) If, at any time when a Prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which the Prospectus, as then amended or supplemented, would, in the judgment of counsel to the Company or counsel to the Placement Agent, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which -9- they were made, not misleading, or the Registration Statement, as then amended or supplemented, would, in the judgment of counsel to the Company or counsel to the Placement Agent, include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, or if for any other reason it is necessary, in the judgment of counsel to the Company or counsel to the Placement Agent, at any time to amend or supplement the Prospectus or the Registration Statement to comply with the Act or the Rules and Regulations, the Company will promptly notify the Placement Agent and, subject to Section 4(a) hereof, will promptly prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance and will deliver to the Placement Agent, without charge, such number of copies thereof as the Placement Agent may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by the Placement Agent. (d) The Company will furnish to the Placement Agent and its counsel, without charge, (i) two signed copies of the registration statement described in Section 3(a) hereof and each pre-effective amendment thereto, including financial statements and schedules, and all exhibits thereto and (ii) so long as a prospectus relating to the Shares is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Placement Agent may reasonably request. (e) The Company will comply with all the undertakings contained in the Registration Statement. (f) Prior to the sale of the Shares to the Investors, the Company will cooperate with the Placement Agent and its counsel in connection with the registration or qualification of the Shares for offer and sale under the state securities or Blue Sky laws of such jurisdictions as the Placement Agent may request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (g) During the period of five years commencing on the Effective Date, the Company will furnish to the Placement Agent copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to the Placement Agent a copy of each annual or other report it shall be required to file with the Commission. (h) The Company will make generally available to holders of its securities, as soon as may be practicable, but in no event later than the last day of the fifteenth full calendar month following the calendar quarter in which the Effective Date falls, a consolidated earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months ended commencing after the Effective Date, and satisfying the -10- provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (i) The Company will not at any time, directly or indirectly, take any action intended, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the Shares to facilitate the sale or resale of any of the Shares. (j) The Company will apply the net proceeds from the offering and sale of the Shares in the manner set forth in the Prospectus under the caption "Use of Proceeds." 5. Expenses. Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to costs and expenses of or relating to (1) the preparation, printing and filing of the Registration Statement (including each pre- and post-effective amendments thereto) and exhibits thereto, each Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus, including all fees, disbursements and other charges of counsel to the Company, (2) the preparation and delivery of certificates representing the Shares, (3) furnishing (including costs of shipping and mailing) such copies of the Registration Statement (including all pre- and post-effective amendments thereto), the Prospectus and any Preliminary Prospectus, and all amendments and supplements to the Prospectus, as may be requested for use in connection with the direct placement of the Shares, (4) the listing of the Common Stock on the NMS, (5) any filings required to be made by the Placement Agent with the NASD, and the fees, disbursements and other charges of counsel for the Placement Agent in connection therewith, (6) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 4(f), including the reasonable fees, disbursements and other charges of counsel to the Placement Agent in connection therewith and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda, (7) fees, disbursements and other charges of counsel to the Company and (8) the fees of the Escrow Agent. The Company shall reimburse the Placement Agent, on a fully accountable basis, for all travel, legal and other out-of-pocket expenses incurred in connection with the engagement hereunder, up to a maximum of $80,000; provided however, that if the transactions contemplated herein do not occur for reasons other than those arising pursuant to Section 8(a) hereof, the Company shall only reimburse the Placement Agent for one half of its actual out-of-pocket expenses incurred through such date of termination, up to a maximum of $40,000. 6. Conditions of the Obligations of the Placement Agent. The obligations of the Placement Agent hereunder are subject to the following conditions: (a) Notification that the Registration Statement has become effective shall be received by the Placement Agent not later than 5:00 p.m., New York City time, on the date of this Agreement or at such later date and time as shall be consented to in writing by the Placement Agent and all filings required by Rule 424 of the Rules and Regulations and Rule -11- 430A shall have been made. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued, and no proceedings for that purpose shall be pending or threatened by any securities or other governmental authority (including, without limitation, the Commission), (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect and no proceeding for such purpose shall be pending before or threatened or contemplated by any securities or other governmental authority (including, without limitation, the Commission), (iii) any request for additional information on the part of the staff of any securities or other governmental authority (including, without limitation, the Commission) shall have been complied with to the satisfaction of the staff of the Commission or such authorities and (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to the Placement Agent and the Placement Agent did not object thereto in good faith, and the Placement Agent shall have received certificates, dated the Closing Date and signed by the President and Chief Executive Officer or the Chairman of the Board of Directors of the Company, and the Chief Financial Officer of the Company (who may, as to proceedings threatened, rely upon the best of their information and belief), to the effect of clauses (i), (ii) and (iii). (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change in the general affairs, business, business prospects, properties, management, condition (financial or otherwise) or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in or contemplated by the Registration Statement and the Prospectus and (ii) the Company shall not have sustained any material loss or interference with its business or properties from fire, explosion, flood or other casualty, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in the judgment of the Placement Agent any such development makes it impracticable or inadvisable to consummate the sale and delivery of the Shares to Investors at the public offering price. (d) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company or any of its officers or directors in their capacities as such, before or by any Federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an unfavorable ruling, decision or finding would materially and adversely affect the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company. (e) Each of the representations and warranties of the Company -12- contained herein shall be true and correct in all material respects at the Closing Date, as if made on such date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to the Closing Date shall have been duly performed, fulfilled or complied with. (f) The Placement Agent shall have received an opinion, dated the Closing Date (or such other date as may be set forth in a representation or warranty), of Morgan, Lewis & Bockius LLP, as counsel to the Company, in form and substance reasonably satisfactory to the Placement Agent: (g) Concurrently with the execution and delivery of this Agreement, or, if the Company elects to rely on Rule 430A, on the date of the Prospectus, the Accountants shall have furnished to the Placement Agent a letter, dated the date of its delivery (the "Original Letter"), addressed to the Placement Agent and in form and substance satisfactory to the Placement Agent, confirming that (i) they are independent public accountants with respect to the Company within the meaning of the Act and the Rules and Regulations; (ii) in their opinion, the financial statements and any supplementary financial information and schedules (and pro forma financial information) included in the Registration Statement and examined by them comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (iii) on the basis of procedures, not constituting an examination in accordance with generally accepted auditing standards, set forth in detail in the Original Letter, a reading of the latest available interim financial statements of the Company, inspections of the minute books of the Company since the latest audited financial statements included in the Prospectus, inquiries of officials of the Company responsible for financial and accounting matters and such other inquiries and procedures as may be specified in the Original -13- Letter to a date not more than five days prior to the date of the Original Letter, nothing came to their attention that caused them to believe that: (A) as of a specified date not more than five days prior to the date of the Original Letter, there have been any changes in the capital stock of the Company or any increase in the long-term debt of the Company, or any decreases in net current assets or net assets or other items specified by the Placement Agent, or any increases in any items specified by the Placement Agent, in each case as compared with amounts shown in the latest balance sheet included in the Prospectus, except in each case for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in the Original Letter; and (B) for the period from the date of the latest financial statements included in the Prospectus to the specified date referred to in Clause (A), there were any decreases in revenues or the total or per share amounts of net income or other items specified by the Placement Agent, or any increases in any items specified by the Placement Agent, in each case as compared with the comparable period of the preceding year and with any other period of corresponding length specified by the Placement Agent, except in each case for decreases or increases which the Prospectus discloses have occurred or may occur or which are described in the Original Letter; and (iv) in addition to the examination referred to in their reports included in the Prospectus and the procedures referred to in clause (iii) above, they have carried out certain specified procedures, not constituting an examination in accordance with generally accepted auditing standards, with respect to certain amounts, percentages and financial information specified by the Placement Agent, which are derived from the general accounting, financial or other records of the Company, as the case may be, which appear in the Prospectus or in Part II of, or in exhibits or schedules to, the Registration Statement, and have compared such amounts, percentages and financial information with such accounting, financial and other records and have found them to be in agreement. At the Closing Date, the Accountants shall have furnished to the Placement Agent a letter, dated the date of its delivery, which shall confirm, on the basis of a review in accordance with the procedures set forth in the Original Letter, that nothing has come to their attention during the period from the date of the Original Letter referred to in the prior sentence to a date (specified in the letter) not more than five days prior to the Closing Date which would require any change in the Original Letter if it were required to be dated and delivered at the Closing Date. (h) The Placement Agent shall have received an opinion, dated the Closing Date, of Patent Counsel in form and substance satisfactory to the Placement Agent as to certain intellectual property matters referenced in the Registration Statement. (i) At the Closing Date, there shall be furnished to the Placement Agent a certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and the Chief Financial Officer of the Company, in form and substance satisfactory to the Placement Agent to the effect that to the best of such person's knowledge: (i) Each signer of such certificate has carefully examined the Registration Statement and the Prospectus and (A) as of the date of such certificate, (x) the Registration Statement does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make -14- the statements therein not misleading and (y) the Prospectus does not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (B) since the Effective Date no event has occurred as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein not untrue or misleading in any material respect. (ii) Each of the representations and warranties of the Company contained in this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects. (iii) Each of the covenants required herein to be performed by the Company on or prior to the date of such certificate has been duly, timely and fully performed and each condition herein required to be complied with by the Company on or prior to the delivery of such certificate has been duly, timely and fully complied with. (iv) No stop order suspending the effectiveness of the Registration Statement or of any part thereof has been issued and no proceedings for that purpose have been instituted or are contemplated by the Securities and Exchange Commission. (v) Subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change in the financial position or results of operations of the Company, except as set forth in or contemplated by the Prospectus. (j) The Shares shall be qualified for sale in such states as the Placement Agent may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (k) The Company shall have furnished to the Placement Agent such certificates, in addition to those specifically mentioned herein, as the Placement Agent may have reasonably requested as to the accuracy and completeness at the Closing Date of any statement in the Registration Statement or the Prospectus, as to the accuracy at the Closing Date of the representations and warranties of the Company as to the performance by the Company of its obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to the obligations hereunder of the Placement Agent. 7. Indemnification. (a) The Company shall indemnify and hold harmless the Placement -15- Agent, the directors, officers, employees and agents of the Placement Agent and each person, if any, who controls the Placement Agent within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all losses, claims, liabilities, expenses and damages, joint or several, (including any and all investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which it, or any of them, may become subject under the Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based on (i) any untrue statement or alleged untrue statement made by the Company in Section 3 of this Agreement, (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) any Preliminary Prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus and (B) any application or other document, or any amendment or supplement thereto, executed by the Company based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or Blue Sky laws thereof or filed with the Commission or any securities association or securities exchange (each, an "Application") or (iii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus or any supplement to the Registration Statement or the Prospectus or any Application a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company will not be liable to the extent that such loss, claim, liability, expense or damage arises from the sale of the Shares in the public offering to any person and is based solely on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to the Placement Agent furnished in writing to the Company by the Placement Agent expressly for inclusion in the Registration Statement, any Preliminary Prospectus or the Prospectus; and provided further, that such indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of any Placement Agent (or any person controlling such Placement Agent) from whom the person asserting any such loss, claim, damage, liability or action purchased Shares which are the subject thereof to the extent that any such loss, claim, damage or liability (i) results from the fact that such Placement Agent failed to send or give a copy of the Prospectus (as amended or supplemented) to such person at or prior to the confirmation of the sale of such Shares to such person in any case where such delivery is required by the Act and (ii) arises out of or is based upon an untrue statement or omission of a material fact contained in such Preliminary Prospectus that was corrected in the Prospectus (or any amendment or supplement thereto), unless such failure to deliver the Prospectus (as amended or supplemented) was the result of noncompliance by the Company with Section 5(d). This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company will not, without the prior written consent of the Placement Agent (which will not be unreasonably withheld), settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such Placement Agent or any person who controls such Placement Agent within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to each claim, action, suit or proceeding), unless such -16- settlement, compromise or consent includes an unconditional release of the Placement Agent and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (b) The Placement Agent will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signs the Registration Statement to the same extent as the foregoing indemnity from the Company to the Placement Agent, but only insofar as losses, claims, liabilities, expenses or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to the Placement Agent furnished in writing to the Company by the Placement Agent expressly for use in the Registration Statement, any Preliminary Prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that the Placement Agent might otherwise have. The Company acknowledges that, for all purposes under this Agreement, the statements set forth under the heading "Plan of Distribution" in any Preliminary Prospectus and the Prospectus constitute the only information relating to the Placement Agent furnished in writing to the Company by the Placement Agent expressly for inclusion in the Registration Statement, any Preliminary Prospectus or the Prospectus. (c) Any party that proposes to assert the right to be indemnified under this Section 7 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 7, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 7 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has reasonably concluded (based on advice of counsel) that a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the -17- defense of such action on behalf of the indemnified party) or (3) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. The Company will not, without the prior written consent of the Placement Agent (which consent will not be unreasonably withheld), settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Placement Agent or any person who controls the Placement Agent within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Placement Agent and each such controlling person from all liability arising out of such claim, action, suit or proceeding. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 7 is applicable in accordance with its terms but for any reason is held to be unavailable from the Company or the Placement Agent, the Company and the Placement Agent will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from persons other than the Placement Agent such as persons who control the Company within the meaning of the Act or the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company, who also may be liable for contribution) to which the Company and the Placement Agent may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Placement Agent on the other. The relative benefits received by the Company on the one hand and the Placement Agent on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting Company expenses) received by the Company as set forth in the table on the cover page of the Prospectus bear to the fee received by the Placement Agent hereunder. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company, on the one hand, and the Placement Agent on the other, with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or -18- alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Placement Agent, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Placement Agent agree that it would not be just and equitable if contributions pursuant to this Section 7(d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 7(d) shall be deemed to include, for purpose of this Section 7(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7(d), the Placement Agent shall not be required to contribute any amount in excess of the fee received by it, and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7(d), any person who controls a party to this Agreement within the meaning of the Act or the Exchange Act will have the same rights to contribution as that party, and each officer of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 7(d), will notify any such party or parties from whom contribution may be sought, but the omission so to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 7(d). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). 8. Termination. (a) The obligations of the Placement Agent under this Agreement may be terminated at any time prior to the Closing Date, by notice to the Company from the Placement Agent, without liability on the part of the Placement Agent to the Company if, prior to delivery and payment for the Shares, in the sole judgment of the Placement Agent (i) trading in the Common Stock of the Company shall have been suspended by the Commission or by the NNM, (ii) trading in securities generally on the New York Stock Exchange or the NNM shall have been suspended or limited or minimum or maximum prices shall have been generally established on any of such exchanges, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by any of such exchanges or by order of the Commission or any court or other governmental authority, (iii) a general banking moratorium shall have been declared by Federal or New York State authorities, (iv) any material adverse change in the financial or securities markets in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity or crisis shall have occurred, the effect of any of which is such as to make it, in the sole judgment of the Placement Agent, impracticable or inadvisable to market the Shares on the terms and in the manner -19- contemplated by the Prospectus. (b) The obligations of the parties under this Agreement shall be automatically terminated in the event that the Requisite Funds have not been deposited by the Investors into the Escrow Account by the close of business on the Closing Date. 9. Notices. Notice given pursuant to any of the provisions of this Agreement shall be in writing and, unless otherwise specified, shall be mailed or delivered (a) if to the Company, at the office of the Company, 102 Witmer Road, Horsham, PA 19044, Attention: Stephen A. Roth or (b) if to the Placement Agent, at the office of Vector Securities International, Inc., 1751 Lake Cook Road, Suite 350, Deerfield, Illinois, 60015, Attention: Marina Bozilenko. Any such notice shall be effective only upon receipt. Any notice under Section 7 may be made by facsimile or telephone, but if so made shall be subsequently confirmed in writing. 10. Survival. The respective representations, warranties, agreements, covenants, indemnities and other statements of the Company, its officers and the Placement Agent set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, the Placement Agent or any controlling person referred to in Section 7 hereof and (ii) delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 5 and 7 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 11. Successors. This Agreement shall inure to the benefit of and shall be binding upon the Placement Agent, the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (i) the indemnification and contribution contained in Sections 7(a) and (d) of this Agreement shall also be for the benefit of the directors, officers, employees and agents of the Placement Agent and any person or persons who control the Placement Agent within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (ii) the indemnification and contribution contained in Sections 7(b) and (d) of this Agreement shall also be for the benefit of the directors of the Company, the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No Investor shall be deemed a successor because of such purchase. 12. APPLICABLE LAW. THE VALIDITY AND INTERPRETATIONS OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN -20- ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. 13. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14. Entire Agreement. This Agreement constitutes the entire understanding between the parties hereto as to the matters covered hereby and supersedes all prior understandings, written or oral, relating to such subject matter. Please confirm that the foregoing correctly sets forth the agreement between the Company and the Placement Agent. Very truly yours, NEOSE TECHNOLOGIES, INC. By: ---------------------------- Name: Title: Confirmed as of the date first above mentioned: VECTOR SECURITIES INTERNATIONAL, INC. By: ---------------------------- Name: Title: -21- EXHIBIT A [ESCROW AGREEMENT] -22- EXHIBIT B LOCK UP LETTERS -23- ATTACHMENT A Vector Securities International, Inc. 1751 Lake Cook Road, Suite 350 Deerfield, Illinois 60015 Ladies and Gentlemen: Reference is made to a Placement Agency Agreement (the "Placement Agency Agreement"), which will be executed between Neose Technologies, Inc., a Delaware corporation (the "Company"), and Vector Securities International, Inc. (the "Placement Agent"). In consideration of the Placement Agency Agreement, the undersigned hereby agrees not to, without the prior written consent of the Placement Agent, offer, sell or otherwise dispose of any shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"), or any securities convertible into or exercisable or exchangeable for, or any rights to purchase or acquire, Common Stock owned by the undersigned for a period of 90 days after the date of the Placement Agency Agreement. Dated: _______________ , 1997 Very truly yours, ---------------------------- -24- ATTACHMENT B Vector Securities International, Inc. 1751 Lake Cook Road, Suite 350 Deerfield, Illinois 60015 Ladies and Gentlemen: Reference is made to a Placement Agency Agreement (the "Placement Agency Agreement"), which will be executed between Neose Technologies, Inc., a Delaware corporation (the "Company"), and Vector Securities International, Inc. (the "Placement Agent"). In consideration of the Placement Agency Agreement, the undersigned hereby agrees not to, without the prior written consent of the Placement Agent, offer, sell or otherwise dispose of any shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"), or any securities convertible into or exercisable or exchangeable for, or any rights to purchase or acquire, Common Stock owned by the undersigned for a period of 90 days after the date of the Placement Agency Agreement except with respect to the issuance of shares of Common Stock upon the exercise of stock options and warrants outstanding as of the date hereof and upon the conversion of shares of Preferred Stock outstanding as of the date hereof and the issuance of Common Stock or stock options under any benefit plan of the Company. Dated: _____________ , 1997 Very truly yours, NEOSE TECHNOLOGIES, INC. -------------------------------- Name: Title: -25- EX-1.2 3 ESCROW AGREEMENT FORM OF ESCROW AGREEMENT ESCROW AGREEMENT, dated as of January __, 1997, by and among Neose Technologies, Inc., a Delaware corporation (the "Company"), Vector Securities International, Inc. (the "Placement Agent") and Citibank N.A., a national banking institution incorporated under the laws of the United States of America (the "Escrow Agent"). WHEREAS, the Company proposes to sell an aggregate of 1,250,000 shares of its common stock, par value $.01 per share (the "Shares"), for an aggregate of $ _______, all as described in the Company's registration statement on Form S-1 (Registration No. 333- ) (which, together with all amendments or supplements thereto is referred to herein as the "Registration Statement"); WHEREAS, the Shares are being offered by the Company to investors whom the Placement Agent has introduced to the Company, pursuant to registration under the Securities Act of 1933, as amended, and pursuant to registration or exemptions from registration under state securities laws; WHEREAS, the offering of the Shares will terminate on January __, 1997 (the "Closing Date") and, if subscriptions for the total number of Shares being offered pursuant to the Registration Statement have not been received by the Company on or before the Closing Date, no Shares will be sold and all payments made by subscribers will be refunded by the Escrow Agent with interest earned thereon, if any; and WHEREAS, with respect to all subscription payments received from subscribers, the Company proposes to establish an escrow account with the Escrow Agent at the office of its Escrow Administration, 120 Wall Street, New York, New York 10043, Attention: Bryan Gartenberg. NOW THEREFORE, it is agreed as follows: 1. Establishment of Escrow. The Escrow Agent hereby agrees to receive and disburse the proceeds from the offering of the Shares and any interest earned thereon in accordance herewith. 2. Deposit of Escrowed Property. The Placement Agent, on behalf of the subscribers for the Shares, shall from time to time, but in no event later than 12:00 noon on the date following the date of receipt by the Placement Agent, cause to be wired to or deposited with, or, cause the subscribers for the Shares to wire or deposit with, the Escrow Agent funds or checks of the subscribers delivered in payment for Shares (the "Escrowed Property"). Such Escrowed Property shall be wired to or deposited with the Escrow Agent not later than 12:00 noon on the date following the date on which it is received by the Placement Agent. Any checks delivered to the Escrow Agent pursuant to the terms hereof shall be made payable to or endorsed to the order of the Escrow Agent. The Escrow Agent upon receipt of such checks shall present such checks for payment to the drawee-bank under such checks. Any checks not honored by the drawee-bank thereunder after the first presentment for payment shall be returned to the Placement Agent, on behalf of such subscriber, in the same manner notices are delivered pursuant to Section 6. Upon receipt of funds or checks from the Placement Agent, the Escrow Agent shall credit such funds and the amount of such checks to a non-interest-bearing account (the "Escrow Account") held by the Escrow Agent. If following the credit of the amount of any check to the Escrow Account such check is dishonored, the Escrow Agent, if such dishonored check amount shall have been invested pursuant to Section 3, shall liquidate to the extent of such dishonored check amount such investments and debit the Escrow Account for the amount of such dishonored check plus, if any, the amount of interest and other income earned with respect to any investment of such dishonored check amount. 3. Investment of Escrowed Property. The Escrow Agent on the second business day ("business day" defined for purposes of this Escrow Agreement as any day which is not a Saturday, a Sunday or a day on which banks or trust companies in the City and State of New York are authorized or obligated by law, regulation or executive order to remain closed) succeeding (unless such deposit is made in federal or other immediately available or "same day" funds, in which case, on the business day next succeeding) the credit of any subscription proceeds to the Escrow Account pursuant to Section 2 and until release of such proceeds in accordance with the terms hereof, shall deposit such proceeds in a Citibank Money Market Deposit Account, pursuant to Rule 15c2-4 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, in accordance with the terms set forth on Exhibit A hereto (made a part of this Escrow Agreement as if herein set forth). The Escrow Agent shall in no event be liable for any loss resulting from any change in interest rates applicable to proceeds invested pursuant to this Section. Interest on proceeds invested pursuant to this Section shall accrue from the date of investment of such proceeds until the termination of such investment pursuant to the terms hereof and shall be paid as set forth in Section 5. 4. List of Subscribers. The Placement Agent shall furnish or cause to be furnished to the Escrow Agent, at the time of each deposit of funds or checks pursuant to Section 2, a list, substantially in the form of Exhibit B hereto, containing the name of, the address of, the number of Shares subscribed for by, the subscription amount delivered to the Escrow Agent on behalf of, and the social security or taxpayer identification number, if applicable, of each subscriber whose funds are being deposited, and to which is attached a completed W-9 form (or, in the case of any subscriber who is not a United States citizen or resident, a W-8 form) for each listed subscriber. The Escrow Agent shall notify the Placement Agent and the Company of any discrepancy between the subscription amounts set forth on any list delivered pursuant to this Section 4 and the subscription amounts received by the Escrow Agent. The Escrow Agent is authorized to revise such list to reflect the actual subscription amounts received and the release of any subscription amounts pursuant to Section 5. 5. Withdrawal of Subscription Amounts. (a) If the Escrow Agent shall receive a notice, substantially in the form of Exhibit C hereto (an "Offering Termination Notice"), from the Company, the Escrow Agent shall (i) promptly after receipt of such Offering Termination Notice and the clearance of all checks received by the Escrow Agent as Escrowed Property, liquidate any -2- investments that shall have been made pursuant to Section 3 and send to each subscriber listed on the list held by the Escrow Agent pursuant to Section 4 whose total subscription amount shall not have been released pursuant to paragraph (b) or (c) of this Section 5, in the manner set forth in paragraph (e) of this Section 5, a check to the order of such subscriber in the amount of the remaining subscription amount held by the Escrow Agent as set forth on such list held by the Escrow Agent, and (ii) promptly after the fourth business day of the month immediately following the month in which the investments made pursuant to Section 3 were terminated pursuant to this paragraph, send, in the manner set forth in paragraph (e) of this Section 5, a check to the order of each such subscriber in the amount of interest and other income earned and not yet paid with respect to any investment of such subscriber's funds. The Escrow Agent shall notify the Company and the Placement Agent of the distribution of such funds to the subscribers. (b) In the event that (i) the Shares have been subscribed for and funds in respect thereof shall have been deposited with the Escrow Agent on or before the Closing Date and (ii) no Offering Termination Notice shall have been delivered to the Escrow Agent, the Company and the Placement Agent, shall deliver to the Escrow Agent a joint notice, substantially in the form of Exhibit D hereto (a "Closing Notice"), designating the date on which Shares are to be sold and delivered to the subscribers thereof as the Closing Date, which date shall not be earlier than the clearance of any checks received by the Escrow Agent as Escrowed Property, the proceeds of which are to be distributed on such Closing Date, and identifying the subscribers and the number of Shares to be sold to each thereof on such Closing Date. Such Closing Notice, unless the parties otherwise agree, shall be delivered not less than two (2) nor more than seven (7) business days prior to such Closing Date. The Escrow Agent, after receipt of such Closing Notice and the clearance of such checks: (i) on or prior to the Closing Date identified in such Closing Notice, shall liquidate any investments that shall have been made pursuant to Section 3 to the extent of the subscription amount to be distributed pursuant to the immediately succeeding clause (ii); (ii) on such Closing Date, pay to the Company and the Placement Agent, in federal or other immediately available funds and otherwise in the manner and amount specified by the Company and the Placement Agent in such Closing Notice, an amount equal to the aggregate of the subscription amounts paid by the subscribers identified in such Closing Notice for the Shares to be sold on such Closing Date as set forth on the list held by the Escrow Agent pursuant to Section 4; and (iii) promptly after the fourth business day of the month immediately following the month in which the investments made pursuant to Section 3 were terminated pursuant to such Closing Notice, shall send, in the manner set forth in paragraph (e) of this Section 5, a check to the order of each subscriber identified in such Closing Notice in the amount of interest and other income earned and not yet paid with respect to any investment of each such subscriber's funds distributed on such Closing Date. At the time of such transfer, the Escrow Agent shall identify in writing to the Company and the Placement Agent the amount of the interest earned for the account of each subscriber and the date such -3- subscription was received. (c) If at any time and from time to time prior to the release of any subscriber's total subscription amount pursuant to paragraph (a) or (b) of this Section 5 from escrow, the Company shall deliver to the Escrow Agent a notice, substantially in the form of Exhibit E hereto (a "Subscription Termination Notice"), to the effect that any or all of the subscriptions of such subscriber have been rejected by the Company (a "Rejected Subscription"), the Escrow Agent (i) promptly after receipt of such Subscription Termination Notice and, if such subscriber delivered a check in payment of its Rejected Subscription, after the clearance of such check, shall liquidate, to the extent of the sum of such subscriber's Rejected Subscription amount as set forth in the Subscription Termination Notice, any investments that shall have been made pursuant to Section 3 and send to such subscriber, in the manner set forth in paragraph (e) of this Section 5, a check to the order of such subscriber in the amount of such Rejected Subscription amount, and (ii) promptly after the fourth business day of the month immediately following the month in which the investments made pursuant to Section 3 were terminated pursuant to this paragraph, shall send to such subscriber, in the manner set forth in paragraph (e) of this Section 5, a check to the order of such subscriber in the amount of interest and other income earned and not yet paid with respect to any investment of such subscriber's Rejected Subscription amount. At the time of such transfer, the Escrow Agent shall identify in writing to the Company and the Placement Agent the amount of the interest earned for the account of each subscriber and the date such subscription was received. (d) On a date following the transfer of any interest earned for the account of each subscriber pursuant to Section 5(a), (b) or (c), but not later than January 1, 1998, the Escrow Agent shall provide each subscriber with tax form 1099 setting forth the amount of such interest. (e) For the purposes of this Section 5, any check that the Escrow Agent shall be required to send to any subscriber shall be sent to such subscriber by first class mail, postage prepaid, at such subscriber's address furnished to the Escrow Agent pursuant to Section 4. 6. Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be (a) delivered by hand or (b) sent by mail, registered or certified, with proper postage prepaid, and addressed as follows: if to the Company, to: Neose Technologies, Inc. 102 Witmer Road Horsham, PA 19044 Attention: Chief Executive Officer with a copy to: Morgan Lewis & Bockius LLP 2000 One Logan Square -4- Philadelphia, PA 19103 Attention: David R. King, Esq. if to the Placement Agent, to: Vector Securities International, Inc. 1751 Lake Cook Road, Suite 350 Deerfield, Illinois 60015 Attention: Marina Bozilenko with a copy to: Stroock & Stroock & Lavan Seven Hanover Square New York, New York 10004-2696 Attention: James R. Tanenbaum, Esq. if to the Escrow Agent, to: Citibank N.A. 120 Wall Street New York, New York 10043 Attention: Bryan Gartenberg or to such other address as the person to whom notice is to be given may have previously furnished to the others in the above-referenced manner. All such notices and communications, if mailed, shall be effective when deposited in the mails, except that notices and communications to the Escrow Agent and notices of changes of address shall not be effective until received. 7. Concerning the Escrow Agent. To induce the Escrow Agent to act hereunder, it is further agreed by the Company and Placement Agent that: (a) The Escrow Agent shall not be under any duty to give the Escrowed Property held by it hereunder any greater degree of care than it gives its own similar property and shall not be required to invest any funds held hereunder except as directed in this Escrow Agreement. Uninvested funds held hereunder shall not earn or accrue interest. (b) This Escrow Agreement expressly sets forth all the duties of the Escrow Agent with respect to any and all matters pertinent hereto. No implied duties or obligations shall be read into this Escrow Agreement against the Escrow Agent. The Escrow Agent shall not be bound by the provisions of any agreement among the other parties hereto except this Escrow Agreement. -5- (c) The Escrow Agent shall not be liable, except for its own negligence or willful misconduct, and, except with respect to claims based upon such negligence or willful misconduct that are successfully asserted against the Escrow Agent, and the other parties hereto shall jointly and severally indemnify and hold harmless the Escrow Agent (and any successor Escrow Agent) from and against any and all losses, liabilities, claims, actions, damages and expenses, including reasonable attorneys' fees and disbursements, arising out of and in connection with this Escrow Agreement. Without limiting the foregoing, the Escrow Agent shall in no event be liable in connection with its investment or reinvestment of any cash held by it hereunder in good faith, in accordance with the terms hereof, including without limitation any liability for any delays (not resulting from gross negligence or willful misconduct) in the investment or reinvestment of the Escrowed Property, or any loss of interest incident to any such delays. (d) The Escrow Agent shall be entitled to rely upon any order, judgment, certification, demand, notice, instrument or other writing delivered to it hereunder without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of the service thereof. The Escrow Agent may act in reliance upon any instrument or signature believed by it in good faith to be genuine and may assume, if in good faith, that any person purporting to give notice or receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. (e) The Escrow Agent may act pursuant to the advice of counsel with respect to any matter relating to this Escrow Agreement and shall not be liable for any action taken or omitted in good faith and in accordance with such advice. (f) The Escrow Agent does not have any interest in the Escrowed Property deposited hereunder but is serving as escrow holder only. Any payments of income from the Escrow Account shall be subject to withholding regulations then in force with respect to United States taxes. The parties hereto will provide the Escrow Agent with appropriate W-9 forms for tax I.D., number certification, or non-resident alien certifications. This paragraph (f) and paragraph (c) of this Section 7 shall survive notwithstanding any termination of this Escrow Agreement or the resignation of the Escrow Agent. (g) The Escrow Agent makes no representation as to the validity, value, genuineness or the collectibility of any security or other document or instrument held by or delivered to it. (h) The Escrow Agent shall not be called upon to advise any party as to the wisdom of selling or retaining or taking or refraining from any action with respect to any securities or other property deposited hereunder. (i) The Escrow Agent (and any successor escrow agent) at any time may be discharged from its duties and obligations hereunder by the delivery to it of notice of termination signed by both the Company and the Placement Agent or at any time may resign by giving written -6- notice to such effect to the Company and the Placement Agent. Upon any such termination or resignation, the Escrow Agent shall deliver the Escrowed Property to any successor escrow agent jointly designated by the other parties hereto in writing, or to any court of competent jurisdiction if no such successor escrow agent is agreed upon, whereupon the Escrow Agent shall be discharged of and from any and all further obligations arising in connection with this Escrow Agreement. The termination or resignation of the Escrow Agent shall take effect on the earlier of (i) the appointment of a successor (including a court of competent jurisdiction) or (ii) the day that is 30 days after the date of delivery: (A) to the Escrow Agent of the other parties' notice of termination or (B) to the other parties hereto of the Escrow Agent's written notice of resignation. If at that time the Escrow Agent has not received a designation of a successor escrow agent, the Escrow Agent's sole responsibility after that time shall be to keep the Escrowed Property safe until receipt of a designation of successor escrow agent or a joint written disposition instruction by the other parties hereto or any enforceable order of a court of competent jurisdiction. (j) The Escrow Agent shall have no responsibility for the contents of any writing of any third party contemplated herein as a means to resolve disputes and may rely without any liability upon the contents thereof. (k) In the event of any disagreement among or between the other parties hereto and/or the subscribers of the Shares resulting in adverse claims or demands being made in connection with the Escrowed Property, or in the event that the Escrow Agent in good faith is in doubt as to what action it should take hereunder, the Escrow Agent shall be entitled to retain the Escrowed Property until the Escrow Agent shall have received (i) a final and non-appealable order of a court of competent jurisdiction directing delivery of the Escrowed Property or (ii) a written agreement executed by the other parties hereto and consented to by the subscribers directing delivery of the Escrowed Property, in which event the Escrow Agent shall disburse the Escrowed Property in accordance with such order or agreement. Any court order referred to in (i) above shall be accompanied by a legal opinion by counsel for the presenting party satisfactory to the Escrow Agent to the effect that said court order is final and non-appealable. The Escrow Agent shall act on such court order and legal opinion without further question. (l) As consideration for its agreement to act as Escrow Agent as herein described, the Company agrees to pay the Escrow Agent fees determined in accordance with the terms set forth on Exhibit F hereto (made a part of this Escrow Agreement as if herein set forth). In addition, the Company agrees to reimburse the Escrow Agent for all reasonable expenses, disbursements and advances incurred or made by the Escrow Agent in performance of its duties hereunder (including reasonable fees, expenses and disbursements of its counsel). (m) The other parties hereto irrevocably (i) submit to the jurisdiction of any New York State or federal court sitting in New York City in any action or proceeding arising out of or relating to this Escrow Agreement, (ii) agree that all claims with respect to such action or proceeding shall be heard and determined in such New York State or federal court and (iii) waive, to the fullest extent possible, the defense of an inconvenient forum. The other parties hereby consent to and grant any such court jurisdiction over the persons of such parties and over the subject matter -7- of any such dispute and agree that delivery or mailing of process or other papers in connection with any such action or proceeding in the manner provided hereinabove, or in such other manner as may be permitted by law, shall be valid and sufficient service thereof. (n) No printed or other matter in any language (including, without limitation, the Registration Statement, notices, reports and promotional material) which mentions the Escrow Agent's name or the rights, powers, or duties of the Escrow Agent shall be issued by the other parties hereto or on such parties' behalf unless the Escrow Agent shall first have given its specific written consent thereto. The Escrow Agent hereby consents to the use of its name and the reference to the escrow arrangement in the Registration Statement. 8. Miscellaneous. (a) This Escrow Agreement shall be binding upon and inure solely to the benefit of the parties hereto and their respective successors and assigns, heirs, administrators and representatives, and the subscribers of the Shares and shall not be enforceable by or inure to the benefit of any other third party except as provided in paragraph (i) of Section 7 with respect to the termination of, or resignation by, the Escrow Agent. No party may assign any of its rights or obligations under this Escrow Agreement without the written consent of the other parties. (b) This Escrow Agreement shall be construed in accordance with and governed by the internal law of the State of New York (without reference to its rules as to conflicts of law). (c) This Escrow Agreement may only be modified by a writing signed by all of the parties hereto and consented to by the subscribers of the Shares adversely affected by such modifications. No waiver hereunder shall be effective unless in a writing signed by the party to be charged. (d) This Escrow Agreement shall terminate upon the payment pursuant to Section 5 of all amounts held in the Escrow Account. (e) The section headings herein are for convenience only and shall not affect the construction thereof. Unless otherwise indicated, references to Sections are to Sections contained herein. (f) This Escrow Agreement may be executed in one or more counterparts but all such separate counterparts shall constitute but one and the same instrument; provided that, although executed in counterparts, the executed signature pages of each such counterpart may be affixed to a single copy of this Agreement which shall constitute an original. -8- IN WITNESS WHEREOF, the parties hereto have caused this Escrow Agreement to be executed as of the day and year first above written. NEOSE TECHNOLOGIES, INC. By: -------------------------------- Name: Title: VECTOR SECURITIES INTERNATIONAL, INC. By: -------------------------------- Name: Title: CITIBANK N.A. By: -------------------------------- Name: Title: -9- EXHIBIT A Citibank Insured Money Market Deposit Accounts Deposits/Withdrawals may be made to the Citibank Money Market Deposit Account ("MMDA") established under the Escrow Agreement to which this Exhibit is attached only through the Escrow Account. All transaction and balance reporting of the MMDA will be included as part of the Escrow Account Statement. Activity in the MMDA will be reflected as the equivalent of dollars on deposit in a Citibank Money Market Deposit Account. Deposits/Withdrawals to the MMDA will be made only as permitted by the Escrow Agreement to which this Exhibit is attached. The MMDA has certain regulatory restrictions as well as some minimum requirements: 1. By regulation, Citibank, N.A. is required to reserve the right to require seven days' prior notice of any withdrawals of funds from an account; provided, however, that, if Citibank, N.A. elects to exercise its right to require seven days' prior notice, it shall exercise such right as to all such accounts established. 2. A daily balance of $10,000 must be maintained on deposit in the MMDA. If the MMDA should fall below $10,000 on any day, Citibank, N.A. will be authorized to transfer the remaining balance to the Escrow Account. 3. Rates will be determined by Citibank, N.A. and can be determined by calling your custody account officer. 4. Balances up to $100,000 (total on deposit at Citibank, N.A.) are FDIC-insured. -1- EXHIBIT B SUMMARY OF CASH RECEIVED NEW PARTICIPANT DEPOSIT Date:---------------------------- Deposit Date: List Number:--------------------- Investment Date: Page --- of --------------------- Batch Number: Approved By:--------------------- JOB#:---------------------------- For Bank use only TITLE:-------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- * *AMOUNT OF * *TAX ID NO./ | | FOR BANK NAME * DEPOSIT *SHARES * ADDRESS |SOC.SEC. NO. * * USE ONLY - ----------------------- ------------ ----------- -------------------------- ----------- ----------- * * * * * * TAX CODE * * * * * * EXEMPT(Y/N) * * * * * * W-9(YR) NRA * * * * * * W-8(YR) * * * * * * 1008(87) * * * * * * - ---------------------------------------------------------------------------------------------------------------------------------- Broker Misc. * * * * Misc. II * Misc. III | TAX CODE * * * * * * EXEMPT(Y/N) * * * * * * W-2(YR) NRS * * * * * * W-8(YR) * * * * * * 1008(87)
-1-
* * * * * * - ---------------------------------------------------------------------------------------------------------------------------------- Broker Misc. * * * * Misc. II * Misc. III | TAX CODE * * * * * * EXEMPT(Y/N) * * * * * * W-2(YR) NRS * * * * * * W-8(YR) * * * * * * 1008(87) * * * * * * - ---------------------------------------------------------------------------------------------------------------------------------- Broker Misc. * * * * Misc. II * Misc. III | TAX CODE * * * * * * EXEMPT(Y/N) * * * * * * W-2(YR) NRS * * * * * * W-8(YR) * * * * * * 1000(87) * * * * * * - ---------------------------------------------------------------------------------------------------------------------------------- Broker Misc. * * * * Misc. II * Misc. III | * * * * * *
EXHIBIT C [Form of Offering Termination Notice] -1- Citibank, N.A. Corporate Trust Escrow Administration 120 Wall Street, 13th Floor New York, New York 10043 Attention: Dear : C-2 Pursuant to Section 5(a) of the Escrow Agreement dated as of ___________, 1997 (the "Escrow Agreement") among NEOSE TECHNOLOGIES, INC., (the "Company"), Vector Securities International, Inc. and you, the Company hereby notifies you of the termination of the offering of the Shares (as that term is defined in the Escrow Agreement) and directs you to make payments to subscribers as provided for in Section 5(a) of the Escrow Agreement. Very truly yours, NEOSE TECHNOLOGIES, INC. By: _______________________________ Name: Title: C-3 EXHIBIT D [Form of Closing Notice] ________________, 1997 Citibank, N.A. Corporate Trust Escrow Administration 120 Wall Street, 13th Floor New York, New York 10043 Attention: Ladies and Gentlemen: Pursuant to Section 5(b) of the Escrow Agreement dated as of ________, 1997, (the "Escrow Agreement") among Neose Technologies, Inc. (the "Company"), Vector Securities International, Inc. and you, the Company hereby certifies that it has received subscriptions for the Shares (as that term is defined in the Escrow Agreement) and the Company will sell and deliver Shares to the subscribers thereof at a closing to be held on ________, 1997 (the "Closing Date"). The names of the subscribers concerned, the number of Shares subscribed for by each of such subscribers and the related subscription amounts are set forth on Schedule I annexed hereto. Please accept these instructions as standing instructions for the closing to be held on the Closing Date. The parties hereto certify that they do not wish to have a call back regarding these D-1 instructions. We hereby request that the aggregate subscription amount be paid to the Placement Agent and us as follows: 1. To the Company, $_________; 2. To Vector Securities International, Inc., $_________; and 3. To the Escrow Agent, $_________. D-2 These instructions may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which together shall constitute one and the same instrument. Very truly yours, NEOSE TECHNOLOGIES, INC. By: _____________________________ Name: Title: VECTOR SECURITIES INTERNATIONAL, INC. By: ______________________________ Name: Title: D-3 SCHEDULE I ---------- Name of Number of Subscription Subscriber Shares Amount - ---------- ------ ------ EXHIBIT E [Form of Subscription Termination Notice] Citibank, N.A. Corporate Trust Escrow Administration 120 Wall Street, 13th Floor New York, New York 10043 Attention: Dear : Pursuant to Section 5(c) of the Escrow Agreement dated as of January __, 1997 (the "Escrow Agreement") among Neose Technologies, Inc. (the "Company"), Vector Securities International, Inc. and you, the Company hereby notifies you that the following subscription(s) have been rejected: E-1 Amount of Dollar Subscribed Amount of Name of Shares Rejected Subscriber Rejected Subscription - ---------- -------- ------------ Very truly yours, NEOSE TECHNOLOGIES, INC. By: ____________________________ Name: Title: E-2 EXHIBIT F Fee to Citibank N.A.: $ F-1 EX-5 4 LEGAL OPINION Morgan, Lewis & Bockius LLP 2000 One Logan Square Philadelphia, PA 19103-6993 215-963-5000 Fax: 215-963-5299 January 10, 1997 Neose Technologies, Inc. 102 Witmer Road Horsham, PA 19044 Re: Neose Technologies, Inc. Registration Statement on Form S-1 Ladies and Gentlemen: We have acted as counsel to Neose Technologies, Inc., a Delaware corporation (the "Company"), in connection with the preparation of a Registration Statement on Form S-1 (the "Registration Statement"), to be filed with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), relating to the offering of 1,250,000 shares (the "Shares") of the Company's common stock, par value $0.01 per share (the "Common Stock"). In rendering the opinion set forth below, we have reviewed (a) the Registration Statement and the exhibits thereto; (b) the Company's Second Amended and Restated Certificate of Incorporation; (c) the Company's Amended and Restated By-Laws; (d) certain records of the Company's corporate proceedings as reflected in its minute and stock books; (e) the draft of the Placement Agency Agreement; (f) the draft of the Escrow Agreement; and (g) such statutes, records and other documents as we have deemed relevant. In our examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity with the originals of all documents submitted to us as copies thereof. Based upon the foregoing, we are of the opinion that the Shares will be validly issued, fully paid and nonassessable shares of Common Stock when issued by the Company in accordance with the resolutions adopted by the Board of Directors of the Company and the plan of distribution described in the Registration Statement. Our opinion set forth above is limited to the General Corporation Law of the State of Delaware, as amended. Neose Technologies, Inc. January 10, 1997 Page 2 We hereby consent to the use of this opinion as Exhibit 5 to the Registration Statement and to the reference to this firm under the caption "Legal Matters." In giving such opinion and consenting to such reference, we do not thereby admit that we are acting within the category of persons whose consent is required under Section 7 of the Act and the rules or regulations of the Commission thereunder. The opinion expressed herein is solely for your benefit and may be relied upon only by you. Very truly yours, /s/Morgan, Lewis & Bockius LLP EX-10.8(D) 5 AGREEMENT Stephen Roth, Ph.D. Neose Pharmaceuticals, Inc. January 18, 1995 Page 1 Abbott Laboratories 625 Cleveland Avenue Columbus, OH 43215 January 18, 1995 Stephen Roth, Ph.D. Chairman and CEO Neose Pharmaceuticals, Inc. 102 Witmer Road Horsham, Pennsylvania 19044 Dear Dr. Roth: Once signed by you, this letter shall constitute an amendment (the "Amendment") to the Research and License Agreement between Neose Pharmaceuticals, Inc. ("Neose") and Abbott Laboratories ("Abbott"), dated December 30, 1992 (the "R & L Agreement) and, to the extent applicable, to the Supply Agreement, which is Exhibit B to the R & L Agreement (collectively, the "Agreements"). The provisions of this Amendment are hereby made a part of the Agreements; any conflict between the provisions of this Amendment and the Agreements shall be resolved in favor of this provisions of this Amendment. All capitalized terms used in this Amendment and not defined herein shall have the same meanings as given to them in the Agreements. Any disputes regarding the Agreements or this Amendment shall be resolved in accordance with Article XII of the Supply Agreement, as if such Article were set forth herein in its entirety. The Agreements shall be modified as follows: 1. Mutual Waiver of Possible Breaches. Abbott and Neose each hereby waive the right to declare any possible breaches that may have occurred prior to the date of this Amendment in accordance with the provisions of the R & L Agreement. Neose hereby waives payment associated with Milestone No. 3 of the R & L Agreement. 2. Milestones No. 4 and No. 5. Abbott hereby releases Neose from its obligations to meet Milestones No. 4 and No. 5 as set forth in Section 4.1 and Exhibit A of the R & L Agreement. Such release shall not be construed as a breach as set forth in Section 10.4 of the R & L Agreement. Neose hereby waives any right to declare any breach by Abbott regarding Milestone No. 4 and Milestone No. 5. Neose will not be entitled to and Abbott will not be obligated to pay any Milestone payments for Milestone No. 4 or Milestone No. 5. 1 Stephen Roth, Ph.D. Neose Pharmaceuticals, Inc. January 18, 1995 Page 2 3. Grant of License (a) Upon execution of this Amendment and continuing so long as payment of the amounts specified in Section 4(b) of this Amendment in accordance with their terms is made on a timely basis, Abbott shall have a temporary license for manufacturing rights under Licensed Patents, and shall take all responsibility from Neose for the manufacture of human milk oligosaccharides and/or carbohydrates for Abbott's use in Human Nutritional Products under Licensed Patents. Abbott shall manufacture such human milk oligosaccharides and/or carbohydrates under its existing Exclusive License granted under Article 8 of the R & L Agreement. Abbott's right to make and have made human milk oligosaccharides and/or carbohydrates under its Exclusive License shall not be contingent on Sections 3.2(a)-(e) of the Supply Agreement. (b) Upon payment of the consideration set forth in Section 4(c) of this Amendment, the Exclusive License granted Abbott described in (a) above shall become irrevocable. 4. Consideration. In consideration for the license of manufacturing rights set forth in Section 3 above, Abbott: (a) commencing upon execution of this Amendment, shall pay Neose in five installments of five hundred thousand dollars ($500,000.00) each, such payments due and payable on January 1, 1995, July 1, 1995, January 1, 1996, July 1, 1996 and January 1, 1997, such payments totaling two million five hundred thousand dollars ($2,500,000.00). All such payments shall be credited against the future fee payments set forth in Section 2.10 and Schedule B of the Supply Agreement. Such credits shall be applied in four equal amounts, one such credit occurring in each of the first four years of commercial sales; and (b) within sixty (60) days of the first commercial sale of a Licensed Product, shall pay Neose five million dollars ($5,000,000.00), one million two hundred fifty thousand dollars ($1,250,000.00) of which shall be credited against future payments set forth in Section 2.10 and Schedule B of the Supply Agreement. Such credits shall be applied in four equal amounts, one credit occurring in each of the first four years of commercial sales. 2 Stephen Roth, Ph.D. Neose Pharmaceuticals, Inc. January 18, 1995 Page 3 5. Fee Negotiation In the event that Neose is able to demonstrate to Abbott, and Abbott, at its reasonable discretion accepts, material improvements or cost efficiencies in the proposed methods or processes of manufacture of human milk oligosaccharides or carbohydrates subject to the Agreements, or is able to identify a compound or compounds with materially improved prospects of commercial feasibility compared to the compounds currently being considered for manufacture by Abbott, then Neose and Abbott agree to negotiate in good faith a revision of Schedule B of the Supply Agreement to reflect an appropriate sharing of the benefits of such improvement, efficiencies, or compounds. 6. Abbott Effort Abbott will expend at least [REDACTED]* dollars ([REDACTED]*) for internal and external research and development work including scale-up of manufacturing as well as safety, efficacy and clinical studies over the period commencing with the execution of this Amendment and ending [REDACTED*]. This expenditure will replace any other such expenditure under the Agreements. 7. Scientific Steering Committee and Conferences The Scientific Steering Committee as defined in the R & L Agreement shall be disbanded. A new Committee made up of the appropriate Neose and Abbott employees will be formed. Members of this Committee will be identified and a definition of a scope of responsibility for the Committee will be decided at the earliest date convenient to both Neose and Abbott, but not later than sixty (60) days following execution of this Amendment. 8. Nonexclusive Right (a) Prior to commencement of the Supply Agreement, Abbott may at any time upon sixty (60) days prior written notice to Neose elect to convert its Exclusive License to a worldwide, nonexclusive license, with the right to sublicense, to make, have made, use and sell human milk oligosaccharides or carbohydrates for use in Human Nutritional Products under Licensed Patents ("Nonexclusive License"). All payments made by Abbott to Neose prior to such election shall be nonreimbursable, but creditable as set forth in Section 4. Fees due Neose as set - -------- *[REDACTED] indicates material that has been omitted and for which confidential treatment has been granted by the Securities and Exchange Commission (the "Commission"). All such omitted material has been filed separately with the Commission pursuant to Rule 406. 3 Stephen Roth, Ph.D. Neose Pharmaceuticals, Inc. January 18, 1995 Page 4 forth in Section 2.10 and Schedule B will be reduced by one-half under the Nonexclusive License. (b) Abbott's Exclusive License (i) shall become a Nonexclusive License in any country in which it fails to make a commercial sale or file a regulatory submission, if such governmental approval is required prior to a commercial sale, of a Licensed Product within eighteen (18) months of the first commercial sale of such Licensed Product in the United States if Neose gives Abbott written notice sixty (60) days of such failure and Abbott does not cure the failure within thirty (30) days of notice; or (ii) shall become a Nonexclusive License in any country in which it discontinues sales of all Licensed Products, such nonexclusivity becoming effective twelve (12) months after Abbott discontinues sales of such Licensed Products. Fees due Neose as set forth in Section 2.10 and Schedule B for such countries will be reduced by one-half under the Nonexclusive License. (c) Neose may, at its option, convert Abbott's Exclusive License to a Nonexclusive License if Abbott has failed to file an appropriate regulatory document with the FDA, such document seeking approval to market a Human Nutritional Product containing a human milk oligosaccharide or carbohydrate, by December 1, 1997 and Neose gives Abbott written notice within sixty (60) days of such failure and Abbott doesn't cure the failure within thirty (30) days of notice. In such an event, fees due Neose as set forth in Section 2.10 and Schedule B will be reduced by one-half under the Nonexclusive License. (d) If Abbott's Exclusive License is converted to a Nonexclusive License pursuant to Section 8(a) or 8(c) of the Amendment, then notwithstanding any other provision of the Agreements, after the notice and/or cure period ends, Abbott will have no further payment obligation under Section 4 of the Amendment. Similarly, if Abbott's Exclusive License is converted to a Nonexclusive License pursuant to Section 8(a) or 8(c) of the Amendment, then notwithstanding any other provision of the Agreements, after the notice and/or cure period ends, Neose will have no further obligation to provide Abbott with access to technology, compounds or know-how discovered or developed after the effective date of the Nonexclusive License. 9. Supply Agreement Commencement. In accordance with its terms, the Supply Agreement as amended by this Amendment, shall begin upon the commencement date of the first 4 Stephen Roth, Ph.D. Neose Pharmaceuticals, Inc. January 18, 1995 Page 5 Contract Year. The definition of Contract Year at Section 1.5 shall be modified so that the first Contract Year commences on the date of the first commercial sale of a Licensed Product to a third party as evidenced by the date on the invoice to such third party. Neose's and Abbott's performance under the Supply Agreement shall be governed in accordance with the parties' rights and obligations arising as if Abbott had acquired its manufacturing rights in accordance with Section 3.2(f) of the Supply Agreement, except as such rights and obligations have been specifically modified in this Amendment. 10. Termination (a) Abbott shall have the right to terminate the Agreements at any time and for any reason by providing Neose with sixty (60) days written notice of its intention to terminate. Upon the effective date of termination, all rights to the Licensed Patents under the Agreements except any Abbott interest in Joint Intellectual Property shall revert to Neose. Such right to terminate is in addition to and not in place of Abbott's right to terminate the Agreements or the Exclusive License as set forth in the Agreements. Any payments under Section 4 of this Amendment that fall due during the notification period shall be paid according to the terms and conditions of Section 4 of this Amendment. Upon termination, pursuant to this Section 10(a), Abbott shall have no further payment obligations to Neose. (b) Neose shall have the right to terminate the R & L Agreement and this Amendment if Abbott fails to make the payments set forth in Section 4 of this Amendment, or fails to commercialize a Licensed Product by [REDACTED]*; upon such termination, all rights to the Licensed Patents except any Abbott interest in Joint Intellectual Property shall revert to Neose. Any such termination by Neose shall be done in accordance with the notice and cure provision of Section 10.4 of the R & L Agreement. 11. Liability The terms of this Amendment are neither to be construed as an assumption by Abbott of Neose's obligations under the R & L Agreement nor to accelerate the time frame of any obligations of Abbott under the R & L Agreement or the Supply - -------- *[REDACTED] indicates material that has been omitted and for which confidential treatment has been granted by the Commission. All such omitted material has been filed separately with the Commission pursuant to Rule 406. 5 Stephen Roth, Ph.D. Neose Pharmaceuticals, Inc. January 18, 1995 Page 6 Agreement. Further, Abbott will not incur any liability nor be subject to any remedy for failure to successfully manufacture or otherwise use in a Licensed Product any human milk oligosaccharide or carbohydrate, except to the extent specifically addressed in the R & L Agreement, the Supply Agreement, or this Amendment. 12. Existing Agreements' Terms All other terms and conditions of the Agreements shall be effective to the extent they are not inconsistent with this Amendment as set forth in the introductory paragraph of this Amendment. 6 Stephen Roth, Ph.D. Neose Pharmaceuticals, Inc. January 18, 1995 Page 7 If you are in agreement with this letter, please sign one copy and return to Thomas A. Picone, Ph.D., Director, Licensing, Ross Products Division. Sincerely, /s/Thomas M. McNally Thomas M. McNally President Ross Products Division Agreed to and accepted this 20th day of January, 1995. Neose Pharmaceuticals, Inc. By: /s/Stephen Roth ------------------------- Stephen Roth, Ph.D. Chairman and CEO 7 EX-10.16 6 STOCK OPTION PLAN NEOSE TECHNOLOGIES, INC. 1995 STOCK OPTION/STOCK ISSUANCE PLAN (Amended and Restated as of March 16, 1996) ARTICLE ONE GENERAL I. PURPOSE OF THE PLAN A. This 1995 Stock Option/Stock Issuance Plan (the "Plan") is intended to promote the interests of Neose Technologies, Inc., a Delaware corporation (the "Corporation"), by providing eligible individuals with the opportunity to obtain an equity interest, or otherwise increase their equity interest, in the Corporation. This Plan shall serve as the successor equity incentive program to the Corporation's 1992 Stock Option Plan and 1991 Stock Option Plan. B. The Discretionary Option Grant and Stock Issuance Programs of the Plan became effective immediately upon the adoption of the Plan by the Corporation's Board of Directors. Such date is hereby designated the "Plan Effective Date." The Automatic Option Grant Program became effective upon the execution and final pricing of the Underwriting Agreement for the initial public offering of the Corporation's Common Stock. The execution date of such Underwriting Agreement is hereby designated as the Automatic Option Grant Program Effective Date. The Director Fee Option Grant Program became effective on March 16, 1996, subject to stockholder approval at the 1996 Annual Stockholders Meeting. II. DEFINITIONS A. For the purposes of this Plan, the following definitions shall be in effect: Board: the Corporation's Board of Directors. Change in Control: a change in ownership or control of the Corporation effected through either of the following transactions: -- the direct or indirect acquisition by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule l3d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's shareholders which the Board does not recommend such shareholders to accept, or -- a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (a) have been Board members continuously since the beginning of such period or (b) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (a) who were still in office at the time such election or nomination was approved by the Board. Code: the Internal Revenue Code of 1986, as amended. Committee: the committee of two (2) or more non-employee Board members appointed by the Board to administer the Plan. Common Stock: shares of the Corporation's common stock. Corporate Transaction: either of the following shareholder-approved transactions to which the Corporation is a party: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. Employee: an individual who performs services while in the employ of the Corporation or one or more parent or subsidiary corporations, subject to the control and direction of the employer entity not only as to the work to be performed but also as to the manner and method of performance. Exercise Date: the date on which the Corporation shall have received written notice of the option exercise. Fair Market Value: the Fair Market Value per share of Common Stock determined in accordance with the following provisions: -- If the Common Stock is at the time traded on the Nasdaq National Market, the Fair Market Value shall be the closing selling price per share on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no reported closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. -- If the Common Stock is at the time listed or admitted to trading on any national securities exchange, then the Fair Market Value shall be the closing selling price per share on the date in question on the exchange determined by the 2 Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date in question, then the Fair Market Value shall be the closing selling price on the exchange on the last preceding date for which such quotation exists. -- If the Common Stock is on the date in question neither listed nor admitted to trading on any national securities exchange nor traded on the Nasdaq National Market, then the Fair Market Value of the Common Stock on such date shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. Hostile Take-Over: a change in ownership of the Corporation effected through the following transaction: -- the direct or indirect acquisition by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's shareholders which the Board does not recommend such shareholders to accept, and -- the acceptance of more than fifty percent (50%) of the securities so acquired in such tender or exchange offer from holders other than the officers and directors of the Corporation subject to the short-swing profit restrictions of Section 16 of the 1934 Act. Incentive Option: a stock option which satisfies the requirements of Code Section 422. Involuntary Termination: the termination of the Service of any Optionee or Participant which occurs by reason of: -- such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or -- such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and any non-discretionary and objective-standard incentive payment or bonus award) by more than ten percent (10%) in the aggregate or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. 3 Misconduct: the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such individual of confidential information or trade secrets of the Corporation or its parent or subsidiary corporations, any failure to perform specific lawful direction of the Corporation's Board or officers of the Corporation, any refusal or neglect to perform such individual's duties, any conviction of, or entering of a plea of nolo contendre to, a crime which constitutes a felony or any other Misconduct by such individual adversely affecting the business or affairs of the Corporation. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation or any parent or subsidiary may consider as grounds for the dismissal or discharge of any Optionee, Participant or other individual in the Service of the Corporation. 1934 Act: the Securities Exchange Act of 1934, as amended. Non-Statutory Option: a stock option not intended to meet the requirements of Code Section 422. Optionee: a person to whom an option is granted under the Discretionary Option Grant Program. Participant: a person who is issued Common Stock under the Stock Issuance Program. Permanent Disability: the inability of an individual to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which is expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. Plan Administrator: either the Board or the Committee, to the extent the Committee is at the time responsible for the administration of the Plan in accordance with Section IV of Article One. Predecessor Plans: the Corporation's 1992 Stock Option Plan and 1991 Stock Option Plan. Service: the performance of services on a periodic basis for the Corporation (or any parent or subsidiary corporation) in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant, except to the extent otherwise specifically provided in the applicable stock option or stock issuance agreement. Section 12(g) Registration Date: the date on which the initial registration of the Common Stock under Section 12(g) of the 1934 Act became effective. 10% Shareholder: the owner of stock (as determined under Code Section 424(d)) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation or any parent or subsidiary corporation. 4 Take-Over Price: the greater of (a) the Fair Market Value per share of Common Stock on the date the particular option to purchase such stock is surrendered to the Corporation in connection with a Hostile Take-Over or (b) the highest reported price per share of Common Stock paid by the tender offeror in effecting such Hostile Take-Over. However, if the cancelled option is an Incentive Option, then the Take-Over Price shall not exceed the clause (a) price per share. B. The following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation: Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. Each corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. III. STRUCTURE OF THE PLAN A. The Plan shall be divided into four separate components: the Discretionary Option Grant Program specified in Article Two, the Stock Issuance Program specified in Article Three, the Automatic Option Grant Program specified in Article Four and the Director Fee Option Grant Program specified in Article Five. Under the Discretionary Option Grant Program, eligible individuals may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock in accordance with the provisions of Article Two at a price not less than eighty-five percent (85%) of the Fair Market Value of such shares on the grant date. Under the Stock Issuance Program, eligible individuals may be issued shares of Common Stock directly, either through the immediate purchase of the shares (at Fair Market Value or at discounts of up to 15%) or as a bonus tied to the individual's performance of services or the Corporation's attainment of prescribed milestones. Under the Automatic Option Grant Program, each individual serving as a non-employee Board member on the Automatic Option Grant Program Effective Date and each individual who first joins the Board as a non-employee director at any time after such Effective Date shall at periodic intervals receive option grants to purchase shares of Common Stock in accordance with the provisions of Article Four, with the first such grants to be made on the such Effective Date. Under the Director Fee Option Grant Program, each non-employee Board member may elect to apply all or a portion of his or her annual retainer fee otherwise payable in cash to a special below-market option grant. 5 B. Unless the context clearly indicates otherwise, the provisions of Articles One and Six shall apply to all equity programs under the Plan and shall accordingly govern the interests of all individuals under the Plan. IV. ADMINISTRATION OF THE PLAN A. The Discretionary Option Grant and Stock Issuance Programs shall be administered solely and exclusively by the Committee, subject to such conditions and limitations as the Board may decide, to the extent permissible under applicable securities and tax laws requirements. No non-employee Board member shall be eligible to serve on the Committee if such individual has, within the relevant period designated below, received an option grant or direct stock issuance under this Plan or any other stock plan of the Corporation (or any parent or subsidiary corporation), other than pursuant to the Automatic Option Grant or Director Fee Option Grant Program: -- for each of the initial members of the Committee, the period commencing with the Section 12(g) Registration Date and ending with the date of his or her appointment to the Committee, or -- for any successor or substitute member, the twelve (12) month period immediately preceding the date of his or her appointment to the Committee or (if shorter) the period commencing with the Section 12(g) Registration Date and ending with the date of his or her appointment to the Committee. B. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. C. The Plan Administrator shall have full power and authority (subject to the express provisions of the Plan) to establish rules and regulations for the proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding option grants or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Discretionary Option Grant or Stock Issuance Program or any outstanding option grant or share issuance thereunder. D. Administration of the Automatic Option Grant and Director Fee Option Grant Programs shall be self-executing in accordance with the express terms and conditions of those programs, and the Plan Administrator shall exercise no discretionary functions with respect to option grants made pursuant to those programs. 6 V. OPTION GRANTS AND STOCK ISSUANCES A. The persons eligible to participate in the Discretionary Option Grant Program under Article Two and the Stock Issuance Program under Article Three shall be limited to the following: (i) officers and other employees of the Corporation (or any parent or subsidiary corporation); (ii) non-employee members of the Board or the non-employee members of the board of directors of any parent or subsidiary corporation; and (iii) consultants who provide valuable services to the Corporation (or any parent or subsidiary corporation). B. The non-employee Board members serving as Plan Administrator shall not, during their period of service from and after the Section 12(g) Registration Date, be eligible to participate in the Discretionary Option Grant and Stock Issuance Programs or in any other stock option, stock purchase, stock bonus or other stock plan of the Corporation (or its parent or subsidiary corporations). Such individuals shall, however, be eligible to receive automatic option grants pursuant to Article Four and to participate in the Director Fee Option Grant Program pursuant to Article Five. C. The Plan Administrator shall have full authority to determine, (i) with respect to the option grants made under the Discretionary Option Grant Program, which eligible individuals are to receive option grants, the time or times when such grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each granted option is to become exercisable and the maximum term for which the option may remain outstanding, and (ii) with respect to stock issuances under the Stock Issuance Program, the number of shares to be issued to each Participant, the vesting schedule (if any) to be applicable to the issued shares, and the consideration to be paid by the Participant for such shares. VI. STOCK SUBJECT TO THE PLAN A. Shares of Common Stock shall be available for issuance under the Plan and shall be drawn from either the Corporation's authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including shares repurchased by the Corporation on the open market. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 1,457,366* shares, subject to adjustment from time to time in accordance with the provisions of this Section VI. Such authorized share reserve is comprised of (i) the number of shares which remained for issuance, as of the Plan Effective - -------- * Reflects the 1-for-3 reverse stock split that was effected immediately prior to the consummation of the initial public offering of the Common Stock. 7 Date, under the Predecessor Plans as last approved by the Corporation's shareholders, including the shares subject to the outstanding options incorporated into this Plan and any other shares which would have been available for future option grant under the Predecessor Plans as last approved by the shareholders, plus (ii) an additional increase of 333,333* shares authorized by the Board on the Plan Effective Date and (iii) an additional increase of 600,000* shares authorized by the Board on December 6, 1995. As one or more outstanding options under the Predecessor Plans which have been incorporated into this Plan are exercised, the number of shares issued with respect to each such option shall reduce, on a share-for-share basis, the number of shares available for issuance under this Plan. B. In no event shall the aggregate number of shares of Common Stock for which any one individual participating in the Plan may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances exceed 250,000* shares over the term of the Plan. C. Should one or more outstanding options under this Plan (including options incorporated from the Predecessor Plans) expire or terminate for any reason prior to exercise in full (including any option cancelled in accordance with the cancellation-regrant provisions of Section IV of Article Two of the Plan), then the shares subject to the portion of each option not so exercised shall be available for subsequent issuance under the Plan. Shares subject to any stock appreciation rights exercised under the Plan and all share issuances under the Plan, whether or not the shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. In addition, should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plan or the vesting of a direct share issuance made under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the share issuance, and not by the net number of shares of Common Stock actually issued to the holder of such option or share issuance. D. Should any change be made to the Common Stock issuable under the Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities for which any one individual participating in the Plan may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances in the aggregate over the term of the Plan, (iii) the number and/or class of securities for which automatic option grants are to be subsequently made per eligible non-employee Board member - -------- * Reflects the 1-for-3 reverse stock split that was effected immediately prior to the consummation of the initial public offering of the Common Stock. 8 under the Automatic Option Grant Program, (iv) the number and/or class of securities and price per share in effect under each option outstanding under the Discretionary Option Grant, Automatic Option Grant or Director Fee Option Grant Program and (v) the number and/or class of securities and price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plans. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. 9 ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. TERMS AND CONDITIONS OF OPTIONS Options granted pursuant to the Discretionary Option Grant Program shall be authorized by action of the Plan Administrator and may, at the Plan Administrator's discretion, be either Incentive Options or Non-Statutory Options. Individuals who are not Employees of the Corporation or its parent or subsidiary corporations may only be granted Non-Statutory Options. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; provided, however, that each such instrument shall comply with the terms and conditions specified below. Each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section II of this Article Two. A. Exercise Price. 1. The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i) The exercise price per share of Common Stock subject to an Incentive Option shall in no event be less than one hundred percent (100%) of the Fair Market Value of such Common Stock on the grant date. (ii) The exercise price per share of Common Stock subject to a Non-Statutory Option shall in no event be less than eighty-five percent (85%) of the Fair Market Value of such Common Stock on the grant date. (iii) If any individual to whom an Incentive Option is granted is a 10% Shareholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Six, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) in shares of Common Stock held by the Optionee for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or 10 (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions (a) to a Corporation designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such purchase and (b) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. 3. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Term and Exercise of Options. Each option granted under this Plan shall be exercisable at such time or times and during such period as is determined by the Plan Administrator and set forth in the instrument evidencing the grant. No such option, however, shall have a maximum term in excess of ten (10) years measured from the grant date. During the lifetime of the Optionee, the option, together with any related stock appreciation right, shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee, except for a transfer of the option by will or by the laws of descent and distribution following the Optionee's death. C. Termination of Service. 1. Except to the extent otherwise provided pursuant to subsection C.2 below, the following provisions shall govern the exercise period applicable to any options held by the Optionee at the time of cessation of Service or death: (i) Should the Optionee cease to remain in Service for any reason other than death, Permanent Disability or Misconduct, then the period during which each outstanding option held by such Optionee is to remain exercisable shall be limited to the three (3)-month period following the date of such cessation of Service. (ii) Should the Optionee's Service terminate by reason of Permanent Disability, then the period during which each outstanding option held by the Optionee is to remain exercisable shall be limited to the twelve (12)- month period following the date of such cessation of Service. (iii) Should the Optionee die while holding one or more outstanding options, then the period during which each such option is to remain exercisable shall be limited to the twelve (12)-month period following the date of the Optionee's death. During such limited period, the option may be exercised by the personal representative of the Optionee's estate or by the person or persons 11 to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. (iv) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to be outstanding. (v) Under no circumstances, however, shall any such option be exercisable after the specified expiration date of the option term. (vi) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be exercisable for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding with respect to any option shares for which the option is not at that time exercisable or in which the Optionee is not otherwise at that time vested. 2. The Plan Administrator shall have complete discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, -- to extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service or death from the limited period in effect under subsection C.1 of this Article Two to such greater period of time as the Plan Administrator shall deem appropriate; provided, that in no event shall such option be exercisable after the specified expiration date of the option term; and/or -- to permit one or more options held by the Optionee under this Article Two to be exercised, during the limited post-Service exercise period applicable under this paragraph C., not only with respect to the number of vested shares of Common Stock for which each such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more subsequent installments for which the option would otherwise have become exercisable had such cessation of Service not occurred. D. Shareholder Rights. An Optionee shall have no shareholder rights with respect to any shares covered by the option until such individual shall have exercised the option and paid the exercise price for the purchased shares. E. Unvested Shares. The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock under the Plan. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right 12 to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the agreement evidencing such repurchase right. All outstanding repurchase rights under the Plan shall terminate automatically upon the occurrence of any Corporate Transaction, except to the extent the repurchase rights are expressly assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction. F. First Refusal Rights. Until such time, as the Corporation's outstanding shares of Common Stock are first registered under Section 12(g) of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed sale or other disposition by the Optionee (or any successor in interest by reason of purchase, gift or other transfer) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms and conditions established by the Plan Administrator and set forth in the agreement evidencing such right. II. INCENTIVE OPTIONS Incentive Options may only be granted to individuals who are Employees, and the terms and conditions specified below shall be applicable to all Incentive Options granted under the Plan. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Five of the Plan shall be applicable to all Incentive Options granted hereunder. Any Options specifically designated as Non-Statutory shall not be subject to such terms and conditions. A. Dollar Limitation. The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Corporation or its parent or subsidiary corporations) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as incentive stock options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. Should the number of shares of Common Stock for which any Incentive Option first becomes exercisable in any calendar year exceed the applicable One Hundred Thousand Dollar ($100,000) limitation, then that option may nevertheless be exercised in that calendar year for the excess number of shares as a Non-Statutory Option under the Federal tax laws. B. 10% Shareholder. If any individual to whom an Incentive Option is granted is a 10% Shareholder, then the option term shall not exceed five (5) years measured from the grant date. 13 III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each option which is at the time outstanding under this Article Two shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for such Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares as fully-vested shares. However, an outstanding option under this Article Two shall not so accelerate if and to the extent: (i) such option is, in connection with such Corporate Transaction, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof, (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the option spread existing at the time of such Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option, (iii) such option is to be replaced by another incentive program which the Plan Administrator determines is reasonably equivalent in value to the program contemplated by either clause (i) or (ii) above, or (iv) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. However, upon an Optionee's cessation of Service by reason of an Involuntary Termination (other than for Misconduct) within eighteen (18) months after a Corporate Transaction in which his or her outstanding options are assumed or replaced pursuant to clause (i), (ii) or (iii) above, each such option under clause (i) shall automatically accelerate and become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares as fully-vested shares, the cash incentive program under clause (ii) shall become fully vested and the benefits under a clause (iii) replacement program shall become fully vested. The option as so accelerated shall remain exercisable until the earlier of (i) the expiration of the option term or (ii) the expiration of a ninety (90) day period measured from the date of such Involuntary Termination. The determination of option comparability under clause (i) or program comparability under clause (iii) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive. B. Immediately following the consummation of a Corporate Transaction, all outstanding options under this Article Two shall terminate and cease to remain outstanding, except to the extent assumed by the successor corporation or its parent company. C. Each outstanding option under this Article Two that is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issued to the option holder, in consummation of such Corporate Transaction, had such person exercised the option immediately prior to such, Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share, provided the aggregate exercise price payable for such securities shall remain the same. In addition, the class and number of securities available for issuance under the Plan on both an aggregate and participant basis following the consummation of such Corporate Transaction shall be appropriately adjusted. 14 D. The Plan Administrator shall have the discretionary authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration of one or more outstanding options under this Article Two (and the termination of one or more of the Corporation's outstanding repurchase rights under this Article Two) upon the occurrence of a Change in Control. The Plan Administrator shall also have full power and authority to condition any such option acceleration (and the termination of any outstanding repurchase rights) upon the Optionee's cessation of Service by reason of an Involuntary Termination (other than for Misconduct) within a specified period following such Change in Control. E. Any options accelerated in connection with a Change in Control shall remain fully exercisable until the expiration or sooner termination of the option term or the surrender of such option in accordance with Section V of this Article Two. F. The grant of options under this Article Two shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. G. The portion of any Incentive Option accelerated under this Section III in connection with a Corporate Transaction or Change in Control shall remain exercisable as an incentive stock option under the Federal tax laws only to the extent the dollar limitation of Section II of this Article Two is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a non-statutory option under the Federal tax laws. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected Optionees, the cancellation of any or all outstanding options under this Article Two (including outstanding options under the Predecessor Plans incorporated into this Plan) and to grant in substitution new options under the Plan covering the same or different numbers of shares of Common Stock but with an exercise price per share not less than (i) one hundred percent (100%) of the Fair Market Value on the new grant date in the case of a grant of an Incentive Option, (ii) one hundred ten percent (110%) of such Fair Market Value in the case of an Incentive Option grant to a 10% Shareholder or (iii) eighty-five percent (85%) of such Fair Market Value in the case of all other grants. V. STOCK APPRECIATION RIGHTS A. Provided and only if the Plan Administrator determines in its discretion to implement the stock appreciation right provisions of this Section V, one or more Optionees may be granted the right, exercisable upon such terms and conditions as the Plan Administrator may establish, to surrender all or part of an unexercised option under this Article Two in exchange for a distribution from the Corporation in an amount equal to the excess of (i) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is 15 at the time vested under the surrendered option (or surrendered portion thereof) over (ii) the aggregate exercise price payable for such vested shares. B. No surrender of an option shall be effective hereunder unless it is approved by the Plan Administrator. If the surrender is so approved, then the distribution to which the Optionee shall accordingly become entitled under this Section V may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. C. If the surrender of an option is rejected by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (i) five (5) business days after the receipt of the rejection notice or (ii) the last day on which the option is otherwise exercisable in accordance with the terms of the instrument evidencing such option, but in no event may such rights be exercised more than ten (10) years after the date of the option grant. D. One or more officers of the Corporation subject to the short-swing profit restrictions of the Federal securities laws may, in the Plan Administrator's sole discretion, be granted limited stock appreciation rights in tandem with their outstanding options under this Article Two. Upon the occurrence of a Hostile Take-Over at a time when the Corporation's outstanding Common Stock is registered under Section 12(g) of the 1934 Act, each such officer holding one or more options with such a limited stock appreciation right in effect for at least six (6) months shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option to the Corporation, to the extent the option is at the time exercisable for fully vested shares of Common Stock. The officer shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the vested shares of Common Stock at the time subject to each surrendered option (or surrendered portion of such option) over (ii) the aggregate exercise price payable for such vested shares. Such cash distribution shall be made within five (5) days following the option surrender date. Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. Any unsurrendered portion of the option shall continue to remain outstanding and become exercisable in accordance with the terms of the instrument evidencing such grant. E. The shares of Common Stock subject to any option surrendered for an appreciation distribution pursuant to this Section V shall not be available for subsequent issuance under the Plan. 16 ARTICLE THREE STOCK ISSUANCE PROGRAM I. TERMS AND CONDITIONS OF STOCK ISSUANCES Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate purchases without any intervening stock option grants. The issued shares shall be evidenced by a Stock Issuance Agreement ("Issuance Agreement") that complies with the terms and conditions of this Article Three. A. Consideration. 1. Shares of Common Stock may be issued under the Stock Issuance Program for one or more of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) full payment in cash or check made payable to the Corporation's order; (ii) a promissory note payable to the Corporation's order in one or more installments; or (iii) past services rendered to the Corporation or any parent or subsidiary corporation. 2. The shares may, in the absolute discretion of the Plan Administrator, be issued for consideration with a value less than one hundred percent (100%) of the Fair Market Value of such shares at the time of issuance, but in no event less than eighty-five percent (85%) of such Fair Market Value. B. Vesting Provisions. 1. Shares of Common Stock issued under the Stock Issuance Program may, in the absolute discretion of the Plan Administrator, be fully and immediately vested upon issuance (as a bonus for past services) or may vest in one or more installments over the Participant's period of Service or the Corporation's attainment of performance milestones. The elements of the vesting schedule applicable to any unvested shares of Common Stock issued under the Stock Issuance Program, namely: (i) the Service period to be completed by the Participant or the performance objectives to be achieved by the Corporation, 17 (ii) the number of installments in which the shares are to vest, (iii) the interval or intervals (if any) which are to lapse between installments, and (iv) the effect which death, Permanent Disability or other event designated by the Plan Administrator is to have upon the vesting schedule, shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement executed by the Corporation and the Participant at the time such unvested shares are issued. 2. The Participant shall have full shareholder rights with respect to any shares of Common Stock issued to him or her under the Plan, whether or not his or her interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. Any new, additional or different shares of stock or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to his or her unvested shares by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration or by reason of any Corporate Transaction shall be issued, subject to (i) the same vesting requirements applicable to his or her unvested shares and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock under the Stock Issuance Program, then the Corporation shall have the right to require the Participant to surrender those shares immediately to the Corporation for cancellation, and the Participant shall cease to have any further shareholder rights with respect to the surrendered shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money promissory note), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares. 4. The Plan Administrator may in its discretion elect to waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. C. First Refusal Rights. Until such time as the Corporation's outstanding shares of Common Stock are first registered under Section 12(g) of the 1934 Act, the Corporation shall have a right of first refusal with respect to any proposed disposition by the 18 Participant (or any successor in interest by reason of purchase, gift or other transfer) of any shares of Common Stock issued under this Article Three. Such right of first refusal shall be exercisable in accordance with the terms and conditions established by the Plan Administrator and set forth in the agreement evidencing such right. II. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All of the Corporation's outstanding repurchase rights under this Article Three shall automatically terminate upon the occurrence of a Corporate Transaction, except to the extent the Corporation's outstanding repurchase rights are expressly assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction. However, any assigned repurchase rights covering the unvested shares held by a Participant under this Article Three shall immediately terminate should there occur an Involuntary Termination of that Participant's Service (other than for Misconduct) within eighteen (18) months after such Corporate Transaction. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the shares are issued under this Article Three or at any time while those shares remain outstanding, to provide for the automatic termination of the Corporation's repurchase rights with respect to those shares should there occur a Change in Control. The Plan Administrator shall also have full power and authority to condition the termination of those repurchase rights upon the Participant's cessation of Service by reason of an Involuntary Termination (other than for Misconduct) within a specified period following such Change in Control. III. SHARE ESCROW/TRANSFER RESTRICTIONS A. Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing such unvested shares. To the extent an escrow arrangement is utilized, the unvested shares and any securities or other assets distributed with respect to such shares (other than regular cash dividends) shall be delivered in escrow to the Corporation to be held until the Participant's interest in such shares (or the distributed securities or assets) vests. B. The Participant shall have no right to transfer any unvested shares of Common Stock issued to him or her under the Stock Issuance Program. For purposes of this restriction, the term "transfer" shall include (without limitation) any sale, pledge, assignment, encumbrance, gift or other disposition of such shares, whether voluntary or involuntary. Upon any such attempted transfer, the unvested shares shall immediately be cancelled in accordance with substantially the same procedure in effect under Section I.B.3 of this Article Three, and neither the Participant nor the proposed transferee shall have any rights with respect to such cancelled shares. However, the Participant shall have the right to make a gift of unvested shares acquired under the Stock Issuance Program to his or her spouse or issue, including adopted children, or to a trust established for such spouse or issue, provided the transferee of such shares 19 delivers to the Corporation a written agreement to be bound by all the provisions of the Stock Issuance Program and the Stock Issuance Agreement applicable to the gifted shares. 20 ARTICLE FOUR AUTOMATIC OPTION GRANT PROGRAM I. ELIGIBILITY The individuals eligible to receive automatic option grants pursuant to the provisions of this Article Four program shall be limited to (i) those individuals who are serving as non-employee Board members on the Automatic Option Grant Program Effective Date, (ii) those individuals who are first elected or appointed as non-employee Board members on or after such Effective Date, whether through appointment by the Board or election by the Corporation's shareholders, and (iii) those individuals who are re-elected to serve as non-employee Board members at one or more Annual Shareholders Meetings held after the Section 12(g) Registration Date. In no event, however, shall a non-employee Board member be eligible to receive an automatic option grant pursuant to clause (i) or (ii) above if such individual has at any time been in the prior employ of the Corporation (or any parent or subsidiary corporation), but such individual shall be eligible to receive one or more automatic option grants pursuant to clause (iii). Each non-employee Board member eligible to receive one or more automatic option grants pursuant to the foregoing criteria shall be designated an Eligible Director for purposes of the Plan. II. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS A. Grant Dates. Option grants shall be made under this Article Three on the dates specified below: 1. Initial Grant. Each Eligible Director who is first elected or appointed as a non-employee Board member after the Automatic Option Grant Program Effective Date shall automatically be granted, on the date of such initial election or appointment (as the case may be), a Non-Statutory Option to purchase 16,666 shares of Common Stock upon the terms and conditions of this Article Four. 2. Annual Grant. On the date of each Annual Shareholders Meeting, beginning with the first Annual Meeting held after the Section 12(g) Registration Date, each individual who will continue to serve as an Eligible Director shall automatically be granted, whether or not such individual is standing for re-election as a Board member at that Annual Meeting, a Non-Statutory Option to purchase an additional 3,333 shares of Common Stock upon the terms and conditions of this Article Four, provided he or she has served as a non-employee Board member for at least six (6) months prior to the date of such Annual Meeting. 3. No Limitation. There shall be no limit on the number of shares for which any one Eligible Director may be granted stock options under this Article Four over his or her period of Board service. 21 B. Exercise Price. The exercise price per share of Common Stock subject to each automatic option grant made under this Article Four shall be equal to one hundred percent (100%) of the Fair Market Value per share of Common Stock on the automatic grant date. C. Payment. The exercise price shall be payable in one of the alternative forms specified below. To the extent the option is exercised for any unvested shares, the Optionee must execute and deliver to the Corporation a stock purchase agreement for those unvested shares which provides the Corporation with the right to repurchase, at the exercise price paid per share, any unvested shares held by the Optionee at the time of cessation of Board service and which precludes the sale, transfer or other disposition of the purchased shares at any time while those shares remain subject to the Corporation's repurchase right. (i) full payment in cash or check drawn to the Corporation's order; (ii) full payment in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date (as such term is defined below); (iii) full payment in a combination of shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date and cash or check drawn to the Corporation's order; or (iv) to the extent the option in exercised for vested shares, full payment through a sale and remittance procedure pursuant to which the Optionee shall provide irrevocable written instructions to (a) a Corporation designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction. Except to the extent the sale and remittance procedure specified above is used for the exercise of the option for vested shares, payment of the exercise price for the purchased shares must accompany the exercise notice. D. Option Term. Each automatic grant under this Article Four shall have a maximum term of ten (10) years measured from the automatic grant date. E. Exercisability/Vesting. Each automatic grant shall be immediately exercisable for any or all of the option shares. However, any shares purchased under the option shall be subject to repurchase by the Corporation, at the exercise price paid per share, upon the 22 Optionee's cessation of Board service prior to vesting in those shares in accordance with the applicable schedule below: Initial Grant. Each initial 16,666-share automatic grant shall vest, and the Corporation's repurchase right shall lapse, in a series of four successive and equal annual installments over the Optionee's period of continued service as a Board member, with the first such installment to vest upon Optionee's completion of one (1) year of Board service measured from the automatic grant date. Annual Grant. Each additional 3,333-share automatic grant shall vest, and the Corporation's repurchase right shall lapse, upon the Optionee's completion of one (1) year of Board service measured from the automatic grant date. Vesting of the option shares shall be subject to acceleration, as provided in Section II.G.3 and Section III of this Article Four. In no event shall any additional option shares vest after the Optionee's cessation of Board service, except as otherwise provided in Section II.G.3 of this Article Four. F. Non-Transferability. During the lifetime of the Optionee, each automatic option grant, together with the limited stock appreciation right pertaining to that option, shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee, except for a transfer of the option by will or by the laws of descent and distribution following Optionee's death. G. Effect of Termination of Board Service. 1. Should the Optionee cease to serve as a Board member for any reason (other than death or Permanent Disability) while holding one or more automatic option grants under this Article Four, then such individual shall have a six (6)-month period following the date of such cessation of Board service in which to exercise each such option for any or all of the shares of Common Stock in which the Optionee is vested at the time of such cessation of Board service. However, each such option shall immediately terminate and cease to be outstanding, at the time of such cessation of Board service, with respect to any shares in which the Optionee is not otherwise at that time vested under that option. 2. Should the Optionee die within six (6) months after cessation of Board service, then any automatic option grant held by the Optionee at the time of death may subsequently be exercised, for any or all of the shares of Common Stock in which the Optionee is vested at the time of his or her cessation of Board service (less any option shares subsequently purchased by the Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. The right to exercise such option shall lapse upon the expiration of a twelve (12)-month period measured from the date of the Optionee's death. 23 3. Should the Optionee die or become Permanently Disabled while serving as a Board member, then the shares of Common Stock at the time subject to each automatic option grant held by such Optionee under this Article Four which are vested may be purchased by the Optionee pursuant to the option for (or the representative of the Optionee's estate or the person or persons to whom the option is transferred upon the Optionee's death) pursuant to the option for a twelve (12)-month period following the date of the Optionee's cessation of Board service. 4. In no event shall any automatic grant under this Article Four remain exercisable after the expiration date of the ten (10)-year option term. Upon the expiration of the applicable post-service exercise period under subparagraphs 1. through 3. above or (if earlier) upon the expiration of the ten (10)-year option term, the automatic grant shall terminate and cease to be outstanding for any option shares in which the Optionee was vested at the time of his or her cessation of Board service but for which such option was not subsequently exercised. H. Shareholder Rights. The holder of an automatic option grant under this Article Three shall have none of the rights of a shareholder with respect to any shares subject to such option until such individual shall have exercised the option and paid the exercise price for the purchased shares. I. Remaining Terms. The remaining terms and conditions of each automatic option grant shall be as set forth in the form Automatic Stock Option Agreement attached as Exhibit A to the plan. III. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER A. In the event of any Corporate Transaction, the shares of Common Stock at the time subject to each outstanding option under this Article Four but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for all or any portion of those shares as fully vested shares. Immediately following the consummation of the Corporate Transaction, all automatic option grants under this Article Four shall terminate and cease to be outstanding, except to the extent one or more of those grants are assumed by the acquiring entity or its parent corporation. B. In connection with any Change in Control of the Corporation, the shares of Common Stock at the time subject to each outstanding option under this Article Four but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the specified effective date for the Change in Control, become fully exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for all or any portion of those shares as fully vested shares. Each such option shall remain so exercisable for all the option shares following the Change in Control, until the expiration or sooner termination of the option term. 24 C. Should a Hostile Take-Over occur at any time following the Section 12(g) Registration Date, then the optionee shall have a thirty (30)-day period in which to surrender to the Corporation each option held by him or her under this Article Four for a period of at least six (6) months. The optionee shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the shares of Common Stock at the time subject to the surrendered option (whether or not those shares are otherwise at the time fully vested) over (ii) the aggregate exercise price payable for such shares. The cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. The shares of Common Stock subject to each option surrendered in connection with the Hostile Take-Over shall not be available for subsequent issuance under the Plan. D. The automatic option grants outstanding under this Article Four shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. AMENDMENT OF THE AUTOMATIC GRANT PROVISIONS The provisions of this Automatic Option Grant Program, together with the automatic option grants outstanding under this Article Four, may not be amended at intervals more frequently than once every six (6) months, other than to the extent necessary to comply with applicable Federal income tax laws and regulations. 25 ARTICLE FIVE DIRECTOR FEE OPTION GRANT PROGRAM I. OPTION GRANTS Each non-employee Board member may elect to apply all or any portion of the annual retainer fee otherwise payable in cash for his or her service on the Board to the acquisition of a special option grant under this Director Fee Option Grant Program. Such election must be filed with the Corporation's Chief Financial Officer prior to first day of July in the calendar year immediately preceding the calendar year for which the annual retainer fee which is the subject of that election is otherwise payable. Each non-employee Board member who files such a timely election shall automatically be granted an option under this Director Fee Option Grant Program on the first trading day in January in the calendar year for which the annual retainer fee which is the subject of that election would otherwise be payable. II. OPTION TERMS Each option shall be a Non-Statutory Option governed by the terms and conditions specified below. A. Exercise Price. 1. The exercise price per share shall be thirty-three and one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall be payable in one or more of the alternative forms authorized under the Discretionary Option Grant Program. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. Number of Option Shares. The number of shares of Common Stock subject to the option shall be determined pursuant to the following formula (rounded down to the nearest whole number): X = A divided by (B x 66-2/3%), where X is the number of option shares, A is the portion of the annual retainer fee subject to the non- employee Board member's election, and 26 B is the Fair Market Value per share of Common Stock on the option grant date. C. Exercise and Term of Options. The option shall become exercisable in a series of twelve (12) successive equal monthly installments upon the Optionee's completion of each calendar month of Board service in the calendar year for which the annual retainer fee which is the subject of his or her election under this Article Five would otherwise be payable. Each option shall have a maximum term of ten (10) years measured from the option grant date. D. Effect of Termination of Service. Should the Optionee cease Board service for any reason (other than death or Permanent Disability) while holding one or more options under this Article Five, then each such option shall remain exercisable, for any or all of the shares for which the option is exercisable at the time of such cessation of Board service, until the earlier of (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of such cessation of Board service. However, each option held by the Optionee under this Article Five at the time of his or her cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all shares of Common Stock for which the option is not otherwise at that time exercisable. E. Death or Permanent Disability. Should the Optionee's service as a Board member cease by reason of death or Permanent Disability, then each option held by such Optionee under this Article Five shall immediately become exercisable for all the shares of Common Stock at the time subject to that option, and the option may, during the three (3)-year period following such cessation of Board service, be exercised for any or all of those shares as fully-vested shares. Should the Optionee die while holding one or more options under this Article Five, then each such option may be exercised, for any or all of the shares for which the option is exercisable at the time of the Optionee's cessation of Board service (less any shares subsequently purchased by Optionee prior to death), by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution. Such right of exercise shall lapse, and the option shall terminate, upon the earlier of (i) the expiration of the ten (10)-year option term or (ii) the three (3)-year period measured from the date of the Optionee's cessation of Board service. III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction while the Optionee remains a Board member, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. Each such outstanding option shall be assumed by the successor corporation (or parent thereof) in the Corporate Transaction and shall remain exercisable for the fully-vested shares until the earlier of (i) the 27 expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Board service. B. In the event of a Change in Control while the Optionee remains in Service, each outstanding option held by such Optionee under this Director Fee Option Grant Program shall automatically accelerate so that each such option shall immediately become fully exercisable with respect to the total number of shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. The option shall remain so exercisable until the earlier or (i) the expiration of the ten (10)-year option term or (ii) the expiration of the three (3)-year period measured from the date of the Optionee's cessation of Service. C. The grant of options under the Director Fee Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. REMAINING TERMS The remaining terms of each option granted under this Director Fee Option Grant Program shall be the same as the terms in effect for option grants made under the Discretionary Option Grant Program. 28 ARTICLE SIX MISCELLANEOUS I. LOANS OR INSTALLMENT PAYMENTS A. The Plan Administrator may, in its discretion, assist any Optionee or Participant (including an Optionee or Participant who is an officer of the Corporation) in the exercise of one or more options granted to such Optionee under the Discretionary Option Grant and Automatic Option Grant Programs or the purchase of one or more shares issued to such Participant under the Stock Issuance Program, including the satisfaction of any Federal, state and local income and employment tax obligations arising therefrom, by: (i) authorizing the extension of a loan from the Corporation to such Optionee or Participant, or (ii) permitting the Optionee or Participant to pay the exercise price or purchase price for the purchased Common Stock in installments over a period of years. B. The terms of any loan or installment method of payment (including the interest rate and terms of repayment) shall be upon such terms as the Plan Administrator specifies in the applicable option or issuance agreement or otherwise deems appropriate at the time such exercise price or purchase price becomes due and payable. Loans or installment payments may be authorized with or without security or collateral. In all events, the maximum credit available to the Optionee or Participant may not exceed the option or purchase price of the acquired shares (less the par value of such shares) plus any Federal, state and local income and employment tax liability incurred by the Optionee or Participant in connection with the acquisition of such shares. C. The Plan Administrator may, in its absolute discretion, determine that one or more loans extended under this Section I shall be subject to forgiveness by the Corporation in whole or in part upon such terms and conditions as the Plan Administrator may in its discretion deem appropriate. II. AMENDMENT OF THE PLAN AND AWARDS A. The Board has complete and exclusive power and authority to amend or modify the Plan (or any component thereof) in any or all respects whatsoever. However, (i) no such amendment or modification shall adversely affect rights and obligations with respect to options at the time outstanding under the Plan, nor adversely affect the rights of any Participant with respect to Common Stock issued under the Stock Issuance Program prior to such action, unless the Optionee or Participant consents to such amendment. In addition, the Board may not, without the approval of the Corporation's shareholders, amend the Plan to (i) increase the 29 maximum number of shares issuable under the Plan or the maximum number of shares for which any one individual participating in the Plan may be granted stock options, separately exercisable stock appreciation rights and direct stock issuances in the aggregate over the term of the Plan, except for permissible adjustments under Article One, (ii) materially modify the eligibility requirements for Plan participation, or (iii) otherwise materially increase the benefits accruing to Plan participants. B. (i) Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and (ii) shares of Common Stock may be issued under the Stock Issuance Program, which are in both instances in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Discretionary Option Grant or the Stock Issuance Programs are held in escrow until shareholder approval is obtained for a sufficient increase in the number of shares available for issuance under the Plan. If such shareholder approval is not obtained within twelve (12) months after the date the first such excess option grants or excess share issuances are made, then (i) any unexercised excess options shall terminate and cease to be exercisable and (ii) the Corporation shall promptly refund the purchase price paid for any excess shares actually issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow. III. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of any stock options granted under Article Two or upon the issuance of any shares under Article Three shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion and in accordance with the provisions of this Section III of Article Five and such supplemental rules as the Plan Administrator may from time to time adopt (including the applicable safe-harbor provisions of Rule 16b-3 of the Securities and Exchange Commission), provide any or all holders of Non-Statutory Options or unvested shares under the Plan with the right to use shares of Common Stock in satisfaction of all or part of the Federal, state and local income and employment tax liabilities incurred by such holders in connection with the exercise of their options or the vesting of their shares (the "Taxes"). Such right may be provided to any such holder in either or both of the following formats: -- The holder of the Non-Statutory Option or unvested shares may be provided with the election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the applicable Taxes (not to exceed one hundred percent (100%)) designated by the holder. -- The Plan Administrator may, in its discretion, provide the holder of the Non-Statutory Option or the unvested shares with the election to deliver to 30 the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such individual (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes incurred in connection with such option exercise or share vesting (not to exceed one hundred percent (100%)) designated by the holder. IV. EFFECTIVE DATE AND TERM OF PLAN A. The Discretionary Option Grant and Stock Issuance Programs of this Plan became effective immediately upon adoption of the Plan by the Board on March 23, 1995 (the "Plan Effective Date"). The Plan was approved by the Corporation's shareholders on April 12, 1995. On December 9, 1995, the Board approved an increase of 600,000 shares (which number reflects the 1-for-3 reverse stock split that was effected immediately prior to the consummation of the initial public offering of the Common Stock) in the aggregate number of shares issuable under the Plan; such increase was approved by the Corporation's shareholders on December 19, 1995. The Automatic Option Grant Program of this Plan became effective on the Automatic Option Grant Program Effective Date. B. The Plan was amended by the Board on March 16, 1996 to implement the Director Fee Option Grant Program, subject to approval of the amendment at the 1996 Annual Stockholders Meeting. If such stockholder approval is not obtained, then the Director Fee Option Grant Program will terminate. C. Each stock option grant outstanding under the Predecessor Plans immediately prior to the Plan Effective Date shall be incorporated into this Plan and treated as an outstanding option under this Plan, but each such option shall continue to be governed solely by the terms and conditions of the instrument evidencing such grant, and nothing in this Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such options with respect to their acquisition of shares of Common Stock thereunder. However, the Plan Administrator shall have complete discretion to extend, under such circumstances as it may deem appropriate, one or more provisions of this Plan to any or all of the stock options which are incorporated into this Plan from the Predecessor Plans but which do not otherwise contain such provisions. D. No further option grants or stock issuances shall be made under the Predecessor Plans from and after the Plan Effective Date. E. The Plan shall terminate upon the earlier of (i) February 28, 2005 or (ii) the date on which all shares available for issuance under the Plan shall have been issued pursuant to the exercise of the options or stock appreciation rights granted under the Plan or the issuance of shares (whether vested or unvested) under the Stock Issuance Program. If the date of termination is determined under clause (i) above, then all option grants and unvested share issuances outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the instruments evidencing such option grants or share issuances. 31 V. NO EMPLOYMENT/SERVICE RIGHTS Neither the action of the Corporation in establishing the Plan, nor any action taken by the Plan Administrator hereunder, nor any provision of the Plan shall be construed so as to grant any individual the right to remain in the employ or service of the Corporation (or any parent or subsidiary corporation) for any period of specific duration, and the Corporation (or any parent or subsidiary corporation retaining the services of such individual) may terminate such individual's employment or service at any time and for any reason, with or without cause. VI. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares pursuant to option grants or share issuances under the Plan shall be used for general corporate purposes. VII. REGULATORY APPROVALS The implementation of the Plan, the granting of any option under the Plan, the issuance of any shares under the Stock Issuance Program, and the issuance of Common Stock upon the exercise or surrender of the option grants made hereunder shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it, and the Common Stock issued pursuant to it. VIII. MISCELLANEOUS PROVISIONS A. The right to acquire Common Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionee or Participant. B. The provisions of the Plan relating to the exercise of options and the vesting of shares shall be governed by the laws of the State of Pennsylvania as such laws are applied to contracts entered into and performed in such State. C. The provisions of the Plan shall inure to the benefit of, and be binding upon, the Corporation and its successors or assigns, whether by Corporate Transaction or otherwise, and the Participants and Optionees, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees. 32 EX-10.21 7 DESIGN-BUILD AGREEMENT STANDARD FORM OF DESIGN-BUILD AGREEMENT AND GENERAL CONDITIONS BETWEEN OWNER AND CONTRACTOR (Where the Basis of Payment is the Cost of the Work Plus a Fee, with a Guaranteed Maximum Price Option) ARTICLE 1 AGREEMENT This Agreement is made this 30th day of August in the year 1996, by and between the OWNER NEOSE TECHNOLOGIES, INC. (Name and Address) 102 Witmer Road Horsham, PA 19044 and the CONTRACTOR IRWIN & LEIGHTON, INC. (Name and Address) 460 North Gulph Road King of Prussia, PA 19406 for services in connection with the following PROJECT CLINICAL SUPPLIES PILOT PLANT FACILITY 102 Witmer Road Horsham, PA 19044 Notice to the parties shall be given at the above addresses. 2 ARTICLE 2 GENERAL PROVISIONS 2.1 TEAM RELATIONSHIP The Owner and the Contractor agree to proceed with the Project on the basis of trust, good faith and fair dealing, and shall take all actions reasonably necessary to perform this Agreement in an economical and timely manner, including consideration of design modifications and alternative materials or equipment that will permit the Work to be constructed within the Guaranteed Maximum Price (GMP) and by the date of Substantial Completion, if they are established by Amendment No. 1. The Contractor agrees to procure the architectural and engineering services set forth below, and to furnish construction and administration of the Work. 2.2 ARCHITECT/ENGINEER Architectural and engineering services shall be procured from licensed, independent design professionals retained by the Contractor or furnished by licensed employees of the Contractor, or as permitted by the law of the state where the Project is located. The person or entity providing architectural and engineering services shall be referred to as the Architect/Engineer. If the Architect/Engineer is an independent design professional, the architectural and engineering services shall be procured pursuant to a separate agreement between the Contractor and the Architect/Engineer. The Architect/Engineer for the Project is Francis Cauffman Foley Hoffmann. 2.3 EXTENT OF AGREEMENT This Agreement is solely for the benefit of the parties, represents the entire and integrated agreement between the parties, and supersedes all prior negotiations, representations or agreements, either written or oral. 2.4 DEFINITIONS .1 The Contract Documents consist of: a. Change Orders and written amendments to this Agreement signed by both the Owner and Contractor, including Amendment No. 1 if executed; b. this Agreement except for the existing Contract Documents set forth in item e below; c. the most current Documents approved by the Owner pursuant to Subparagraphs 3.1.4, 3.1.5 or 3.1.6; d. the information provided by the Owner pursuant to Clause 4.1.2.1; e. the Contract Documents in existence at the time of execution of this Agreement which are set forth in Article 15; f. the Owner's Program provided pursuant to Subparagraph 4.1.1. In case of any inconsistency, conflict or ambiguity among the Contract Documents, the Documents shall govern in the order in which they are listed above. .2 The Work is the Design Phase Services procured in accordance with Paragraph 3.1, the GMP Proposal provided in accordance with Paragraph 3.2, the Construction Phase Services provided in accordance with Paragraph 3.3, Additional Services that may be provided in accordance with Paragraph 3.8, and other services which are necessary to complete the Project in accordance with and reasonably inferable from the Contract Documents. .3 The term Day shall mean calendar day. .4 A Subcontractor is a person or entity who has an agreement with the Contractor to perform any portion of the Work. The term Subcontractor does not include the Architect/Engineer or any separate contractor employed by the Owner or any separate contractor's subcontractors. .5 A Subsubcontractor is a person or entity who has an agreement with a Subcontractor to perform any portion of the Subcontractor's work. .6 Substantial Completion of the Work, or of a designated portion, occurs on the date when construction is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Project, or a designated portion, for the use for which it is intended. This date shall be confirmed by a certificate of Substantial Completion signed by the Owner and Contractor. The certificate shall state the respective responsibilities of the Owner and Contractor for security, maintenance, heat, utilities, damage to the Work, and insurance. The certificate shall also list the items to be completed or corrected, and establish the time for their completion and correction. .7 The Owner's Program is an initial description of the Owner's objectives, including budgetary and time criteria, space requirements and relationships, flexibility and expandability requirements, special equipment and systems, and site requirements. ARTICLE 3 CONTRACTOR'S RESPONSIBILITIES The Contractor shall be responsible for procuring the design and for the construction of the Work consistent with the Owner's Program, as such Program may be modified by the Owner during the course of the Work. The Contractor shall exercise reasonable skill and judgment in the performance of its services, but does not warrant or guarantee schedules and estimates other than those that are part of the GMP proposal. 3.1 DESIGN PHASE SERVICES 3.1.1 PRELIMINARY EVALUATION The Contractor shall provide a preliminary evaluation of the Project's feasibility based on the Owner's Program and other relevant information. 3.1.2 PRELIMINARY SCHEDULE The Contractor shall prepare a preliminary schedule of the Work for the Owner's written approval. The schedule shall show the activities of the Owner, Architect/Engineer and Contractor necessary to meet the Owner's completion requirements. The schedule shall be updated periodically with the level of detail for each schedule update reflecting the information then available. If an update indicates that a previously approved schedule will not be met, the Contractor shall recommend corrective action to the Owner in writing. 3 3.1.3 PRELIMINARY ESTIMATE When sufficient Project information has been identified, the Contractor shall prepare for the Owner's written approval a preliminary estimate utilizing area, volume or similar conceptual estimating techniques. The estimate shall be updated periodically with the level of detail for each estimate update reflecting the information then available. If the preliminary estimate or any update exceeds the Owner's budget, the Contractor shall make written recommendations to the Owner. 3.1.4 SCHEMATIC DESIGN DOCUMENTS The Contractor shall submit for the Owner's written approval Schematic Design Documents, based on the Owner's Program and other relevant information. Schematic Design Documents shall include drawings, outline specifications and other conceptual documents illustrating the Project's basic elements, scale, and their relationship to the site. One set of these documents shall be furnished to the Owner. The Contractor shall update the preliminary schedule and estimate based on the Schematic Design Documents. 3.1.5 DESIGN DEVELOPMENT DOCUMENTS The Contractor shall submit for the Owner's written approval Design Development Documents based on the approved Schematic Design Documents. The Design Development Documents shall further define the Project including drawings and outline specifications fixing and describing the Project size and character, and other appropriate elements incorporating the structural, architectural, mechanical and electrical systems. One set of these documents shall be furnished to the Owner. The Contractor shall update the schedule and estimate based on the Design Development Documents. 3.1.6 CONSTRUCTION DOCUMENTS The Contractor shall submit for the Owner's written approval Construction Documents based on the approved Design Development Documents. The Construction Documents shall set forth in detail the requirements for construction of the Work, and shall consist of drawings and specifications based upon codes, laws or regulations enacted at the time of their preparation. Construction shall be in accordance with these approved Construction Documents. One set of these documents shall be furnished to the Owner prior to commencement of construction. If a GMP has not been established, the Contractor shall prepare a further update of the schedule and estimate. 3.1.7 OWNERSHIP OF DOCUMENTS All Documents shall remain the property of the Contractor and are not to be used by the Owner without the written consent of the Contractor. 3.2 GUARANTEED MAXIMUM PRICE (GMP) PROPOSAL 3.2.1 When the drawings and specifications are sufficiently complete, the Contractor shall, propose a GMP, which shall be the sum of the estimated Cost of the Work as defined in Article 8 and the Contractor's Fee as defined in Article 7. The GMP is subject to modification as provided in Article 9. 3.2.2 [Intentionally Omitted] 3.2.3 The estimated Cost of the Work may include the Contractor's contingency, a sum established by the Contractor for use at the Contractor's discretion to cover costs which are properly reimbursable as a Cost of the Work but are not the basis for a Change Order. 3.2.4 BASIS OF GUARANTEED MAXIMUM PRICE The Contractor shall include with the GMP proposal a written statement of its basis, which shall include: .1 a list of the drawings and specifications, including all addenda, which were used in preparation of the GMP proposal; .2 a list of allowances and a statement of their basis; .3 a list of the assumptions and clarifications made by the Contractor in the preparation of the GMP proposal to supplement the information contained in the drawings and specifications; .4 the date of Substantial Completion upon which the proposed GMP is based, and the Schedule of Work upon which the date of Substantial Completion is based; .5 schedule of applicable alternate prices; .6 schedule of applicable unit prices; .7 statement of Additional Services included, if any; and .8 the time limit for acceptance of the GMP proposal. 3.2.5 The Contractor shall meet with the Owner to review the GMP proposal. In the event that the Owner discovers any inconsistencies or inaccuracies in the information presented, the Owner shall promptly give written notice to the Contractor, who shall make appropriate adjustments to the GMP, its basis or both. 3.2.6 Unless the Owner accepts the GMP proposal in writing on or before the date specified in the proposal for such acceptance and so notifies the Contractor, the GMP proposal shall not be effective without written acceptance by the Contractor. 3.2.7 Prior to the Owner's acceptance of the Contractor's GMP proposal, the Contractor shall incur costs to be reimbursed as part of the Cost of the Work, as provided in this Agreement or as the Owner may specifically authorize in writing. 3.2.8 Upon acceptance by the Owner of the GMP proposal, the GMP and its basis shall be set forth in Amendment No. 1. The GMP and the date of Substantial Completion shall be subject to modification by changes in the Work as provided in Articles 6 and 9. 3.2.9 The GMP shall include in the Cost of the Work those taxes which are applicable at the time the GMP is established. If in accordance with the Owner's direction an exemption is claimed for taxes, the Owner agrees to indemnify, defend and hold the Contractor harmless for any liability, penalty, interest, fine, tax assessment, attorneys fees or other expense or cost incurred by the Contractor as a result of any action taken by the Contractor in accordance with the Owner's direction. 3.3 CONSTRUCTION PHASE SERVICES 3.3.1 The Construction Phase will commence upon the issuance by the Owner of a written notice to proceed with 4 construction. If construction commences prior to execution of Amendment No. 1, the Owner's written notice to proceed shall list the documents that are applicable to the part of the Work which the Owner has authorized. 3.3.2 In order to complete the Work, the Contractor shall provide all necessary construction supervision, inspection, construction equipment, labor, materials, tools, and subcontracted items. 3.3.3 The Contractor shall give all notices and comply with all laws and ordinances legally enacted at the date of execution of the Agreement which govern the proper performance of the Work. 3.3.4 The Contractor shall prepare and submit a Schedule of Work for the Owner's written approval. This schedule shall indicate the dates for the start and completion of the various stages of the construction including the dates when information and approvals are required from the Owner. It shall be revised as required by the conditions of the Work. 3.3.5 The Contractor shall secure the building permits necessary for the construction of the Project. 3.3.6 The Contractor shall take necessary precautions for the safety of its employees on the Project, and shall comply with all applicable provisions of federal, state and municipal safety laws to prevent accidents or injury to persons on, about or adjacent to the Project site. The Contractor, directly or through its Subcontractors, shall erect and properly maintain at all times, as required by the conditions and progress of the Work, necessary safeguards for the protection of workers and the public. The Contractor, however, shall not be responsible for the elimination or abatement of safety hazards created or otherwise resulting from work at the Project site carried on by the Owner or its employees, agents, separate contractors or tenants. The Owner agrees to cause its employees, agents, separate contractors and tenants to abide by and fully adhere to all applicable provisions of federal, state and municipal safety laws and regulations. The above provision shall not relieve Subcontractors of their responsibility for the safety of persons or property in the performance of their work, nor for compliance with all applicable provisions of relevant laws. 3.3.7 The Contractor shall keep such full and detailed accounts as may be necessary for proper financial management under this Agreement. The Owner shall be afforded access to all the Contractor's records, books, correspondence, instructions, drawings, receipts, vouchers, memoranda and similar data relating to this Agreement. The Contractor shall preserve all such records for a period of three years after the final payment or longer where required by law. 3.3.8 The Contractor shall provide periodic written reports to the Owner on the progress of the Work as agreed to by the Owner and Contractor. 3.3.9 The Contractor shall develop a system of cost reporting for the Work, including regular monitoring of actual costs for activities in progress and estimates for uncompleted tasks and proposed changes in the Work. The reports shall be presented to the Owner at mutually agreeable intervals. 3.3.10 At all times the Contractor shall maintain the site of the Work free from debris and waste materials resulting from the Work. At the completion of the Work, the Contractor shall remove from the premises all construction equipment, tools, surplus materials, waste materials and debris. 3.4 HAZARDOUS MATERIAL 3.4.1 A Hazardous Material is any substance or material identified now or in the future as hazardous under any federal, state or local law or regulation, or any other substance or material which may be considered hazardous or otherwise subject to statutory or regulatory requirements governing handling, disposal and/or clean-up. The Contractor shall not be obligated to commence or continue Work until any known or suspected Hazardous Material discovered at the Project site has been removed, rendered or determined to be harmless by the Owner as certified by an independent testing laboratory and approved by the appropriate government agency. 3.4.2 If after the commencement of the Work, known or suspected Hazardous Material is discovered at the Project site, the Contractor shall be entitled to immediately stop Work in the affected area, and the Contractor shall report the condition to the Owner and, if required, the government agency with jurisdiction. 3.4.3 The Contractor shall not be required to perform any Work relating to or in the area of known or suspected Hazardous Material without written mutual agreement. 3.4.4 The Owner shall be responsible for retaining an independent testing laboratory to determine the nature of the material encountered and whether it is a Hazardous Material requiring corrective measures and/or remedial action. Such measures shall be the sole responsibility of the Owner, and shall be performed in a manner minimizing any adverse effect upon the Work of the Contractor. The Contractor shall resume Work in the area affected by any Hazardous Material only upon written agreement between the parties after the Hazardous Material has been removed or rendered harmless. 3.4.5 If the Contractor incurs additional costs and/or is delayed due to the presence of known or suspected Hazardous Material, the Contractor shall be entitled to an equitable adjustment in the GMP and/or the date of Substantial Completion. 3.4.6 To the fullest extent permitted by law, the Owner shall defend, indemnify and hold harmless the Contractor, Architect/Engineer, Subcontractors and Subsubcontractors, and the agents, officers, directors and employees of each of them, from and against any and all claims, damages, losses, costs and expenses, whether direct, indirect or consequential, including but not limited to attorney's fees, costs and expenses incurred in connection with litigation or arbitration, arising out of or relating to the performance of the Work in any area affected by Hazardous Material. To the fullest extent permitted by law, such indemnification shall apply regardless of the fault, negligence, breach of warranty or contract, or strict liability of the indemnitee. 3.4.7 The terms of this Paragraph 3.4 shall survive the completion of the Work under this Agreement and/or any termination of this Agreement. 3.5 ROYALTIES, PATENTS AND COPYRIGHTS The Contractor shall pay all royalties and license fees which may be due on the inclusion of any patented or copyrighted 5 materials, methods, equipment, or systems selected by the Contractor and incorporated in the Work. The Contractor shall defend, indemnify and hold the Owner harmless from all suits or claims for infringement of any patent rights or copyrights arising out of such selection. The Owner agrees to defend, indemnify and hold the Contractor harmless from any suits or claims of infringement of any patent rights or copyrights arising out of any patented or copyrighted materials, methods, equipment or systems specified by the Owner. 3.6 TAX EXEMPTION If in accordance with the Owner's direction an exemption is claimed for taxes, the Owner agrees to defend, indemnify and hold the Contractor harmless from any liability, penalty, interest, fine, tax assessment, attorneys fees or other expense or cost incurred by the Contractor as a result of any action taken by the Contractor in accordance with the Owner's direction. 3.7 WARRANTIES AND COMPLETION 3.7.1 The Contractor warrants that all materials and equipment furnished under the Construction Phase of this Agreement will be new unless otherwise specified, of good quality, in conformance with the Contract Documents, and free from defective workmanship and materials. Warranties shall commence on the date of Substantial Completion of the Work or of a designated portion. The Contractor agrees to correct all construction performed under this Agreement which proves to be defective in workmanship and materials within a period of one year from the date of Substantial Completion or for such longer periods of time as may be set forth with respect to specific warranties required by the Contract Documents. 3.7.2 Those products, equipment, systems or materials incorporated in the Work at the direction of or upon the specific request of the Owner (e.g. process equipment) shall be covered exclusively by the warranty of the manufacturer. There are no warranties which extend beyond the description on the face thereof. All other warranties expressed or implied including the warranty of merchantability and the warranty of fitness for a particular purpose are expressly disclaimed. 3.7.3 The Contractor shall secure required certificates of inspection, testing or approval and deliver them to the Owner. 3.7.4 The Contractor shall collect all written warranties and equipment manuals and deliver them to the Owner. 3.7.5 With the assistance of the Owner's maintenance personnel, the Contractor shall direct the checkout of utilities and operations of systems and equipment for readiness, and assist in their initial start-up and testing. Validation of building support and process systems shall be performed as agreed upon with Owner. 3.8 ADDITIONAL SERVICES The Contractor shall provide or procure the following Additional Services upon the request of the Owner. A written agreement between the Owner and Contractor shall define the extent of such Additional Services. If a GMP has been established for the Work or any portion of the Work, such Additional Services shall be considered a Change in the Work, unless they are specifically included in the statement of the basis of the GMP as set forth in Amendment No. 1. .1 Documentation of the Owner's Program, establishing the Project budget, investigating sources of financing, general business planning and other information and documentation as may be required to establish the feasibility of the Project. .2 Consultations, negotiations, and documentation supporting the procurement of Project financing. .3 Surveys, site evaluations, legal descriptions and aerial photographs. .4 Appraisals of existing equipment, existing properties, new equipment and developed properties. .5 Soils, subsurface and environmental studies, reports and investigations required for submission to governmental authorities or others having jurisdiction over the Project. .6 Consultations and representations other than normal assistance in securing building permits, before governmental authorities or others having jurisdiction over the Project. .7 Investigation or making measured drawings of existing conditions or the verification of drawings or other Owner-provided information. .8 Artistic renderings, models and mockups of the Project or any part of the Project or the Work. .9 Inventories of existing furniture, fixtures, furnishings and equipment which might be under consideration for incorporation into the Work. .10 Interior design and related services including procurement and placement of furniture, furnishings, artwork and decorations. .11 Making revisions to the Schematic Design, Design Development, Construction Documents or documents forming the basis of the GMP after they have been approved by the Owner, and which are due to causes beyond the control of the Contractor. .12 Design, coordination, management, expediting and other services supporting the procurement of materials to be obtained, or work to be performed, by the Owner, including but not limited to telephone systems, computer wiring networks, sound systems, alarms, security systems and other specialty systems which are not a part of this Agreement. .13 Estimates, proposals, appraisals, consultations, negotiations and services in connection with the repair or replacement of an insured loss. .14 The premium portion of overtime work ordered by the Owner including productivity impact costs. .15 Document reproduction exceeding the limits provided for in this Agreement. .16 Out-of-town travel by the Architect/Engineer in connection with the Work, except between the Architect/Engineer's office, Contractor's office, Owner's office and the Project site. .17 Obtaining service contractors and training maintenance personnel, assisting and consulting in the use of systems and equipment after the initial start up, and adjusting and balancing of systems and equipment. .18 Services for tenant or rental spaces not a part of this Agreement. 6 .19 Services requested by the Owner or required by the Work which are not specified in the Contract Documents and which are not normally part of generally accepted design and construction practice. .20 Serving or preparing to serve as an expert witness in connection with any proceeding, legal or otherwise, regarding the Project. .21 Preparing reproducible record drawings from marked-up prints, drawings or other documents that incorporate significant changes in the Work made during the Construction Phase. ARTICLE 4 OWNER'S RESPONSIBILITIES 4.1 INFORMATION AND SERVICES PROVIDED BY OWNER 4.1.1 The Owner shall provide full information in a timely manner regarding requirements for the Project, including the Owner's Program and other relevant information. 4.1.2 The Owner shall provide: .1 all necessary information describing the physical characteristics of the site, including surveys, site evaluations, legal descriptions, existing conditions, subsurface and environmental studies, reports and investigations; .2 inspection and testing services during construction as required by law or as mutually agreed; and .3 unless otherwise provided in the Contract Documents, necessary approvals, site plan review, rezoning, easements and assessments, necessary permits, fees and charges required for the construction, use, occupancy or renovation of permanent structures, including legal and other required services. 4.1.3 The Owner shall provide reasonable evidence satisfactory to the Contractor, prior to commencing the Work and during the progress of the Work, that sufficient funds are available and committed for the entire cost of the Project, including an allowance for changes in the Work as may be approved in the course of the Work. Unless such reasonable evidence is provided, the Contractor shall not be required to commence or continue the Work. The Contractor may stop Work after seven (7) days' written notice to the Owner if such evidence is not presented within a reasonable time. The failure of the Contractor to insist upon the providing of this evidence at any one time shall not be a waiver of the Owner's obligation to make payments pursuant to this Agreement, nor shall it be a waiver of the Contractor's right to request or insist that such evidence be provided at a later date. 4.1.4 The Contractor shall be entitled to rely on the completeness and accuracy of the information and services required by this Paragraph 4.1. 4.2 OWNER'S RESPONSIBILITIES DURING DESIGN PHASE 4.2.1 The Owner shall provide the Owner's Program at the inception of the Design Phase and shall review and timely approve schedules, estimates, Schematic Design Documents, Design Development Documents and Construction Documents furnished during the Design Phase as set forth in Paragraph 3.1, and the GMP proposal as set forth in Paragraph 3.2. 4.3 OWNER'S RESPONSIBILITIES DURING CONSTRUCTION PHASE 4.3.1 The Owner shall review and timely approve the Schedule of the Work as set forth in Subparagraph 3.3.4 4.3.2 If the Owner becomes aware of any error, omission or failure to meet the requirements of the Contract Documents or any fault or defect in the Work, the Owner shall give prompt written notice to the Contractor 4.3.3 The Owner shall communicate with the Contractor's Subcontractors, suppliers and Architect/Engineer only through the Contractor. The Owner shall have no contractual obligations to Subcontractors, suppliers, or the Architect/Engineer. 4.3.4 The Owner shall provide insurance for the Project as provided in Article 11. 4.4 OWNER'S REPRESENTATIVE The Owner's representative is Mr. Edward McGuire or Mr. Robert Fleming who is agreed to by the Contractor. The representative: .1 shall be fully acquainted with the Project; .2 agrees to furnish the information and services required of the Owner pursuant to Paragraph 4.1 so as not to delay the Contractor's Work; and .3 shall have authority to bind the Owner in all matters requiring the Owner's approval, authorization or written notice. If the Owner changes its representative or the representative's authority as listed above, the Owner shall notify the Contractor in advance in writing. The Contractor shall have the right to approve any successor representative. ARTICLE 5 SUBCONTRACTS Work not performed by the Contractor with its own forces shall be performed by Subcontractors. 5.1 RETAINING SUBCONTRACTORS The Contractor shall not retain any Subcontractor to whom the Owner has a reasonable and timely objection, provided that the Owner agrees to compensate the Contractor for any additional costs incurred by the Contractor as a result of such objection. The Contractor shall not be required to retain any Subcontractor to whom the Contractor has a reasonable objection. 5.2 MANAGEMENT OF SUBCONTRACTORS The Contractor shall be responsible for the management of the Subcontractors in the performance of their work. 7 5.3 ASSIGNMENT OF SUBCONTRACT AGREEMENTS The Contractor shall provide for assignment of subcontract agreements in the event that the Owner terminates this Agreement for cause as provided in Paragraph 12.2. Following such termination, the Owner shall notify in writing those subcontractors whose assignments will be accepted, subject to the rights of sureties. ARTICLE 6. CONTRACT TIME 6.1 COMMENCEMENT OF THE WORK The Work shall commence on or about *________, and shall proceed in general accordance with the Schedule of Work as such schedule may be amended from time to time, subject, however, to the provisions of Paragraph 3.4 and Subparagraph 4.1.3. 6.2 SUBSTANTIAL COMPLETION At such time as a GMP is accepted, a date of Substantial Completion of the Work shall be established as set forth in Amendment No. 1. If a GMP is not established and the parties desire to establish a date of Substantial Completion, it shall be set forth in Amendment No.1. If such a date is established, time shall be of the essence of this Agreement. 6.3 DELAYS IN THE WORK 6.3.1 If causes beyond the Contractor's control delay the progress of the Work, then the GMP, compensation for Design Phase Services, the Contractor's Fee and/or the date of Substantial Completion shall be modified by Change Order as appropriate. Such causes shall include but not be limited to: changes ordered in the Work, acts or omissions of the Owner or separate contractors employed by the Owner, the Owner preventing the Contractor from performing the Work pending dispute resolution, Hazardous Materials, differing site conditions, adverse weather conditions not reasonably anticipated, fire, unusual transportation delays, labor disputes, or unavoidable accidents or circumstances. 6.3.2 In the event delays to the project are encountered for any reason, the parties agree to undertake reasonable steps to mitigate the effect of such delays. *Preconstruction services including design and ordering of long-lead equipment commence immediately; onsite work starts as permits and documentation are available. ARTICLE 7 COMPENSATION 7.1 [Intentionally Omitted] 7.2 Design Phase Compensation 7.2.1 The cost of services performed directly by the Architect/Engineer is computed separately and is independent from the Contractor's compensation for work or services directly performed by the Contractor; these costs shall be shown as separate items on applications for payment. If an Architect/Engineer is retained by the Contractor, the payments to the Architect/Engineer shall be as detailed in a separate agreement between the Contractor and Architect/Engineer. 7.2.2 The Owner shall compensate the Contractor for services performed during the Design Phase as described in Paragraph 3.1, including preparation of a GMP proposal as described in Paragraph 3.2, as follows: (State whether a stipulated sum, actual cost, or other basis. If a stipulated sum, state what portion of the sum shall be payable each month.) .1 Reimbursement of all costs for Design & Engineering and Validation .2 Reimbursement for other costs as outlined in Article 8.1 .3 Reimbursement for personnel as per attached hourly billing rates .4 Contractor's stated percentage fee as per 7.3.1 applicable to items .1 through .3 above. 7.2.3 Compensation for Design Phase Services shall be equitably adjusted if such services extend beyond six months from the date of this Agreement for reasons beyond the reasonable control of the Contractor or as provided in Paragraph 9.1. For changes in Design Phase Services, compensation shall be adjusted as follows: To be negotiated. 7.2.4 Payments for Design Phase Services shall be due and payable within twenty (20) days following presentation of the Contractor's monthly invoice to the Owner. If the Owner fails to pay the Contractor as agreed, then the Contractor shall have the right to stop the Work and be entitled to payments due plus interest as provided in Subparagraphs 10.1.3 and 10.1.4. 7.3 CONSTRUCTION PHASE COMPENSATION 7.3.1 The Owner shall compensate the Contractor for Work performed following the commencement of the Construction Phase on the following basis: .1 the Cost of the Work as allowed in Article 8; and .2 the Contractor's Fee in the amount of 2.95% of the accepted GMP fee; to be fixed upon acceptance of GMP. ($ To be determined subject to adjustment as provided in Paragraph 7.5. The Contractor's Fee shall be paid proportionately to the ratio that the monthly Cost of the Work bears to the total estimated Cost of the Work.) 7.3.2 The compensation to be paid under this Paragraph 7.3 shall be limited to the GMP established in Amendment No. 1, 8 as the GMP may be adjusted under Article 9. In the event the Cost of the Work plus the Contractor's Fee shall be less than the GMP as adjusted by Change Orders, the resulting savings shall be shared by the Owner and the Contractor in accordance with attached Rider 1. 7.3.3 Payment for Construction Phase Services shall be as set forth in Article 10. If Design Phase Services continue to be provided after construction has commenced, the Contractor shall also continue to be compensated as provided in Paragraph 7.2, or as mutually agreed. 7.3.4 Schedule Incentive - See attached Rider 2. 7.4 CONTRACTOR'S FEE The Contractor's Fee includes the following: .1 salaries and other mandatory or customary compensation of the Contractor's employees at its principal and branch offices, except employees listed in Subparagraph 8.2.2; .2 general and administrative expenses of the Contractor's principal and branch offices other than the field office, except as may be expressly included in Article 8; and .3 the Contractor's capital expenses, including interest on the Contractor's capital employed for the Work. 7.5 ADJUSTMENT IN THE CONTRACTOR'S FEE Adjustment in the Contractor's Fee shall be made as follows. .1 for changes in the Work as provided in Article 9, the Contractor's Fee shall be adjusted as follows: To be negotiated. .2 for delays in the Work not caused by the Contractor, there will be an equitable adjustment in the Contractor's Fee to compensate the Contractor for increased expenses; and .3 if the Contractor is placed in charge of managing the replacement of an insured or uninsured loss, the Contractor shall be paid an additional Fee in the same proportion that the Contractor's Fee bears to the estimated Cost of the Work. ARTICLE 8 COST OF THE WORK The Owner agrees to pay the Contractor for the Cost of the Work as defined in this Article. This payment shall be in addition to the Contractor's Fee stipulated in Article 7. 8.1 COST ITEMS FOR DESIGN PHASE SERVICES 8.1.1 Compensation for Design Phase Services as provided in Paragraph 7.2. 8.2 COST ITEMS FOR CONSTRUCTION PHASE SERVICES 8.2.1 Wages paid for labor in the direct employ of the Contractor in the performance of the Work. 8.2.2 Salaries of Contractor's employees when stationed at the field office, in whatever capacity employed, employees engaged on the road expediting the production or transportation of material and equipment, and employees from the principal or branch office performing the functions listed on the attached Personnel Schedule. Personnel to be charged in accordance with billing rates listed on the attached Personnel Schedule. 8.2.3 Cost of all employee benefits and taxes including but not limited to workers' compensation, unemployment compensation, Social Security, health, welfare, retirement and other fringe benefits as required by law, labor agreements, or paid under the Contractor's standard personnel policy, insofar as such costs are paid to employees of the Contractor who are included in the Cost of the Work under Subparagraphs 8.2.1 and 8.2.2. 8.2.4 Reasonable transportation, travel, hotel and moving expenses of the Contractor's personnel incurred in connection with the Work. 8.2.5 Cost of all materials, supplies and equipment incorporated in the Work, including costs of inspection, testing, transportation, storage and handling. 8.2.6 Payments made by the Contractor to Subcontractors for work performed under this Agreement. 8.2.7 Fees and expenses for design services procured by the Contractor except as provided by the A/E and compensated in Paragraph 7.2. 8.2.8 Cost, including transportation and maintenance of all materials, supplies, equipment, temporary facilities and hand tools not owned by the workers that are used or consumed in the performance of the Work, less salvage value; and cost less salvage value on such items used, but not consumed that remain the property of the Contractor. 8.2.9 Rental charges of all necessary machinery and equipment, exclusive of hand tools owned by workers, used at the site of the Work, whether rented from the Contractor or others, including installation, repair and replacement, dis- mantling, removal, maintenance, transportation and delivery costs at rental charges consistent with those prevailing in the area. 8.2.10 Cost of the premiums for all insurance and surety bonds which the Contractor is required to procure or deems necessary. 8.2.11 Sales, use, gross receipts or other taxes, tariffs or duties related to the Work for which the Contractor is liable. 9 8.2.12 Permits, fees, licenses, tests, royalties, damages for infringement of patents and/or copyrights, including costs of defending related suits for which the Contractor is not responsible as set forth in Paragraph 3.5, and deposits lost for causes other than the Contractor's negligence. 8.2.13 Losses, expenses or damages to the extent not compensated by insurance or otherwise, and the cost of corrective work during the Construction Phase and for a period of one year following the date of Substantial Completion. 8.2.14 All costs associated with establishing, equipping, operating, maintaining and demobilizing the field office. 8.2.15 Reproduction costs, photographs, cost of telegrams, facsimile transmissions, long distance telephone calls, data processing services, postage, express delivery charges, telephone service at the site and reasonable petty cash expenses at the field office. 8.2.16 All water, power and fuel costs necessary for the Work. 8.2.17 Cost of removal of all nonhazardous substances, debris and waste materials. 8.2.18 Costs incurred due to an emergency affecting the safety of persons and/or property. 8.2.19 Legal, mediation and arbitration fees and costs, other than those arising from disputes between the Owner and Contractor, reasonably and properly resulting from the Contractor's performance of the Work. 8.2.20 All costs directly incurred in the performance of the Work or in connection with the Project, and not included in the Contractor's Fee as set forth in Article 7, which are reasonably inferable from the Contract Documents as necessary to produce the intended results. 8.3 DISCOUNTS All discounts for prompt payment shall accrue to the Owner to the extent such payments are made directly by the Owner. To the extent payments are made with funds of the Contractor, all cash discounts shall accrue to the Contractor. All trade discounts, rebates and refunds, and all returns from sale of surplus materials and equipment, shall be credited to the Cost of the Work. ARTICLE 9 CHANGES IN THE WORK Changes in the Work which are within the general scope of this Agreement may be accomplished by Change Order without invalidating this Agreement. 9.1 CHANGE ORDERS A Change Order is a written instrument, issued after execution of this Agreement, signed by the Owner and Contractor stating their agreement upon a change and the adjustment in the GMP, compensation for Design Phase Services, the Contractor's Fee and/or the date of Substantial Completion. Each adjustment in the GMP resulting from a Change Order shall clearly separate the amount attributable to compensation for Design Phase Services, other Cost of the Work and the Contractor's Fee. 9.2 DETERMINATION OF COST An increase or decrease in the GMP resulting from a change in the Work shall be determined by one or more of the following methods: .1 unit prices set forth in this Agreement or as subsequently agreed; .2 a mutually accepted, itemized lump sum; .3 costs determined as defined in Paragraph 7.2 and Article 8 and a mutually acceptable Contractor's Fee as determined in Subparagraph 7.5.1; or .4 if an increase or decrease cannot be agreed to as set forth in Subparagraphs 9.2.1 through 9.2.3 and the Owner issues a written order for the Contractor to proceed with the change, the cost of the change in the Work shall be determined by the reasonable expense and savings of the performance of the Work resulting from the change. If there is a net increase in the GMP, the Contractor's Fee shall be adjusted as set forth in Subparagraph 7.5.1. In case of a net decrease in the GMP, the Contractor's Fee shall not be adjusted. The Contractor shall maintain a documented, itemized accounting evidencing the expenses and savings. 9.3 NO OBLIGATION TO PERFORM The Contractor shall not be obligated to perform changed Work until a Change Order has been executed by the Owner and Contractor, except as provided in Subparagraph 9.2.4. 9.4 ADJUSTMENT OF UNIT PRICES If a proposed Change Order alters original quantities to a degree that application of previously agreed to unit prices would be inequitable to either the Owner or the Contractor, the unit prices and the GMP shall be equitably adjusted. 9.5 UNKNOWN CONDITIONS If in the performance of the Work the Contractor finds latent, concealed or subsurface physical conditions which differ from the conditions the Contractor reasonably anticipated, or if physical conditions are materially different from those normally encountered and generally recognized as inherent in the kind of work provided for in this Agreement, then the GMP compensation for Design Phase Services, the Contractor's Fee, and/or the date of Substantial Completion shall be equitably adjusted by Change Order within a reasonable time after the conditions are first observed. 9.6 CLAIMS FOR ADDITIONAL COST OR TIME For any claim for an increase in the GMP, compensation for Design Phase Services, the Contractor's Fee and/or an extension in the date of Substantial Completion, the Contractor shall give the Owner written notice of the claim within twenty-one (21) days after the occurrence giving rise to the claim or within twenty-one (21) days after the Contractor first recognizes the condition giving rise to the claim, whichever is later. Except in an emergency, notice shall be given before proceeding with the Work. Claims for design and estimating costs incurred in connection with possible changes requested by the Owner, but which do not proceed, shall be made within twenty-one (21) days after the decision is made not to proceed. Any change in the GMP, compensation for Design Phase Services, the Contractor's Fee, and/or date of Substantial Completion resulting from such claim shall be authorized by Change Order. 10 9.7 EMERGENCIES In any emergency affecting the safety of persons and/or property, the Contractor shall act, at its discretion, to prevent threatened damage, injury or loss. Any change in the GMP, compensation for Design Phase Services, the Contractor's Fee and/or extension of the date of Substantial Completion on account of emergency work shall be determined as provided in this Article. ARTICLE 10 PAYMENT FOR CONSTRUCTION PHASE SERVICES 10.1 PROGRESS PAYMENTS 10.1.1 On the last day of each month after the Construction Phase has commenced, the Contractor shall submit to the Owner an Application for Payment consisting of the Cost of the Work performed up to the last day of the current month, including the cost of material stored on the site or at other locations approved by the Owner, along with a proportionate share of the Contractor's Fee. Prior to submission of the next Application for Payment, the Contractor shall furnish to the Owner a statement accounting for the disbursement of funds received under the previous Application. The extent of such statement shall be as agreed upon between the Owner and Contractor. 10.1.2 Within twenty (20) days after receipt of each monthly Application for Payment, the Owner shall pay directly to the Contractor the appropriate amount for which Application for Payment is made, less amounts previously paid by the Owner. 10.1.3 If the Owner fails to pay the Contractor at the time payment of any amount becomes due, then the Contractor may, at any time thereafter, upon serving written notice that the Work will be stopped within five (5) days after receipt of the notice by the Owner, and after such five (5) day period, stop the Work until payment of the amount owing has been received. 10.1.4 Payments due but unpaid shall bear interest at the rate the Owner is paying on its construction loan or at the current "prime rate" whichever is higher. 10.1.5 The Contractor warrants and guarantees that title to all Work, materials and equipment covered by an Application for Payment, whether incorporated in the Project or not, will pass to the Owner upon receipt of such payment by the Contractor free and clear of all liens, claims, security interests or encumbrances, hereinafter referred to as "liens." 10.1.6 The Owner's progress payment, occupancy or use of the Project, whether in whole or in part, shall not be deemed an acceptance of any Work not conforming to the requirements of the Contract Documents. 10.1.7 Upon Substantial Completion of the Work, the Owner shall pay the Contractor the unpaid balance of the Cost of the Work, compensation for Design Phase Services and the Contractor's Fee, less a sum equal to the Contractor's estimated cost of completing any unfinished items as agreed to between the Owner and Contractor as to extent and time for completion. The Owner thereafter shall pay the Contractor monthly the amount retained for unfinished items as each item is completed. 10.2 FINAL PAYMENT 10.2.1 Final payment, consisting of the unpaid balance of the Cost of the Work, compensation for Design Phase Services and the Contractor's Fee, less the initial payment made under Paragraph 7.1, shall be due and payable when the Work is fully completed. Before issuance of final payment, the Owner may request satisfactory evidence that all payrolls, materials bills and other indebtedness connected with the Work have been paid or otherwise satisfied. 10.2.2 In making final payment the Owner waives all claims except for: .1 outstanding liens; .2 improper workmanship or defective materials appearing within one year after the date of Substantial Completion; .3 Work not in conformance with the Contract Documents; and .4 terms of any special warranties required by the Contract Documents. 10.2.3 In accepting final payment, the Contractor waives all claims except those previously made in writing and which remain unsettled. ARTICLE 11 INDEMNITY, INSURANCE AND WAIVER OF SUBROGATION 11.1 INDEMNITY 11.1.1 To the fullest extent permitted by law, the Contractor shall defend, indemnify and hold the Owner harmless from all claims for bodily injury and property damage (other than to the Work itself and other property insured under Paragraph 11.5), including resulting loss of use that may arise from the performance of the Work, to the extent of the negligence attributed to such acts or omissions by the Contractor, Subcontractors or anyone employed directly or indirectly by any of them or by anyone for whose acts any of them may be liable. The Contractor shall not be required to defend, indemnify or hold harmless the Owner for any acts, omissions or negligence of the Owner, Owner's employees, agents or separate contractors. 11.1.2 The Owner shall cause any other contractor who may have a contract with the Owner to perform work in the areas where Work will be performed under this Agreement, to agree to indemnify the Contractor, Subcontractors or anyone employed directly or indirectly by any of them or anyone for whose acts any of them may be liable and hold them harmless from all claims for bodily injury and property damage, other than property insured under Paragraph 11.5, that may arise from that contractor's operations. Such provisions shall be in a form satisfactory to the Contractor. 11 11.2 CONTRACTOR'S LIABILITY INSURANCE 11.2.1 The Contractor shall obtain and maintain insurance coverage for the following claims which may arise out of the performance of this Agreement, whether resulting from the Contractor's operations or by the operations of any Subcontractor, anyone in the employ of any of them, or by an individual or entity for whose acts they may be liable: .1 workers' compensation, disability and other employee benefit claims under acts applicable to the Work; .2 under applicable employers liability law, bodily injury, occupational sickness, disease or death claims of the Contractor's employees; .3 bodily injury, sickness, disease or death claims for damages to persons not employed by the Contractor; .4 usual personal injury liability claims for damages directly or indirectly related to the person's employment by the Contractor or for damages to any other person; .5 damage to or destruction of tangible property, including resulting loss of use, claims for property other than the Work itself and other property insured under Paragraph 11.5; .6 bodily injury, death or property damage claims resulting from motor vehicle liability in the use, maintenance or ownership of any motor vehicle; and .7 contractual liability claims involving the Contractor's obligations under Subparagraph 11.1.1. 11.2.2 The Contractor's Commercial General and Automobile Liability Insurance as required by Subparagraph 11.2.1 shall be written for not less than the following limits of liability: .1 Commercial General Liability Insurance a. Each Occurrence Limit $1,000,000 b. General Aggregate $2,000,000 c. Products/Completed Operations Aggregate $1,000,000 d. Personal and Advertising Injury Limit $1,000,000 .2 Comprehensive Automobile Liability Insurance a. Combined Single Limit Bodily Injury and Property Damage $1,000,000 Each Occurrence or b. Bodily Injury $--------- Each Person $--------- Each Occurrence c. Property Damage $--------- Each Occurrence .3 Umbrella Liability Coverage $20,000,000 11.2.3 Commercial General Liability Insurance may be arranged under a single policy for the full limits required or by a combination of underlying policies and an Excess or Umbrella Liability policy. 11.2.4 The policies shall contain a provision that coverage will not be cancelled or not renewed until at least thirty (30) days' prior written notice has been given to the Owner. Certificates of insurance showing required coverage to be in force shall be filed with the Owner prior to commencement of the Work. 11.2.5 Products and Completed Operations insurance shall be maintained for a minimum period of at least 5 year(s) after either ninety (90) days following the date of Substantial Completion or final payment, whichever is earlier. 11.3 PROFESSIONAL LIABILITY INSURANCE The Architect/Engineer's professional liability insurance for claims arising from the negligent performance of professional services under this Agreement shall be written for not less than $1,000,000 per claim and in the aggregate with a deductible not to exceed $2,000,000. These requirements shall be continued in effect for 3 year(s) after the date of Substantial Completion. If the Architect/Engineer retains consultants for a portion of the design, their professional liability insurance coverage, including deductible amounts, shall be set forth in Article 14 of this Agreement. 11.4 OWNER'S LIABILITY INSURANCE The Owner shall be responsible for obtaining and maintaining its own liability insurance. Insurance for claims arising out of the performance of this Agreement may be purchased and maintained at the Owner's discretion. 11.5 INSURANCE TO PROTECT PROJECT 11.5.1 The Owner shall obtain and maintain property insurance in a form acceptable to the Contractor upon the entire Project for the full cost of replacement at the time of any loss. This insurance shall include as named insureds the Owner, Contractor, Architect/Engineer, Subcontractors and Subsubcontractors. This insurance shall insure against loss from the perils of fire and extended coverage, and shall include "all risk" insurance for physical loss or damage including without duplication of coverage at least: theft, vandalism, malicious mischief, transit, collapse, falsework, temporary buildings, debris removal, flood, earthquake, testing, and damage resulting from defective design, workmanship or material. The Owner shall increase limits of coverage, if necessary, to reflect estimated replacement cost. The Owner shall be responsible for any co-insurance penalties or deductibles. 11.5.2 If the Owner occupies or uses a portion of the Project prior to its Substantial Completion, such occupancy or use shall not commence prior to a time mutually agreed to by the Owner and the Contractor and to which the insurance company or companies providing the property insurance have consented by endorsing the policy or policies. This insurance shall not be cancelled or lapsed on account of partial occupancy. Consent of the Contractor to such early occupancy or use shall not be unreasonably withheld. 11.5.3 The Owner shall obtain and maintain boiler and machinery insurance as necessary. The interests of the Owner, Contractor, Architect/Engineer, Subcontractors and Subsubcontractors shall be protected under this coverage. 12 11.5.4 The Owner shall purchase and maintain insurance to protect the Owner, Contractor, Architect/Engineer, Subcontractors and Subsubcontractors against loss of use of Owner's property due to those perils insured pursuant to Paragraph 11.5. Such policy will provide coverage for expediting expenses of materials, continuing overhead of the Owner and the Contractor, Architect/Engineer, Subcontractors and Subsubcontractors, necessary labor expense including overtime, loss of income by the Owner and other determined exposures. Exposures of the Owner, Contractor, Architect/Engineer, Subcontractors and Subsubcontractors, shall be determined by mutual agreement with separate limits of coverage fixed for each item. 11.5.5 Upon the Contractor's request, the Owner shall provide the Contractor with a copy of all policies before an exposure to loss may occur. Copies of any subsequent endorsements shall be furnished to the Contractor. The Contractor shall be given thirty (30) days' notice of cancellation, non-renewal, or any endorsements restricting or reducing coverage. The Owner shall give written notice to the Contractor before commencement of the Work if the Owner will not be obtaining property insurance. In that case, the Contractor may obtain insurance in order to protect its interest in the Work as well as the interest of Architect/Engineer, Subcontractors and Subsubcontractors in the Work. The cost of this insurance shall be a Cost of the Work pursuant to Article 8, and the GMP shall be increased by Change Order. It the Contractor is damaged by failure of the Owner to purchase or maintain property insurance or to so notify the Contractor, the Owner shall bear all reasonable costs incurred by the Contractor arising from the damage. 11.6 PROPERTY INSURANCE LOSS ADJUSTMENT 11.6.1 Any insured loss shall be adjusted with the Owner and the Contractor and made payable to the Owner and Contractor as trustees for the insureds, as their interests may appear, subject to any applicable mortgagee clause. 11.6.2 Upon the occurrence of an insured loss, monies received will be deposited in a separate account and the trustees shall make distribution in accordance with the agreement of the parties in interest, or in the absence of such agreement, in accordance with an arbitration award pursuant to Article 13. If the trustees are unable to agree between themselves on the settlement of the loss, such dispute shall also be submitted for resolution pursuant to Article 13. 11.7 WAIVER OF SUBROGATION 11.7.1 The Owner and Contractor waive all rights against each other, the Architect/Engineer, and any of their respective employees, agents, consultants, subcontractors and subsubcontractors for damages caused by risks covered by insurance provided in Paragraph 11.5 to the extent they are covered by that insurance, except such rights as they may have to the proceeds of such insurance held by the Owner and Contractor as trustees. The Contractor shall require similar waivers from the Architect/Engineer and all Subcontractors, and shall require each of them to include similar waivers in their subsubcontracts and consulting agreements. 11.7.2 The Owner waives subrogation against the Contractor, Architect/Engineer, Subcontractors and Subsubcontractors on all property and consequential loss policies carried by the Owner on adjacent properties and under property and consequential loss policies purchased for the Project after its completion. 11.7.3 If the policies of insurance referred to in this Paragraph require an endorsement to provide for continued coverage where there is a waiver of subrogation, the owners of such policies will cause them to be so endorsed. ARTICLE 12 TERMINATION OF THE AGREEMENT AND OWNER'S RIGHT TO PERFORM CONTRACTOR'S RESPONSIBILITIES 12.1 TERMINATION BY THE CONTRACTOR 12.1.1 Upon seven (7) days' written notice to the Owner, the Contractor may terminate this Agreement for any of the following reasons: .1 if the Work has been stopped for a thirty (30) day period a. under court order or order of other governmental authorities having jurisdiction; b. as a result of the declaration of a national emergency or other governmental act during which, through no act or fault of the Contractor, materials are not available; or c. because of the Owner's failure to pay the Contractor in accordance with this Agreement; .2 if the Work is suspended by the Owner for sixty (60) days; .3 if the Owner materially delays the Contractor in the performance of the Work; .4 if the Owner otherwise materially breaches this Agreement; or .5 if the Owner fails to furnish reasonable evidence that sufficient funds are available and committed for the entire cost of the Project in accordance with Subparagraph 4.1.3 of this Agreement. 12.1.2 Upon termination by the Contractor in accordance with Subparagraph 12.1.1, the Contractor shall be entitled to recover from the Owner payment for all Work executed and for any proven loss, cost or expense in connection with the Work, plus all demobilization costs and reasonable damages. In addition, the Contractor shall be paid an amount calculated as set forth either in Subparagraph 12.3.1 or 12.3.2, depending on when the termination occurs, and Subparagraphs 12.3.3 and 12.3.4. 12.2 OWNER'S RIGHT TO PERFORM CONTRACTOR'S OBLIGATIONS AND TERMINATION BY THE OWNER FOR CAUSE 12.2.1 If the Contractor persistently fails to perform any of its obligations under this Agreement, the Owner may, after seven (7) days' written notice, during which period the Contractor fails to perform such obligation, undertake to perform 13 such obligations. The GMP shall be reduced by the cost to the Owner of performing such obligations. 12.2.2 Upon seven (7) days' written notice to the Contractor and the Contractor's surety, if any, the Owner may terminate this Agreement for any of the following reasons: .1 if the Contractor persistently utilizes improper materials and/or inadequately skilled workers; .2 if the Contractor does not make proper payment to laborers, material suppliers or Subcontractors; .3 if the Contractor persistently fails to abide by the orders, regulations, rules, ordinances or laws of governmental authorities having jurisdiction; or .4 if the Contractor otherwise materially breaches this Agreement. If the Contractor fails to proceed to cure within the seven (7) days, the Owner, without prejudice to any other right or remedy, may take possession of the site and complete the Work utilizing any reasonable means. In this event, the Contractor shall not have a right to further payment until the Work is completed. 12.2.3 If the Contractor files a petition under the Bankruptcy Code, this Agreement shall terminate if the Contractor or the Contractor's trustee rejects the Agreement or, if there has been a default, the Contractor is unable to give adequate assurance that the Contractor will perform as required by this Agreement or otherwise is unable to comply with the requirements for assuming this Agreement under the applicable provisions of the Bankruptcy Code. 12.2.4 In the event the Owner exercises its rights under Subparagraph 12.2.1 or 12.2.2, upon the request of the Contractor the Owner shall provide a detailed accounting of the cost incurred by the Owner. 12.3 TERMINATION BY OWNER WITHOUT CAUSE If the Owner terminates this Agreement other than as set forth in Paragraph 12.2, the Owner shall pay the Contractor for all Work executed and for any proven loss, cost or expense in connection with the Work, plus all demobilization costs. In addition, the Contractor shall be paid an amount calculated as set forth below: .1 If the Owner terminates this Agreement prior to commencement of the Construction Phase, the Contractor shall be paid the balance of the Contractor's Design Phase compensation as set forth in Subparagraph 7.2.2, and 25% of the Contractor's Fee as set forth in Clause 7.3.1.2. .2 If the Owner terminates this Agreement after commencement of the Construction Phase, the Contractor shall be paid the balance of the Contractor's Design Phase compensation as set forth in Subparagraph 7.2.2 and 100% of the Contractor's Fee as set forth in Clause 7.3.1.2. .3 In either event, the initial payment as provided in Paragraph 7.1 shall be credited to the Owner's account at the time of termination. .4 The Owner shall also pay to the Contractor fair compensation, either by purchase or rental at the election of the Owner, for any equipment retained. The Owner shall assume and become liable for obligations, commitments and unsettled claims that the Contractor has previously undertaken or incurred in good faith in connection with the Work or as a result of the termination of this Agreement. As a condition of receiving the payments provided under this Article 12, the Contractor shall cooperate with the Owner by taking all steps necessary to accomplish the legal assignment of the Contractor's rights and benefits to the Owner, including the execution and delivery of required papers. 12.4 SUSPENSION BY THE OWNER FOR CONVENIENCE 12.4.1 The Owner may order the Contractor in writing to suspend, delay or interrupt all or any part of the Work without cause for such period of time as the Owner may determine to be appropriate for its convenience. 12.4.2 Adjustments caused by suspension, delay or interruption shall be made for increases in the GMP, compensation for Design Phase Services, the Contractor's Fee and/or the date of Substantial Completion. No adjustment shall be made if the Contractor is or otherwise would have been responsible for the suspension, delay or interruption of the Work, or if another provision of this Agreement is applied to render an equitable adjustment. ARTICLE 13 DISPUTE RESOLUTION 13.1 INITIAL DISPUTE RESOLUTION If a dispute arises out of or relates to this Agreement or its breach, the parties shall endeavor to settle the dispute first through direct discussions. If the dispute cannot be settled through direct discussions, the parties shall endeavor to settle the dispute by mediation under the Construction Industry Mediation Rules of the American Arbitration Association before recourse to arbitration. Issues to be mediated are subject to the exceptions in Paragraph 13.2 for arbitration. The location of the mediation shall be the location of the Project. Once one party files a request for mediation with the other contracting party and with the American Arbitration Association, the parties agree to conclude such mediation within sixty (60) days of filing of the request. 13.2 AGREEMENT TO ARBITRATE Any controversy or claim arising out of or relating to this Agreement or its breach not resolved by mediation, except for claims which have been waived by the making or acceptance of final payment, shall be decided by arbitration in accordance with the Construction Industry Arbitration Rules of the American Arbitration Association then in effect unless the parties mutually agree otherwise. Notwithstanding Paragraph 14.2, this agreement to arbitrate shall be governed by the Federal Arbitration Act. 13.3 NOTICE OF DEMAND A written demand for arbitration shall be filed with the American Arbitration Association and the other party to this Agreement within a reasonable time after the dispute or claim has arisen, but in no event after the applicable statute of limitations for a legal or equitable proceeding would have run. 14 13.4 AWARD The arbitration award shall be final. Judgment upon the award may be confirmed in any court having jurisdiction. 13.5 WORK CONTINUANCE AND PAYMENT Unless otherwise agreed in writing, the Contractor shall continue the Work and maintain the approved schedules during any arbitration proceedings. If the Contractor continues to perform, the Owner shall continue to make payments in accordance with this Agreement. 13.6 [Intentionally Omitted] 13.7 COST OF DISPUTE RESOLUTION The prevailing party in any dispute arising out of or relating to this Agreement or its breach that is resolved by arbitration or litigation shall be entitled to recover from the other party reasonable attorney's fees, costs and expenses incurred by the prevailing party in connection with such arbitration or litigation. ARTICLE 14 MISCELLANEOUS PROVISIONS 14.1 ASSIGNMENT Neither the Owner nor the Contractor shall assign their interest in this Agreement without the written consent of the other except as to the assignment of proceeds. 14.2 GOVERNING LAW This Agreement shall be governed by the law in effect at the location of the Project. 14.3 SEVERABILITY The partial or complete invalidity of any one or more provisions of this Agreement shall not affect the validity or continuing force and effect of any other provlslon. 14.4 NO WAIVER OF PERFORMANCE The failure of either party to insist, in any one or more instances, on the performance of any of the terms, covenants or conditions of this Agreement, or to exercise any of its rights, shall not be construed as a waiver or relinquishment of such term, covenant, condition or right with respect to further performance. 14.5 TITLES The title given to the Articles of this Agreement are for ease of reference only and shall not be relied upon or cited for any other purpose. 14.6 OTHER PROVISIONS ARTICLE 15 EXISTING CONTRACT DOCUMENTS The Contract Documents in existence at the time of execution of this Agreement are as follows: This Agreement is entered into as of the date entered in Article 1. OWNER: NEOSE TECHNOLOGIES, INC. ---------------------------- ATTEST: /s/ Darlene Lane BY: /s/ P. Sherrill Neff -------------------------- ------------------------------- PRINT NAME: P. Sherrill Neff ----------------------- PRINT TITLE: PRESIDENT ---------------------- CONTRACTOR: IRWIN & LEIGHTON, INC. ----------------------- ATTEST: /s/ Sandra J. Wentzel BY: /s/ James F. Brecker, Jr. -------------------------- ------------------------------- PRINT NAME: JAMES F. BRECKER, JR. ----------------------- PRINT TITLE: PRESIDENT ---------------------- 15 EX-11 8 COMPUTATION OF PRO FORMA EXHIBIT 11 Computation of Pro Forma Net Loss Per Common Share (in thousands, except per share data) (Unaudited)
Year Ended Nine Months December 31, 1995 Ended September 30, 1996 ----------------- ------------------------ Net loss ....................................................................... $(5,067) $(4,600) ======= ======= Pro forma weighted average shares outstanding: Common stock .............................................................. 2,551 7,357 Convertible preferred stock ............................................... 2,210 371 ------- ------- Pro forma weighted average shares outstanding ........................................................... 4,761 7,728 ======= ======= Pro forma net loss per share ................................................... $ (1.06) $ (0.60) ======= =======
EX-23.1 9 CONSENT OF PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To Neose Technologies, Inc.: As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of this Form S-1 Registration Statement. Arthur Andersen LLP Philadelphia, Pa., January 10, 1997 EX-27 10 FDS
5 This schedule contains summary financial information extracted from 12/31/95 Audited Financial Statements and is qualified in its entirety by reference to such financial statements. 12-MOS 9-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 SEP-30-1996 11,189,001 35,717,379 0 0 0 0 0 0 0 0 11,455,981 36,080,905 3,671,165 4,338,315 985,552 1,402,538 14,638,712 39,031,731 1,596,165 1,757,752 0 0 0 0 0 0 31,453 82,036 11,701,581 36,430,084 14,638,712 39,031,731 0 0 1,198,863 1,006,100 0 0 0 0 6,398,108 6,688,077 0 0 189,839 196,148 (5,066,775) (4,599,880) 0 0 (5,066,775) (4,599,880) 0 0 0 0 0 0 (5,066,775) (4,599,880) (1.06) (.60) (1.06) (.60)
-----END PRIVACY-ENHANCED MESSAGE-----