-----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, BJ2f+ZswqlCm8Pjqte8hdUuNp5NxTOp9gzrNbaDHpf/78Feiqd2xAHmlqsCG62Ko 9IPxAtKPbmPHJIRM2M7p/Q== 0001021408-03-004382.txt : 20030318 0001021408-03-004382.hdr.sgml : 20030318 20030317193759 ACCESSION NUMBER: 0001021408-03-004382 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOSE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000877902 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 133549286 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27718 FILM NUMBER: 03606856 BUSINESS ADDRESS: STREET 1: 102 WITMER RD CITY: HORSHAM STATE: PA ZIP: 19044 BUSINESS PHONE: 2154415890 MAIL ADDRESS: STREET 1: 102 WITMER ROAD CITY: HORSHAM STATE: PA ZIP: 19044 FORMER COMPANY: FORMER CONFORMED NAME: NEOSE PHARMACEUTICALS INC DATE OF NAME CHANGE: 19950817 10-K 1 d10k.txt FORM 10-K NEOSE TECHNOLOGIES, INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2002 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______ to _______ Commission File Number 0-27718 NEOSE TECHNOLOGIES, INC. ------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-3549286 --------------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 19044 102 Witmer Road -------- Horsham, Pennsylvania (Zip Code) --------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (215) 315-9000 ------------- Securities registered pursuant to Section 12(b) of the Act: None None --------------------- --------------------------------------- (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Preferred Share Purchase Rights ------------------------------- (Title of class) Common Stock, par value $.01 per share -------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in the definitive proxy statement incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [_] As of June 28, 2002, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $120,010,330 based on the last sale price of the Common Stock as reported by the The Nasdaq Stock Market. This calculation excludes 3,286,707 shares held by directors, executive officers, and one holder of more than 10% of the registrant's Common Stock. As of March 14, 2003, there were 17,207,766 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None. ================================================================================ TABLE OF CONTENTS PART I ------ ITEM 1. BUSINESS. ........................................................................ 1 EXECUTIVE OFFICERS OF THE COMPANY. .............................................................. 9 ITEM 2. PROPERTIES. ...................................................................... 11 ITEM 3. LEGAL PROCEEDINGS. ............................................................... 11 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ............................. 11 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .......................................................................... 11 ITEM 6. SELECTED FINANCIAL DATA. ......................................................... 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ........................................................... 14 FACTORS AFFECTING THE COMPANY'S PROSPECTS. ...................................................... 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. ....................... 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ..................................... 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. ............................................................ 31 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. ................................. 33 ITEM 11. EXECUTIVE COMPENSATION. .......................................................... 35 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. .................. 39 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. .................................. 42 ITEM 14. CONTROLS AND PROCEDURES .......................................................... 42 PART IV ------- ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. ................ 44 CERTIFICATIONS. ................................................................................. 48
NEOSE, GlycoAdvance, GlycoPEGylation and GlycoConjugation are trademarks of Neose Technologies, Inc. This Annual Report on Form 10-K also includes trademarks and trade names of other companies. This report includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and contentions and are not historical facts, which typically may be identified by use of terms such as "anticipate," "believe," "estimate," "plan," "may," "expect," "intend," "could," "potential," and similar expressions, although some forward-looking statements are expressed differently. You should be aware that the forward-looking statements included in this report represent management's current judgment and expectations, but our actual results, events and performance could differ materially from those in the forward-looking statements. The forward looking statements are subject to a number of risks and uncertainties which are discussed in the section of Part II entitled "Factors Affecting the Company's Prospects." We do not intend to update any of these factors or to publicly announce the results of any revisions to these forward-looking statements. PART I ITEM 1. BUSINESS. Overview We are a biopharmaceutical company focused on improving glycoprotein therapeutics using our proprietary technologies. We are using our GlycoAdvance(TM), GlycoPEGylation(TM) and GlycoConjugation(TM) technologies to develop improved versions of currently marketed drugs with proven efficacy and to improve therapeutic profiles of glycoproteins in development for our partners. We expect these next generation proteins to offer significant advantages over drugs that are now on the market, potentially including less frequent dosing and improved safety and efficacy. In addition to developing our own products or co-developing products with others, we expect to enter into strategic partnerships for including our technologies into the product design and manufacturing processes of other biotechnology and pharmaceutical companies. While our primary goal is protein drug development, our technologies offer multiple opportunities to participate in the evolving therapeutic protein market by addressing other challenges, such as manufacturing efficiency, manufacturing consistency, and the use of non-mammalian cell expression systems. Glycoprotein Market Proteins are molecules that are comprised of chains of amino acids, also called a polypeptides. Most commercially available protein therapeutics are glycoproteins, which have carbohydrate structures, or sugar chains, linked to the polypeptide backbone. Worldwide sales of glycoprotein drugs (which include monoclonal antibodies) were over $20 billion in 2001, and by some estimates are expected to grow to $80 billion by 2010. Many of the glycoproteins now on the market will lose the protection of certain patent claims over the next 15 years. We believe our GlycoAdvance, GlycoPEGylation and, potentially, GlycoConjugation technologies could be applied to many of these marketed drugs to create next generation products. A growing number of glycoproteins are facing increased competition from other marketed drugs in their approved disease indications. This increased competition should generate demand for technologies that can improve and differentiate a therapeutic protein. We believe our GlycoAdvance, GlycoPEGylation and, possibly, GlycoConjugation technologies could be applied to drugs facing increased competition, thereby creating next generation products with improved clinical profiles. The same opportunity for the use of our technologies may also be found in their application to products in development that are going to enter a highly competitive market environment. Core Technology Our GlycoAdvance, GlycoPEGylation and emerging GlycoConjugation technologies evolve from the same core - the use of enzymes to complete and modify carbohydrate structures on glycoproteins. We have developed a special expertise and strong intellectual property position in this area. Our technologies may permit the development of new therapeutic proteins with improved clinical profiles. In many cases, these new therapeutic proteins will also give rise to new intellectual property. We continue to make significant investments in research and development and legal services to protect and expand our intellectual property position. We believe our core technology has broad application to protein drug development and can be extended to provide an opportunity for sustainable growth. 1 GlycoAdvance Our GlycoAdvance technology uses enzymes to remodel or complete the sugar chains on glycoprotein drugs that lack complete carbohydrate structures, which is also called incomplete or incorrect glycosylation. Currently, recombinant glycoprotein drugs are most often produced in mammalian cell culture expression systems, primarily Chinese hamster ovary (CHO) cells. Carbohydrate chains, known as glycans, are added to proteins by the internal CHO cell glycosylation machinery. Proteins expressed in CHO cells, and many other expression systems used for commercial manufacturing, tend to produce carbohydrates on proteins that are described as incomplete because they lack one or more of the sugars typically found in glycoproteins of human tissues. Incompletely glycosylated proteins may be cleared more rapidly from the body, break down more rapidly, or stimulate unwanted antibody responses. Conventional approaches to improving glycosylation, such as changing expression cell types, re-engineering the protein, and modifying cell culture conditions or media, are time consuming and frequently provide only partial solutions. Purification of incompletely glycosylated drug molecules from a drug product results in lower manufacturing yields. GlycoAdvance technology employs recombinant glycosyltransferase enzymes to remodel or complete the glycan chains on glycoprotein drugs after they have been secreted by a cell expression system. Remodeling or completing sugar chains in this way has been shown to prolong half-life or enhance drug potency for several drug candidates in development. We are using GlycoAdvance to develop proprietary protein therapeutics and expect to partner with biotechnology and pharmaceutical companies that are developing or marketing glycoprotein drugs. We are also exploring the use of GlycoAdvance to enable alternative protein production systems, such as plants, insect cells, and yeast, that naturally produce only partial versions of glycan chains found in human glycoproteins. GlycoPEGylation Many glycoprotein drugs are smaller than the most abundant plasma proteins and are cleared much more rapidly from the circulation. Others tend to be subject to common protein drug delivery problems, such as poor solubility and stability, proteolytic degradation, short pharmacokinetic half-life and unwanted immunogenicity. For some proteins, covalent attachment of the large, water-soluble polymer, polyethylene glycol (PEG), to one or more amino acids has been shown to increase the effective size of the drug and improve solubility, stability, and half-life, while reducing the immunogenicity of the native protein. For many other protein drugs, however, it has been difficult to achieve these benefits by conventional PEGylation, because the amino acids that may serve as sites for attachment of PEG occur at positions in the polypeptide backbone where the bulky PEG blocks access to the protein's active site or alters the conformation of the protein, drastically diminishing drug activity. GlycoPEGylation technology enables us to employ the selectivity of glycosyltransferase enzymes to link a simple sugar unit carrying preattached PEG to the ends of glycan chains on glycoprotein drugs. By specifically linking PEG to sugar chains that are remote from the protein's active site, GlycoPEGylation can preserve the bioactivity of the drug and extend its half-life. Starting with PEG-sugar nucleotide donors that bear PEGs of preselected sizes, we are able to enzymatically PEGylate a new or existing glycoprotein drug to create a family of molecular sizes that may be screened for optimal receptor binding and pharmacokinetic properties. We expect that significant clinical benefits may be achieved through the application of our GlycoPEGylation technology to proteins that have not been improved by traditional chemical PEGylation. GlycoConjugation Our emerging GlycoConjugation technology is a broader application of the enzymatic approach we use for GlycoPEGylation. However, instead of adding PEG to the glycoprotein to change its properties, we would add a different compound to achieve different therapeutic objectives. For example, some developers of monoclonal antibodies (MAbs) seek to achieve targeted therapeutic benefit by linking small molecules to their antibodies. Current methods for linking small molecule drugs to proteins, such as MAbs, generally employ chemistries that modify the protein backbone. These random chemical coupling processes frequently render some fraction of the protein molecules non-functional and result in a final product whose composition is highly variable and difficult to control. 2 GlycoConjugation should build upon our experience coupling PEG to sugar chains. Because of the well defined number of sites at which sugars can be added enzymatically to any glycoprotein, GlycoConjugation may allow us to produce uniform drug conjugates with reproducible pharmaceutical properties. For MAbs that target cancer cells, GlycoConjugation can be designed to enable coupling of a defined number of toxin molecules or radionuclides per antibody molecule without interfering with antigen targeting activity. Experiments to explore these and other applications of this technology are ongoing. Strategy Primary Business Strategy During 2002, we focused our business on the development of next-generation proprietary protein therapeutics, which we plan to pursue independently and in collaboration with selected partners. We generated internal data on potential proprietary drug candidates, and we continued to conduct research studies for biotechnology and pharmaceutical companies. In January 2003, we announced the selection of an improved erythropoietin (EPO) as the target for our first proprietary drug development program. EPO is prescribed to stimulate production of red blood cells, and is approved for sale in major markets around the world for the treatment of anemia associated with oncology chemotherapy, end stage renal disease, and chronic renal insufficiency. EPO accounts for more sales worldwide than any other glycoprotein drug. Worldwide sales of EPO in 2001 were over $6 billion. Of this amount, approximately $4.5 billion in sales were in the U.S., $1.1 billion in sales were in Europe, and $0.6 billion in sales were in other markets, primarily in Asia. Based on preliminary laboratory data and animal studies, we believe it is feasible to develop a longer-acting EPO through GlycoPEGylation. Our proof-of-concept studies conducted during 2002 suggest that the pharmacokinetic profile of EPO can be adjusted by manipulating the number of GlycoPEGylation sites and the molecular weight of the PEG that we attach to the compound. In these early studies, the biological activity of constructs of GlycoPEGylated EPO was comparable to the activity of unmodified EPO, or its longer acting analog. Based on our preliminary market research, we believe that clinicians, particulary oncologists, would favor a longer-acting erythropoietic protein over currently available formulations. This is supported by quantitative data for Amgen's longer acting darbapoietin (ARANESP(TM)) indicating first full year sales of greater than $400 million. We believe that the expiration of key patents covering EPO will provide commercial opportunities in a time frame consistent with the development timeline of a new product. We expect to seek regulatory approval for EPO both in and outside the U.S In Europe, the key patents will expire in mid-decade. In the U.S., the patent situation surrounding EPO is more complex and the subject of ongoing litigation, making the time frame less predictable. We are planning to conduct various preclinical activities during 2003 and the first half of 2004, with the goal of initiating clinical trials in the second half of 2004. We plan to submit data from these trials to the appropriate government agencies for regulatory and marketing approval. The process we have begun with erythropoietin will be expanded to other currently marketed proteins. We are generating internal data on other potential proprietary drug candidates, and we expect to select our second proprietary candidate in the second half of 2003. We believe GlycoPEGylation has applicability to other proteins that are in early stage development or for which the threshold of patent expiration is too remote to consider the protein as a proprietary drug candidate. In these cases, we will pursue collaborations with the originating company to incorporate our technology in their protein development programs. 3 Business Development Initiatives Our business development initiatives vary depending on the segment of our business model they support. In the case of proprietary proteins, our first objective is to assemble a portfolio of potential products and to partner them at various stages of development, with the goal of obtaining milestone payments and royalties from earlier products to fund the development of later products. In some cases, in order to retain more upside from the evolution of a product, we may co-develop the product, retaining commercial rights in some territories, thereby sharing the risks and rewards of product development with a partner. In those cases where we are working on another company's protein, our business development approach involves a two-step process. In the first instance, we seek to enter into a funded research and development collaboration, in which our costs are funded and we have the opportunity to earn additional fees for technical success. Once the potential benefit of our technology to another company's protein is established in the initial step, we would begin the second phase of negotiations, with the goal of entering into a collaboration and license arrangement that recognizes the improvement in the product profile that we have demonstrated in the first step of the process. The initial step of this approach was incorporated into our negotiations with Novo Nordisk and Monsanto, which resulted in three research and development collaborations during 2002. We believe that this process will enable us and our partners to reflect the appropriate value of our technology in our license agreements, following the funded research and development collaborations. Other Programs During 2002, Wyeth decided to discontinue the clinical development of its recombinant PSGL-Ig (P-selectin glycoprotein ligand) after examination of Phase II results obtained with this protein, which did not yet incorporate our technology. As a result, Wyeth terminated our agreement to provide GlycoAdvance services and products in connection with Wyeth's recombinant PSGL-Ig. Wyeth's decision was unrelated to the performance of our GlycoAdvance technology, which had been intended to be used to subsequently produce recombinant PSGL-Ig for Phase III studies and commercial use. Since we are now focused on developing next generation proprietary protein therapeutics, we are exploring the most effective means of continuing some of our other programs. These include our collaboration with Neuronyx, Inc. for the discovery and development of drugs for treating Parkinson's disease and other neurological diseases, our joint venture with McNeil Nutritionals (a subsidiary of Johnson & Johnson) to explore inexpensive, enzymatic production of complex carbohydrates for use as bulking agents, and our work with Wyeth Nutrition to develop a manufacturing process for a bioactive carbohydrate to be used as an ingredient in Wyeth's infant and pediatric nutritional products. Intellectual Property Strategy Our success depends on our ability to protect and use our intellectual property rights in the continued development and application of our technologies, to operate without infringing the proprietary rights of others, and to prevent others from infringing on our proprietary rights. As we pursue our strategy of developing next generation products, we have increased our focus on investigating the patent protection for currently marketed proteins. We devote significant resources to obtaining, enforcing and maintaining patents, although we recognize that the scope and validity of patents is never certain. Our patent strategy is to increase our proprietary portfolio by continuing to seek patents for our technologies, including our proprietary reagents and enzymes, our proprietary methods, and products made using our technologies. We have filed applications for patents, have been granted patents, and have licensed rights relating to our technologies. We have continued to file patent applications covering new developments in our existing technologies and our new technologies, including GlycoPEGylation and GlycoConjugation, and the remodeling of a multitude of proteins. 4 In addition to developing our own intellectual property, we seek to obtain rights to complementary intellectual property from others. We have entered into license agreements with various institutions and individuals for certain patent rights, as well as sponsored research and option agreements for the creation and possible license to us of additional intellectual property rights. We are obligated to pay royalties at varying rates based upon, among other things, levels of revenues from the sale of licensed products under our existing license agreements, and we expect to pay royalties under new license agreements for intellectual property. Generally, these agreements continue for a specified number of years or as long as any licensed patents remain in force, unless the agreements are terminated earlier. We also have certain proprietary trade secrets and know-how that are not patentable or which we have chosen to maintain as secret rather than filing for patent protection. We rely on certain security measures to protect our trade secrets, proprietary know-how, technologies and confidential information, and we continue to explore further methods of protection. We enter into confidentiality agreements with employees, consultants, licensees, and potential collaboration partners. These agreements generally require that all confidential information developed or made known by us to the other party during the relationship must be kept confidential and may not be disclosed to third parties, except in specific circumstances. Our agreements with employees and consultants also provide that inventions conceived by the individual in the course of rendering services to us will be our exclusive property. Patents and Proprietary Rights We own 26 issued U.S. patents, and have licensed 63 issued U.S. patents from 15 institutions. In addition, we own or have licensed over 81 patent applications pending in the U.S. There are also 393 foreign patent applications pending or granted related to our owned and licensed patents. In addition, we had three issued U.S. patents, one pending U.S. patent application and 34 granted or pending foreign counterparts, all of which have been assigned to Magnolia Nutritionals, our joint venture with McNeil Nutritionals (a subsidiary of Johnson & Johnson). We have licensed, or have an option to license, patents and patent applications from the following institutions: University of California, The Scripps Research Institute, University of Pennsylvania, University of Michigan, Marukin Shoyu Co., Ltd., University of Arkansas, University of British Columbia, Rockefeller University, University of Alberta, Genencor International, GlycoZym Aps., Ghent University, National Research Council of Canada and University of Washington. Government Regulation Our research and development activities, the future manufacture of reagents and products incorporating our technologies, and the marketing of these products are subject to regulation for safety and efficacy by numerous governmental authorities in the U.S. and other countries. Regulation of Pharmaceutical Product Candidates The research and development, clinical testing, manufacture and marketing of products using our technologies are subject to regulation by the U.S. Food and Drug Administration (FDA) and by comparable regulatory agencies in other countries. These national agencies and other federal, state and local entities regulate, among other things, research and development activities, and the manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of therapeutic products. Product development and approval within this regulatory framework take a number of years and involve the expenditure of substantial resources. We anticipate that the development of our next generation proprietary proteins will involve a traditional development program, including clinical trials. In the U.S., after laboratory analysis and preclinical testing in animals, an investigational new drug application is required to be filed with the FDA before human testing may begin. Typically, a three-phase human clinical testing program is then undertaken. In Phase I, small clinical trials are conducted to determine the safety of the product. In Phase II, clinical trials are conducted to assess safety, establish an acceptable dose, and gain preliminary evidence of the efficacy of the product. In Phase III, clinical trials are conducted to obtain sufficient data to establish statistically significant proof of safety and efficacy. The time and expense required to perform this clinical testing vary 5 and can be substantial. No action may be taken to market any new drug or biologic product in the U.S. until an appropriate marketing application has been approved by the FDA. Even after initial FDA approval is obtained, further clinical trials may be required to provide additional data on safety and effectiveness, and will be required to gain clearance for the use of a product as a treatment for indications other than those initially approved. Side effects or adverse events that are reported during clinical trials may delay, impede, or prevent marketing approval. Similarly, adverse events that are reported after obtaining marketing approval may result in additional limitations being placed on the use of a product and, potentially, withdrawal of the product from the market. The regulatory requirements and approval processes of countries in the European Union (EU) are similar to those in the U.S. In the EU, depending on the type of drug for which approval is sought, there are currently two potential tracks for marketing approval in member countries: mutual recognition and the centralized procedure. Typically, recombinant products are reviewed through the centralized procedure. The EU review mechanisms may ultimately lead to approval in all EU countries, but each method grants all participating countries some decision-making authority in product approval. Sales of pharmaceutical and biopharmaceutical products in other areas of the world vary from country to country. Whether or not FDA licensure has been obtained, licensure of a product by comparable regulatory authorities in other countries must be obtained prior to marketing the product in those countries. The time required to obtain such licensure may be longer or shorter than that required for FDA approval, and we cannot assure that we or our collaborators will be able to obtain foreign approvals for any of our product candidates or products manufactured using our technologies. In addition to regulating and auditing human clinical trials, the FDA regulates and inspects equipment, facilities, and processes used in the manufacture of products prior to providing approval to market a product. Among other conditions for marketing approval in the U.S., the prospective manufacturer's quality control and manufacturing procedures must conform on an ongoing basis with current Good Manufacturing Practices (cGMP). Before granting marketing approval, the FDA will perform a prelicensing inspection of the facility to determine its compliance with cGMP and other rules and regulations. In complying with cGMP, manufacturers must continue to expend time, money and effort in the area of production, training and quality control to ensure full compliance. After the establishment is licensed for the manufacture of any product, manufacturers are subject to periodic inspections by the FDA. If, as a result of FDA inspections relating to our products or reagents, the FDA determines that our equipment, facilities, or processes do not comply with applicable FDA regulations or conditions of product approval, the FDA may seek civil, criminal, or administrative sanctions and remedies against us, including the suspension of our manufacturing operations. We expect to manufacture enzymes and sugar nucleotides for use by our potential GlycoAdvance and GlycoPEGylation customers, as well as for our own manufacturing use in the development of next generation proprietary protein therapeutics. Our partners may be responsible for clinical and regulatory approval procedures, but we would expect to participate in this process by submitting to the FDA a drug master file developed and maintained by us that contains data concerning the manufacturing processes for our enzymes and sugar nucleotides. Our ability to manufacture and sell enzymes and sugar nucleotides developed under contract depends upon completion of satisfactory clinical trials and success in obtaining marketing approvals. Regulation of Other Products Manufactured Using Our Technologies The development, manufacture, marketing, and sale of other products using our technologies also will be subject to regulatory review in the U.S. and other countries before commercialization. Generally foods and food ingredients are regulated less rigorously than pharmaceuticals. Infant formula ingredients are regulated as special types of food ingredients that are regulated more rigorously than most other types of food ingredients. 6 Other Regulations Affecting Our Business We are subject to regulation by the Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency (EPA), and the Nuclear Regulatory Commission (NRC), and to regulation under the Toxic Substances Control Act, the Resources Conservation and Recovery Act, and other regulatory statutes. Our research and development activities involve the controlled use of hazardous materials, chemicals, biological materials, and various radioactive compounds. We believe that our procedures comply with the standards prescribed by state and federal regulations, but we recognize that the risk of injury or accidental contamination cannot be completely eliminated. We voluntarily comply with the National Institutes of Health Guidelines for Research Involving Recombinant DNA Technologies. We are also subject to the U.S. Foreign Corrupt Practices Act, which prohibits corporations and individuals from engaging in certain activities to obtain or retain business or to influence a person working in an official capacity. Our present and future business continues and will continue to be subject to various other U.S. and foreign laws and regulations. In addition, new laws or regulations may be applicable to our research and development programs, and we cannot predict whether they would have a material adverse effect on our operations. Third Party Reimbursement Our ability and each of our collaborator's ability to successfully commercialize drug products may depend in part on the extent to which coverage and reimbursement for the cost of such products will be available from government health administration authorities, private health insurers, and other organizations. Uncertainty continues within the pharmaceutical and biotechnology industries as to the reimbursement status of new therapeutic products, and we cannot be sure that third-party reimbursement would be available for any therapeutic products that we or our collaborators might develop. Healthcare reform, especially as it relates to prescription drugs, is an area of increasing national attention and a priority of many governmental officials. Certain reforms, if adopted, could impose limitations on the prices we would be able to charge for our products, or the amount of reimbursement available for our products from governmental agencies or third-party payors. Competition The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. Our competitors include pharmaceutical and biotechnology companies. In addition, many specialized biotechnology companies have formed collaborations with large, established companies to support research, development and commercialization of products that may be competitive with our current and future product candidates and technologies. Academic institutions, governmental agencies and other public and private research organizations are also conducting research activities and seeking patent protection and may commercialize products or technologies on their own or through joint ventures. We are aware that other companies are working on the development of next generation protein therapeutics in anticipation of the expiration of certain patent claims covering marketed proteins. Specific companies such as Maxygen and Applied Molecular Evolution are using directed evolution techniques to manipulate protein structure and increase efficacy. Nektar and Enzon continue to utilize their traditional chemical pegylation technologies to increase the circulating half-life of certain proteins. Human Genome Sciences and BioRexis are now applying in-vivo fusion technologies using albumin and other carrier proteins to increase circulating half-life on specific proteins. In addition, drug delivery companies like Alkermes continue to exploit formulation technologies to improve administration and dosing of therapeutic proteins. Some of these companies have greater financial, technical, manufacturing, marketing and other resources than ours, and may be better equipped than we are to develop, market and manufacture these proteins. We cannot assure that any of our product candidates will be able to compete successfully against the products already established in the marketplace, or against new therapies that either may be developed by our competitors or may result from advances in biotechnology or other fields. In addition, our products may become subject to generic competition in the future. Although a clear development and regulatory landscape does not currently exist for generic biologics in the U.S. and Europe, we are aware that companies are considering the opportunity to develop and commercialize 7 multisource versions of currently marketed products, including EPO. We continue to expect that first generation, multisource biologic products will involve traditional process development, manufacturing and clinical development. Therefore, we expect that the cost of entry will be more significant than for classic small molecule generic products and will result in fewer multisource companies participating in the field, with less price erosion than one typically sees for small molecule generic equivalents. There are a number of companies that have active programs focused on developing next generation or improved versions of EPO. Among them, companies such as Roche, Amgen, and Johnson & Johnson are actively engaged in EPO product improvement initiatives. Furthermore, non-originator companies are applying their technologies to develop improved EPO compounds. These include Gryphon, with their precision length polymer and chemical ligation technology, Transkaryotic Therapeutics, utilizing their gene activation technology, Human Genome Sciences, with their albumin fusion technology, and ARIAD, with their gene therapy and small molecule promoter technology. Other companies are active in this area, and we expect that competition will increase. Although we are focused on the development of next generation protein therapeutics, we also use our GlycoAdvance and GlycoPEGylation technologies to provide collaborative research services and product improvement opportunities to other pharmaceutical and biotechnology companies. These services compete with internal efforts within these companies to improve therapeutic protein profiles and expression, and services provided by other companies to improve proteins, such as traditional PEGylation technology. There are several companies that are engaged in glycobiology research. Their work includes efforts to develop better-glycosylating cell lines and optimizing cell culture conditions to improve glycosylation. Companies working in this area include Crucell, Glycart, and GlycoFi. Crucell has developed human cell lines for glycoprotein production. Glycart is pursuing the utilization of in vivo glycosylation of antibodies, and GlycoFi is focused on expressing glycoproteins in yeast systems. Manufacturing We have invested in the construction and validation of a manufacturing pilot plant in Horsham to support our business objectives. We have facilities to produce enzyme and sugar nucleotide reagents at scale to support our GlycoAdvance, GlycoPEGylation and GlycoConjugation technologies, and to assist in the production of our proprietary glycoprotein drugs and the glycoprotein drugs of collaborators. We continue to discover and develop improved reagents and technologies, and we will use our pilot plant to scale-up production of these reagents. Our facility is also expected to support the manufacture of modified forms of glycoprotein drugs as active pharmaceutical ingredients for use in clinical trials utilizing GlycoAdvance, GlycoPEGylation and GlycoConjugation technologies. We intend to develop scalable processes to use our proprietary GlycoAdvance and GlycoPEGylation reagents to produce glycoproteins with improved properties. The reagents include donor sugars (sugar nucleotides) and enzymes (glycosyltransferases) that transfer the sugars onto the carbohydrate structures of glycoproteins. In our pilot plant, these reagents will be used in multiple combinations to selectively modify a glycoprotein under cGMP conditions, with the goal of producing a final active pharmaceutical ingredient. Depending on future supply requirements, we may employ one or more contract manufacturing organizations to manufacture our modified proteins or active pharmaceutical ingredients. In 2002, we expanded our capabilities with the construction of a pilot manufacturing facility at our headquarters location for the production of enzymes and sugar nucleotides at commercial-scale in accordance with U.S. Food and Drug Administration's Good Manufacturing Practices regulations. The facility consists of approximately 20,000 square feet of processing areas supported by 3,500 square feet of utility space. Separate areas are dedicated to sugar nucleotide processing, enzymes expressed in bacterial organisms, and enzymes expressed in fungal organisms. The sugar nucleotide synthesis area has multiple process bays with reaction vessels up to 1,200 liter scale and is designed to handle the synthesis of carbohydrates using enzymes. Downstream processing can handle volumes up to 4,000 liters and consists of multiple suites with capability for filtration and chromatography. The bacterial fermentation area is designed to progressively scale an enzyme expression system from a 1 milliliter vial to a 1,500 8 liter batch. The area includes separate harvest and purification suites. The equipment is highly automated and controlled through a dedicated server. The fungal fermentation area has a similar layout and capacity to the bacterial area but is separated physically. It too has fermentation capacity up to 1,500 liters to produce enzymes expressed in fungal organisms. These suites are designed to allow flexibility in process scale and downstream processing needs. Marketing, Distribution, and Sales of Proprietary Protein Products We intend to capitalize on the significant experience and resources of our collaborative partners to commercialize proprietary products made using our technologies. These partners generally would be responsible for much of the development, regulatory approval, sales, marketing, and distribution activities for products incorporating our technologies. However, Neose intends to retain commercial rights to some proteins in select territories. If we commercialize any products on our own, we will have to establish or contract for regulatory, sales, marketing, and distribution capabilities, and we may have to supplement our development capabilities. The marketing, advertising, and promotion of any product manufactured using our technology would be subject to regulation by the FDA or other governmental agencies. Employees As of December 31, 2002, we employed 124 individuals, consisting of 79 employees engaged in research, development and manufacturing activities, 8 employees devoted to business development and licensing activities, and 37 employees devoted to corporate and administrative activities. Our scientific 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 our employees have prior experience with pharmaceutical or biotechnology companies, and many have specialized training in carbohydrate technology. None of our employees is covered by collective bargaining agreements. We believe we have good relations with our employees. Internet Address and Securities Exchange Act Filings Our internet address is www.neose.com. We make available through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make these reports and amendments available on our website as soon as practicable after filing them electronically with, or furnishing them to, the Securities and Exchange Commission. EXECUTIVE OFFICERS OF THE COMPANY The name, age as of March 14, 2003, and position of each of our executive officers are as follows: C. Boyd Clarke, 54, has served on our Board and as our President and Chief Executive Officer since April 2002. From December 1999 to March 2002, Mr. Clarke was President and Chief Executive Officer of Aviron, a biotechnology company developing vaccines, which was acquired by MedImmune, and was also Chairman of Aviron from January 2001 to March 2002. From 1998 to 1999, Mr. Clarke was President and Chief Executive Officer of U.S. Bioscience, Inc., a biotechnology company focused on products to treat cancer, which also was acquired by MedImmune. Mr. Clarke served as President and Chief Operating Officer of U.S. Bioscience, Inc. from 1996 to 1998. From 1977 to 1996, Mr. Clarke held a number of positions at Merck & Co., Inc., including being the first President of Pasteur-Merieux MSD, and most recently as Vice President of Merck Vaccines. Mr. Clarke has a B.S. in biochemistry and an M.A. in history from the University of Calgary. Mr. Clarke also serves on the Board of Trustees of the Textile Museum in Washington, D.C. David A. Zopf, M.D., 60, has served as our Executive Vice President since January 2002. He served as our Vice President, Drug Development from 1992 to January 2002. From 1991 to 1992, we engaged Dr. Zopf as a consultant on the biomedical applications of complex carbohydrates. From 1988 to 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 9 therapeutics. Dr. Zopf received his A.B. in zoology from Washington University, and his M.D. from Washington University School of Medicine. Robert I. Kriebel, 60, has served as our Senior Vice President and Chief Financial Officer since August 2002. From 1991 through 1999, he held various positions at U.S. Bioscience, Inc., most recently as Executive Vice President, Chief Financial Officer and Director. Prior to U.S. Bioscience, Mr. Kriebel held various positions with Rhone-Poulenc Rorer Inc. (formerly Rorer Group Inc.) from 1974 until November 1990. From 1987 to November 1990 he was Vice President and Controller of Armour Pharmaceutical Company, a subsidiary of Rorer Group Inc. In 1986, Mr. Kriebel was Vice President-Investor Relations of Rorer Group Inc. and from 1979 to 1985, he was Treasurer of Rorer Group Inc. Mr. Kriebel has a B.S. in economics from Roanoke College. Debra J. Poul, Esq., 50, has served as our Senior Vice President and General Counsel since December 2002. From May 2002 to December 2002, she served as our Vice President and General Counsel, and from January 2000 until May 2002, she served as our General Counsel. From January 1995 to January 2000, Ms. Poul was Of Counsel at Morgan Lewis. From September 1978 to December 1994, Ms. Poul was at Dechert, serving as Counsel from 1989 to 1994. Ms. Poul received her B.A. from the University of Pennsylvania and her J.D. from Villanova University. George J. Vergis, Ph.D., 42, has served as our Senior Vice President, Business and Commercial Development since December 2002. From July 2001 to December 2002, he served as our Vice President, Business and Commercial Development. From January 1996 to May 2001, Dr. Vergis served as Vice President, New Product Development and Commercialization at Knoll Pharmaceutical Company, a division of BASF Pharma, responsible for the commercial planning, product development, and marketing for the immunology franchise. Prior to this position, Dr. Vergis was responsible for managing the endocrine business for BASF Pharma's Knoll Pharmaceutical Division. Dr. Vergis has held a variety of clinical and medical marketing positions at Wyeth Pharmaceuticals and Warner-Lambert Parke-Davis. Dr. Vergis received his BA in biology and history from Princeton University, his Ph.D. in physiology from The Pennsylvania State University, and his M.B.A. from Columbia University. Joseph J. Villafranca, Ph.D., 58, has served as our Senior Vice President, Pharmaceutical Development and Operations since October 2002. From 1992 to 2002, he held various positions at Bristol-Myers Squibb, serving most recently as Vice President of Biologics Strategy and Biopharmaceuticals Operations. Prior to Bristol-Myers, Dr. Villafranca spent 20 years at The Pennsylvania State University, including eight years as the Evan Pugh Professor of Chemistry. Dr. Villafranca earned a B.S. in chemistry from the State University of New York and a Ph.D. in biochemistry/chemistry from Purdue University. He completed his post-doctoral training in biophysics at the Institute for Cancer Research in Philadelphia. A. Brian Davis, 36, has served as our Vice President, Finance since August 2002. From 1994 until August 2002, Mr. Davis served in a variety of positions, most recently as Acting Chief Financial Officer and Senior Director, Finance. Mr. Davis is licensed as a Certified Public Accountant in New Jersey, and received his B.S. in accounting from Trenton State College. From 1991 to 1994, Mr. Davis was employed by MICRO HealthSystems, Inc., a provider of healthcare information systems, where he served most recently as Corporate Controller. Marjorie A. Hurley, Pharm.D., 43, has served as Vice President, Regulatory Affairs and Project Management, since May 2002. She served as our Senior Director of Regulatory Affairs from January 2001 to May 2002, and as our Director of Regulatory Affairs from 1993-2000. From 1987 to 1993, Dr. Hurley served in various positions, including Assistant Director of Regulatory ffairs, at Cytogen Corporation, 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. (now Wyeth). Dr. Hurley received her B.S. in pharmacy and her Pharm.D. from the University of Michigan. 10 ITEM 2. PROPERTIES. We own, subject to a mortgage, approximately 50,000 square feet of cGMP manufacturing, laboratory, and corporate office space in Horsham, Pennsylvania, and we lease approximately 5,000 square feet of additional office and warehouse space in a building nearby. We lease approximately 10,000 square feet of laboratory and office space in San Diego, California. The initial term of the lease ends in March 2006, at which time we have an option to extend the lease for an additional five years. In 2001 and 2002, we made capital expenditures of $17.4 million to provide additional cGMP manufacturing capacity in our Horsham, Pennsylvania facility. In 2002, we entered into a lease agreement for a 40,000 square foot building in Horsham, Pennsylvania, which we may convert into laboratory and office space. During 2002, we suspended plans to complete this conversion, and we have not yet made a final decision as to when or if we will resume this project. Approximately $4 million was expended as part of a $12 million renovation. ITEM 3. LEGAL PROCEEDINGS. We are not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We did not submit any matters to a vote of security holders during the fourth quarter of 2002. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is listed on The Nasdaq Stock Market under the symbol NTEC. We commenced trading on The Nasdaq Stock Market on February 15, 1996. The following table sets forth the high and low sale prices of our common stock for the periods indicated.
Common Stock Price ------------------ High Low ---- --- Year Ended December 31, 2001 First Quarter ........................................ $44.38 $22.38 Second Quarter ....................................... 46.97 23.25 Third Quarter ........................................ 47.42 30.15 Fourth Quarter ....................................... 41.81 27.31 Year Ended December 31, 2002 First Quarter ........................................ 37.30 29.80 Second Quarter ....................................... 32.58 9.07 Third Quarter ........................................ 11.06 6.41 Fourth Quarter ....................................... 14.00 5.90 Year Ended December 31, 2003 First Quarter (through March 14, 2003) ............... 9.31 6.03
As of March 14, 2003, there were approximately 200 record holders and 3,500 beneficial holders of our common stock. We have not paid any cash dividends on our common stock and we do not anticipate paying any in the foreseeable future. 11 Equity Compensation Plan Information The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of March 14, 2003.
Number of Securities remaining available for Number of Securities Weighted-average future issuance under to be issued upon exercise price of equity compensation exercise of outstanding outstanding options, plans (excluding securities Plan Category options, warrants and rights warrants and rights reflected in second column) ------------- ---------------------------- ------------------- --------------------------- Equity compensation plans approved by securityholders 4,171,865(1) $17.14(1) 152,360(1) Equity compensation plans not approved by securityholders 499,186(2) $31.62 -- --------- ------- Total 4,671,051 $18.65 152,360 ========= =======
(1) Does not include rights granted under the Employee Stock Purchase Plan. The next scheduled purchase date under the Employee Stock Purchase Plan is July 31, 2003, for which rights were granted in connection with the 24-month offering period that commenced in February 2002. (2) Includes option grant to C. Boyd Clarke and option grants to two consultants, each as described in the text below. Option Grants Under Plans Not Approved by Stockholders On March 29, 2002, the Company's board of directors approved a grant to C. Boyd Clarke in connection with his appointment as President and Chief Executive officer of a non-qualified stock option to purchase 487,520 shares of common stock. The option grant to Mr. Clarke is not pursuant to the stock option plan and has not been submitted to, and is not required to be submitted to, the stockholders for approval. The option is exercisable for a period of ten years at a price of $32.05 per share, which was the fair market value of the underlying stock on the date of grant. The option is subject to a vesting schedule pursuant to which the options will vest and become exercisable with respect to 121,880 shares on March 29, 2003, and on a monthly basis thereafter such that the option will vest and become exercisable with respect to an aggregate of 93,750, 121,880, 121,880 and 28,130 shares in each of the remainder of 2003, 2004, 2005 and the first three months of 2006, respectively. On December 6, 1995, the Company granted options to two consultants in connection with services provided to the Company. These options are now fully vested and exercisable at a price of $13.80 per share with respect to 8,333 shares for one consultant and 3,333 shares for the other. These options expire on December 6, 2005 12 ITEM 6. SELECTED FINANCIAL DATA. The following Statements of Operations and Balance Sheet Data for the years ended December 31, 1998, 1999, 2000, 2001, and 2002, and for the period from inception (January 17, 1989) through December 31, 2002, are derived from our audited financial statements. The financial data set forth below should be read in conjunction with the sections of this Annual Report on Form 10-K entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the financial statements and notes included elsewhere in this Form 10-K.
Period from inception (January 17, 1989) Year ended December 31, to December 31, ------------------------------------------------------------- 1998 1999 2000 2001 2002 2002 -------------------------------------------------------------------------------- (in thousands, except per share data) Statements of Operations Data: Revenue from collaborative agreements $ 390 $ 422 $ 4,600 $ 1,266 $ 4,813 $ 17,446 --------------------------------------------------------------------------------- Operating expenses: Research and development 9,912 10,649 12,094 14,727 18,879 97,253 Marketing, general and administrative 3,635 4,520 5,648 8,631 12,390 47,902 Severance - - - 873 2,722 3,595 --------------------------------------------------------------------------------- Total operating expenses 13,547 15,169 17,742 24,231 33,991 148,750 Other income - - - 6,120 1,653 7,773 Interest income, net 1,250 1,429 4,642 3,516 1,108 15,473 --------------------------------------------------------------------------------- Net loss $(11,907) $(13,318) $(8,500) $(13,329) $(26,417) $(108,058) ================================================================================= Basic and diluted net loss per share $ (1.25) $ (1.25) $ (0.63) $ (0.95) $ (1.85) ============================================================= Weighted-average shares outstanding used in computing basic and diluted loss per share 9,556 10,678 13,428 14,032 14,259 =============================================================
As of December 31, ------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------------------------------------------------------- (in thousands) Balance Sheet Data: Cash, cash equivalents and marketable securities $ 32,023 $ 33,235 $ 94,762 $ 76,245 $ 41,040 Total assets 46,265 52,239 114,768 105,786 83,092 Long-term debt 8,300 7,300 6,200 5,100 5,560 Deficit accumulated during the development stage (46,494) (59,812) (68,312) (81,641) (108,058) Total stockholders' equity 36,013 40,785 104,868 93,946 70,685
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with our financial statements and related notes included in this Form 10-K. Overview We are a biopharmaceutical company focused on improving glycoprotein therapeutics using our proprietary technologies. We are using our GlycoAdvance(TM), GlycoPEGylation(TM) and GlycoConjugation(TM) technologies to develop improved versions of currently marketed drugs with proven efficacy and to improve therapeutic profiles of glycoproteins in development for our partners. We expect these next generation proteins to offer significant advantages over drugs that are now on the market, potentially including less frequent dosing and improved safety and efficacy. In addition to developing our own products or co-developing products with others, we expect to enter into strategic partnerships for including our technologies into the product design and manufacturing processes of other biotechnology and pharmaceutical companies. While our primary goal is protein drug development, our technologies offer multiple opportunities to participate in the evolving therapeutic protein market by addressing other challenges, such as manufacturing efficiency, manufacturing consistency, and the use of non-mammalian cell expression systems. As of December 31, 2002, we had an accumulated deficit of approximately $108 million. We expect additional losses in 2003 and over the next several years as we expand product research and development efforts, increase manufacturing scale-up activities and, potentially, begin sales and marketing activities. Application of Critical Accounting Policies Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") focuses on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of financial statements requires management to make estimates and assumptions that affect the carrying amounts of assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are developed and adjusted periodically by management based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Our summary of significant accounting policies is described in Note 2 to our financial statements included in Item 8 of this Form 10-K. Management considers the following policies to be the most critical in understanding the more complex judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial position, and cash flows. Valuation of Long-Lived Assets We evaluate our long-lived assets for impairment whenever indicators of impairment exist. Our history of negative operating cash flows is an indicator of impairment. Accounting standards require that if the sum of the future cash flows expected to result from a company's long-lived asset, undiscounted and without interest charges, is less than the reported value of the asset, an asset impairment must be recognized in the financial statements. The amount of the recognized impairment would be calculated by subtracting the fair value of the asset from the reported value of the asset. Valuation of Acquired Intellectual Property The carrying value of acquired intellectual property ("Acquired IP") on our balance sheet as of December 31, 2002 was $2.5 million. As of December 31, 2001 and 2002, our market capitalization exceeded the book value of our net assets by approximately $422 million and $53 million, respectively. Because most of our intellectual property portfolio is not reflected on our balance sheet, we believe the premium to book value reflected in our market 14 capitalization is largely due to the market's valuation of our intellectual property portfolio. As a result of the decline during 2002 in the premium to book value reflected in our market capitalization, we believed it was appropriate to review our acquired intellectual property ("Acquired IP") for impairment as of December 31, 2002. Since the undiscounted sum of the estimated future cash flows from the Acquired IP exceeded the carrying value, we have not recognized an impairment. We believe that the accounting estimate related to asset impairment of our Acquired IP is a "critical accounting estimate" because: . the accounting estimate is highly susceptible to change from period to period because it requires company management to estimate future cash flows over the life of our Acquired IP by making assumptions about the timing and probability of our success in: . entering into new collaborations; and . developing and commercializing products that incorporate our technologies, either directly or with collaborators; and . the recognition of an impairment would have a material impact on the assets reported on our balance sheet as well as our net loss. Management's assumptions underlying the estimate of cash flows require significant judgment because we have limited experience in entering into collaborations with others to develop products incorporating our technologies. In addition, we have limited experience in developing products incorporating our technologies and we have no experience in commercializing any products. Management has discussed the development and selection of this critical accouting estimate with the audit committee of our board of directors, and the audit committee has reviewed the company's disclosure relating to it in this MD&A. In estimating the impact of future collaborations, we have made assumptions about the timing of entering into collaborations for potential products, most of which we are not yet developing. We have used data from public and private sources to estimate the types of cash flows that would occur at various stages of development for each product. As of December 31, 2002, we estimate that our future cash flows, on an undiscounted basis, related to Acquired IP are greater than the current carrying value of the asset. Any decreases in estimated future cash flows could have an impact on the carrying value of the Acquired IP. If we had determined the Acquired IP to be fully impaired as of December 31, 2002, total assets would have been reduced by 3% and net loss would have been increased by 9%. Valuation of Property and Equipment Our property and equipment, which have a carrying value of $36.5 million as of December 31, 2002, have been recorded at cost and are being amortized on a straight-line basis over the estimated useful lives of those assets. Approximately $21.4 million of the carrying value represents the cost and, we believe, the fair value of construction-in-progress. We believe the remaining property and equipment carrying value of $15.1 million does not exceed its fair value. Of the $21.4 million of carrying value of construction-in-progress, approximately $4.0 million, was expended as part of a planned $12.0 million renovation to a leased facility. We have suspended plans to complete these renovations and we have not yet made a final decision as to when or if we will resume this project. To the extent that we determine that the partially completed renovations are of no future use to us, we would be required to recognize an impairment loss in our statement of operations. If we had determined this asset to be fully impaired as of December 31, 2002, total assets would have been reduced by 5% and net loss would have been increased by 15%. If we decide to resume the project, we anticipate expending an additional $8.0 million to restart the project and complete the renovations. Valuation of Investment in Convertible Preferred Stock In 2000, we made an investment of approximately $1.3 million in convertible preferred stock of Neuronyx, Inc. Our equity investment, which represents an ownership interest of less than 1%, was made on the same terms as 15 other unaffiliated investors. Accordingly, we recorded and carry our investment at cost. We will continue to evaluate the realizability of this investment and record, if necessary, appropriate impairments in value. No such impairments have occurred as of December 31, 2002. Future events could cause us to conclude that impairment indicators exist and the carrying value of our investment is impaired. If we had determined this investment to be fully impaired as of December 31, 2002, total assets would have been reduced by 2% and net loss would have been increased by 5%. Revenue Recognition Our revenue from collaborative agreements consists of up-front fees, research and development funding, and milestone payments. We recognize revenues from these agreements consistent with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), issued by the Securities and Exchange Commission. Non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate our performance period based on the specific terms of each collaborative agreement, but the actual performance period may vary. We adjust the performance periods based on available facts and circumstances. Periodic payments for research and development activities are recognized over the period that we perform those activities under the terms of each agreement. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based on the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards completion under the contract. Stock-based Employee Compensation We apply APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for all stock-based employee compensation. We record deferred compensation for option grants to employees for the amount, if any, by which the market price per share exceeds the exercise price per share. We amortize deferred compensation over the vesting periods of each option. We have elected to adopt only the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The following table illustrates the effect on our net loss and basic and diluted net loss per share if we had recorded compensation expense for the estimated fair value of our stock-based employee compensation, consistent with SFAS 123 (in thousands, except per share data):
Year Ended December 31, 2000 2001 2002 - ---------------------------------------------------------------------------------------------------------- Net loss - as reported $ (8,500) $ (13,329) $ (26,417) Add: Stock-based employee compensation expense included in reported net loss 70 125 171 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards (3,752) (8,179) (15,588) ---------------------------------------------------- Net loss - pro forma $ (12,182) $ (21,383) $ (41,834) ==================================================== Basic and diluted net loss per share - as reported $ (0.63) $ (0.95) $ (1.85) Basic and diluted net loss per share - pro forma $ (0.91) $ (1.52) $ (2.94)
Liquidity and Capital Resources Overview We have incurred operating losses each year since our inception. As of December 31, 2002, we had an accumulated deficit of approximately $108 million. We have financed our operations through private and public 16 offerings of our securities, and revenues from our collaborative agreements. We had approximately $41 million in cash, cash equivalents and marketable securities as of December 31, 2002, compared to approximately $76 million in cash and cash equivalents as of December 31, 2001. The decrease for 2002 was primarily attributable to the use of cash to fund our operating loss and capital expenditures. In February 2003, we sold approximately 2.9 million shares of common stock in a private placement to a group of institutional and individual investors, generating net proceeds of approximately $16.3 million. We believe that our existing cash and marketable securities, expected revenue from collaborations and license arrangements, and interest income should be sufficient to meet our operating and capital requirements at least through the middle of 2004, although changes in our collaborative relationships or our business, whether or not initiated by us, may cause us to deplete our cash and marketable securities sooner than the above estimate. The timing and amount of our future capital requirements and the adequacy of available funds will depend on many factors, including if and when any products manufactured using our technology are commercialized. During 2002, we focused our business on the development of next generation proprietary protein therapeutics, which we plan to pursue both independently and in collaboration with selected partners. This development and commercialization will require substantial investments by us and our collaborators. Most of our 2002 revenues were derived from agreements that have been terminated or will conclude early in 2003. As a result, our 2003 revenues are difficult to project and will be largely dependent on entering into new collaborations and on the financial terms of any new collaborations. Other than revenues from any future collaborations, we expect to generate no significant revenues until such time as products incorporating our technologies are commercialized, which is not expected during the next several years. We expect an additional several years to elapse before we can expect to generate sufficient cash flow from operations to fund our operating and investing requirements. Accordingly, we will need to raise substantial additional funds to continue our business activities and fund our operations beyond the middle of 2004. Capital Expenditures During 2000, 2001, and 2002, we purchased approximately $1.5 million, $9.4 million, and $17.8 million, respectively, of property, equipment, and building improvements. The improvements during 2001 and 2002 consisted largely of the two following facility improvement projects: . We completed construction in 2002 of a pilot manufacturing facility at our headquarters location for the production of enzymes and sugar nucleotides at commercial-scale in accordance with U.S. Food and Drug Administration's Good Manufacturing Practices regulations. The facility comprises approximately 20,000 square feet of processing areas and 3,500 square feet of utility space. It has bacterial and fungal fermentation capabilities and houses two 1,500 liter fermenters. We expended approximately $17.4 million for this project, of which approximately $8.2 million and $9.2 million were expended in 2001 and 2002, respectively. . We entered into a lease agreement in 2002 for a 40,000 square foot building, which we intended to convert into laboratory and office space for an expected cost of approximately $12.0 million. Later in 2002, we suspended plans to complete these renovations and we have not yet made a final decision as to when or if we will resume this project. Our property and equipment at December 31, 2002 includes approximately $4.0 million in renovations to this facility. To the extent that we determine the partially completed renovations are of no future use to us, we would be required to recognize an impairment loss in our statement of operations. If we decide to resume the project, we anticipate expending an additional $8.0 million to restart the project and complete the renovations. In 2003, we expect our investment in capital expenditures to be approximately $3.0 million to $5.0 million, which excludes the impact of resuming the facility renovations described above. We may finance some or all of these capital expenditures through the issuance of new debt or equity. If we issue new debt, we may be required to maintain a minimum cash and investments balance, or to transfer cash into an escrow account to collateralize some portion of the debt, or both. 17 Long-term Debt Montgomery County (Pennsylvania) IDA Bonds In 1997, we issued, through the Montgomery County (Pennsylvania) Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds, of which $5.1 million remains outstanding as of December 31, 2002. The bonds were issued to finance the purchase of our headquarters building and the construction of a pilot-scale manufacturing facility within our building. The bonds are supported by an AA-rated letter of credit, and a reimbursement agreement between our bank and the letter of credit issuer. The interest rate on the bonds will vary weekly, depending on market rates for AA-rated taxable and tax-exempt obligations, respectively. During 2002, the weighted-average, effective interest rate was 3.3% per year, including letter-of-credit and other fees. The terms of the bond issuance provide for monthly, interest-only payments and a single repayment of principal at the end of the twenty-year life of the bonds. However, under our agreement with our bank, we are making monthly payments to an escrow account to provide for an annual prepayment of principal. As of December 31, 2002, we had restricted funds relating to the bonds of approximately $1.0 million, which consisted of our monthly payments to an escrow account plus interest revenue on the balance of the escrow account. During 2003, we will be required to make payments of $1.2 million into the escrow account. To provide credit support for this arrangement, we have given a first mortgage on the land, building, improvements, and certain machinery and equipment to our bank. We have also agreed to maintain a minimum required cash and short-term investments balance of at least two times the outstanding loan balance. If we fail to comply with this requirement, we are required to deposit with the lender cash collateral up to, but not more than, the loan's unpaid balance. At December 31, 2002, we were required to maintain $10.2 million of cash and short-term investments. Equipment Loan In December 2002, we borrowed approximately $2.3 million to finance the purchase of equipment, which is collateralizing the amount borrowed. The terms of the financing require us to pay monthly principal and interest payments over 36 months at an interest rate of 8%. During 2003, we will be required to make payments totalling approximately $0.8 million under this agreement. Capital Lease Obligation In November 2002, we entered into a capital lease to lease $50,000 of equipment. The terms of the lease require us to make monthly payments of $1,561 over 36 months. During 2003, we will be required to make payments totalling $19,000 under this agreement. Summary of Contractual Obligations In addition to entering into the equipment lease financing described above, we entered into an operating lease agreement during 2002 for a 40,000 square foot building in Horsham, Pennsylvania. Our aggregate rental obligation over the 20-year lease term is approximately $9.9 million. The following table summarizes our obligations to make future payments under current contracts: 18
Payments due by period ------------------------------------------------------------------------------------- Less than 1 Total Year 1 - 3 Years 4 - 5 Years After 5 Years ------------------------------------------------------------------------------------- Long-term debt/1/ ....................... $ 7,361,000 $1,835,000 $2,856,000 $ 370,000 $2,300,000 Capital lease obligation/2/ ............. 50,000 16,000 34,000 -- -- Operating leases/3/ ..................... 10,865,000 761,000 1,538,000 964,000 7,602,000 Purchase obligations/4/ ................. 832,000 634,000 194,000 4,000 -- Other long-term liabilities reflected on our balance sheet under GAAP/5/ ........................... 451,000 185,000 170,000 96,000 -- ------------------------------------------------------------------------------------- Total contractual obligations ........... $ 19,559,000 $3,431,000 $4,792,000 $ 1,434,000 $9,902,000 =====================================================================================
1. See "Long-term debt" in this Liquidity and Capital Resources section for a description of the material features of our long-term debt. 2. See "Capital Lease Obligation" in this Liquidity and Capital Resources section for a description of the material features of our capital lease obligation. 3. See Note 13 of the Notes to Financial Statements included in this Form 10-K for a description of our significant operating leases. The obligations presented in this table include $64,000 of deferred rent, which is included in the Other Liabilities section of our Balance Sheet. 4. Includes our commitments as of December 31, 2002 to purchase goods and services. 5. Represents the present value as of December 31, 2002 of the remaining payments under agreements with two former employees. The agreement relating to one of the employees will terminate in March 2003. Prior to the termination, the employee may agree to extend his non-competition and non-solicitation commitments for two additional years by entering into a separate non-competition agreement. If he does so, we will continue his medical benefits for an additional six months, extend his monthly payment of $39,622 for 24 additional months, and continue his stock option vesting and exercisability during the additional two-year period. This contingent commitment is not reflected in the above table or on our balance sheet as of December 31, 2002. These agreements are described in Note 11 of the Notes to Financial Statements included in this Form 10-K. Other Factors Affecting Liquidity Wyeth Pharmaceuticals In December 2001, we entered into a research, development and license agreement with Wyeth Pharmaceuticals, a division of Wyeth, for the use of our GlycoAdvance technology to develop an improved production process for Wyeth's biopharmaceutical compound, recombinant PSGL-Ig (P-selectin glycoprotein ligand), which was in Phase II clinical trials. In May 2002, we learned of Wyeth's decision to discontinue the development of rPSGL-Ig for the treatment of myocardial infarction based on Phase II results. Their decision was unrelated to the performance of our GlycoAdvance technology, which was to have been incorporated for Phase III and commercial production. Wyeth subsequently notified us of the termination of the agreement, effective September 2002. During 2002, we recognized approximately $3.8 million of revenue from this agreement. We expect to receive no further revenues from this collaboration. Joint Venture with McNeil Nutritionals We have a joint venture with McNeil Nutritionals to develop bulking agents for use in the food industry. We account for our investment in the joint venture under the equity method, under which we recognize our share of the income and losses of the joint venture. In 1999, we reduced the carrying value of our initial investment in the joint venture of approximately $345,000 to zero to reflect our share of the joint venture's losses. We recorded this amount 19 as research and development expense in our statements of operations. We will record our share of post-1999 losses of the joint venture, however, only to the extent of our actual or committed investment in the joint venture. The joint venture developed a process for making fructooligosaccharides and constructed a pilot facility in Athens, Georgia. In 2001, the joint venture closed the pilot facility and is exploring establishing a manufacturing arrangement with a third party to produce this or other bulking agents. As a result, we do not intend to commit the joint venture to make any further investments in facilities. During the years ended December 31, 2000, 2001, and 2002, we supplied to the joint venture research and development services and supplies, which cost approximately $1.6 million, $0.8 million, and $252,000, respectively, which were reimbursed to us by the joint venture. These amounts have been reflected as a reduction of research and development expense in our statements of operations. As of December 31, 2002, the joint venture owed us $16,000. We expect to provide fewer research and development services during 2003 compared to 2002, thereby reducing our expected reimbursement from the joint venture. If the joint venture becomes profitable, we will recognize our share of the joint venture's profits only after the amount of our capital contributions to the joint venture is equivalent to our share of the joint venture's accumulated losses. As of December 31, 2002, the joint venture had an accumulated loss since inception of approximately $10.2 million. Until the joint venture is profitable, McNeil Nutritionals is required to fund, as a non-recourse, no-interest loan to the joint venture, all of the joint venture's capital expenditures in excess of an agreed-upon amount, and all of the joint venture's operating losses. The loan balance would be repayable by the joint venture to McNeil Nutritionals over a seven-year period commencing on the earlier of September 30, 2006 or the date on which Neose attains a 50% ownership interest in the joint venture after having had a lesser ownership interest. In the event of any dissolution of the joint venture, the loan balance would be payable to McNeil Nutritionals by the joint venture before any distribution of assets to us. As of December 31, 2002, the joint venture owed McNeil Nutritionals approximately $8.5 million. Off-Balance Sheet Arrangements We are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. Results of Operations Years Ended December 31, 2002 and 2001 and Outlook for 2003 Our net loss for the year ended December 31, 2002 was approximately $26.4 million compared to approximately $13.3 million for the corresponding period in 2001. The following section explains the trends within each component of net loss for 2002 compared to 2001 and provides our estimate of trends for 2003 for each component. Revenue from Collaborative Agreements. Revenues from collaborative agreements increased to approximately $4.8 million in 2002 from approximately $1.3 million in 2001. The increase in revenues during 2002 was primarily a result of our Wyeth Pharmaceuticals collaboration, which was terminated in the third quarter of 2002. Of the increase, $1.0 million was non-cash, and represented the remaining amortization of the up-front fee that Wyeth paid in December 2001. As required under SAB 101, we deferred the up-front fee and began to amortize this amount as revenue over the expected performance period of the Wyeth agreement. Upon termination of the Wyeth agreement, the unamortized portion of the up-front fee was recognized as revenue. Most of our 2002 revenues were derived from agreements that have been terminated or will conclude early in 2003. As a result, our 2003 revenues are difficult to project and are largely dependent on entering into new collaborations and on the financial terms of any new collaborations. Research and Development Expense. Research and development expenses for the year ended December 31, 2002 were approximately $18.9 million, compared to approximately $14.7 million for the year ended December 31, 20 2001. The increase was primarily attributable to increases in the number of employees as well as increased laboratory supplies and service expenses. In January 2003, we announced the selection of an improved erythropoietin as our first proprietary candidate for development. We are planning to conduct various preclinical activities during 2003 and the first half of 2004, with the goal of beginning clinical trials in the second half of 2004. In addition, we intend to generate internal data on other potential proprietary drug candidates, and we expect to announce our second proprietary candidate for development in the second half of 2003. As a result of these activities, we expect our 2003 research and development expenses to be significantly greater than they were in 2002. Marketing, General and Administrative Expense. Marketing, general and administrative expenses for the year ended December 31, 2002 were approximately $12.4 million, compared to approximately $8.6 million for the corresponding period in 2001. The 2002 period contained higher personnel costs (including payroll, recruiting, and relocation), legal, and consulting expenses than the comparable 2001 period, which increases resulted primarily from recruiting of senior executives and focusing our business on the development of next generation proprietary protein therapeutics. During 2003, we expect our marketing, general and administrative expenses to increase by less than 10% over 2002. Severance Expense. During the year ended December 31, 2002, we incurred severance expense of approximately $2.7 million compared to approximately $0.9 million for the year ended December 31, 2001. Of the $2.7 million incurred in 2002, approximately $1.6 million is a non-cash charge related to stock option modifications for an agreement entered into with one of our officers in connection with his retirement. We have no current plans to incur severance expenses during 2003. Other Income and Expense. During the year ended December 31, 2002, we recognized approximately $1.7 million of other income upon receipt from Genzyme General of a contract payment, which was due as a result of the restructuring of our agreement with Novazyme Pharmaceuticals, Inc. in March 2001. In September 2001, Genzyme acquired Novazyme, and assumed Novazyme's contractual obligation to us. We do not expect to recognize any additional other income during 2003. Interest income for the year ended December 31, 2002 was approximately $1.1 million, compared to approximately $3.7 million for the corresponding period in 2001. The decrease was due to lower average cash and cash equivalents and marketable securities balances, as well as lower interest rates, during 2002. Our interest income during 2003 is difficult to project, and will depend largely on prevailing interest rates and whether we complete any collaborative agreements and any additional equity or debt financings during the year. Interest expense for the year ended December 31, 2002 was zero, compared to $188,000 for the corresponding period in 2001. The decrease was due to the fact that in 2002 we capitalized $150,000 of interest expense on our two capital construction projects, as discussed in the Liquidity and Capital Resources section of this MD&A. In accordance with GAAP, we recognized capitalized interest for these projects only to the extent of our actual interest expense, resulting in no reported interest expense for 2002. Our interest expense during 2003 is difficult to project, and will depend largely on prevailing interest rates and whether we complete any additional debt financings, and whether we decide to resume and complete the facility renovations described in the Liquidity and Capital Resources section of this MD&A. Years Ended December 31, 2001 and 2000 Our net loss for the year ended December 31, 2001 was approximately $13.3 million compared to approximately $8.5 million for the corresponding period in 2000. The following section explains the trends within each component of net loss for 2001 compared to 2000. Revenue from Collaborative Agreements. Revenues from collaborative agreements decreased to approximately $1.3 million in 2001 from approximately $4.6 million in 2000. Substantially all of our revenues during 2001 were payments received by us under our collaborative agreement with Wyeth Nutrition. Research and Development Expense. Research and development expenses increased to approximately $14.7 million in 2001 from approximately $12.1 million in 2000. The increase was primarily attributable to the addition of 21 new employees in 2001 and the expenses associated with our San Diego facility, which we began leasing in April 2001. In addition, our joint venture with McNeil Nutritionals reimbursed Neose approximately $0.8 million in 2001, which was approximately $0.8 million less than in 2000, for the cost of research and development services and supplies provided to the joint venture. The reimbursement amounts have been reflected as a reduction of research and development expense in our statements of operations for 2000 and 2001. Marketing, General and Administrative Expense. Marketing, general and administrative expenses increased to approximately $8.6 million in 2001 from $5.6 million in 2000. The increase was primarily attributable to the hiring of additional business development personnel, increased expenses for marketing GlycoAdvance, and increased legal and filing expenses associated with our growing patent portfolio. Severance Expense. During the year ended December 31, 2001, we incurred severance expense of approximately $0.9 million, which included non-cash charges of approximately $0.8 million related to stock option modifications in connection with the separation of employees from Neose. Other Income and Expense. We realized a gain of approximately $6.1 million in 2001 from the sale of shares of Genzyme General common stock, which we received as a result of Genzyme's acquisition of Novazyme Pharmaceuticals, Inc. in September 2001. Interest income decreased to approximately $3.7 million in 2001 from approximately $5.1 million in 2000 due to lower average cash and marketable securities balances and lower interest rates during 2001. Interest expense decreased to $188,000 in 2001 from approximately $0.5 million in 2000 due to lower average loan balances and lower interest rates during 2001. Recent Accounting Pronouncements Statement of Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143), which was released in August 2001, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and their associated asset retirement costs. SFAS 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of intangible long-lived assets that result from the acquisition, construction, development, or normal use of the asset. The enterprise is also required to record a corresponding increase to the carrying amount of the related long-lived asset (i.e. the associated asset retirement cost) and to depreciate that cost over the life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e. accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Because of the extensive use of estimates, most enterprises will record a gain or loss when they settle the obligation. We are required to adopt SFAS 143 for our fiscal year beginning January 1, 2003; we do not expect the adoption of SFAS 143 to have a material impact on our financial position or results of operations. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS 145 also amends SFAS 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 are applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS 145 is not expected to have a material effect on our financial statements. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees and termination of benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS 146 is effective for exit or disposal activities that are initiated 22 after December 31, 2002. Adoption of SFAS 146 is not expected to have a material impact on our financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002, and are not expected to have a material effect on our financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002, and are included in the notes to the financial statements included in this Form 10-K. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. Because we have no involvement with any variable interest entities, the application of this Interpretation is not expected to have a material effect on our financial statements. 23 FACTORS AFFECTING THE COMPANY'S PROSPECTS Risks Related to Development Stage Company If we fail to obtain necessary funds for our operations, we will be unable to maintain and improve our technology position and we will be unable to develop and commercialize our therapeutic proteins. To date, we have funded our operations primarily through proceeds from the public and private placements of debt and equity securities, revenues from corporate collaborations, capital equipment and leasehold financing proceeds, gains from the sale of investments, and interest earned on investments. We believe that our existing cash and short-term investments, expected revenue from collaborations and license arrangements, anticipated financing of capital expenditures, and interest income should be sufficient to meet our operating and capital requirements at least through the middle of 2004. Our present and future capital requirements depend on many factors, including: . the level of research and development investment required to develop our therapeutic proteins and improve our technology position; . the progress of preclinical and clinical testing; . the time and cost involved in obtaining regulatory approvals; . our ability to enter into new agreements with collaborators and to extend our existing collaborations, and the terms of these agreements; . our success rate or that of our collaborators in discovery efforts associated with milestones and royalties; . the timing, willingness, and ability of our collaborators to commercialize products incorporating our technologies; . costs of recruiting and retaining qualified personnel; . costs of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights; . our need or decision to acquire or license complementary technologies or new drug targets; and . changes in product candidate development plans needed to address any difficulties in clinical studies or in commercialization. We will require significant amounts of additional capital in the future, and we do not have any assurance that funding will be available when we need it on terms that we find favorable, if at all. We may seek to raise these funds through public or private equity offerings, debt financings, credit facilities, or through corporate collaborations and licensing arrangements. If we raise additional capital by issuing equity securities, our existing stockholders' percentage ownership would be reduced and they may experience substantial dilution. We may also issue equity securities that provide for rights, preferences, or privileges senior to those of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences, and privileges senior to those of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations. If we enter into a credit facility, the agreement may require us to maintain compliance with financial covenants and restrict our ability to incur additional debt, pay dividends, make redemptions or repurchases of capital stock, make loans, investments or capital expenditures, or engage in other activities. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish some rights to our technologies or drug candidates, or to grant licenses on terms that are not favorable to us. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, develop products or technologies, or otherwise respond to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations. We have a history of losses, and we may incur continued losses for some time. We have incurred losses each year, including net losses of $8.5 million for the year ended December 31, 2000, $13.3 million for the year ended December 31, 2001, and $26.4 24 million for the year ended December 31, 2002. Given our planned level of operating expenses, we expect to continue incurring losses for some time. As of December 31, 2002, we had an accumulated deficit of $108 million. To date, we have derived substantially all of our revenue from corporate collaborations, license agreements, and investments. We expect that substantially all of our revenue for the foreseeable future will result from these sources and from the licensing of our technologies. We also expect to spend significant amounts to expand our research and development on our proprietary drug candidates and technologies, maintain and expand our intellectual property position, expand our manufacturing scale-up activities, and expand our business development and commercialization efforts. We may continue to incur substantial losses even if our revenues increase. We have a joint venture with McNeil Nutritionals, a subsidiary of Johnson & Johnson. The joint venture has incurred losses since its inception, and we expect that the joint venture will incur additional losses for some time while it explores opportunities to continue the development of this technology. We have not yet commercialized any products or technologies, and we may never become profitable. We have not yet developed any products or commercialized any products or technologies, and we may never be able to do so. Since we began operations in 1990, we have not generated any revenues, except for interest income and revenues from collaborative agreements and investments. We do not know when or if we will complete any of our product development efforts, receive regulatory approval of any of our product candidates, or successfully commercialize any approved products. Even if we should be successful in developing products that are approved for marketing, we will not be successful unless our products, and products incorporating our technologies, gain market acceptance. The degree of market acceptance of these products will depend on a number of factors, including: . the receipt of regulatory approvals for the uses we seek; . the establishment and demonstration in the medical community of the safety and clinical efficacy of our products and their potential advantages over existing therapeutic products; and . pricing and reimbursement policies of government and third-party payors, such as insurance companies, health maintenance organizations and other plan administrators. Physicians, patients, payors or the medical community in general may be unwilling to accept, utilize or recommend any of our products or products incorporating our technologies. As a result, we are unable to predict the extent of future losses or the time required to achieve profitability, if at all. Even if we or our collaborators successfully develop one or more products that incorporate our technologies, we may not become profitable. Risks Related to Development of Products and Technologies We have limited product development and commercial manufacturing capability and experience, and we may be unable to develop therapeutic proteins and commercialize our technologies. Until recently, we have not focused on the development of our own proprietary products. We are now seeking to use our GlycoAdvance, GlycoPEGylation and GlycoConjugation technologies to develop proprietary next generation proteins, generally in collaboration with a partner. Our technologies may not result in the successful remodeling, optimization or development of proteins that are safe or efficacious. Because the development of new pharmaceutical products is highly uncertain, our technologies may not produce any commercially successful proteins. If we fail to validate our technologies through the successful remodeling of the proteins we select for development, we will not be able to license our next generation drug candidates, and our customers will not be able to develop drug candidates incorporatiing our technologies. To date, we have manufactured only smaller, noncommercial quantities of our enzymes, sugar nucleotides, and complex carbohydrates. We intend to manufacture enzymes and sugar nucleotides for use in our proprietary product development programs and for use by our customers. Our success depends on our ability to manufacture these compounds on a commercial scale and in accordance with current Good Manufacturing Practices, or cGMP, prescribed by the U.S. Food and Drug Administration, or FDA. We may not be able to manufacture sufficient 25 quantities of the products we develop, even to meet our needs for pre-clinical or clinical development, and we may have problems complying, or maintaining compliance, with cGMP. In addition to the normal scale-up risks associated with any manufacturing process, we may face unanticipated problems unique to the manufacture of enzymes, sugar nucleotides, or complex carbohydrates. If we are unable to develop commercial-scale manufacturing capacity, we would seek collaborators, licensees, or contract manufacturers to manufacture the compounds necessary to commercialize our technologies. We may not be able to find parties willing to manufacture these compounds at acceptable prices. Any manufacturing facility must adhere to the FDA's evolving regulations on cGMP, which are enforced by the FDA through its facilities inspection program. The manufacture of products at any facility will be subject to strict quality control, testing, and record keeping requirements, and continuing obligations regarding the submission of safety reports and other post-market information. Ultimately, we or our contract manufacturers may not meet these requirements. If we encounter delays or difficulties in connection with manufacturing, commercialization of our products and technologies could be delayed, or we could breach our obligations under our collaborative agreements. Our success depends on collaborative relationships, and our failure to enter into new collaborations, or to successfully manage our existing and future collaborations and license arrangements, could prevent us from commercializing our product candidates and technologies. We rely to a large extent on collaborative partners to co-develop our products and to commercialize products made using our technologies. This strategy entails many risks, including: . we may be unsuccessful in entering into collaborative agreements for the co-development of our products or the commercialization of products incorporating our technologies; . we may not be successful in adapting our technologies to the needs of our collaborative partners; . our collaborators may not be successful in, or may not remain committed to, co-developing our products or commercializing products incorporating our technologies; . our collaborators may not commit sufficient resources to incorporating our technologies into their products; . our collaborators may seek to develop proprietary alternatives to our products or technologies; . none of our collaborators is contractually obligated to market or commercialize our products or products incorporating our technologies, nor is any of them contractually required to achieve any specific production schedule; . our collaborative agreements are generally terminable by our partners on short notice; and . continued consolidation in our target markets may also limit our ability to enter into collaboration agreements, or may result in terminations of existing collaborations. Any of our present or future collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. In addition, we may dispute the application of payment provisions under any of our collaborative agreements. If any of these events occur or if we fail to enter into or maintain collaborative agreements, we may not be able to commercialize our products and technologies. We will be increasingly exposed to business interruption risks. We are always exposed to the risks of business interruptions at our facilities and those of our collaborators and suppliers. Any interruption of our utility supplies or ability to continue work could delay our business and research activities and may render ongoing work worthless. As our manufacturing operations increase in importance, and as we scale up the size of our manufacturing batches, we will be increasingly exposed to these risks, any of which could result in significant expense and may result in our inability to comply with our development plans and contractual deadlines. 26 We may be exposed to product liability and related risks. The use in humans of compounds developed by us or incorporating our technologies may result in product liability claims. Product liability claims can be expensive to defend, and may result in large settlements of claims or judgments against us. Even if a product liability claim is not successful, the adverse publicity, time, and expense involved in defending such a claim may interfere with our business. We may not be able to obtain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses. Risks Related to Intellectual Property The failure to obtain or maintain adequate patents, and other intellectual property protection, could impact our ability to compete effectively. Our commercial success depends in part on avoiding infringing patents and proprietary rights of third parties and developing and maintaining a proprietary position with regard to our own technologies, products and business. As we seek to develop next generation proprietary products, we will have to investigate the patent protection for our target proteins. There have been significant litigation and interference proceedings regarding patent rights, and the patent situation regarding particular products is often complex and uncertain. For example, with respect to EPO, the target of our first development program, the status of issued patents is currently being litigated and may delay our ability to market EPO in the U.S As we choose other targets, we may face uncertainty and litigation could result, which could lead to liability for damages, prevent our development and commercialization efforts, and divert resources from our business strategy. Legal standards relating to the validity and scope of claims in our technology field are still evolving. Therefore, the degree of future protection for our proprietary rights in our core technologies and products made using these technologies is also uncertain. The risks and uncertainties that we face with respect to our patents and other proprietary rights include the following: . the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents; . we may be subject to interference proceedings; . the claims of any patents that are issued may not provide meaningful protection; . we may not be able to develop additional proprietary technologies that are patentable; . the patents licensed or issued to us or our customers may not provide a competitive advantage; . other companies may challenge patents licensed or issued to us or our customers; . other companies may independently develop similar or alternative technologies, or duplicate our technologies; and . other companies may design around technologies we have licensed or developed. We cannot be certain that patents will be issued as a result of any of our pending applications. Nor can we be certain that any of our issued patents would give us adequate protection from competing products. For example, issued patents may be circumvented or challenged and declared invalid, narrow in scope, or unenforceable. In addition, since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make our inventions or to file patent applications covering those inventions. In the event that another party has also filed a patent application relating to an invention claimed by us, we may be required to participate in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and cost for us, even if the eventual outcome were favorable to us. It is also possible that others may obtain issued patents that could prevent us from commercializing our products or require us to obtain licenses requiring the payment of significant fees or royalties in order to enable us to conduct 27 our business. As to those patents that we have licensed, our rights depend on maintaining our obligations to the licensor under the applicable license agreement, and we may be unable to do so. The cost to us of any patent litigation or other proceeding relating to our patents or applications, even if resolved in our favor, could be substantial. Others seeking to develop next generation versions of proteins, or the holders of patents on our target proteins, may have greater financial resources, making them better able to bear the cost of litigation. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to develop, manufacture, and market products, form strategic alliances, and compete in the marketplace. In addition to patents and patent applications, we depend upon trade secrets and proprietary know-how to protect our proprietary technology. We require our employees, consultants, advisors, and collaborators to enter into confidentiality agreements that prohibit the disclosure of confidential information to any other parties. We require our employees and consultants to disclose and assign to us their ideas, developments, discoveries, and inventions. These agreements may not, however, provide adequate protection for our trade secrets, know-how, or other proprietary information in the event of any unauthorized use or disclosure. International patent protection is uncertain. Patent law outside the U.S. is uncertain, and is currently undergoing review and revision in many countries. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as U.S. laws. We may participate in opposition proceedings to determine the validity of foreign patents belonging to us or our competitors, which proceedings could result in substantial costs and diversion of our efforts. Finally, some of our patent protection in the U.S. is not available to us in foreign countries due to the differences in the patent laws of those countries. We may have to develop or license alternative technologies if we are unable to maintain or obtain key technology from third parties. We have licensed patents and patent applications from a number of institutions. Some of our proprietary rights have been licensed to us under agreements that have performance requirements or other contingencies. The failure to comply with these provisions could lead to termination or modifications of our rights to these licenses. Additionally, we may need to obtain additional licenses to patents or other proprietary rights from other parties to facilitate development of our proprietary technology base. If our existing licenses are terminated or if we are unable to obtain such additional licenses on acceptable terms, our ability to perform our own research and development and to comply with our obligations under our collaborative agreements may be delayed while we seek to develop or license alternative technologies. Risks Related to Competition We are exposed to intense competition from many sources. Our potential competitors include both public and private pharmaceutical and biotechnology companies. A number of these competitors are working on the development of next generation protein therapeutics. Compared to us, many of these companies have more: . financial, scientific, and technical resources; . product development, manufacturing and marketing capabilities; . experience conducting preclinical studies and clinical trials of new products; and . experience in obtaining regulatory approvals for products. Competitors may succeed in developing products and technologies that are more effective and less costly than ours, which would render our products or technologies, or both, obsolete or noncompetitive. For example, potential customers may develop other ways to achieve the benefits of our technology. Competitors also may prove to be more 28 successful in designing, manufacturing and marketing of products. If we are successful in developing our own drug candidates or versions of drugs that are no longer patented, we will compete with other drug manufacturers for market share. If we are unable to compete successfully, our commercial opportunities will be diminished. We operate in an environment of rapid technological change, and we may fall behind our competitors. Our business is characterized by extensive research efforts and rapid technological progress. New developments in molecular biology, medicinal chemistry, and other fields of biology and chemistry are expected to continue at a rapid pace in both industry and academia. Research and discoveries by others may render some or all of our target products or technologies, or both, noncompetitive or obsolete. We know that other companies with substantial resources are working on the development of next generation proteins, and they may achieve better results in remodeling our target proteins or the target proteins of our potential collaborators. We may be unable to retain key employees or recruit additional qualified personnel. Because of the specialized scientific nature of our business, we are highly dependent upon qualified scientific, technical, and managerial personnel. There is intense competition for qualified personnel in our business. Therefore, we may not be able to attract and retain the qualified personnel necessary for the development of our business. The loss of the services of existing personnel, as well as the failure to recruit additional key scientific, technical, and managerial personnel in a timely manner, would harm our research and development programs or our manufacturing capabilities. Risks Related to Government Approvals We are subject to extensive government regulation, and we or our collaborators may not obtain necessary regulatory approvals. The research, development, manufacture, marketing, and sale of our reagents and product candidates manufactured using our technologies are subject to significant, but varying, degrees of regulation by a number of government authorities in the U.S. and other countries. Pharmaceutical product candidates manufactured using our technologies must undergo an extensive regulatory approval process before commercialization. This process is regulated by the FDA and by comparable agencies in the EU and other countries. The U.S. and foreign regulatory agencies have substantial discretion to terminate clinical trials, require additional testing, delay or withhold registration and marketing approval, and mandate product withdrawals. Even if regulatory approvals were obtained, our manufacturing processes would be subject to continued review by the FDA and other regulatory authorities. Any later discovery of unknown problems with our products, products incorporating our technologies, or manufacturing processes could result in restrictions on such products or manufacturing processes, including potential withdrawal of the products from the market. In addition, if regulatory authorities determine that we have not complied with regulations in the research and development of a product candidate or the manufacture of our reagents, then we may not obtain necessary approvals to market and sell the product candidate or reagents. Neither we nor our collaborators have submitted any product candidates for marketing approval to the FDA or any other regulatory authority. If any product candidate manufactured using our technology is submitted for regulatory approval, it may not receive the approvals necessary for commercialization, the desired labeling claims, or adequate levels of reimbursement. Any delay in receiving, or failure to receive, these approvals would adversely affect our ability to generate product revenues or royalties. In addition, new governmental regulations may delay or alter regulatory approval of any product candidate manufactured using our technology. We cannot predict the impact of adverse governmental action that might arise from future legislative and administrative action. 29 The use of hazardous materials in our operations may subject us to environmental claims or liability. Our research and development processes involve the controlled use of hazardous materials, chemicals, and radioactive compounds. The risk of accidental injury or contamination from these materials cannot be entirely eliminated. We do not maintain a separate insurance policy for these types of risks. In the event of an accident or environmental discharge, we may be held liable for any resulting damages, and any liability could exceed our resources. We are subject to federal, state, and local laws and regulations governing the use, storage, handling, and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant. Third party reimbursement for our collaborators' or our future product candidates may not be adequate. Even if regulatory approval is obtained to sell any product candidates incorporating our technologies, our future revenues, profitability, and access to capital will be determined in part by the price at which we or our collaborators can sell such products. There are continuing efforts by governmental and private third-party payors to contain or reduce the costs of health care through various means. We expect a number of federal, state, and foreign proposals to control the cost of drugs through governmental regulation. We are unsure of the form that any health care reform legislation may take or what actions federal, state, foreign, and private payors may take in response to the proposed reforms. Therefore, we cannot predict the effect of any implemented reform on our business. Our ability to commercialize our products successfully will depend, in part, on the extent to which reimbursement for the cost of such products and related treatments will be available from government health administration authorities, such as Medicare and Medicaid in the U.S., private health insurers, and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, particularly for indications for which there is no current effective treatment or for which medical care typically is not sought. Adequate third-party coverage may not be available to enable us to maintain price levels sufficient to realize an appropriate return on investment in product research and development. Inadequate coverage and reimbursement levels provided by government and third-party payors for use of our or our collaborators' products may cause these products to fail to achieve market acceptance and would cause us to lose anticipated revenues and delay achievement of profitability. Risks Related to Stock Market Our stock price may continue to experience fluctuations. The market prices of securities of thinly traded biotechnology companies, such as ours, have historically been highly volatile. Sales of a substantial number of shares of our common stock in the public market or the perception that such sales might occur could adversely affect the market price of our common stock. We have a number of investors who hold relatively large positions in our securities. A decision by any of these investors to sell all or a block of their holdings of our common stock could cause our stock price to drop significantly. The market also continues to experience significant price and volume fluctuations, many of which are unrelated to the operating performance of particular companies. In recent years, the price of our common stock has fluctuated significantly and may continue to do so in the future. If we raise additional capital by issuing equity securities in a fluctuating market, many or all of our existing stockholders may experience substantial dilution. If any of the risks described in these "Factors Affecting the Company's Prospects" occurred, or if any unforeseen risk affected our performance, it could have a dramatic and adverse impact on the market price of our common stock. 30 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Our holdings of financial instruments are comprised primarily of government agency securities. All such instruments are classified as securities held to maturity. We seek reasonable assuredness of the safety of principal and market liquidity by investing in rated fixed income securities, while at the same time seeking to achieve a favorable rate of return. Our market risk exposure consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers. We typically invest in the shorter-end of the maturity spectrum. As of December 31, 2002, the marketable securities that we held consisted of obligations of U.S government agencies. The approximate principal amount and weighted-average interest rate per year of our investment portfolio as of December 31, 2002 was approximately $38.2 million and 1.5%, respectively. We have exposure to changing interest rates on our taxable and tax-exempt bonds, and we are currently not engaged in hedging activities. Interest on approximately $5.1 million of outstanding indebtedness is relating to the bonds at an interest rate that varies weekly, depending on the market rates for AA-rated taxable and tax-exempt obligations. As of December 31, 2002, the weighted-average, effective interest rate was approximately 3.3% per year. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. (a) Financial Statements. The Financial Statements required by this item are attached to this Annual Report on Form 10-K beginning on page F-1. (b) Supplementary Data. Quarterly financial data (unaudited) (in thousands, except per share data)
2002 Quarter Ended Dec. 31 Sept. 30 June 30 Mar. 31 - ------------------ ----------- ---------- --------- --------- Revenue from collaborative agreements $ 294 $ 2,187 $ 1,561 $ 771 Net loss (6,377) (5,955) (6,490) (7,595) Basic and diluted net loss per share (0.45) (0.42) (0.45) (0.53) 2001 Quarter Ended Dec. 31 Sept. 30 June 30 Mar. 31 - ------------------ ---------- ---------- --------- --------- Revenue from collaborative agreements $ 332 $ 330 $ 292 $ 312 Net income (loss) 4 (4,824) (5,210) (3,299) Basic and diluted net loss per share -- (0.34) (0.37) (0.24) - ----------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. As previously reported on a Current Report on Form 8-K dated April 29, 2002 (the "Form 8-K"), our Board of Directors, upon recommendation of the Audit Committee, informed the Company's independent public accountants, Arthur Andersen LLP ("Arthur Andersen"), that they would be dismissed as the Company's independent public 31 accountants and engaged KPMG LLP ("KPMG") to serve as the Company's independent public accountants for the fiscal year 2002. The appointment of KPMG was effective immediately. Arthur Andersen's reports on the Company's consolidated financial statements for each of the years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2001 and 2000 and through April 30, 2002 (the filing date of the Form 8-K), there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K. The Company provided Arthur Andersen with a copy of the foregoing disclosures, and we filed as an Exhibit to the Form 8-K a copy of Arthur Andersen's amended letter, dated May 14, 2002, stating its agreement with such statements. During the years ended December 31, 2001 and 2000 and through April 30, 2002 (the filing date of the Form 8-K), the Company did not consult KPMG with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K. 32 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. You should read "Executive Officers of the Company" following Item 1 of this Annual Report for a description of persons who served as our executive officers on March 14, 2003. The following table shows the name, age and position of each of our executive officers and directors as of March 14, 2003:
Name Age Position Executive Officers C. Boyd Clarke 54 President and Chief Executive Officer David A. Zopf, M.D. 60 Executive Vice President Robert I. Kriebel 60 Senior Vice President and Chief Financial Officer Debra J. Poul, Esq. 50 Senior Vice President and General Counsel George J. Vergis, Ph.D. 42 Senior Vice President, Business and Commercial Development Joseph J. Villafranca, Ph.D. 58 Senior Vice President, Pharmaceutical Development and Operations A. Brian Davis 36 Vice President, Finance Marjorie A. Hurley, Pharm.D. 43 Vice President, Regulatory Affairs and Project Management Directors C. Boyd Clarke 54 Director L. Patrick Gage, Ph.D. 60 Director William F. Hamilton, Ph.D. 63 Director Douglas J. MacMaster, Jr. 72 Director P. Sherrill Neff 51 Director Mark H. Rachesky, M.D. 44 Director Stephen A. Roth, Ph.D. 60 Chairman Lowell E. Sears 51 Director Elizabeth H.S.Wyatt 55 Director
Biographic Information Regarding Our Directors as of March 14, 2003 C. Boyd Clarke, 54, has served on our Board, and as President and Chief Executive Officer, since March 2002. From December 1999 through March 2002, Mr. Clarke was President and Chief Executive Officer of Aviron, a biotechnology company developing vaccines, which was acquired by MedImmune, and was also Chairman from January 2001 through March 2002. From 1998 through 1999, Mr. Clarke was Chief Executive Officer and President of U.S. Bioscience, Inc., a biotechnology company focused on products to treat cancer, which also was acquired by MedImmune. Mr. Clarke served as President and Chief Operating Officer of U.S. Bioscience, Inc. from 1996 to 1998. From 1977 to 1996, Mr. Clarke held a number of positions at Merck & Co., Inc., including being the first President of Pasteur-Merieux MSD, and most recently as Vice President of Merck Vaccines. Mr. Clarke has a B.S. in biochemistry, and an M.A. in history from the University of Calgary. Mr. Clarke also serves on the Board of Trustees to the Textile Museum in Washington, D.C. L. Patrick Gage, Ph.D., 60, has served on our Board since October 2002. Dr. Gage is Chairman of Compound Therapeutics, a private biotechnology company, and Chairman of the Dublin (IE) Molecular Medicine Centre. He is also an advisor to the Life Sciences Research Foundation, Perkin Elmer, Inc. and Warburg Pincus LLC. Dr. Gage served as Senior Vice President, Science and Technology, at Wyeth, from 2001 to 2002, and as President of Wyeth Research from 1998 to 2002. Prior to Wyeth, Dr. Gage held positions of increasing responsibility at Genetics Institute, Inc. from 1989 to 1998, culminating with his service as President after the company was acquired by Wyeth. 33 He also spent 18 years at Hoffmann-La Roche, Inc. in various scientific and management positions. Dr. Gage serves as a director of the Biotechnology Institute and the Philadelphia Orchestra Association. Dr. Gage has a B.S. in physics from Massachusetts Institute of Technology and a Ph.D. from The University of Chicago. William F. Hamilton, Ph.D., 63, has served on our Board since 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. He serves as a director of Digital Lightwave, Inc., a manufacturer of telecommunications test equipment. Dr. Hamilton received his B.S. and 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. Douglas J. MacMaster, Jr., 72, has served on our Board since 1993. Mr. MacMaster served as Senior Vice President of Merck & Co., Inc. from 1988 to 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. Mr. MacMaster serves as a director of the following publicly-held companies: Stratton Mutual Funds, and Martek Biosciences Corp., a biological products manufacturing company. He received his B.A. from St. Francis Xavier University, and his J.D. from Boston College Law School. P. Sherrill Neff, 51, has served on our Board since 1994. He served as President and Chief Financial Officer from December 1994 through January 2002, and as Chief Operating Officer from April 2000 through January 2002. Mr. Neff is now Managing Partner of Quaker BioVentures, L.P., a venture capital firm. From 1993 to 1994, Mr. Neff was Senior Vice President, Corporate Development, at U.S. Healthcare, Inc., a managed healthcare company. From 1984 to 1993, he worked at Alex. Brown & Sons Incorporated, an investment banking firm, where he held a variety of positions, most recently as Managing Director and Co-Head of the Financial Services Group. Mr. Neff is a director of Resource America, Inc., a publicly-held energy and real estate finance company. Mr. Neff is also on the Board of Directors of University City Science Center, the Greater Philadelphia Venture Group, and the Biotechnology Institute. Mr. Neff received his B.A.in religion from Wesleyan University, and his J.D. from the University of Michigan Law School. Mark H. Rachesky, M.D., 44, has served on our Board since 1999. Dr. Rachesky is the founder and President of MHR Fund Management LLC and affiliates, investment managers of various private investment funds that invest in inefficient market sectors, including special situation equities and distressed investments. From 1990 through June 1996, Dr. Rachesky was employed by Carl C. Icahn, initially as a senior investment officer and for the last three years as sole Managing Director of Icahn Holding Corporation, and acting chief investment advisor. Dr. Rachesky is currently on the Board of Directors of Samsonite Corporation and Keryx Biopharmaceuticals, Inc. Dr. Rachesky is a graduate of Stanford University School of Medicine, and Stanford University School of Business. Dr. Rachesky graduated from the University of Pennsylvania with a major in Molecular Aspects of Cancer. Stephen A. Roth, Ph.D., 60, has served on our Board since 1989, and as Chairman from 1994. Dr. Roth is President and Chief Executive Officer of Immune Control, Inc. He co-founded Neose, served as Chief Executive Officer from August 1994 until March 2002, and now serves as a consultant. From 1992 until August 1994, he served as Senior Vice President, Research and Development and Chief Scientific Officer. 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 received his A.B. in biology from The Johns Hopkins University, and his Ph.D. in developmental biology from the Case Western Reserve University. He completed his post-doctorate training in carbohydrate chemistry at The Johns Hopkins University. Lowell E. Sears, 52, has served on our Board since 1994. He has been a private investor involved in portfolio management and life sciences venture capital since April 1994. From 1988 until April 1994, Mr. Sears was Chief Financial Officer of Amgen Inc., a pharmaceutical company, and from 1992 until 1994, he also served as Senior Vice President responsible for the Asia-Pacific region. Mr. Sears is a director of Techne Corp. which is a publicly-held biotechnology company. Mr. Sears received his B.A. in economics from Claremont McKenna College, and his M.B.A. from Stanford University. 34 Elizabeth H.S. Wyatt, 55, has served on our Board since May 2002. From 1980 through December 2000, Ms. Wyatt held a variety of positions at Merck & Co., Inc., most recently as Merck's Vice President, Corporate Licensing, heading Merck's worldwide product and technology acquisition activities. Prior to joining Merck in 1980, Ms. Wyatt was a consultant and an academic administrator, responsible for the Harvard Business School's first formal marketing of its executive education programs. She currently serves on the Boards of Directors of MedImmune, Inc. and ARIAD Pharmaceuticals, and on the Board of Trustees of Randolph-Macon College. Ms. Wyatt received her B.A., magna cum laude, from Sweet Briar College, an M. Ed. in counseling psychology from Boston University, and an M.B.A. with honors from Harvard University. Section 16(a) Beneficial Ownership Reporting Compliance Based solely upon a review of reports of stock ownership (and changes in stock ownership) and written representations received by us, we believe that our directors and executive officers met all of their filing requirements under Section 16(a) of the Securities and Exchange Act of 1934 during the year ended December 31, 2002. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table provides information about all compensation earned in 2002, 2001, and 2000 by the individuals who served as Chief Executive Officer during 2002, and the four other most highly compensated executive officers during 2002.
Long-term Compensation ------------ Annual Compensation Shares ------------------------ Underlying All Other Name and Principal Position Year Salary Bonus Options (#) Compensation - ------------------------------- ------ ---------- --------- ------------ ---------------- C. Boyd Clarke (1) 2002 $ 339,231 $ 254,423 750,000 $ 397,346 (2) President and Chief Executive Officer Stephen A. Roth (3) 2002 79,245 -- -- 368,227 (4) Chairman and Former Chief 2001 294,866 147,433 50,000 5,682 (4) Executive Officer 2000 274,294 109,718 50,000 5,472 (4) David A. Zopf 2002 240,413 96,065 30,000 5,836 (5) Executive Vice President 2001 200,136 45,021 25,000 5,646 (5) 2000 180,303 54,091 25,000 4,962 (5) Debra J. Poul (6) 2002 213,333 67,500 85,000 5,180 (6) Senior Vice President and 2001 144,933 20,925 7,500 4,460 (6) General Counsel 2000 102,462 16,200 10,000 1,788 (6) George J. Vergis (7) 2002 220,500 66,150 35,000 5,836 (8) Senior Vice President, Business 2001 93,154 47,250 180,000 180 (8) and Commercial Development Marjorie A. Hurley 2002 153,086 39,468 15,000 4,383 (9) Vice President, Regulatory 2001 137,998 21,114 12,000 4,092 (9) Affairs and Project Management 2000 125,453 16,936 10,000 3,778 (9)
_________ (1) Mr. Clarke joined Neose in March 2002. (2) Includes $397,094 during 2002 of reimbursement of relocation expenses to Mr. Clarke, and $252 in premiums paid by us for group term life insurance. 35 (3) Dr. Roth was employed by Neose, and served as chief executive officer, until March 2002. (4) Includes $356,603 paid to Dr. Roth for consulting fees pursuant to his Separation and Consulting Agreement; $10,000 paid to Dr. Roth's attorney for services rendered to Dr. Roth for negotiating that agreement; and $1,540, $5,250, and $5,040 of matching contributions in 2002, 2001, and 2000, respectively, to Dr. Roth's account in our 401(k) plan. Also includes $84, $432, and $432 in 2002, 2001, and 2000, respectively in premiums paid by us for group term life insurance. (5) Includes $5,500, $5,214, and $4,530 of matching contributions in 2002, 2001, and 2000, respectively, to Dr. Zopf's account in our 401(k) Plan. Also includes $336, $432, and $432 in 2002, 2001, and 2000, respectively in premiums paid by us for group term life insurance. (6) Ms. Poul joined Neose in January 2000 and served on a part-time basis until May 2002. Includes $5,500, $4,028, and $1,500 of matching contributions in 2002, 2001, and 2000, respectively, to Ms. Poul's account in our 401(k) Plan. Also includes $336, $432, and $288 in 2002, 2001, and 2000, respectively in premiums paid by us for group term life insurance. (7) Dr. Vergis joined Neose in July 2001. (8) Includes $5,500 of matching contributions in 2002 to Dr. Vergis' account in our 401(k) plan. Also includes $336 and $180 in 2002 and 2001, respectively, in premiums paid by us for group term life insurance. (9) Includes $5,500, $3,660, and $3,346 of matching contributions in 2002, 2001, and 2000, respectively, to Dr. Hurley's account in our 401(k) Plan. Also includes $336, $432, and $432 in 2002, 2001, and 2000, respectively in premiums paid by us for group term life insurance. Employment Agreements In March 2002, we entered into an employment agreement with C. Boyd Clarke when he joined the Company as our President and Chief Executive Officer. Under this agreement, which includes non-competition and confidentiality covenants: . The Company agreed that Mr. Clarke would receive a minimum base salary of $450,000 per year, and an annual performance incentive bonus, with a target amount of 75% of base salary, based upon the achievement of annual goals established by the Board of Directors and Mr. Clarke, which were established soon after his arrival at the Company with respect to 2002; . The Board of Directors granted Mr. Clarke options to purchase 500,000 shares of common stock at an exercise price of $32.05 per share, the fair market value on the date of grant, as follows: an incentive stock option to purchase 12,480 shares, which option vests totally in four years from the date of grant, with 3,120 shares vesting on March 29, 2003, 260 shares vesting on the last day of each of the 24 months in 2004 and 2005, and an additional 1,040 shares vesting on the last day of each of the first three months of 2006; and a non-qualified stock option to purchase 487,520 shares, which option vests totally in four years from the date of grant, with 121,880 shares vesting on March 29, 2003, and shares vesting on a monthly basis thereafter such that an aggregate of 93,750, 121,880, 121,880 and 28,130 options vest in each of the remainder of 2003, 2004, 2005, and the first three months of 2006, respectively. . The Company agreed to reimburse Mr. Clarke for job-related expenses and reasonable costs related to the relocation of his residence to Pennsylvania, including travel expenses, temporary housing costs, realtor fees not to exceed $180,000, moving costs, closing costs in connection with the purchase of a new home, and $25,000 to defray additional miscellaneous expenses. Each of these payments is subject to partial repayment by Mr. Clarke in the event he resigns from Neose other than for good reason, as defined in the agreement. . In the event that Mr. Clarke is involuntarily terminated without cause or resigns for good reason (each as defined in the agreement), provided that Mr. Clarke and Neose enter into a mutual release of claims, Mr. Clarke would receive on the date of such termination a cash payment equal to one year of base salary, 36 target annual bonus for the year in which the termination occurs, and any unpaid bonus amounts from prior years. Additionally, all outstanding options that would have vested in the 12 months following termination would immediately vest and remain exercisable for 12 months following termination. . In the event that Mr. Clarke is involuntarily terminated without cause or resigns for good reason (each as defined in the agreement) within 18 months following certain changes of control of Neose or a sale of all or substantially all of our assets in a complete liquidation or dissolution, provided that Mr. Clarke and Neose enter into a mutual release of claims, Mr. Clarke would receive on the date of such termination a cash payment equal to two years of base salary, two times the target annual bonus for the year in which termination occurs, and any unpaid bonus amounts from prior years. Additionally, all outstanding options would immediately vest and remain exercisable for 12 months following termination. . In the even that payments to Mr. Clarke under the employment agreement would result in the imposition of a parachute excise tax under Internal Revenue Code Section 4999, Mr. Clarke would be entitled to receive an additional "gross-up" payment to insulate him from the effect of that tax. Change of Control Agreements During the third quarter of 2002, we entered into change of control agreements with Drs. Zopf, Vergis, and Hurley and Ms. Poul. In the event any of these executive officers is involuntarily terminated without cause (as defined in the agreement), the executive would receive on the date of termination a cash payment equal to six months base salary. The Company also would arrange for outplacement services for the employee and provide medical benefits to the employee (and his or her spouse and dependents, if they were covered immediately prior to such termination) for six months, at a monthly cost to the employee equal to the monthly cost of such coverage, if any, to the employee immediately prior to such termination. In the event that any of these executive officers is involuntarily terminated without cause or resigns for good reason within 12 months following a change of control (each as defined in the agreement), the executive would receive on the date of termination a cash payment equal to one year of base salary and the employee's target annual bonus for the year in which the termination occurs. Additionally, all outstanding options that would have vested in the 12 months following termination would immediately vest and remain exercisable for 12 months following termination. The Company also would arrange for outplacement services for the employee and provide medical benefits to the employee (and his or her spouse and dependents, if they were covered immediately prior to such termination) for 12 months, at a monthly cost to the employee equal to the monthly cost of such coverage, if any, to the employee immediately prior to such termination. In the event payments to any executive under the change of control agreement would result in the imposition of a parachute excise tax under Section 280(G) of the Internal Revenue Code, the executive would be entitled to receive an additional "gross-up" payment to insulate the executive from the effect of that tax. The change of control agreements require these executives to release the Company from certain claims and to comply with certain restrictive covenants. Separation and Consulting Agreement In March 2002, we entered into a Separation and Consulting Agreement with Stephen A. Roth, Ph.D., who was our Chief Executive Officer. Under this agreement, Dr. Roth agreed to provide consulting services to the Chief Executive Officer and the Board of Directors for a period of 12 months, and the Company agreed to provide health insurance benefits to Dr. Roth and pay him $39,622 per month for 12 months. On or before the first anniversary of this agreement, Dr. Roth may agree to extend his non-competition and non-solicitation commitments, and his consulting obligations, for two additional years by entering into a separate non-competition agreement. If he does so, we will continue his health insurance benefits for six additional months, extend the $39,622 monthly payments for 24 additional months and, for purposes of stock option vesting and exercisability, treat Dr. Roth as remaining in service to Neose until the third anniversary of his resignation as Chief Executive Officer (or until the end of his service as a director, if later). Dr. Roth also released us from any obligations we may have incurred in connection with his employment with us. 37 Compensation of Directors Directors who are also Neose employees receive no additional compensation for serving as a director or as a member of any Committee of the Board. Under our standard arrangements, which are currently under review, each non-employee director receives annually a retainer of $14,000, which may be applied, in whole or in part, toward the acquisition of an option to purchase shares of our common stock. Upon initial election or appointment to the Board of Directors, each non-employee director receives an option to purchase 30,000 shares of our common stock, and upon re-election to the Board, each non-employee director receives an option to purchase 10,000 shares of our common stock. Each automatic option grant has an exercise price equal to the fair market value on the date of grant. Each automatic grant is immediately exercisable, and has a term of ten years, subject to earlier termination, following the director's cessation of service on the Board of Directors. Any shares purchased upon exercise of the option are subject to repurchase should the director's service as a non-employee director cease prior to vesting of the shares. The initial automatic option grant of 30,000 shares vests in successive equal, annual installments over the director's initial four-year period of Board service. Each annual automatic option grant vests upon the director's completion of one year of service on the Board of Directors, as measured from the grant date. Each outstanding option vests immediately, however, upon certain changes in the ownership or control of the Company. Non-employee directors are also compensated for their services at each meeting of the Board or Committees on which they serve, at the following rates: $2,500 for Board meetings attended in person; $2,000 ($2,500 for the Chairman) for Committee meetings attended in person; and $1,000 for telephonic meetings of the Board or a Committee lasting longer than 30 minutes. All Board members are reimbursed for their reasonable travel expenses incurred to attend meetings of the Board or Committees of the Board on which they serve. Option Grant Table The following table provides information about grants of stock options made during 2002 to each of the executive officers named in our Summary Compensation Table.
Individual Grants ------------------------------------------------------------ Number of Potential Realizable Value Shares Percentage of at Assumed Annual Rates of Underlying Total Options Stock Price Appreciation for Options Granted to Exercise Expiration Option Term (2) ------------------------------ Name Granted Employees (1) Price Date 5% 10% - ---- ------- ------------- -------- ---------- ----------- ------------- C. Boyd Clarke ........... 500,000 (3) 33.9% $32.05 03/29/12 $ 10,078,036 $ 25,539,723 250,000 (4) 17.0 8.75 12/24/12 1,375,707 3,486,312 Stephen A. Roth .......... -- -- -- -- -- -- David A. Zopf ............ 30,000 (4) 2.0 10.62 12/12/12 200,366 507,766 Debra J. Poul ............ 50,000 (4) 3.4 11.61 05/27/12 365,073 925,168 35,000 (4) 2.4 10.62 12/12/12 233,760 592,394 George J. Vergis ......... 35,000 (4) 2.4 10.62 12/12/12 233,760 592,394 Marjorie A. Hurley ....... 15,000 (4) 1.0 11.61 05/27/12 109,522 277,550
_________ (1) Based on a total of 1,473,800 options granted during 2002 to employees to purchase common stock. (2) The potential realizable value of each grant is calculated assuming that the market price per share of common stock appreciates at annualized rates of 5% and 10% over the ten-year option term. The results of these calculations are based on rates set forth by the Securities and Exchange Commission and are not intended to forecast possible future appreciation of the price of our common stock. 38 (3) Includes (i) an incentive stock option to purchase 12,480 shares, which option vests totally in four years from the date of grant, with 3,120 vesting on March 29, 2003, 260 shares vesting on the last day of each of the 24 months in 2004 and 2005, and an additional 1,040 shares vesting on the last day of each of the first three months of 2006; and (ii) a non-qualified stock option to purchase 487,520 shares, which option vests totally in four years from the date of grant, with 122,880 shares vesting on March 29, 2003, and shares vesting on a monthly basis thereafter such that an aggregate of 93,750, 121,880, 121,880 and 28,130 options vest in each of the remainder of 2003, 2004, 2005, and the first three months of 2006, respectively. (4) Each option has a term of ten years from the date of grant and vests ratably over a four-year period, beginning on the first anniversary of the date of grant. Aggregated Fiscal Year-End Option Values The following table provides information about the exercise of stock options during 2002 and the value of stock options unexercised at the end of 2002 for the executive officers named in our Summary Compensation Table. The value of unexercised stock options is calculated by multiplying the number of option shares by the differences between the option exercise price and the year-end stock price.
Number of Shares Number of Underlying Unexercised Values of Unexercised Shares Options In-The-Money Options Acquired On Value ---------------------------- ---------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - ---------------- -------- -------- ----------- ------------- ----------- ------------- C. Boyd Clarke ........... -- $ -- -- 750,000 $ -- $ -- Stephen A. Roth .......... -- -- 398,333 70,000 60,123 -- David A. Zopf ............ 20,899 629,060 79,791 64,375 -- -- Debra J. Poul ............ -- -- 6,875 95,625 -- -- George J. Vergis ......... -- -- 42,917 172,083 -- -- Marjorie A. Hurley ....... 3,481 29,623 54,958 30,875 18,619 --
Compensation Committee Interlocks and Insider Participation The Compensation Committee consists of Douglas J. MacMaster, Jr. (chairman), L. Patrick Gage,Ph.D., and Elizabeth H.S. Wyatt, each of whom is a non-employee director. There are no compensation committee interlocks between our Company and any other entity involving our Company's or such other entity's executive officers or board members. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table shows information known to us about beneficial ownership (as defined under the regulations of the Securities and Exchange Commission) of our common stock by: . Each person we know to be the beneficial owner of at least five percent of our common stock; . Each director (eight of whom are nominees for re-election and one of whom is not); . Each executive officer named in our Summary Compensation Table; and . All directors and executive officers as a group. Unless otherwise indicated, the information is as of March 14, 2003. On March 14, 2003, there were 17,207,766 shares of our common stock outstanding. To calculate a shareholder's percentage of beneficial ownership, we must include in the numerator and denominator those shares underlying options that a person has the right to acquire upon the exercise of stock options within 60 days after March 14, 2003. Options held by other shareholders are disregarded in this calculation. Therefore, the denominator used in calculating beneficial ownership among our shareholders may differ. Unless we have indicated otherwise, each person 39 named in the table below has sole voting power and investment power for the shares listed opposite such person's name.
Number of Shares of Common Stock Percent of Beneficially Shares Name of Beneficial Owner Owned Outstanding - ------------------------ ----------------- ----------- Eastbourne Capital Management, LLC (1) 1101 Fifth Avenue Suite 160 San Rafael, CA 94901 ....................................... 2,933,166 17.0% Kopp Investment Advisors, Inc. (2) 7701 France Avenue South Suite 500 Edina, MN 55455 ............................................ 2,284,384 13.3% George W. Haywood (3) c/o Cronin & Vris, LLP 380 Madison Avenue, 24/th/ Floor New York, NY 10017 ......................................... 1,588,866 9.2% Domain Partners V, L.P.(4) DP V Associates, L.P. One Palmer Square Princeton, NJ 08542 ........................................ 949,766 5.5% Lindsay A. Rosenwald, M.D. (5) c/o Paramount Capital, Inc. 787 7/th/ Avenue New York, NY 10019 ......................................... 917,280 5.3% Directors and Named Executive Officers Mark H. Rachesky, M.D. (6)(7) c/o MHR Fund Management LLC 40 West 57/th/ Street, 33/rd/ Floor New York, NY 10019 ..................................... 791,648 4.6% Stephen A. Roth, Ph.D. (6)(8) .............................. 612,224 3.5% P. Sherrill Neff (6)(9) .................................... 499,396 2.8% C. Boyd Clarke (6) ......................................... 170,617 1.0% Douglas J. MacMaster, Jr. (6) .............................. 100,990 * William F. Hamilton, Ph.D. (6)(10) ......................... 85,152 * David A. Zopf, M.D. (6) .................................... 83,097 * Lowell E. Sears (6)(11) .................................... 65,956 * Marjorie A. Hurley, Pharm.D. (6) ........................... 60,885 * George J. Vergis, Ph.D. (6) ................................ 44,360 * Debra J. Poul (6) .......................................... 14,980 * Elizabeth Wyatt (6) ........................................ 9,505 * L. Patrick Gage, Ph.D. (6) ................................. 3,500 * All current directors and executive officers as a group (16 persons) (6) ........................................... 3,546,155 19.1%
_____ * Less than one percent. 40 (1) According to a Schedule 13G/A filed February 13, 2003: (i) Eastbourne Capital Management, LLC ("Eastbourne"), is a registered investment advisor whose clients (including Black Bear Offshore Master Fund Limited ("BB Offshore") and Black Bear Fund I ("BB"), have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the reported shares; (ii) Eastbourne filed the Schedule 13G/A jointly with Richard Jon Barry ("Mr. Barry"), who is the controlling member of Eastbourne, BBear Offshore and Black Bear; (iii) Eastbourne and Mr. Barry comprise a group, but they disclaim membership in a group with any other person or persons; (iv) BB Offshore and BB filed the Schedule 13G/A jointly with the other filers but not as a group, and each expressly disclaims membership in a group; (v) each of Eastbourne, Mr. Barry, BB Offshore and BB disclaimed beneficial ownership of the reported shares except to the extent of their pecuniary interest therein. The foregoing table also includes the following shares purchased on February 13, 2003: 301,308 shares purchased by BB Offshore, 98,928 shares purchased by BB, and 16,430 shares purchased by Black Bear Fund II, L.L.C. (2) According to a Schedule 13/G filed January 16, 2003: (i) Kopp Investment Advisors, Inc. ("KIA") is an investment adviser registered under the Investment Advisers Act of 1940, KIA is wholly owned by Kopp Holding Company ("KHC"), and KHC is wholly owned by Mr. Leroy C. Kopp ("Mr. Kopp"); (ii) KIA reported sole voting power over 923,000 shares, sole dispositive power over 725,000 shares and shared dispositive power over 1,951,051; (iii) KHC reported beneficial ownership of 1,951,051 shares; (iv) Mr. Kopp reported beneficial ownership of 2,088,551 shares, of which Mr. Kopp reported sole voting and dispositive power over 137,500 shares; (v) of the shares beneficially owned by KIA, KHC, and Mr. Kopp, 1,926,051 are held in a fiduciary or representative capacity. The foregoing table also includes 333,333 shares purchased by Kopp Emerging Growth Fund on February 13, 2003. (3) In a Schedule 13G filed on January 8, 2003, Mr. Haywood reported sole voting and dispositive power over 1,398,000 shares and shared voting and dispositive power over 24,200 shares, including 8,200 shares owned by his spouse and 16,000 shares owned jointly with his mother. The foregoing table also includes 166,666 shares purchased by Mr. Haywood on February 13, 2003. (4) According to a Schedule 13D filed on February 24, 2003: (i) each of Domain Partners V, L.P., a Delaware limited partnership ("DP V"), and DP V Associates, a Delaware limited partnership ("DP V A"), are limited partnerships whose principal business is that of a private investment partnership; (ii) the sole general partner of DP V and DP V A is One Palmer Square Associates V, L.L.C., a Delaware limited liability company ("OPSA V"), whose principal business is that of acting as the general partner of DP V and DP V A; (iii) James C. Blair, Brian H. Dovey, Jesse I. Treu, Kathleen K. Schoemaker, Arthur J. Klausner and Robert J. More are the managing members of OPSA V (the "Managing Members"); (iv) the Managing Members may be deemed to share the power to vote or direct the voting of and to dispose or to direct the disposition of the shares owned by DP V and DP V A; (v) the Managing Members disclaim beneficial ownership of the shares owned by DP V and DP V A other than the shares he or she may own directly, if any, or by virtue of his or her indirect pro rata interest, as a Managing Member of OPSA V, in the shares owned by DP V and/or DP V A; (vi) DP V reported sole voting and dispositive power over 927,848 shares; (vii) DP V A reported sole voting and dispositive power over 21,918 shares; and (viii) DP V and DP V A may constitute a "group" within the meaning of Section 13(d)(3) of the Securities Act of 1934, as amended. (5) According to a Schedule 13G/A filed on February 19, 2003: (i) Dr. Rosenwald is an investment banker, venture capitalist, fund manager and sole stockholder and chairman of Paramount Capital Asset Management, Inc., a Delaware corporation; (ii) Dr. Rosenwald reported sole voting and dispositive power over 396,111 shares and shared voting and dispositive power over 521,169 shares; and (iii) the reported shares include: (a) 521,169 shares of which Paramount Capital may be deemed the owner; (b) 152,157 shares of which Aries Domestic may be deemed the beneficial owner; (c) 32,534 shares of which Aries II may be deemed the beneficial owner; (d) 336,478 shares of which Aries Fund may be deemed the beneficial owner; and (e) 31,785 shares which Dr. Rosenwald has the right to purchase under options exercisable within 60 days. (6) Includes the following shares of common stock issuable under stock options that are exercisable within 60 days after March 14, 2003: Rachesky - 36,258 shares; Roth - 398,333 shares; Neff - 403,040 shares; Clarke - 41 135,417 shares; MacMaster - 71,139 shares; Hamilton - 26,402 shares Zopf - 79,791 shares; Sears - 44,632 shares; Hurley - 54,958 shares; Vergis - 42,917; Poul - 8,125; Wyatt - 9,505; Gage - 0; and all current directors and executive officers as a group - 1,380,491 shares. (7) Includes (i) 210,526 shares of common stock held by MHR Capital Partners LP, (ii) 502,759 shares of common stock held by MRL Partners LP, and (iii) 42,105 shares of common stock held by OTT LLC. Dr. Rachesky is the managing member of MHR Advisors LLC, which is the General Partner of MHR Capital Partners and MRL Partners. Dr. Rachesky is the managing member of OTT LLC. Dr. Rachesky may be deemed to have voting and investment control over the shares held by MHR Capital Partners, MRL Partners, and OTT LLC. Dr. Rachesky disclaims beneficial ownership of the shares held by MHR Capital Partners, MRL Partners, and OTT LLC, except to the extent of his pecuniary interest in the funds. (8) Includes 100,000 shares of common stock owned by Dr. Roth's wife and 15,758 shares of common stock owned by Dr. Roth's daughter. Dr. Roth disclaims beneficial ownership of the shares held by his wife and daughter. (9) Includes 1,000 shares of common stock owned by Mr. Neff's wife. Mr. Neff disclaims beneficial ownership of the shares held by his wife. (10) Excludes 43,070 shares of common stock which are exercisable within 60 days under options that were transferred by Dr. Hamilton in December 2002 pursuant to a domestic relations order. Dr. Hamilton disclaims beneficial interest in the transferred options. (11) Includes 21,324 shares of common stock owned by the Sears Family Living Trust, of which Mr. Sears is trustee. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In May 2001, we entered into a tuition reimbursement agreement with A. Brian Davis, who serves as our Vice President, Finance. Under the agreement, we agreed to lend Mr. Davis the amounts necessary to pay for tuition payments and related costs and fees for an MBA degree. Interest accrues on the loan at 4.71% per year, and is payable annually beginning in May 2002. We have agreed to forgive repayment of the principal amount outstanding in four equal, annual installments commencing in May 2004 if he remains employed by us on each forgiveness date. We will forgive the accrued interest as it becomes due and, if Mr. Davis is terminated without cause, we will forgive all outstanding principal and interest. As of December 31, 2002, the amount outstanding under the agreement, including accrued interest, was $121,000. ITEM 14. CONTROLS AND PROCEDURES. Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, and our internal controls and procedures for financial reporting. Based on that evaluation, our principal executive officer and principal financial officer concluded that these controls and procedures are effective. There were no significant changes in these controls or procedures, or in other factors that could significantly affect these controls or procedures, subsequent to the date of their evaluation. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. These disclosure controls and procedures include, among other things, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Our internal controls and procedures for financial reporting are designed to provide reasonable assurance, and management believes that they provide such reasonable assurance, that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use, and our 42 transactions are properly recorded and reported, in order to permit the preparation of our financial statements in conformity with generally accepted accounting principles. Our management group, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and internal controls and related procedures will prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable assurance that the objectives of the control system are met. In addition, the design and implementation of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered in relation to their costs. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events, which may prove to be incorrect. Due to the limitations of all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within an organization have been detected. 43 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The Financial Statements filed as part of this Annual Report on Form 10-K are listed on the Index to Financial Statements on page F-1. 2. Financial Statement Schedules. All financial statement schedules have been omitted here because they are not applicable, not required, or the information is shown in the Financial Statements or Notes thereto. 3. Exhibits. (See (c) below) (b) Reports on Form 8-K. On October 30, 2002, the Company filed a report on Form 8-K, announcing under Item 5 that its board of directors approved an amendment to the Amended and Restated Rights Agreement between the Company and American Stock Transfer & Trust Company, as Rights Agent, effective as of December 3, 1998 (the "Rights Agreement"), permitting a specified significant stockholder to increase its percentage of beneficial ownership in the Company to more than 15% but less than 25%, without being deemed an Acquiring Person under the Rights Agreement. On December 12, 2002, the Company filed a report on Form 8-K, announcing under Item 5 that on that date its board of directors adopted new corporate governance principles and a new charter of the Corporate Governance Committee. (c) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K. We are incorporating by reference to our previous SEC filings each exhibit that contains a footnote. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. Exhibit Number Description - ------ ----------- 3.1 Second Amended and Restated Certificate of Incorporation. (Exhibit 3.1)(1) 3.2 Second Amended and Restated By-Laws. (Exhibit 3.2)(10) 3.3 Certificate of Designation establishing and designating the Series A Junior Participating Preferred Stock. (Exhibit 3.2)(3) 4.1 See Exhibits 3.1, 3.2, and 3.3 for instruments defining rights of holders of common stock. 4.2 Representation pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. (Exhibit 4.1)(2) 4.3 Trust Indenture, dated as of March 1, 1997, between Montgomery County Industrial Development Authority and Dauphin Deposit Bank and Trust Company. (Exhibit 4.2)(2) 4.4 Form of Montgomery County Industrial Development Authority Federally Taxable Variable Rate Demand Revenue Bond (Neose Technologies, Inc. Project) Series B of 1997. (Exhibit 4.3)(2) 4.5 Amended and Restated Rights Agreement, dated as of December 3, 1998, between American Stock Transfer & Trust Company, as Rights Agent, and Neose Technologies, Inc. (Exhibit 4.1)(4) 4.6 Amendment No. 1, dated November 14, 2000, to the Amended and Restated Rights Agreement, dated as of December 3, 1998, between Neose Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (Exhibit 4.1)(7) 44 4.7 Amendment No. 2, dated June 13, 2002, to the Amended and Restated Rights Agreement, dated as of December 3, 1998, between Neose Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (Exhibit 4.1)(13) 4.8 Amendment No. 3, dated October 30, 2002, to the Amended and Restated Rights Agreement, dated as of December 3, 1998, between Neose Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent. (Exhibit 4.1)(15) 10.1* Amended and Restated License Agreement, dated as of February 27, 2003, between University of Pennsylvania and Neose Technologies, Inc. 10.2++ 1995 Amended and Restated Stock Option/Stock Issuance Plan, as amended. (Exhibit 99.1)(12) 10.3++ Amended and Restated Employee Stock Purchase Plan. (Exhibit 99.2)(12) 10.4++ Employment Agreement, dated March 29, 2002, between C. Boyd Clarke and Neose Technologies, Inc. (Exhibit 10.1)(11) 10.5++ Non-Qualified Stock Option Agreement, dated March 29, 2002, between C. Boyd Clarke and Neose Technologies, Inc. (Exhibit 10.2)(11) 10.6++ Separation and Consulting Agreement, dated March 29, 2002, between Stephen A. Roth and Neose Technologies, Inc. (Exhibit 10.3)(11) 10.7++ Employment Letter Agreement, dated August 15, 2002, between Robert I. Kriebel and Neose Technologies, Inc. (Exhibit 10.3)(14) 10.8++ Change of Control Agreement, dated October 7, 2002, between Robert I. Kriebel and Neose Technologies, Inc. (Exhibit 10.4)(14) 10.9++ Employment Agreement, dated September 12, 2002, between Joseph J. Villafranca and Neose Technologies, Inc. (Exhibit 10.5)(14) 10.10++* Form of Change of Control Agreement between Neose Technologies, Inc. and Certain Officers. (Exhibit 10.1)(14) 10.11++ Change of Control Agreement, dated October 7, 2002, between Debra J. Poul and Neose Technologies, Inc. (Exhibit 10.2)(14) 10.12 Loan Agreement, dated as of March 1, 1997, between Montgomery County Industrial Development Authority and Neose Technologies, Inc. (Exhibit 10.1)(2) 10.13 Participation and Reimbursement Agreement, dated as of March 1, 1997, between Jefferson Bank and CoreStates Bank, N.A. (Exhibit 10.2)(2) 10.14 Form of CoreStates Bank, N.A. Irrevocable Letter of Credit. (Exhibit 10.3)(2) 10.15 Pledge, Security and Indemnification Agreement, dated as of March 1, 1997, by and among CoreStates Bank, N.A., Jefferson Bank, and Neose Technologies, Inc. (Exhibit 10.4)(2) 10.16 Reimbursement Agreement, dated as of March 1, 1997, between Jefferson Bank and Neose Technologies, Inc. (Exhibit 10.5)(2) 10.17 Specimen of Note from Company to Jefferson Bank. (Exhibit 10.6)(2) 10.18 Mortgage, Assignment and Security Agreement, dated March 20, 1997, between Jefferson Bank and Neose Technologies, Inc. (Exhibit 10.7)(2) 10.19 Security Agreement, dated as of March 1, 1997, by and between Jefferson Bank and Neose Technologies, Inc. (Exhibit 10.8)(2) 10.20 Assignment of Contract, dated as of March 20, 1997, between Jefferson Bank and Neose Technologies, Inc. (Exhibit 10.9)(2) 10.21 Custodial and Collateral Security Agreement, dated as of March 20, 1997, by and among Offitbank, Jefferson Bank, and Neose Technologies, Inc. (Exhibit 10.10)(2) 10.22 Placement Agreement, dated March 20, 1997, among Montgomery County Industrial Development Authority, CoreStates Capital Markets, and Neose Technologies, Inc. (Exhibit 10.11)(2) 10.23 Remarketing Agreement, dated as of March 1, 1997, between CoreStates Capital Markets and Neose Technologies, Inc. (Exhibit 10.12)(2) 10.24 Operating Agreement of Magnolia Nutritionals LLC, dated October 12, 1999, between Neose Technologies, Inc. and McNeil PPC, Inc. acting through its division McNeil Specialty Products Company. (Exhibit 99.2)(5) 10.25+ Collaboration and License Agreement, dated November 3, 1999, between Neose Technologies, Inc. and American Home Products Corporation. (Exhibit 99.3)(5) 45 10.26 Modification Agreement Relating To Reimbursement Agreements, dated as of May 1, 2000, between Hudson United Bank, Jefferson Bank Division, successor to Jefferson Bank, and Neose Technologies, Inc. (Exhibit 10.1)(6) 10.27 Modification Agreement Relating to Custodial Bank Agreement, dated as of May 1, 2000, by and among Offitbank, Hudson United Bank, Jefferson Bank Division, successor to Jefferson Bank, and Neose Technologies, Inc. (Exhibit 10.2)(6) 10.28 Amendment No. 1 to Research and Development Agreement, dated May 14, 2001, between Neose Technologies, Inc. and Progenics Pharmaceuticals, Inc. (as successor to the Pharmaceutical Research Institute of Bristol-Myers Squibb Company). (Exhibit 99.2)(9) 10.29 Agreement of Lease, dated as of February 15, 2002, between Liberty Property Leased Partnership and Neose Technologies, Inc. (Exhibit 10.40)(10) 10.30 Standard Industrial/Commercial Multi-Tenant Lease-Net, dated February 2, 2001, between Nancy Ridge Technology Center, LLC and Neose Technologies, Inc. (Exhibit 10.47)(10) 10.31 First Amendment to Lease, dated May 18, 2001, between Nancy Ridge Technology Center, LLC and Neose Technologies, Inc. (Exhibit 10.48)(10) 10.32 Agreement, dated as of August 24, 2001, between IPS and Neose Technologies, Inc. (Exhibit 10.49)(10) 10.33* Master Security Agreement between General Electric Capital Corporation and Neose Technologies, Inc., dated as of December 19, 2002. 10.34* Amendment to Master Security Agreement between General Electric Capital Corporation and Neose Technologies, Inc., dated as of December 19, 2002. 10.35* Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation, dated December 27, 2002 10.36* Common Stock Purchase Agreement between Neose Technologies, Inc. and the Purchasers, dated as of February 13, 2003 23.1* Consent of KPMG LLP 23.2* Information Regarding Consent of Arthur Andersen LLP 24* Powers of Attorney (included as part of signature page hereof). 99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ----------------- * Filed herewith. + Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant to an order of the SEC granting our application for confidential treatment filed pursuant to Rule 406 under the Securities Act. ++ Compensation plans and arrangements for executives and others. # Portions of this Exhibit were omitted and filed separately with the Secretary of the SEC pursuant to a request for confidential treatment that has been filed with the SEC. (1) Filed as an Exhibit to our Registration Statement on Form S-1 (Registration No. 33-80693) filed with the SEC on December 21, 1995, as amended. (2) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997. (3) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on October 1, 1997. (4) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on January 8, 1999. (5) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on February 2, 2000. (6) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000. (7) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on November 15, 2000. (8) Filed as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2000. (9) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on May 18, 2001. (10) Filed as an Exhibit to our Annual Report on Form 10-K filed with the SEC on March 29, 2002. (11) Filed as an Exhibit to our Current Report on Form 8-K/A filed with the SEC on April 30, 2002. (12) Filed as an Exhibit to our Proxy Statement filed with the SEC on May 15, 2002. (13) Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on June 13, 2002. (14) Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002. (15) Filed Filed as an Exhibit to our Current Report on Form 8-K filed with the SEC on October 31, 2002. 46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized. NEOSE TECHNOLOGIES, INC. Date: March 17, 2003 By: /s/ C. Boyd Clarke ------------------ C. Boyd Clarke President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Neose and in the capacities and on the dates indicated. Each person, in so signing also makes, constitutes, and appoints C. Boyd Clarke, Robert I. Kriebel and A. Brian Davis, and each of them acting alone, as his or her true and lawful attorneys-in-fact, with full power of substitution, in his name, place, and stead, to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report.
Name Capacity Date - ---- -------- ---- /s/ C. Boyd Clarke President and Chief Executive Officer (Principal March 17, 2003 - ------------------ C. Boyd Clarke Executive Officer) /s/ Robert I. Kriebel Senior Vice President and Chief Financial Officer March 17, 2003 - --------------------- Robert I. Kriebel (Principal Financial Officer) /s/ L. Patrick Gage Director March 17, 2003 - ------------------- L. Patrick Gage /s/ William F. Hamilton Director March 17, 2003 - ----------------------- William F. Hamilton /s/ Douglas J. MacMaster, Jr. Director March 17, 2003 - ----------------------------- Douglas J. MacMaster, Jr. /s/ P. Sherrill Neff Director March 17, 2003 - -------------------- P. Sherrill Neff /s/ Mark H. Rachesky Director March 17, 2003 - -------------------- Mark H. Rachesky /s/ Stephen A. Roth Chairman March 17, 2003 - ------------------- Stephen A. Roth /s/ Lowell E. Sears Director March 17, 2003 - ------------------- Lowell E. Sears /s/ Elizabeth H.S. Wyatt Director March 17, 2003 - ------------------------ Elizabeth H.S. Wyatt
47 CERTIFICATIONS CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, C. Boyd Clarke, certify that: 1. I have reviewed this annual report on Form 10-K of Neose Technologies, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 17, 2003 /s/ C. Boyd Clarke ------------------ ------------------ Date C. Boyd Clarke President and Chief Executive Officer 48 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Robert I. Kriebel, certify that: 1. I have reviewed this annual report on Form 10-K of Neose Technologies, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. March 17, 2003 /s/ Robert I. Kriebel -------------- --------------------- Date Robert I. Kriebel Senior Vice President and Chief Financial Officer 49 Index to Financial Statements Independent Auditors' Report ............................................ F-2 Report of Independent Public Accountants ................................ F-3 Balance Sheets .......................................................... F-4 Statements of Operations ................................................ F-5 Statements of Stockholders' Equity and Comprehensive Loss ............... F-6 Statements of Cash Flows ................................................ F-10 Notes to Financial Statements ........................................... F-11 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Neose Technologies, Inc.: We have audited the accompanying balance sheet of Neose Technologies, Inc. (a development-stage company) as of December 31, 2002, and the related statements of operations, stockholders' equity and comprehensive loss, and cash flows for the year then ended, and for the period from January 17, 1989 (inception) through December 31, 2002. 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 audit. The financial statements of Neose Technologies, Inc. as of December 31, 2001 and for each of the years in the two-year period ended December 31, 2001 and for the period from January 17, 1989 (inception) through December 31, 2002, to the extent related to the period from January 17, 1989 (inception) through December 31, 2001, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 25, 2002. Our opinion on the statements of operations, stockholders' equity and comprehensive loss, and cash flows, insofar as it relates to the amounts included for the period from January 17, 1989 (inception) through December 31, 2001, is based solely on the report of the other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Neose Technologies, Inc. (a development-stage company) as of December 31, 2002, and the results of its operations and its cash flows for the year then ended, and for the period from January 17, 1989 (inception) through December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Philadelphia, Pennsylvania February 19, 2003 F-2 The following is a copy of a report issued by Arthur Andersen LLP and included in the 2001 Form 10-K/A report for the fiscal year ended December 31, 2001 filed on April 30, 2002. This report has not been reissued by Arthur Andersen LLP, and Arthur Andersen LLP has not consented to its use in this Annual Report on Form 10-K. For further discussion, see Exhibit 23.2 to this Form 10-K. Report of Independent Public Accountants To Neose Technologies, Inc.: We have audited the accompanying consolidated balance sheets of Neose Technologies, Inc. (a Delaware corporation in the development stage) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2001, and for the period from inception (January 17, 1989) to December 31, 2001. 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 auditing standards generally accepted in the United States. 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. and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, and for the period from inception (January 17, 1989) to December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Philadelphia, Pennsylvania January 25, 2002 F-3 Neose Technologies, Inc. (a development-stage company) Balance Sheets (in thousands, except per share amounts)
December 31, ------------------------- Assets 2001 2002 ---------- ----------- Current assets: Cash and cash equivalents $ 76,245 $ 31,088 Marketable securities -- 9,952 Restricted funds 902 977 Prepaid expenses and other current assets 1,635 558 ---------- ----------- Total current assets 78,782 42,575 Property and equipment, net 22,649 36,508 Acquired intellectual property, net 3,105 2,507 Other assets 1,250 1,502 ---------- ----------- Total assets $ 105,786 $ 83,092 ========== =========== Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 1,100 $ 1,851 Accounts payable 719 1,127 Accrued compensation 855 1,339 Accrued expenses 2,844 1,880 Deferred revenue 1,222 320 ---------- ----------- Total current liabilities 6,740 6,517 Long-term debt 5,100 5,560 Other liabilities -- 330 ---------- ----------- Total liabilities 11,840 12,407 ---------- ----------- Commitments (Note 13) Stockholders' equity: Preferred stock, $.01 par value, 5,000 shares authorized, none issued -- -- Common stock, $.01 par value, 30,000 shares authorized; 14,089 and 14,330 shares issued; 14,083 and 14,324 shares outstanding 141 143 Additional paid-in capital 176,124 178,945 Treasury stock, 6 shares at cost (175) (175) Deferred compensation (503) (170) Deficit accumulated during the development stage (81,641) (108,058) ---------- ----------- Total stockholders' equity 93,946 70,685 ---------- ----------- Total liabilities and stockholders' equity $ 105,786 $ 83,092 ========== ===========
The accompanying notes are an integral part of these financial statements. F-4 Neose Technologies, Inc. (a development-stage company) Statements of Operations (in thousands, except per share amounts)
Period from inception (January 17, Year Ended December 31, 1989) to ----------------------------------------- December 31, 2000 2001 2002 2002 ----------- ----------- ------------- ------------- Revenue from collaborative agreements $ 4,600 $ 1,266 $ 4,813 $ 17,446 ----------- ----------- ------------- ------------- Operating expenses: Research and development 12,094 14,727 18,879 97,253 Marketing, general and administrative 5,648 8,631 12,390 47,902 Severance -- 873 2,722 3,595 ----------- ----------- ------------- ------------- Total operating expenses 17,742 24,231 33,991 148,750 ----------- ----------- ------------- ------------- Operating loss (13,142) (22,965) (29,178) (131,304) Other income -- 6,120 1,653 7,773 Interest income 5,111 3,704 1,108 18,778 Interest expense (469) (188) -- (3,305) ----------- ----------- ------------- ------------- Net loss $ (8,500) $ (13,329) $ (26,417) $ (108,058) =========== =========== ============= ============= Basic and diluted net loss per share $ (0.63) $ (0.95) $ (1.85) =========== =========== ============= Weighted-average shares outstanding used in computing basic and diluted net loss per share 13,428 14,032 14,259 =========== =========== =============
The accompanying notes are an integral part of these financial statements. F-5 Neose Technologies, Inc. (a development-stage company) Statements of Stockholders' Equity and Comprehensive Loss (in thousands)
Convertible Additional Preferred Stock Common Stock paid-in Treasury --------------- --------------- Shares Amount Shares Amount capital stock ----------------------------------------------------------------------------- Balance, January 17, 1989 (inception) -- $ -- -- $ -- $ -- $ -- Initial issuance of common stock -- -- 1,302 13 (3) -- Shares issued pursuant to consulting, licensing, and antidilutive agreements -- -- 329 3 (1) -- Sale of common stock -- -- 133 1 1 -- Net loss -- -- -- -- -- -- ---------------------------------------------------------------------------- Balance, December 31, 1990 -- -- 1,764 17 (3) -- Sale of stock 1,517 15 420 4 4,499 -- Shares issued pursuant to consulting and antidilutive agreements -- -- 145 1 -- -- Capital contributions -- -- -- -- 10 -- Dividends on preferred stock -- -- -- -- (18) -- Net loss -- -- -- -- -- -- ---------------------------------------------------------------------------- Balance, December 31, 1991 1,517 15 2,329 22 4,488 -- Sale of stock 260 2 17 -- 2,344 -- Shares issued pursuant to redemption of notes payable -- -- 107 1 682 -- Exercise of stock options and warrants -- -- 21 -- 51 -- Amortization of deferred compensation -- -- -- -- -- -- Dividends on preferred stock -- -- -- -- (36) -- Net loss -- -- -- -- -- -- ---------------------------------------------------------------------------- Balance, December 31, 1992 1,777 17 2,474 23 7,529 -- Sale of preferred stock 250 3 -- -- 1,997 -- Shares issued to licensor -- -- 3 -- -- -- Shares issued to preferred stockholder in lieu of cash dividends -- -- 1 -- 18 -- Amortization of deferred compensation -- -- -- -- -- -- Dividends on preferred stock -- -- -- -- (36) -- Net loss -- -- -- -- -- -- ---------------------------------------------------------------------------- Balance, December 31, 1993 2,027 20 2,478 23 9,508 -- Sale of preferred stock 2,449 25 -- -- 11,040 -- Exercise of stock options -- -- 35 1 14 -- Shares issued to preferred stockholder in lieu of cash dividends -- -- 10 1 53 -- Dividends on preferred stock -- -- -- -- (18) -- Net loss -- -- -- -- -- -- ---------------------------------------------------------------------------- Balance, December 31, 1994 4,476 $ 45 2,523 $ 25 $20,597 $ -- Comprehensive Deficit loss accumulated Unrealized accumulated during the gains on during the Deferred development marketable development compensation stage securities stage ------------------------------------------------------- Balance, January 17, 1989 (inception) $ -- $ -- $ -- $ -- Initial issuance of common stock -- -- -- -- Shares issued pursuant to consulting, licensing, and antidilutive agreements -- -- -- -- Sale of common stock -- -- -- -- Net loss -- (460) -- (460) ------------------------------------------------------- Balance, December 31, 1990 -- (460) -- (460) Sale of stock (7) -- -- -- Shares issued pursuant to consulting and antidilutive agreements -- -- -- -- Capital contributions -- -- -- -- Dividends on preferred stock -- -- -- -- Net loss -- (1,865) -- (1,865) ------------------------------------------------------- Balance, December 31, 1991 (7) (2,325) -- (2,325) Sale of stock -- -- -- -- Shares issued pursuant to redemption of notes payable -- -- -- -- Exercise of stock options and warrants -- -- -- -- Amortization of deferred compensation 5 -- -- -- Dividends on preferred stock -- -- -- -- Net loss -- (3,355) -- (3,355) ------------------------------------------------------- Balance, December 31, 1992 (2) (5,680) -- (5,680) Sale of preferred stock -- -- -- -- Shares issued to licensor -- -- -- -- Shares issued to preferred stockholder in lieu of cash dividends -- -- -- -- Amortization of deferred compensation 2 -- -- -- Dividends on preferred stock -- -- -- -- Net loss -- (2,423) -- (2,423) ------------------------------------------------------- Balance, December 31, 1993 -- (8,103) -- (8,103) Sale of preferred stock -- -- -- -- Exercise of stock options -- -- -- -- Shares issued to preferred stockholder in lieu of cash dividends -- -- -- -- Dividends on preferred stock -- -- -- -- Net loss -- (6,212) -- (6,212) ------------------------------------------------------- Balance, December 31, 1994 $ -- $ (14,315) $ -- $(14,315)
(continued) The accompanying notes are an integral part of these financial statements. F-6 Neose Technologies, Inc. (a development-stage company) Statements of Stockholders' Equity and Comprehensive Loss (continued) (in thousands)
Convertible Additional Preferred Stock Common Stock paid-in Treasury Deferred --------------- --------------- Shares Amount Shares Amount capital stock compensation --------------------------------------------------------------------------------- Sale of preferred stock 2,721 $ 27 -- $ -- $10,065 $ -- $ -- Exercise of stock options and warrants -- -- 116 1 329 -- -- Shares issued to employees in lieu of cash compensation -- -- 8 -- 44 -- -- Deferred compensation related to grant of stock options -- -- -- -- 360 -- (360) Shares issued to stockholder related to the initial public offering -- -- 23 -- -- -- -- Shares issued to preferred stockholder in lieu of cash dividends -- -- 3 -- 18 -- -- Dividends on preferred stock -- -- -- -- (36) -- -- Conversion of preferred stock into common stock (1,417) (14) 472 5 9 -- -- Net loss -- -- -- -- -- -- -- ------------------------------------------------------------------------------ Balance, December 31, 1995 5,780 58 3,145 31 31,386 -- (360) Dividends on preferred stock -- -- -- -- (18) -- -- Sale of common stock in initial public offering -- -- 2,588 26 29,101 -- -- Conversion of preferred stock into common stock (5,780) (58) 2,411 24 34 -- -- Exercise of stock options and warrants -- -- 65 1 162 -- -- Shares issued pursuant to employee stock purchase plan -- -- 6 -- 60 -- -- Stock-based compensation related to modification of -- -- -- -- 106 -- -- options Amortization of deferred compensation -- -- -- -- -- -- 90 Net loss -- -- -- -- -- -- -- ------------------------------------------------------------------------------ Balance, December 31, 1996 -- -- 8,215 82 60,831 -- (270) Sale of common stock in public offering -- -- 1,250 13 20,326 -- -- Exercise of stock options and warrants -- -- 42 -- 139 -- -- Shares issued pursuant to employee stock purchase plan -- -- 18 -- 189 -- -- Deferred compensation related to grants of stock options -- -- -- -- 322 -- (322) Amortization of deferred compensation -- -- -- -- -- -- 231 Net loss -- -- -- -- -- -- -- ------------------------------------------------------------------------------ Balance, December 31, 1997 -- $ -- 9,525 $ 95 $81,807 $ -- $ (361) Comprehensive Deficit loss accumulated Unrealized accumulated during the gains on during the development marketable development stage securities stage ------------------------------------------- Sale of preferred stock $ -- $ -- $ -- Exercise of stock options and warrants -- -- -- Shares issued to employees in lieu of cash compensation -- -- -- Deferred compensation related to grant of stock options -- -- -- Shares issued to stockholder related to the initial public offering -- -- -- Shares issued to preferred stockholder in lieu of cash dividends -- -- -- Dividends on preferred stock -- -- -- Conversion of preferred stock into common stock -- -- -- Net loss (5,067) -- (5,067) --------------------------------------- Balance, December 31, 1995 (19,382) -- (19,382) Dividends on preferred stock -- -- -- Sale of common stock in initial public offering -- -- -- Conversion of preferred stock into common stock -- -- -- Exercise of stock options and warrants -- -- -- Shares issued pursuant to employee stock purchase plan -- -- -- Stock-based compensation related to modification of -- -- -- options Amortization of deferred compensation -- -- -- Net loss (6,141) -- (6,141) --------------------------------------- Balance, December 31, 1996 (25,523) -- (25,523) Sale of common stock in public offering -- -- -- Exercise of stock options and warrants -- -- -- Shares issued pursuant to -- -- -- employee stock purchase plan -- -- -- Deferred compensation related to grants of stock options -- -- -- Amortization of deferred -- -- -- compensation -- -- -- Net loss (9,064) -- (9,064) --------------------------------------- Balance, December 31, 1997 $(34,587) $ -- $(34,587)
(continued) The accompanying notes are an integral part of these financial statements. F-7 Neose Technologies, Inc. (a development-stage company) Statements of Stockholders' Equity and Comprehensive Loss (continued) (in thousands)
Comprehensive Deficit loss accumulated Unrealized accumulated Convertible Additional during the gains on during the Preferred Stock Common Stock paid-in Treasury Deferred development marketable development ---------------- --------------- Shares Amount Shares Amount capital stock compensation stage securities stage ------------------------------------------------------------------------------------------------------- Exercise of stock options -- $ -- 49 $ 1 $ 261 $ -- $ -- $ -- $ -- $ -- Shares issued pursuant to employee stock purchase plan -- -- 15 -- 171 -- -- -- -- -- Deferred compensation related to grants of stock options -- -- -- -- 161 -- (161) -- -- -- Amortization of deferred compensation -- -- -- -- -- -- 311 -- -- -- Unrealized gains on marketable securities -- -- -- -- -- -- -- -- 222 222 Net loss -- -- -- -- -- -- (11,907) -- (11,907) ------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 -- -- 9,589 96 82,400 -- (211) (46,494) 222 (46,272) Sales of common stock in private placements -- -- 1,786 18 17,398 -- -- -- -- -- Exercise of stock options and warrants -- -- 43 -- 263 -- -- -- -- -- Shares issued pursuant to employee stock purchase plan -- -- 16 -- 156 -- -- -- -- -- Deferred compensation related to grants of stock options -- -- -- -- 796 -- (796) -- -- -- Amortization of deferred compensation -- -- -- -- -- -- 477 -- -- -- Unrealized gains on marketable securities -- -- -- -- -- -- -- -- (222) (222) Net loss -- -- -- -- -- -- -- (13,318) -- (13,318) ------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 -- -- 11,434 114 101,013 (530) (59,812) -- (59,812) Sale of common stock in public offering -- -- 2,300 23 68,582 -- -- -- -- -- Exercise of stock options and warrants -- -- 247 3 2,735 -- -- -- -- -- Shares issued pursuant to employee stock purchase plan -- -- 11 -- 157 -- -- -- -- -- Deferred compensation related to grants of employee stock options -- -- -- -- 70 -- (70) -- -- -- Deferred compensation related to non-employee stock options -- -- -- -- 1,200 -- (1,200) -- -- -- Amortization of deferred compensation related to: Employee options -- -- -- -- -- -- 70 -- -- -- Non-employee options -- -- -- -- -- -- 1,013 -- -- -- Net loss -- -- -- -- -- -- -- (8,500) -- (8,500) ------------------------------------------------------------------------------------------------------ Balance, December 31, 2000 -- $ -- 13,992 $ 140 $ 173,757 $ -- $ (717) $(68,312) $ -- $(68,312)
(continued) The accompanying notes are an integral part of these financial statements. F-8 Neose Technologies, Inc. (a development-stage company) Statements of Stockholders' Equity and Comprehensive Loss (continued) (in thousands)
Convertible Additional Preferred Stock Common Stock paid-in Treasury ----------------- ----------------- Shares Amount Shares Amount capital stock ---------------------------------------------------------------- Exercise of stock options and warrants -- $ -- 79 $ 1 $ 867 $ -- Shares issued pursuant to employee stock purchase plan -- -- 18 -- 335 -- Acquisition of treasury stock, 6 shares at cost -- -- (6) -- -- (175) Deferred compensation related to grants of employee stock options -- -- -- -- 299 -- Deferred compensation related to non-employee stock options -- -- -- -- 75 -- Stock-based compensation related to modifications of options -- -- -- -- 791 -- Amortization of deferred compensation related to: Employee options -- -- -- -- -- -- Non-employee options -- -- -- -- -- -- Net loss -- -- -- -- -- -- ---------------------------------------------------------------- Balance, December 31, 2001 -- -- 14,083 141 176,124 (175) Exercise of stock options and warrants -- -- 209 2 1,575 -- Shares issued pursuant to employee stock purchase plan -- -- 32 -- 384 -- Deferred compensation related to grants of employee stock options -- -- -- -- 118 -- Deferred compensation related to non-employee stock options -- -- -- -- (878) -- Stock-based compensation related to modification of options -- -- -- -- 1,622 -- Amortization of deferred compensation related to: Employee options -- -- -- -- -- -- Non-employee options -- -- -- -- -- -- Net loss -- -- -- -- -- -- ---------------------------------------------------------------- Balance, December 31, 2002 -- $ -- 14,324 $ 143 $ 178,945 $ (175) ================================================================ Deficit Comprehensive accumulated Unrealized gains loss accumulated during the on marketable during the Deferred development development compensation stage securities stage ------------------------------------------------------------------- Exercise of stock options and warrants $ -- $ -- $ -- $ -- Shares issued pursuant to employee stock purchase plan -- -- -- -- Acquisition of treasury stock, 6 shares at cost -- -- -- -- Deferred compensation related to grants of employee stock options (299) -- -- -- Deferred compensation related to non-employee stock options (75) -- -- -- Stock-based compensation related to modifications of options -- -- -- -- Amortization of deferred compensation related to: Employee options 125 -- -- -- Non-employee options 463 -- -- -- Net loss -- (13,329) -- (13,329) -------------------------------------------------------------------------- Balance, December 31, 2001 (503) (81,641) -- (81,641) Exercise of stock options and warrants -- -- -- -- Shares issued pursuant to employee stock purchase plan -- -- -- -- Deferred compensation related to grants of employee stock options (118) -- -- -- Deferred compensation related to non-employee stock options 878 -- -- -- Stock-based compensation related to modification of options -- -- -- -- Amortization of deferred compensation related to: Employee options 171 -- -- -- Non-employee options (598) -- -- -- Net loss -- (26,417) -- (26,417) ------------------------------------------------------------------------- Balance, December 31, 2002 (170) $ (108,058) -- $ (108,058) =========================================================================
The accompanying notes are an integral part of these financial statements. F-9 Neose Technologies, Inc. (a development-stage company) Statements of Cash Flows (in thousands)
Period from inception (January 17, 1989) to Year ended December 31, December 31, ------------------------------------------------- 2000 2001 2002 2002 ------------- -------------- ------------- -------------- Cash flows from operating activities: Net loss $ (8,500) $ (13,329) $ (26,417) $ (108,058) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 2,051 2,422 2,376 13,109 Non-cash compensation 1,083 1,379 1,195 4,773 Common stock issued for non-cash and other charges - - - 35 Changes in operating assets and liabilities: Prepaid expenses and other current and non-current assets (465) (1,052) 825 (810) Accounts payable (154) 636 408 1,127 Accrued compensation 146 254 484 1,383 Accrued expenses (405) (208) 734 1,778 Deferred revenue (416) 833 (902) 320 Other liabilities - - 330 330 ---------- ------------ ----------- ------------ Net cash used in operating activities (6,660) (9,065) (20,967) (86,013) ---------- ------------ ----------- ------------ Cash flows from investing activities: Purchases of property and equipment (1,455) (9,371) (17,826) (47,108) Proceeds from sale-leaseback of equipment - - - 1,382 Purchases of marketable securities (81,077) (103,465) (60,411) (384,738) Proceeds from sales of marketable securities - - - 11,467 Proceeds from maturities of and other changes in marketable securities 76,174 131,238 51,000 363,860 Purchase of acquired technology (1,000) - - (4,550) Investment in equity securities (1,250) - - (1,250) Restricted cash related to acquired technology 1,500 - - - ---------- ------------ ----------- ------------ Net cash provided by (used in) investing activities (7,108) 18,402 (27,237) (60,937) ---------- ------------ ----------- ------------ Cash flows from financing activities: Proceeds from issuance of debt - - 2,261 14,216 Repayment of debt (1,000) (1,100) (1,100) (8,152) Restricted cash related to debt (108) (9) (75) (906) Proceeds from issuance of preferred stock, net - - - 29,497 Proceeds from issuance of common stock, net 68,762 335 384 137,224 Proceeds from exercise of stock options and warrants 2,738 868 1,577 6,406 Acquisition of treasury stock - (175) - (175) Dividends paid - - - (72) ---------- ------------ ----------- ------------ Net cash provided by (used in) financing activities 70,392 (81) 3,047 178,038 ---------- ------------ ----------- ------------ Net increase (decrease) in cash and cash equivalents 56,624 9,256 (45,157) 31,088 Cash and cash equivalents, beginning of period 10,365 66,989 76,245 - ---------- ------------ ----------- ------------ Cash and cash equivalents, end of period $ 66,989 $ 76,245 $ 31,088 $ 31,088 ========== ============ =========== ============ Supplemental disclosure of cash flow information: Cash paid for interest $ 481 $ 284 $ 142 $ 3,445 ========== ============ =========== ============ Non-cash investing activities: Increase (decrease) in accrued property and equipment $ 220 $ 1,525 $ (1,698) $ 102 ========== ============ =========== ============ Non-cash financing activities: Issuance of common stock for dividends $ - $ - $ - $ 90 ========== ============ =========== ============ Issuance of common stock to employees in lieu of cash compensation $ - $ - $ - $ 44 ========== ============ =========== ============
The accompanying notes are an integral part of these financial statements. F-10 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements Note 1. Background We are a biopharmaceutical company focused on improving glycoprotein therapeutics using our proprietary technologies. We are using our GlycoAdvance(TM), GlycoPEGylation(TM) and GlycoConjugation(TM) technologies to develop improved versions of currently marketed drugs with proven efficacy and to improve therapeutic profiles of glycoproteins in development for our partners. We expect these next generation proteins to offer significant advantages over drugs that are now on the market, potentially including less frequent dosing and improved safety and efficacy. In addition to developing our own products or co-developing products with others, we expect to enter into strategic partnerships for including our technologies into the product design and manufacturing processes of other biotechnology and pharmaceutical companies. While our primary goal is protein drug development, our technologies offer multiple opportunities to participate in the evolving therapeutic protein market by addressing other challenges, such as manufacturing efficiency, manufacturing consistency, and the use of non-mammalian cell expression systems. Neose was initially incorporated in January 1989, and began operations in October 1990. In February 2003, we sold approximately 2.9 million shares of common stock in a private placement to a group of institutional and individual investors at a price of $6.00 per share, generating net proceeds of approximately $16.3 million. Note 2. Summary of Significant Accounting Policies Basis of Presentation In December 2002, we dissolved our subsidiaries and, therefore, are no longer presenting our financial statements on a consolidated basis. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets and liabilities as of the date of the financial statements, the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents We consider all highly liquid investments with a maturity of three months or less on the date of purchase to be cash equivalents. As of December 31, 2001 and 2002, cash equivalents consisted of securities and obligations of either the U.S. Treasury or U.S. government agencies. Our cash balances have been kept on deposit primarily at one bank and in amounts greater than $100,000, which is the limit of insurance provided by the Federal Deposit Insurance Corporation. Marketable Securities Marketable securities consist of investments that have a maturity of more than three months on the date of purchase. To help maintain the safety and liquidity of our marketable securities, we have established guidelines for the concentration, maturities, and credit ratings of our investments. F-11 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements We determine the appropriate classification of our debt securities at the time of purchase and re-evaluate such designation as of each balance sheet date. Marketable securities that we have the positive intent and ability to hold to maturity are classified as held-to-maturity securities and recorded at amortized cost. As of December 31, 2002, we held a marketable security that was an obligation of a U.S. government agency. The security, which is classified as held-to-maturity, had an original maturity of 11 months. The security's amortized cost, which was $9,952,000, as of December 31, 2002 includes $200,000 of accrued interest. The security's fair value as of December 31, 2002 was $9,979,000. Additionally, there was $341,000 of interest earned throughout 2002 on securities that matured during the year. Restricted Funds We are required to make monthly payments to an escrow account to provide for an annual prepayment of principal of our Industrial Development Authority bonds (see Note 6). As of December 31, 2002, we had restricted funds of $1.0 million, which consisted of our monthly payments to the escrow account plus interest earned on the balance of the escrow account. 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. We generally use depreciable lives of three to seven years for laboratory and office equipment, and three to twenty years for building and improvements. Expenditures for maintenance and repairs are charged to expense as incurred, and expenditures for major renewals and improvements are capitalized. Impairment of Long-Lived Assets As required by Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," we assess the recoverability of long-lived assets for which an indicator of impairment exists. Specifically, we calculate, and recognize, any impairment losses by comparing the carrying value of these assets to our estimate of the undiscounted future operating cash flows. Although our current and historical negative cash flows are indicators of impairment, we believe the future cash flows to be received from our long-lived assets will exceed the assets' carrying value. Accordingly, we have not recognized any impairment losses through December 31, 2002. Revenue Recognition Revenue from collaborative agreements consists of up-front fees, research and development funding, and milestone payments. In accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), non-refundable up-front fees are deferred and amortized to revenue over the related estimated performance period. Periodic payments for research and development activities are recognized over the period in which we perform those activities under the terms of each agreement. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the milestone is achieved. Research and Development Research and development costs are charged to expense as incurred. F-12 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements Income Taxes We account for income taxes under the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Net Loss Per Share Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution from the exercise or conversion of securities into common stock. For the years ended December 31, 2000, 2001, and 2002, the effects of the exercise of outstanding stock options were antidilutive; accordingly, they were excluded from the calculation of diluted earnings per share. See Note 9 for a summary of outstanding options. Comprehensive Loss Our comprehensive loss for the years ended December 31, 2000, 2001, and 2002 was approximately $8.5 million, $13.3 million, and $26.4 million, respectively. Comprehensive loss is comprised of net loss and other comprehensive income or loss. Our only source of other comprehensive income or loss is unrealized gains and losses on our marketable securities that are classified as available-for-sale. Fair Value of Financial Instruments As of December 31, 2002, the carrying values of cash and cash equivalents, restricted funds, accounts receivable, accounts payable, accrued expenses, and accrued compensation approximate their respective fair values. In addition, we believe the carrying value of our debt instruments, which do not have readily ascertainable market values, approximates their fair values. Stock-based Compensation We apply the intrinsic value method of accounting for all stock-based employee compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations. We record deferred compensation for option grants to employees for the amount, if any, by which the market price per share exceeds the exercise price per share. In addition, we apply fair value accounting for option grants to non-employees in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), and Emerging Issues Task Force Issue 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" (EITF 96-18). F-13 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements We have elected to adopt only the disclosure provisions of SFAS 123, as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." The following table illustrates the effect on our net loss and basic and diluted net loss per share if we had recorded compensation expense for the estimated fair value of our stock-based employee compensation, consistent with SFAS 123 (in thousands, except per share data):
Year Ended December 31, 2000 2001 2002 - ------------------------------------------------------------------------------------------------------- Net loss - as reported $ (8,500) $ (13,329) $ (26,417) Add: Stock-based employee compensation expense included in reported net loss 70 125 171 Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards (3,752) (8,179) (15,588) ----------------------------------------------- Net loss - pro forma $ (12,182) $ (21,383) $ (41,834) =============================================== Basic and diluted net loss per share - as reported $ (0.63) $ (0.95) $ (1.85) Basic and diluted net loss per share - pro forma $ (0.91) $ (1.52) $ (2.94)
Recent Accounting Pronouncements Statement of Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143), which was released in August 2001, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and their associated asset retirement costs. SFAS 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of intangible long-lived assets that result from the acquisition, construction, development, or normal use of the asset. The enterprise is also required to record a corresponding increase to the carrying amount of the related long-lived asset (i.e. the associated asset retirement cost) and to depreciate that cost over the life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e. accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Because of the extensive use of estimates, most enterprises will record a gain or loss when they settle the obligation. We are required to adopt SFAS 143 for our fiscal year beginning January 1, 2003; we do not expect the adoption of SFAS 143 to have a material impact on our financial position or results of operations. In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145). SFAS 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS 145 also amends SFAS 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 are applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 is not expected to have a material effect on our financial statements. In June 2002, the FASB issued Statement of Financial Accounting Standard No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to consolidate F-14 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements facilities or relocate employees and termination of benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of SFAS 146 is not expected to have a material impact on our financial position or results of operations. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34." This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002, and are not expected to have a material effect on our financial statements. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002, and are included in Notes 2 and 9. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. Because we have no involvement with any variable interest entities, the application of this Interpretation is not expected to have a material effect on our financial statements. Reclassification Certain prior year amounts have been reclassified to conform to our current year presentation. Note 3. Property and Equipment Property and equipment consisted of the following (in thousands): December 31, 2001 2002 - ---------------------------------------------------------------------------- Building and improvements $ 14,482 $ 14,872 Laboratory and office equipment 8,227 8,964 Land 700 700 Construction-in-progress 8,196 21,440 ----------------------------------- 31,605 45,976 Less accumulated depreciation (8,956) (9,468) ----------------------------------- $ 22,649 $ 36,508 =================================== F-15 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements The construction in progress amounts represent amounts incurred related to improvements to our existing facility in Horsham, Pa. and to a newly-leased facility in Horsham, Pa. During 2001 and 2002, we incurred $8.2 million and $9.2 million, respectively, for the construction and validation of our cGMP facility at our existing Horsham location. Our cGMP facility was placed in-service in January 2003. Of the total cost of $17.4 million, $13.1 million is considered building improvements and will be depreciated over 20 years and $4.3 million is laboratory equipment and will be depreciated over seven years. Separately, in 2002 we incurred $4.0 million for the design and renovations of our newly leased facility in Horsham. We then suspended plans to complete these renovations and we have not yet made a final decision as to when or if we will resume this project. To the extent that we determine the partially completed renovations are of no future use to us, we would be required to recognize an impairment loss in our statement of operations. In 2001 and 2002, we capitalized $70,000 and $150,000, respectively, of interest expense in connection with our facility improvement projects. Depreciation expense was approximately $1.5 million, $1.8 million, and $2.3 million for the years ended December 31, 2000, 2001, and 2002, respectively. In 2002, we wrote off $1.8 million of fully depreciated laboratory and office equipment. Note 4. Acquired Intellectual Property In 1999, we acquired the carbohydrate-manufacturing patents, licenses, and other intellectual property of Cytel Corporation for aggregate consideration of $4.8 million. The acquired intellectual property consists of core technology with alternative future uses. The acquired intellectual property balance is being amortized to research and development expense in our statement of operations over eight years, which is the estimated useful life of the technology. Amortization expense relating to the acquired intellectual property for the years ended December 31, 2000, 2001, and 2002 was approximately $0.5 million, $0.6 million, and $0.6 million, respectively. Note 5. Other Assets Investment in Convertible Preferred Stock In 2000, we made an investment of approximately $1.3 million in convertible preferred stock of Neuronyx, Inc., and entered into a research and development collaboration with Neuronyx for the discovery and development of drugs for treating Parkinson's disease and other neurological diseases. The collaboration agreement provides for each of Neose and Neuronyx to perform and fund specific tasks, and to share in any financial benefits of the collaboration. We incurred research and development expense related to this collaboration of $352,000, $1,045,000, and $297,000 for the years ended December 31, 2000, 2001, and 2002, respectively. Our equity investment, which represents an ownership interest of less than 1%, was made on the same terms as other unaffiliated investors. Accordingly, we have recorded and carry our investment at cost. We will continue to evaluate the realizability of this investment and record, if necessary, appropriate impairments in value. No such impairments have occurred as of December 31, 2002. Receivable from Related Party In 2001, we entered into a tuition reimbursement agreement with an employee who subsequently became an executive officer. Under the agreement, we agreed to lend the amounts necessary to pay for the employee's tuition payments and related costs and fees for an MBA degree. Interest accrues on the loan at 4.71% per year, and is payable annually beginning in May 2002. We have agreed to forgive repayment of the principal amount outstanding in four equal, annual installments commencing in May 2004 if the employee remains employed by us on each forgiveness date. We will forgive the accrued interest as it becomes due and, if the employee is terminated without cause, we will forgive all outstanding principal and interest. As of December 31, 2001 and 2002, the amounts outstanding under the agreement, including accrued interest, were $72,000 and $121,000, respectively. F-16 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements Note 6. Long-Term Debt Long-term debt consisted of the following (in thousands): December 31, 2001 2002 - ------------------------------------------------------------------------------- Industrial development authority bonds $ 6,200 $ 5,100 Equipment loan -- 2,261 Capital lease obligation -- 50 ------------------------------ 6,200 7,411 Less current portion (1,100) (1,851) ------------------------------ $ 5,100 $ 5,560 ============================== Minimum principal repayments of long-term debt as of December 31, 2002 were as follows (in thousands): 2003--$1,851; 2004--$1,964; 2005--$926; 2006--$270; 2007--$100; and thereafter--$2,300. Industrial Development Authority Bonds In 1997, we issued, through the Montgomery County (Pennsylvania) Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds. The bonds are supported by an AA-rated letter of credit, and a reimbursement agreement between our bank and the letter of credit issuer. The interest rate on the bonds will vary weekly, depending on market rates for AA-rated taxable and tax-exempt obligations, respectively. During 2000, 2001, and 2002, the weighted-average, effective interest rate was 7.5%, 5.3%, and 3.3% per year, including letter-of-credit and other fees. The terms of the bond issuance provide for monthly, interest-only payments and a single repayment of principal at the end of the twenty-year life of the bonds. However, under our agreement with our bank, we are making monthly payments to an escrow account to provide for an annual prepayment of principal. As of December 31, 2002, we had restricted funds relating to the bonds of $1.0 million, which consisted of our monthly payments to an escrow account plus interest earned on the balance of the escrow account. To provide credit support for this arrangement, we have given a first mortgage on land, building, improvements, and certain equipment to our bank. The net book value of the pledged assets was $7.6 million as of December 31, 2002. We have also agreed to maintain a minimum required cash and short-term investments balance of at least two times the outstanding loan balance. If we fail to comply with this covenant, we are required to deposit with the lender cash collateral up to, but not more than, the loan's unpaid balance. At December 31, 2002, we were required to maintain $10.2 million of cash and short-term investments. Equipment Loan During 2002, we borrowed $2.3 million secured by laboratory equipment, which had a book value of $2.3 million as of December 31, 2002. We are required to make monthly principal and interest payments at an annual rate of 8% over a three-year period ending January 2006. F-17 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements Capital Lease Obligation In November 2002, we entered into a capital lease obligation for computer equipment that had a book value of $50,000. The lease has an imputed interest rate of 6.2%. We are required to make monthly payments over a three-year period ending November 2005. Note 7. Accrued Expenses Accrued expenses consisted of the following (in thousands): December 31, 2001 2002 - ------------------------------------------------------------------------------ Accrued property and equipment $ 1,800 $ 102 Accrued outside research expenses 286 573 Accrued professional fees 340 500 Accrued employee relocation - 315 Accrued other expenses 418 390 --------------------------------- $ 2,844 $ 1,880 ================================= Note 8. Stockholders' Equity Common Stock In February 2003, we sold approximately 2.9 million shares of common stock in a private placement to a group of institutional and individual investors at a price of $6.00 per share, generating net proceeds of approximately $16.3 million. In March 2000, we offered and sold 2.3 million shares of our common stock at a public offering price of $32.00 per share. Our net proceeds from the offering after the payment of underwriting fees and offering expenses were approximately $68.6 million. In June 1999, we sold 1.5 million shares of common stock in a private placement to a group of institutional and individual investors at a price of $9.50 per share, generating net proceeds of approximately $13.4 million. In January 1999, we sold 286,097 shares of common stock to Johnson & Johnson Development Corporation at a price of $13.98 per share, generating net proceeds of $4.0 million. In January 1997, we sold 1,250,000 shares of common stock in a public offering at a price of $17.50 per share. Our net proceeds from this offering after the payment of placement fees and offering expenses were approximately $20.3 million. Our initial public offering closed in February 1996. We sold 2,587,500 shares of common stock, which included the exercise of the underwriters' over-allotment option in March 1996, at a price of $12.50 per share. Our net proceeds from this offering after the underwriting discount and payment of offering expenses were approximately $29.1 million. In connection with this offering, all outstanding shares of Series A, C, D, E, and F Convertible Preferred Stock converted into 2,410,702 shares of common stock. Shareholder Rights Plan In September 1997, we adopted a Shareholder Rights Plan. Under this plan, which was amended in December 1998, holders of common stock are entitled to receive one right for each share of common stock held. F-18 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements Separate rights certificates would be issued and become exercisable if any acquiring party either accumulates or announces an offer to acquire at least 15% of our common stock. Each right will entitle any holder who owns less than 15% of our common stock to buy one one-hundredth share of the Series A Junior Participating Preferred Stock at an exercise price of $150. Each one one-hundredth share of the Series A Junior Participating Preferred Stock is essentially equivalent to one share of our common stock. If an acquiring party accumulates at least 15% of our common stock, each right entitles any holder who owns less than 15% of our common stock to purchase for $150 either $300 worth of our common stock or $300 worth of the 15% acquirer's common stock. In November 2000, the Plan was amended to increase the threshold from 15% to 20% for Kopp Investment Advisors, Inc. and related parties. In June 2002 and October 2002, the Plan was amended to increase the threshold to 20% and 25%, respectively, for Eastbourne Capital Management, LLC and related parties. The rights expire in September 2007 and may be redeemed by us at a price of $.01 per right at any time up to ten days after they become exercisable. Note 9. Compensation Plans Stock Option Plans We have three stock option plans, the 1991, 1992, and 1995 Stock Option Plans, under which a total of 5,051,666 shares of common stock have been reserved. In addition, we granted nonqualified stock options outside of these plans in 1995 to two consultants to purchase an aggregate of 69,998 shares and in 2002 to our Chief Executive Officer and President to purchase 487,520 shares. The 1995 Stock Option Plan, which incorporates the two predecessor plans, provides for the granting of both incentive stock options and nonqualified stock options to our employees, officers, directors, and consultants. In addition, the plan allows us to issue shares of common stock directly either through the immediate purchase of shares or as a bonus tied to either an individual's performance or our attainment of prescribed milestones. Incentive stock options may not be granted at an exercise price less than the fair market value on the date of grant. In addition, the plan includes stock appreciation rights to be granted at our discretion. The stock options are exercisable over a period, which may not exceed ten years from the date of grant, determined by our board of directors. A summary of the status of stock options as of December 31, 2000, 2001, 2002, and changes during each of the years then ended, is presented below:
2000 2001 2002 ---------------------------------------------------------------------------------------------- Weighted-Average Weighted-Average Weighted-Average Exercise Exercise Exercise Number Price Number Price Number Price Outstanding Per Share Outstanding Per Share Outstanding Per Share ---------------------------------------------------------------------------------------------- Balance as of January 1 2,152,037 $ 12.41 2,506,901 $ 16.61 3,112,256 $ 20.39 Granted 616,140 28.94 789,035 32.48 1,588,721 16.92 Exercised (247,501) 11.06 (79,055) 11.28 (209,307) 7.42 Canceled (13,775) 12.89 (104,625) 27.98 (164,801) 22.49 ---------------------------------------------------------------------------------------------- Balance as of December 31 2,506,901 $ 16.61 3,112,256 $ 20.39 4,326,869 $ 19.66 ============================================================================================== Options exercisable as of December 31 1,412,499 $ 12.29 1,782,271 $ 14.86 2,041,726 $ 17.86 ==============================================================================================
F-19 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements The following table summarizes information about stock options outstanding as of December 31, 2002:
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Range of Number Remaining Exercise Number Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price - -------------------------------------------------------------------------------------------------------------- $ 0.90 -- $ 5.70 129,342 2.7 $ 3.16 129,342 $ 3.16 $ 6.06 -- $ 10.47 964,969 9.0 $ 8.45 184,028 $ 9.18 $10.62 -- $ 15.13 1,193,285 5.7 $ 13.35 957,241 $ 13.82 $15.25 -- $ 27.40 427,898 6.3 $ 20.60 288,023 $ 19.30 $28.06 -- $ 41.13 1,611,375 8.7 $ 32.13 483,092 $ 32.26 --------------- -------------- 4,326,869 7.5 $ 19.66 2,041,726 $ 17.86 =============== ==============
Fair Value Disclosures We have elected to adopt only the disclosure provisions of SFAS 123. Accordingly, we apply APB 25 and related interpretations in accounting for our stock-based employee compensation. We record deferred compensation for option grants to employees for the amount, if any, by which the market price per share exceeds the exercise price per share. We amortize deferred compensation over the vesting periods of each option. We recognized $70,000, $125,000, and $171,000 of compensation expense related to employee stock options for the years ended December 31, 2000, 2001, and 2002, respectively. In addition, we recorded approximately $0.8 million and $1.6 million of expense related to the modification of certain stock options to former employees for the years ended December 31, 2001 and 2002. See Note 11 for a description of severance expense. The weighted-average fair value of options granted in 2000, 2001, and 2002 was $17.49, $22.55, and $12.81, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model. We used the following weighted-average assumptions for 2000, 2001, and 2002 grants, respectively: risk-free interest rate of 4.7%, 4.9%, and 4.2%; expected life of 4.3, 6.1, and 6.7 years; volatility of 75%, 75%, and 80%; and a dividend yield of zero. The weighted-average fair value of employee purchase rights granted under our employee stock purchase plan (see below) in 2000, 2001, and 2002 was $8.45, $11.60, and $15.37, respectively. The fair value of the purchase rights was estimated using the Black-Scholes model with the following weighted-average assumptions for 2000, 2001, and 2002, respectively: risk-free interest rate of 5.0%, 4.6%, and 2.9%; expected life of 14, 16, and 17 months; volatility of 70%, 75%, and 80%; and a dividend yield of zero. F-20 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements A summary of options granted at exercise prices equal to, greater than, and less than the market price on the date of grant is presented below:
Year Ended December 31, 2000 2001 2002 - ----------------------------------------------------------------------------------------------- Exercise Price = Market Value Options granted 608,900 610,400 1,578,800 Weighted-average exercise price $ 29.27 $ 30.96 $ 16.98 Weighted-average fair value $ 17.56 $ 21.29 $ 12.79 Exercise Price ** Market Value Options granted -- -- -- Weighted-average exercise price $ -- $ -- $ -- Weighted-average fair value $ -- $ -- $ -- Exercise Price * Market Value Options granted 7,240 178,635 9,921 Weighted-average exercise price $ 4.83 $ 37.67 $ 6.00 Weighted-average fair value $ 11.54 $ 26.85 $ 15.46
Non-employee Stock Options During the years ended December 31, 2000 and 2001, we recognized approximately $1.0 million and $463,000 of compensation expense in connection with the vesting of stock options granted to non-employees. During the year ended December 31, 2002, we recognized a gain of approximately $0.6 million in connection with the vesting of stock options granted to non-employees. The compensation expense or gain was based on each option's estimated fair value, which was calculated using the Black-Scholes option-pricing model. Because we re-value each option over the related vesting term in accordance with EITF 96-18, increases in our stock price result in increased expense while decreases in our stock price result in a gain. At December 31, 2002, our closing stock price was lower than at December 31, 2001 and, therefore, we recognized a gain during 2002. Employee Stock Purchase Plan We maintain an employee stock purchase plan, or ESPP, for which 150,000 shares are reserved for issuance. The ESPP allows any eligible employee the opportunity to purchase shares of our common stock through payroll deductions. The ESPP provides for successive, two-year offering periods, each of which contains four semiannual purchase periods. The purchase price at the end of each purchase period is 85% of the lower of the market price per share on the employee's entry date into the offering period or the market price per share on the purchase date. Any employee who owns less than 5% of our common stock may purchase up to the lesser of: . 10% of his or her eligible compensation; . 1,000 shares per purchase; or . the number of shares per year that does not exceed the quotient of $25,000 divided by the market price per share on the employee's entry date into the offering period. A total of 35,163 shares of common stock remained available for issuance under the ESPP as of December 31, 2002. The total purchases of common stock under the ESPP during the years ended December 31, 2000, 2001, and 2002, were 10,990 shares at a total purchase price of approximately $0.2 million, 17,790 shares at a total * means less than ** means greater than F-21 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements purchase price of approximately $0.3 million, and 32,149 shares at a total purchase price of approximately $0.4 million, respectively. We have not recorded any compensation expense for the ESPP. 401(k) Plan We maintain a 401(k) Savings Plan (401(k) Plan) for our 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. We match employee contributions up to specified limits. We contributed $113,000, $149,000, and $176,000 to the 401(k) Plan for the years ended December 31, 2000, 2001, and 2002, respectively. Note 10. Revenues from Collaborative Agreements Our revenues from collaborative agreements have historically been derived from a few major collaborators. Our collaborative agreements have had some or all of the following elements: up-front fees, research and development funding, milestone revenues, and royalties on product sales. The amount of revenues from collaborators that accounted for at least 10% of our collaborative revenues in each of the years ended December 31, 2000, 2001, and 2002 are listed in the following table (in thousands): Year Ended December 31, 2000 2001 2002 - ------------------------------------------------------------------------------- Bristol-Myers $ 3,320 $ -- $ -- Wyeth 1,167 1,167 4,472 Other collaborators 113 99 341 ---------------------------------------------- $ 4,600 $ 1,266 $ 4,813 ============================================== During 2002, we recognized $3.8 million related to one of our Wyeth collaborations, which was terminated in September 2002. Of this amount, $1.0 million was non-cash, and represented the recognition of a $1.0 million up-front fee, which we received from Wyeth in December 2001. As required under SAB 101, we deferred the up-front fee and began to amortize this amount as revenue over the expected performance period of the related Wyeth agreement. Note 11. Severance Expense We incurred severance expense of approximately $0.9 million and $2.7 million during the years ended December 31, 2001 and 2002, respectively, in connection with the separation of employees from Neose. For 2002, approximately $0.6 million was paid during 2002, approximately $0.5 million is reflected in accrued compensation and other liabilities in our balance sheet as of December 31, 2002 and will be paid through December 2006, and approximately $1.6 million was a non-cash charge related to the modification of stock options. For 2001, $82,000 was paid during the year and approximately $0.8 million was a non-cash charge related to the modifications of stock options. In March 2002, we entered into a Separation and Consulting Agreement with our former Chief Executive Officer. Under this agreement, we agreed to provide medical benefits to Dr. Roth and to pay him $39,622 per month for twelve months. During 2002, we recorded severance expense related to this agreement of $309,000, which represented the present value of his future benefit payments. On or before the first anniversary of the agreement, Dr. Roth may agree to extend his non-competition and non-solicitation commitments for two additional years by entering into a separate non-competition agreement. If he does so, we will continue his medical benefits for an additional six months, extend the monthly payment of $39,622 for 24 additional months, and continue his stock F-22 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements option vesting and exercisability during the additional two-year period. If Dr. Roth enters into the separate non-competition agreement, we will record a liability in the amount of the present value of the future payments and a corresponding asset for the value of the non-competition commitment. The asset would be amortized over the two-year term of the agreement. In January 2002, we entered into a retirement agreement with our Vice President, Research. Under the agreement, he terminated his employment effective June 30, 2002. We have committed to pay a retirement benefit over a five-year period. We will continue to provide Dr. McGuire health insurance benefits through December 31, 2003. During 2002, we recorded severance expense related to this agreement of approximately $0.5 million, which represented the present value of his future retirement benefit. In addition, we extended the period during which he may exercise his stock options and recorded a non-cash severance charge of approximately $1.6 million associated with this option modification. Note 12. Other Income In 2000, we invested approximately $0.6 million in an 8% convertible subordinated debenture, which included a warrant to purchase shares of common stock, issued by Novazyme Pharmaceuticals, Inc. The investment was charged to expense in the statement of operations for 2000 due to uncertainty regarding realizability. In March 2001, Novazyme committed to pay us approximately $1.7 million in November 2002 in exchange for restructuring our agreement. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," we did not record the $1.7 million due to uncertainty regarding the fair value of the note, thereby reducing our cost basis to zero. In September 2001, Genzyme General acquired Novazyme. As a result, we exercised our warrant to purchase shares of Novazyme, converted our debenture into shares of Novazyme, and exchanged our shares of Novazyme for shares of Genzyme. In 2001, we realized a gain on the sale of Genzyme shares of approximately $6.1 million, which has been reflected as other income in our statement of operations. Genzyme also assumed Novazyme's obligation to pay us approximately $1.7 million. In November 2002, Genzyme paid us $1.7 million, which resulted in the recognition of a gain that has been reflected as other income in our statement of operations. Note 13. Commitments Leases In April 2001, we entered into a lease agreement for approximately 10,000 square feet of laboratory and office space in California. The initial term of the lease ends in March 2006, at which time we have an option to extend the lease for an additional five years. In July 2001, we entered into a lease agreement for approximately 5,000 square feet of office and warehouse space in Pennsylvania. The lease term expires in December 2004. In February 2002, we entered into a lease agreement for approximately 40,000 square feet of laboratory and office space in Pennsylvania. Our facility rental expense for the years ended December 31, 2000, 2001, and 2002 was approximately $112,000, $248,000, and $583,000, respectively. Minimum future annual payments under our operating lease agreements as of December 31, 2002 were as follows (in thousands): 2003--$761; 2004--$782; 2005--$756; 2006--$519; 2007--$445; and thereafter--$7,602. License Agreements We have entered into agreements with various entities under which we have been granted licenses to use patent rights and technology. Typically, these agreements will terminate upon the expiration of the applicable patent rights, and require us to reimburse the licensor for fees related to the acquisition and maintenance of the patents licensed to us. In addition, we usually are required to pay royalties to the licensor based either on sales of applicable products by us or specified license fees, milestone fees, and royalties received by us from sublicensees, or both. F-23 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements Note 14. Income Taxes As of December 31, 2002, we had net operating loss carryforwards for federal and state income tax purposes of approximately $11.7 million and $7.0 million, respectively. In addition, we had federal research and development credit carryforwards of approximately $3.2 million. All of these carryforwards begin to expire in 2004. Approximately $8.1 million of the federal net operating loss carryforwards result from tax deductions related to equity-based compensation, which is considered a capital contribution, and not a tax benefit, for financial reporting purposes. Due to the uncertainty surrounding the realization of the tax benefit associated with our federal and state carryforwards, we have provided a full valuation allowance against this tax benefit. In addition, pursuant to the Tax Reform Act of 1986, the annual utilization of our net operating loss carryforwards will be limited. We do not believe that these limitations will have a material adverse impact on the utilization of our net operating loss carryforwards. The approximate income tax effect of each type of temporary difference and carryforward is as follows (in thousands):
December 31, 2001 2002 - --------------------------------------------------------------------------------------------- Benefit of net operating loss carryforwards $ 1,141 $ 1,388 Research and development credit carryforwards 2,686 3,217 Capitalized research and development 14,532 17,796 Start-up costs 11,906 15,827 Depreciation and amortization 3,485 5,410 Deferred compensation 1,494 1,978 Accrued expenses not currently deductible 182 534 Deferred revenue 56 102 ------------------------------- 35,482 46,252 Valuation allowance (35,482) (46,252) ------------------------------- $ -- $ -- ===============================
Note 15. Related-Party Transaction We have a joint venture with McNeil Nutritionals to develop bulking agents for use in the food industry. We account for our investment in the joint venture under the equity method, under which we recognize our share of the income and losses of the joint venture. In 1999, we reduced the carrying value of our initial investment in the joint venture of $345,000 to zero to reflect our share of the joint venture's losses. We recorded this amount as research and development expense in our statement of operations. We will record our share of post-1999 losses of the joint venture only to the extent of our actual or committed investment in the joint venture. The joint venture developed a process for making fructooligosaccharides and constructed a pilot facility in Athens, Georgia. In 2001, the joint venture closed the pilot facility and is exploring establishing a manufacturing arrangement with a third party to produce this or other bulking agents. As a result, we do not intend to commit the joint venture to make any further investments in facilities. For the year ended December 31, 2002, the joint venture had a net loss and a loss from continuing operations of approximately $406,000. The joint venture had no revenues during 2002. As of December 31, 2002, the joint venture had no assets, $150,000 of current liabilities, and $8.5 million noncurrent liabilities, which consisted of amounts owed to McNeil Nutritionals. During the years ended December 31, 2000, 2001, and 2002, we supplied to the joint venture research and development services and supplies, which cost approximately $1.6 million, $0.8 million, and $252,000, respectively, F-24 Neose Technologies, Inc. (a development-stage company) Notes to Financial Statements which were reimbursed to us by the joint venture. These amounts have been reflected as a reduction of research and development expense in our statements of operations. As of December 31, 2002, the joint venture owed us approximately $16,000. We expect to provide fewer research and development services during 2003 compared to 2002, thereby reducing our expected reimbursement from the joint venture. If the joint venture becomes profitable, we will recognize our share of the joint venture's profits only after the amount of our capital contributions to the joint venture is equivalent to our share of the joint venture's accumulated losses. As of December 31, 2002, the joint venture had an accumulated loss since inception of approximately $10.2 million. Until the joint venture is profitable, McNeil Nutritionals is required to fund, as a non-recourse, no-interest loan to the joint venture, all of the joint venture's aggregate capital expenditures in excess of an agreed-upon amount, and all of the joint venture's operating losses. The loan balance would be repayable by the joint venture to McNeil Nutritionals over a seven-year period commencing on the earlier of September 30, 2006 or the date on which Neose attains a 50% ownership interest in the joint venture after having had a lesser ownership interest. In the event of any dissolution of the joint venture, the loan balance would be payable to McNeil Nutritionals by the joint venture before any distribution of assets to us. As of December 31, 2002, the joint venture owed McNeil Nutritionals approximately $8.5 million. F-25 Exhibit Index Exhibit Description - ------- ----------- 10.1* Amended and Restated License Agreement, dated as of February 27, 2003, between University of Pennsylvania and Neose Technologies, Inc. 10.10* Form of Change of Control Agreement between Neose Technologies, Inc. and Certain Officers. 10.33* Master Security Agreement between General Electric Capital Corporation and Neose Technologies, Inc., dated as of December 19, 2002. 10.34* Amendment to Master Security Agreement between General Electric Capital Corporation and Neose Technologies, Inc., dated as of December 19, 2002. 10.35* Promissory Note of Neose Technologies, Inc. to General Electric Capital Corporation, dated December 27, 2002 10.36* Common Stock Purchase Agreement between Neose Technologies, Inc. and the Purchasers, dated as of February 13, 2003 23.1* Consent of KPMG LLP 23.2* Information Regarding Consent of Arthur Andersen LLP 24* Powers of Attorney (included as part of signature page hereof). 99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. EX-10.1 3 dex101.txt AMENDED AND RESTATED LICENSE AGREEMENT, DATED AS OF FEBRUARY 27, 2003 Exhibit 10.1 University of Pennsylvania Amended and Restated License Agreement This Amended and Restated License Agreement (this "Agreement") is between The Trustees of the University of Pennsylvania, a Pennsylvania nonprofit corporation ("Penn"), and Neose Technologies, Inc., a Delaware corporation and successor to Paromel Corp. ("Company"). This will become effective as of February 27, 2003 (the "Effective Date"). BACKGROUND Penn and Company are parties to a License Agreement dated August 28, 1990, as amended April 14, 1995 (the "Prior License Agreement") with respect to certain intellectual property developed by Dr. Stephen Roth relating to the synthesis of saccharides and oligosaccharides using enzymatic techniques, and with the design and synthesis of commodity and therapeutic compositions and methods employing saccharides and oligosaccharides prepared through enzymatic techniques, and patents relating to such intellectual property. Contemporaneously with the entry into the Prior License Agreement, Penn and Company also entered into a Sponsored Research Agreement and a Stock Purchase Agreement (the "Stock Purchase Agreement"), under which there are no obligations remaining to be performed by either party. Penn and Company desire to amend and restate the Prior License Agreement as hereinafter set forth, and Penn has determined that this Agreement is in the best interest of Penn and is consistent with its educational and research missions and goal. In consideration of the mutual obligations contained in this Agreement, and intending to be legally bound, the parties agree as follows: 1. LICENSE 1.1 License Grant. Penn grants to Company an exclusive, world-wide license (the "License") to make, have made, use, import, sell and offer for sale Licensed Products in the Field of Use during the Term (as such terms may be defined in Sections 1.2 and 6.1). The License includes the right to sublicense as permitted by this Agreement. No other rights or licenses are granted by Penn. 1.2 Related Definitions. The term "Licensed Products" means products that are made, made for, used, imported, sold or offered for sale by Company or its Affiliates or sublicensees and that either (i) in the absence of this Agreement, would infringe at least one claim of the Penn Patent Rights or (ii) use a process or apparatus covered by a claim of Penn Patent Rights. The term "Penn Patent Rights" means all patent rights represented by or issuing from: (a) the United States patent applications listed in Exhibit A; (b) any continuation, divisional and re-issue applications and continuation-in-part applications of (a); and (c) any foreign counterparts and extensions of (a) or (b). The term "Affiliate" means a legal entity that is controlling, controlled by or under common control with Company and that has executed either this Agreement or a written Joinder Agreement agreeing to be bound by all of the terms and conditions of this Agreement. For purposes of this Section 1.2, the word "control" means (x) the direct or indirect ownership of fifty percent (50%) or more of the outstanding voting securities of a legal entity, (y) the right to receive fifty percent (50%) or more of the profits or earnings of a legal entity, or (z) the right to determine the policy decisions of a legal entity. The term "Field of Use" means the biochemical field of saccharide and oligosaccharide synthesis (including, but not limited to, saccharide and oligosaccharide conjugates of any lipid, glycolipid, protein, glycoprotein or related composition) employing enzymatic techniques, as well as oligosaccharide and polysaccharide/cell receptor interaction. 1.3 Reservation of Rights by Penn. Penn reserves the right to use, and to permit other non-commercial entities to use, the Penn Patent Rights for educational and research purposes. 1.4 U.S. Government Rights. The parties acknowledge that the United States government retains rights in intellectual property funded under any grant or similar contract with a Federal agency. The License is expressly subject to all applicable United States government rights, including, but not limited to, any applicable requirement that products, which result from such intellectual property and are sold in the United States, must be substantially manufactured in the United States. 1.5 Sublicense Conditions. The Company's right to sublicense granted by Penn under the License is subject to each of the following conditions: (a) Company will require the sublicensee to comply with the terms and conditions of this Agreement. (b) Within thirty (30) days after Company enters into a sublicense agreement, Company will deliver to Penn a complete and accurate copy of the entire sublicense agreement written in the English language. Penn's receipt of the sublicense agreement, however, will constitute neither an approval of the sublicense nor a waiver of any right of Penn or obligation of Company under this Agreement. (c) In the event that Company causes or experiences a Trigger Event (as defined in Section 6.4), all payments due to Company from its Affiliates or sublicensees under the sublicense agreement will, upon notice from Penn to such Affiliate or sublicensee, become payable directly to Penn for the account of Company. Upon receipt of any such funds, Penn will remit to Company the amount by which such payments exceed the amounts owed by Company to Penn. (d) Company's execution of a sublicense agreement will not relieve Company of any of its obligations under this Agreement. 2. DILIGENCE 2.1 Company's Efforts. Company will use commercially reasonable efforts to develop, commercialize, market and sell Licensed Products. Within sixty (60) days after the Effective Date and on each December 1 thereafter, Company must provide Penn with a written progress report, setting forth in reasonable detail the progress of the development, evaluation, testing and commercialization of each Licensed Product ("Developmental Progress Report"). Company shall also notify Penn within thirty (30) days of the first commercial Sale by the Company, an Affiliate, or 2 any sublicensee of each Licensed Product. The Developmental Progress Report will include at a minimum the information listed in Exhibit C. 3 FEES AND ROYALTIES 3.1 Issuance of Shares and Payment under Prior License Agreement. Upon execution of the Prior License Agreement, Company issued to Penn certain shares of Common Stock of Company pursuant to the Stock Purchase Agreement. Penn and Company agree that no amounts are payable by Company to Penn under the Prior License Agreement in respect of the period prior to the Effective Date. 3.2 Earned Royalties. In partial consideration of the License, Company will pay to Penn a royalty of three percent (3%) of Net Sales during each Quarter, commencing with the Quarter ending March 31, 2003. The term "Quarter" means each three-month period beginning on January 1, April 1, July 1 and October 1. The term "Net Sales" means the amount received by Company from each sale of Licensed Product ("Sale"), less Qualifying Costs directly attributable to a Sale and borne by Company or its Affiliates or sublicensees. The term "Qualifying Costs" means: (a) customary discounts in the trade for quantity purchased, prompt payment or wholesalers and distributors; (b) credits or refunds for claims or returns that do not exceed the original invoice amount; (c) transportation and insurance charges paid by the seller; and (d) sales, use, excise, value-added and other taxes and other fees imposed by a governmental agency measured by Sales. 3.3 Stacking Protection. If (a) Company becomes obligated to pay royalties to third parties for technology necessary to develop or manufacture a Licensed Product and (b) the aggregate royalty rate owed by Company to all parties (including Penn) to develop and manufacture a Licensed Product exceeds ten percent (10%), then the royalty rate applicable to Penn under Section 3.2 for such Licensed Product will be reduced to the stacked royalty calculated by the following formula: SR = A(10/A+B) Where: SR = Stacked Royalty payable to Penn A = royalty rate payable to Penn before reduction B = sum of royalty rates owed by Company, before stacking, to all third parties In no event, however, will the royalty rate applicable to Penn under Section 3.2 for a Licensed Product be reduced to less than one and three-quarters percent (1.75%). A reduction of the royalty rate in Section 3.2 for one Licensed Product will not affect the royalty rate for another Licensed Product. 3.4 Sublicense Fees. In partial consideration of the License, Company will pay to Penn a sublicense fee of five percent (5%) of all payments and the fair value of all other consideration of any kind received by Company each Quarter, commencing with the Quarter ending March 31, 2003 from sublicensees of the Penn Patent Rights during the Quarter, other than: (a) royalties paid to Company by a sublicensee based upon sales or net sales by the sublicensee; (b) equity investments in Company by a sublicensee up to the amount of the fair market value of the equity purchased on the date of the investment; (c) loan proceeds paid to Company by a sublicensee in an arms length, 3 full recourse debt financing; (d) funding paid to Company for future internal research and development; and (e) funding paid to Company for clinical testing. 3.5 Renegotiation Fee. In partial consideration of the execution and delivery of this Agreement, Company will pay to Penn a one-time, non-refundable, non-creditable renegotiation fee of $100,000, payable in four equal installments, as follows: $25,000_____ on February 28, 2003 $25,000_____ on March 31, 2003 $25,000_____ on April 30, 2003 $25,000_____ on May 31, 2003 4 REPORTS AND PAYMENTS 4.1 Royalty Reports. Within forty-five (45) days after the end of each Quarter, Company will deliver to Penn a report, certified by the chief financial officer of Company, detailing the calculation of all royalties and fees due to Penn for such Quarter. The report will include, at a minimum: (a) the number of Licensed Products involved in Sales, listed by product, by country; (b) gross consideration invoiced, billed or received by Company, its Affiliates, or sublicensees for Sales in the Quarter; (c) Qualifying Costs, listed by category of cost; (d) Net Sales, listed by product, by country; (e) sublicense fees and other consideration received by Company from sublicensees, listed by product, by country; and (f) royalties and fees owed to Penn, listed by category, by product, by country. 4.2 Payments. Company will pay all royalties and fees due to Penn under Article 3 within forty-five (45) days after the end of the Quarter in which the royalties or fees accrue. 4.3 Records. Company will maintain complete and accurate books and records to verify Sales, Net Sales, and all of the royalties, fees, and other payments due under this Agreement, and Company will use its best efforts to require its sublicensees to do likewise. The Company's records for each Quarter will be maintained for at least four (4) years after submission of the applicable report required under Section 4.1. 4.4 Audit Rights. Upon reasonable prior written notice to Company, Company will provide Penn and a firm of independent certified public accountants reasonably satisfactory to Company, which is selected and paid for by Penn, with access to all of the books and records required to be maintained by Company under Section 4.3 to conduct a review or audit of Sales, Net Sales, and all of the royalties, fees, and other payments payable under this Agreement solely for the purpose of determining the correctness of any payments made and information as to payments due for any period in which Company has failed to report or to make payment pursuant to the terms of this Agreement. Access will be made available: (a) during normal business hours; (b) in a manner reasonably designed to facilitate Penn's review or audit without unreasonable disruption to Company's business; and (c) no more than once each calendar year during the Term and for a period of three (3) years thereafter. Company will promptly pay to Penn the amount of any underpayment determined by the review or audit plus accrued interest. If the review or audit determines that Company has underpaid any royalty payment by five percent (5%) or more, then Company will also promptly pay the out-of-pocket costs and expenses of Penn in connection with the review or audit. 4 4.5 Currency. All dollar amounts referred to in this Agreement are expressed in United States dollars. All payments will be made in United States dollars. If Company receives payment from a third party in a currency other than United States dollars for which a royalty or fee is owed under this Agreement, then (a) the payment will be converted into United States dollars at the conversion rate for the foreign currency as published in the eastern edition of the Wall Street Journal as of the last business day of the Quarter in which the payment was received by Company, and (b) the conversion computation will be documented by Company in the applicable report delivered to Penn under Section 4.1. 4.6 Place of Payment. All payments by Company are payable to "The Trustees of the University of Pennsylvania" and will be made to the following addresses: By Electronic Transfer: By Check: Mellon Bank East The Trustees of the University of Pennsylvania ABA #031000037 c/o Center for Technology Transfer Account Number: 2945020 P.O. Box 7777-W3850 c/o: CTT / T. Dunn Philadelphia, PA 19175-3850 4.7 Interest. All amounts that are not paid by Company when due will accrue interest from the date due until paid at the prevailing prime rate in the United States, compounded daily. 5 CONFIDENTIALITY AND USE OF PENN'S NAME 5.1 Mutual Obligations. In connection with this Agreement, the parties may find it mutually beneficial to disclose to each other certain information that the furnishing party considers confidential and proprietary. The term "Confidential Information" includes all technical information, inventions, developments, discoveries, business information, software, know-how, methods, techniques, formulae, data, processes, and other proprietary ideas, whether or not patentable, that is received from the other party, identified by the providing party as confidential or proprietary at the time of delivery or other communication. The confidential information should be in writing and marked confidential or, if oral, should be reduced to writing within 30 days after the initial disclosure and marked confidential. During the Term and for a period of five (5) years thereafter, each party will maintain in confidence and not disclose to any third party any Confidential Information and will use the Confidential Information only for the purposes of this Agreement. A party receiving Confidential Information will be deemed to have discharged its obligations under this Section 5.1 if it: (a) restricts disclosure of the Confidential Information solely to those if its employees and agents with a need to know the Confidential Information; (b) provides the Confidential Information to such employees and agents only after advising them of the obligations of confidentiality and restrictions on use under this Agreement; (c) uses and requires its employees and agents to use the same degree of care to protect the Confidential Information as is used with the receiving party's confidential information; (d) uses the Confidential Information only for the purposes of this Agreement or a sublicense granted under this Agreement; and (e) secures prior, written approval from the furnishing party before the Confidential Information is disclosed to others. 5.2 General Exceptions. The obligations under Section 5.1 will not apply to: (a) information that is known to the receiving party prior to the time of disclosure or independently developed by the receiving party, in each case, to the extent shown by credible evidence; (b) information that is disclosed to the receiving party by a third party that has the right to make such 5 disclosure; (c) information that becomes patented, published or otherwise part of the public domain through no fault of the receiving party; or (d) information that is required to be disclosed by order of United States governmental authority or a court of competent jurisdiction, provided that the party required to make such disclosure provides prompt notice thereof to the other party and cooperates with the reasonable efforts of the other party to limit the required disclosure and/or to obtain confidential treatment of such information. 5.3 Penn Exception. Penn shall have no obligation to accept Confidential Information from Company, except for the reports required by Sections 4.1 and 6.6. Penn, acting through its Center for Technology Transfer and finance offices, will use reasonable efforts not to disclose to any third party outside of Penn any Confidential Information of Company contained in those reports, subject to the exceptions contained in Section 5.2(a)-(d) above. 5.4 Use of Penn's Name. Company and its Affiliates, sublicensees, employees, and agents may not use the name, logo, seal, trademark, or service mark (including any adaptation of them) of Penn or any Penn school, organization, employee, student or representative, without the prior written consent of Penn. 6 TERM AND TERMINATION 6.1 Term. This Agreement will commence on Effective Date and terminate upon the expiration or abandonment of the last patent to expire or become abandoned of the Penn Patent Rights (the "Term"). 6.2 Early Termination by Company. Company may terminate this Agreement at any time upon sixty (60) days prior written notice to Penn after completing each of the following: (a) ceasing to make, have made, use, import, sell and offer for sale all Licensed Products; (b) terminating all sublicenses and causing all Affiliates and sublicensees to cease making, having made, using, importing, selling and offering for sale all Licensed Products; and (c) paying all amounts owed to Penn under this Agreement through the date of termination. 6.3 Early Termination by Penn. Penn may terminate this Agreement if: (a) Company is more than sixty (60) days late in paying to Penn any amounts owed under this Agreement and does not immediately pay Penn in full upon demand; (b) Company breaches this Agreement and does not cure the breach within sixty (60) days after written notice of the breach; or (c) Company experiences a Trigger Event. 6.4 Trigger Event. The term "Trigger Event" means if Company becomes insolvent or is adjudicated insolvent or bankrupt. 6.5 Effect of Termination. Upon the termination of this Agreement for any reason: (a) the License terminates; (b) Company and all its Affiliates and sublicensees will cease all making, having made, using, importing, selling and offering for sale all Licensed Products, except to extent permitted by Section 6.6; (c) Company will pay to Penn all amounts owed to Penn through the date of termination under this Agreement; (d) Company will, at Penn's request, return to Penn all Confidential Information provided by Penn to Company during the Term and copies of all scientific and technical information, technology and know-how within the Field of Use provided by Penn to Company during the Term; and (e) in the case of termination under Section 6.3, all duties of Penn 6 and all rights (but not duties) of Company under this Agreement immediately terminate without further action required by either Penn or Company. 6.6 Inventory and Sell Off. Upon the termination of this Agreement for any reason, Company will cause physical inventories to be taken immediately of: (a) all completed Licensed Products on hand under the control of Company or its Affiliates or sublicensees; and (b) such Licensed Products as are in the process of manufacture and any component parts on the date of termination of this Agreement. Company will deliver promptly to Penn a copy of the written inventory, certified by an officer of the Company. Penn will have forty-five (45) days after receipt of the report to challenge the report and request an audit under Section 4.4. Upon termination of this Agreement for any reason, Company will promptly remove, efface or destroy all references to Penn from any advertising, labels, web sites or other materials used in the promotion of the business of Company or its Affiliates or sublicensees, and Company and its Affiliates and sublicensees will not represent in any manner that it has rights in or to the Penn Patent Rights or the Licensed Products. Upon the termination of this Agreement for any reason other than pursuant to Section 6.3(a) or (c), Company may sell off its inventory of Licensed Products existing on the date of termination for a period of six (6) months and pay Penn royalties on Sales of such inventory within thirty (30) days following the expiration of such six (6) month period. 6.7 Survival. Company's obligation to pay all amounts owed to Penn under this Agreement will survive the termination of this Agreement for any reason. Section 13.10 and Articles 4, 5, 6, 9, 10, and 11 will survive the termination of this Agreement for any reason in accordance with their respective terms. 7 PATENT MAINTENANCE AND REIMBURSEMENT 7.1 Patent Maintenance. Penn controls the preparation, prosecution and maintenance of the Penn Patent Rights and the selection of patent counsel, with input from Company. If, however, Company desires to manage the preparation, prosecution and maintenance of the Penn Patent Rights with input from Penn, then Company and Penn will enter into with patent counsel a Client and Billing Agreement in the form attached as Exhibit B. 7.2 Patent Reimbursement. Penn acknowledges that Company reimbursed Penn for all historically accrued attorneys fees, expenses, official fees and all other charges accumulated prior to August 28, 1990 (the effective date of the Prior License Agreement) and that Company has timely reimbursed Penn for all documented attorneys fees, expenses, official fees and all other charges incident to the preparation, prosecution and maintenance of the Penn Patent Rights payable through the Effective Date or that Company paid for such fees and charges directly. Thereafter, Company will reimburse Penn for all documented attorneys fees, expenses, official fees and all other charges incurred incident to the preparation, prosecution and maintenance of the Penn Patent Rights, in each case, within thirty (30) days after Company's receipt of invoices for such fees, expenses, and charges or in accordance with Section 7.1, Company will pay for such fees and other charges directly under a Client and Billing Agreement. 7 8 INFRINGEMENT 8.1 Notice. Company and Penn will notify each other promptly of any infringement of the Penn Patent Rights that may come to their attention. Company and Penn will consult each other in a timely manner concerning any appropriate response to the infringement. 8.2 Prosecution. Company may prosecute any infringement of the Penn Patent Rights at Company's expense. Company must not settle or compromise any such litigation in a manner that imposes any obligations or restrictions on Penn or grants any rights to the Penn Patent Rights without Penn's prior written permission. Financial recoveries from any such litigation will be: (a) first, applied to reimburse Company for its litigation expenditures; and (b) second, as to any remainder, retained by Company, but treated as Net Sales for the purpose of determining the royalties due to Penn under Section 3.6. 8.3 Intervention. Penn reserves the right to intervene at Penn's expense and join Company in any litigation under Section 8.2. If Penn elects to participate in any such litigation, then, in lieu of the division of recoveries specified in Section 8.2, financial recoveries from any such litigation will be shared between Company and Penn in proportion with their respective shares of the aggregate litigation expenditures by Company and Penn. 8.4 Penn Prosecution. If Company does not prosecute any infringement of the Penn Patent Rights, then Penn may elect to prosecute such infringement at Penn's expense. If Penn elects to prosecute such infringement, then financial recoveries will retained by Penn in their entirety. 8.5 Cooperation. In any litigation under this Article 8, either party, at the request and expense of the other party, will cooperate to the fullest extent reasonably possible. This Section 8.5 will not be construed to require either party to undertake any activities, including legal discovery, at the request of any third party, except as may be required by lawful process of a court of competent jurisdiction. 9 WARRANTIES AND DISCLAIMER 9.1 Warranties. PENN warrants and represents that as of the date of this Agreement it is the owner of the Penn Patent Rights listed on Exhibit A and has the right to grant the licenses granted hereunder under the terms and conditions of this Agreement. 9.2 Disclaimer. THE PENN PATENT RIGHTS, LICENSED PRODUCTS AND ANY OTHER TECHNOLOGY LICENSED UNDER THIS AGREEMENT ARE PROVIDED ON AN "AS IS" BASIS. PENN MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF ACCURACY, COMPLETENESS, PERFORMANCE, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, COMMERCIAL UTILITY, NON-INFRINGEMENT OR TITLE. 10. LIMITATION OF LIABILITY 10.1 Limitation of Liability. PENN WILL NOT BE LIABLE TO COMPANY, ITS AFFILIATES OR SUBLICENSEES, ITS SUCCESORS OR ASSIGNS, OR ANY THIRD PARTY WITH RESPECT TO ANY CLAIM: ARISING FROM COMPANY'S USE OF THE PENN 8 PATENT RIGHTS, LICENSED PRODUCTS OR ANY OTHER TECHNOLOGY LICENSED UNDER THIS AGREEMENT; ARISING FROM THE DEVELOPMENT, TESTING, MANUFACTURE, USE OR SALE OF LICENSED PRODUCTS; OR FOR LOST PROFITS, BUSINESS INTERRUPTION, OR INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND. 11. INDEMNIFICATION 11.1 Indemnfication. Company will defend, indemnify, and hold harmless Penn, and its trustees, officers, faculty, agents, employees and students (each, an "Indemnified Party") from and against any and all liability, loss, damage, action, claim, or expense suffered or incurred by the Indemnified Parties, including attorneys' fees and expenses (collectively, "Liabilities"), arising out of or resulting from the distribution by Company, its Affiliates or sublicensees of any Licensed Products, including, without limitation, product liability actions, provided that Penn notifies Company in writing of the claim and Company is entitled to control the defense and settlement of the claim. 11.2 Other Provisions. Company will not settle or compromise any claim or action giving rise to Liabilities in any manner that imposes any restrictions or obligations on Penn without Penn's prior written consent. If Company fails or declines to assume the defense of any claim or action within thirty (30) days after notice of the claim or action, then Penn may assume the defense of such claim or action for the account and at the risk of Company, and any Liabilities related to such claim or action will be conclusively deemed a liability of Company. The indemnification rights of the Indemnified Parties under this Article 11 are in addition to all other rights that an Indemnified Party may have at law, in equity or otherwise. 12. INSURANCE 12.1 Coverages. Company will procure and maintain insurance policies for the following coverages with respect to personal injury, bodily injury and property damage arising out of Company's performance under this Agreement: (a) during the Term, comprehensive general liability, including broad form and contractual liability, in a minimum amount of $2,000,000 combined single limit per occurrence and in the aggregate; and (b) prior to the commencement by Company of human clinical trials involving Licensed Products, clinical trials coverage in a minimum amount of $5,000,000 combined single limit per occurrence and in the aggregate; and (c) prior to the sale by Company of the first Licensed Product approved for human use, product liability coverage, in a minimum amount of $5,000,000 combined single limit per occurrence and in the aggregate. Penn may review periodically the adequacy of the minimum amounts of insurance for each coverage required by this Section 12.1, and Penn reserves the right to require Company to reasonably adjust the limits of such coverage. The required minimum amounts of insurance do not constitute a limitation on Company's liability or indemnification obligations to Penn under this Agreement. 12.2 Other Requirements. The policies of insurance required by Section 12.1 will be issued by an insurance carrier with an A.M. Best rating of "A" or better and will name Penn as an additional insured with respect to Company's performance under this Agreement. Company will provide Penn with insurance certificates evidencing the required coverage within thirty (30) days after the commencement of each policy period and any renewal periods. Each certificate will 9 provide that the insurance carrier will notify Penn in writing at least thirty (30) days prior to the cancellation or material change in coverage. 13. ADDITIONAL PROVISIONS 13.1 Independent Contractors. The parties are independent contractors. Nothing contained in this Agreement is intended to create an agency, partnership or joint venture between the parties. At no time will either party make commitments or incur any charges or expenses for or on behalf of the other party. 13.2 No Discrimination. Neither Penn nor Company will discriminate against any employee or applicant for employment because of race, color, sex, sexual or affectional preference, age, religion, national or ethnic origin, handicap, or veteran status. 13.3 Compliance with Laws. Company must comply with all prevailing laws, rules and regulations that apply to its activities or obligations under this Agreement. For example, Company will comply with applicable United States export laws and regulations. The transfer of certain technical data and commodities may require a license from the applicable agency of the United States government and/or written assurances by Company that Company will not export data or commodities to certain foreign countries without prior approval of the agency. Penn does not represent that no license is required, or that, if required, the license will issue. 13.4 Modification, Waiver and Remedies. This Agreement may only be modified by a written amendment that is executed by an authorized representative of each party. Any waiver must be express and in writing. No waiver by either party of a breach by the other party will constitute a waiver of any different or succeeding breach. Unless otherwise specified, all remedies are cumulative. 13.5 Assignment. Company may not assign this Agreement or any part of it, either directly or by merger or operation of law, except to a purchaser of Company's business relating to the subject matter of this Agreement or with the prior written consent of Penn. Penn will not unreasonably withhold or delay its consent, provided that: (a) at least thirty (30) days before the proposed transaction, Company gives Penn written notice and such background information as may be reasonably necessary to enable Penn to give an informed consent; (b) the assignee agrees in writing to be legally bound by this Agreement; and (c) the assignee agrees to deliver to Penn an updated Development Plan within forty-five (45) days after the closing of the proposed transaction. Any permitted assignment will not relieve Company of responsibility for performance of any obligation of Company that has accrued at the time of the assignment. Any prohibited assignment will be null and void. 13.6 Notices. Any notice or other required communication (each, a "Notice") must be in writing, addressed to the party's respective Notice Address listed on the signature page, and delivered: (a) personally; (b) by certified mail, postage prepaid, return receipt requested; (c) by recognized overnight courier service, charges prepaid; or (d) by facsimile. A Notice will be deemed received: if delivered personally, on the date of delivery; if mailed, five (5) days after deposit in the United States mail; if sent via courier, one (1) business day after deposit with the courier service; or if sent via facsimile, upon receipt of confirmation of transmission provided that a confirming copy of such Notice is sent by certified mail, postage prepaid, return receipt requested. 10 13.7 Severability and Reformation. If any provision of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction, then the remaining provisions of this Agreement will remain in full force and effect. Such invalid or unenforceable provision will be automatically revised to be a valid or enforceable provision that comes as close as permitted by law to the parties' original intent. 13.8 Headings and Counterparts. The headings of the articles and sections included in this Agreement are inserted for convenience only and are not intended to affect the meaning or interpretation of this Agreement. This Agreement may be executed in several counterparts, all of which taken together will constitute the same instrument. 13.9 Governing Law. This Agreement will be governed in accordance with the laws of the Commonwealth of Pennsylvania, without giving effect to the conflict of law provisions of any jurisdiction. 13.10 Dispute Resolution. If a dispute arises between the parties concerning any right or duty under this Agreement, then the parties will confer, as soon as practicable, in an attempt to resolve the dispute. If the parties are unable to resolve the dispute amicably, then the parties will submit to the exclusive jurisdiction of, and venue in, the state and Federal courts located in the Eastern District of Pennsylvania with respect to all disputes arising under this Agreement. 13.11 Integration. This Agreement with its Exhibits contains the entire agreement between the parties with respect to the Penn Patent Rights and the License and supersede all other oral or written representations, statements, or agreements with respect to such subject matter, including but not limited to the Prior License Agreement. Each party has caused this Agreement to be executed by its duly authorized representative. THE TRUSTEES OF THE NEOSE TECHNOLOGIES, INC. UNIVERSITY OF PENNSYLVANIA By: /s/ Louis P. Berneman By: /s/ C. Boyd Clarke --------------------------------------- ----------------------------- Name: Louis P. Berneman Name: C. Boyd Clarke Title: Managing Director, Title: President and CEO Center for Technology Transfer Address: University of Pennsylvania Address: 102 Witmer Road Center for Technology Transfer Horsham, PA 19063 3160 Chestnut Street, Suite 200 Attn: General Counsel Philadelphia, PA 19104-6283 Attention: Managing Director Required copy to: University of Pennsylvania Office of General Counsel 133 South 36/th/ Street, Suite 300 Philadelphia, PA 19104-3246 Attention: General Counsel 11 Exhibit A Penn Patent Rights U.S. Patent No. 5,180,674, entitled "Saccharide Compositions, Methods and Apparatus for their Synthesis," issued January 19, 1993. U.S. Patent No. 5,288,637, entitled "Apparatus for the Synthesis of Saccharide Compositions," issued February 22, 1994. U.S. Patent No. 5,583,042, entitled "Apparatus for the Synthesis of Saccharide Compositions," issued December 10, 1996. U.S. Patent No. 5,874,261, entitled "Method for the Purification of Glycosyltransferases," issued February 23, 1999. U.S. Patent No. 6,156,547, entitled "Apparatus for the Synthesis of Saccharide Compositions," issued December 5, 2000. U.S. Patent No. 6,331,418, entitled "Saccharide Compositions, Methods and Apparatus for Their Synthesis," issued December 18, 2001. U.S. Patent No. 6,518,051, entitled "Saccharide Compositions, Methods and Apparatus for Their Synthesis," issued February 11, 2003. 12 Exhibit B Client and Billing Agreement The Trustees of the University of Pennsylvania ("Penn"), a Pennsylvania non-profit corporation doing business at 3160 Chestnut Street, Suite 200, Philadelphia, PA 19104-6283; and ______ ("Company"), a corporation doing business at __________________________________________, have entered into a License Agreement with respect to certain inventions which are the subject of the patent applications and patents listed in Appendix A hereto, including any continuations, divisions, extensions thereof, and any foreign counterpart patents, applications, or registrations ("Patent Rights"); Penn has retained the services of _______________ ("Law Firm"), with offices at ______________, to prepare, file and prosecute the pending patent applications constituting the Patent Rights and to maintain the patents that issue thereon; Penn, Company and Law Firm, intending to formalize their business relationships, agree as follows: 1. Penn is the owner of the Patent Rights 2. Company is the licensee of Penn's interest in the Patent Rights. 3. Penn shall maintain an attorney-client relationship with Law Firm in furtherance of efforts to secure and maintain the Patent Rights. 4. Law Firm will interact directly with Company on all patent prosecution and patent maintenance matters related to the Patent Rights and will copy Penn on all correspondence related thereto. Company and Law Firm agree to use all reasonable efforts to notify Penn in writing at least thirty (30) days prior to the due date or deadline for any action which could adversely affect the pending status of any patent application within the Patent Rights, the maintenance of any granted patent within the Patent Rights, Penn's right to file any continuing application or foreign counterpart application based on the Patent Rights, or the breadth of any claim within the Patent Rights. In any case, Company shall give Penn written notice of any final decision regarding the action to be taken or not to be taken on such matters prior to instructing Law Firm to implement the decision. Penn reserves the right to countermand any instruction given by Company to Law Firm. 5. Law Firm's legal services relating to the Patent Rights will be performed on behalf of Penn. Law Firm shall invoice Company directly for all work relating to the filing, prosecution and maintenance of the Patent Rights and shall provide copies of all invoices to Penn. Company is responsible for the payment of all charges and fees so invoiced by Law Firm. Company will pay invoices directly to Law Firm and copy Penn on each payment. 6. To clarify each party's position with regard to prosecution and maintenance of the Patent Rights, either Penn or Company will notify Law Firm in writing of all decisions to authorize the performance of any desired service(s), which shall be subject to Penn's right to countermand, as provided in paragraph 4, above. In the event Penn countermands any decision or instruction of Company, such countermand shall be promptly communicated in writing to Law Firm. 7. This agreement represents the complete understanding of each of the undersigned parties as to the client and billing arrangements defined herein. Additions or deletions of dockets identified in Appendix A will become effective only by written addendum to Appendix A. All such additions or 13 deletions of individual patents or applications filed in the US, or as foreign counterparts thereof are considered to be within the terms of this client and billing agreement. 8. Notices and copies of all correspondence relating to the Patent Rights should be sent to the following: To PENN: To COMPANY: Center for Technology Transfer University of Pennsylvania 3160 Chestnut Street, Suite 200 Philadelphia, PA 19104-6283 Attn: Director, Intellectual Property To Law Firm: ACCEPTED AND AGREED TO: THE TRUSTEES OF THE COMPANY UNIVERSITY OF PENNSYLVANIA By: ___________________________ By: ______________________________ Name:__________________________ Name:_____________________________ Title:_________________________ Title:____________________________ Date:__________________________ Date:_____________________________ LAW FIRM By: ___________________________ Name:__________________________ Title:_________________________ Date:__________________________ 14 Appendix A COMPANY LICENSED TECHNOLOGIES PENN 10 Title 11 Patent Numbers Docket Number 15 Exhibit C Development Progress Report Development Progress Report setting forth the current stage of development of Licensed Products, shall include, without limitation: 1. Date of Development Progress Report and time covered by such report. 2. Major activities and accomplishments relating to Licensed Products which were completed by Company, an Affiliate, or any sublicensee since the last Development Progress Report. 3. Significant research and development projects covered by the Penn Patent Rights currently being performed by Company, an Affiliate, or any sublicensee and projected dates of completion. 4. Identity of development activities covered by the Penn Patent Rights that are proposed to be undertaken by Company, an Affiliate, or any sublicense during the next reporting period. 5. Copies of all reports made available to shareholders during the reporting period, including 10K and 10Q filings made to the United States Securities and Exchange Commission, which shall be provided by reference to the Company's website where they are available as soon as practicable after issuance (www.neose.com). 16 EX-10.10 4 dex1010.txt FORM OF CHANGE OF CONTROL Exhibit 10.10 - -------------------------------------------------------------------------------- Executive Officer Title - -------------------------------------------------------------------------------- David A. Zopf, M.D. Executive Vice President - -------------------------------------------------------------------------------- Robert I. Kriebel Senior Vice President and Chief Financial Officer - -------------------------------------------------------------------------------- George J. Vergis Senior Vice President, Business & Commercial Development - -------------------------------------------------------------------------------- A. Brian Davis Vice President, Finance - -------------------------------------------------------------------------------- Marjorie Hurley Vice President, Regulatory Affairs & Project Management - -------------------------------------------------------------------------------- CHANGE OF CONTROL AGREEMENT THIS CHANGE OF CONTROL AGREEMENT (the "Agreement"), is made on this ___ day of ________, ____, by and between NEOSE TECHNOLOGIES, INC. (the "Company") and _______________ (the "Employee"). Background The Employee serves as a senior executive of the Company; and the Company and the Employee desire to establish certain protections for the Employee in the event of his or her termination of employment. Terms NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and promises contained herein, and intending to be bound hereby, the parties agree as follows: 1. Definitions. As used herein: 1.1. "Base Salary" means, as of any given date, the annual base rate of salary payable to the Employee by the Company, as then in effect; provided, however, that in the case of a resignation by the Employee for the Good Reason described in Section 1.8.4, "Base Salary" will mean the annual base rate of salary payable to the Employee by the Company, as in effect immediately prior to the reduction giving rise to the Good Reason. 1.2. "Board" means the Board of Directors of the Company. 1.3. "Business" means research, development, manufacture, supply, marketing, licensing, use and sale of biologic, pharmaceutical and therapeutic materials and products and related process technology directed to (a) the enzymatic synthesis of complex carbohydrates for use in food, cosmetic, therapeutic, consumer and industrial applications, (b) enzymatic synthesis or modification of the carbohydrate portion of proteins or lipids, or modification of proteins or lipids through the attachment of carbohydrates, (c) carbohydrate-based therapeutics, and (d) the development of protein therapeutics using sialylation, fucosylation, glycosylation, glycopegylation, or glycoconjugation. 1.4. "Cause" means fraud, embezzlement, or any other serious criminal conduct that adversely affects the Company committed intentionally by the Employee in connection with his or her employment or the performance of his or her duties as an officer or director of the Company or the Employee's conviction of, or plea of guilty or nolo contendere to, any felony. 1.5. "Change in Control" means a change in ownership or control of the Company effected through: 1.5.1. the direct or indirect acquisition by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities possessing more than 50% of the total combined voting power of the Company's outstanding securities; 1.5.2. a change in the composition of the Board over a period of 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; 1.5.3. the consummation of any consolidation, share exchange or merger of the Company (a) in which the stockholders of the Company immediately prior to such transaction do not own at least a majority of the voting power of the entity which survives/results from that transaction, or (b) in which a shareholder of the Company who does not own a majority of the voting stock of the Company immediately prior to such transaction, owns a majority of the Company's voting stock immediately after such transaction; or 1.5.4. the liquidation or dissolution of the Company or any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company, including stock held in subsidiary corporations or interests held in subsidiary ventures. 1.6. "Code" means Internal Revenue Code of 1986, as amended. 1.7. "Disability" means the Employee's inability, by reason of any physical or mental impairment, to substantially perform his or her regular duties as contemplated by this Agreement, as determined by the Board in its sole discretion (after affording the Employee the opportunity to present his or her case), which inability is reasonably contemplated to continue for -2- at least one year from its commencement and at least 90 days from the date of such determination. 1.8. "Good Reason" means, without the Employee's prior written consent, any of the following: 1.8.1. an adverse change in the Employee's title; 1.8.2. a reduction in the Employee's authority, duties or responsibilities, or the assignment to the Employee of duties that are inconsistent, in a material respect, with Employee's position; 1.8.3. the relocation of the Company's headquarters more than 15 miles from Horsham, Pennsylvania, unless such move reduces the Employee's commuting time; 1.8.4. a reduction in the Employee's Base Salary or in the amount, expressed as a percentage of Base Salary, of the Employee's Target Bonus; 1.8.5. the Company's failure to pay or make available any material payment or benefit due under this Agreement or any other material breach by the Company of this Agreement. However, the foregoing events or conditions will constitute Good Reason only if the Employee provides the Company with written objection to the event or condition within 60 days following the occurrence thereof, the Company does not reverse or otherwise cure the event or condition within 30 days of receiving that written objection and the Employee resigns his or her employment within 90 days following the expiration of that cure period. 1.9. "Intellectual Property" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents and patent applications claiming such inventions, (b) all trademarks, service marks, trade dress, logos, trade names, fictitious names, brand names, brand marks and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets (including research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, methodologies, technical data, designs, drawings and specifications), (f) all computer software (including data, source and object codes and related documentation), (g) all other proprietary rights, (h) all copies and tangible embodiments thereof (in whatever form or medium), or similar intangible personal property which have been or are developed or created in whole or in part by the Employee (i) at any time and at any place while the Employee is employed by Company and which, in the case of any or all of the foregoing, are related to and used in connection with the business of the Company, or (ii) as a result of tasks assigned to the Employee by the Company. 1.10. "Proprietary Information" means any and all information of the Company or of any subsidiary or affiliate of the Company. Such Proprietary Information shall include, but -3- shall not be limited to, the following items and information relating to the following items: (a) all intellectual property and proprietary rights of the Company (including without limitation Intellectual Property), (b) computer codes or instructions (including source and object code listings, program logic algorithms, subroutines, modules or other subparts of computer programs and related documentation, including program notation), computer processing systems and techniques, all computer inputs and outputs (regardless of the media on which stored or located), hardware and software configurations, designs, architecture and interfaces, (c) business research, studies, procedures and costs, (d) financial data, (e) distribution methods, (f) marketing data, methods, plans and efforts, (g) the identities of actual and prospective customers, contractors and suppliers, (h) the terms of contracts and agreements with customers, contractors and suppliers, (i) the needs and requirements of, and the Company's course of dealing with, actual or prospective customers, contractors and suppliers, (j) personnel information, (k) customer and vendor credit information, and (l) any information received from third parties subject to obligations of non-disclosure or non-use. Failure by the Company to mark any of the Proprietary Information as confidential or proprietary shall not affect its status as Proprietary Information under the terms of this Agreement. 1.11. "Release" means a release substantially identical to the one attached hereto as Exhibit A. 1.12. "Restricted Period" means the period beginning on the date hereof and ending on the first anniversary of the termination of the Employee's employment with the Company for any reason. 1.13. "Restrictive Covenants" means the covenants set forth in Sections 6.1, 6.2 and 6.3 of this Agreement. 1.14. "Target Bonus" means, with respect to any year, the target amount of the annual bonus that would be payable to the Employee with respect to that year, whether under an employment or incentive agreement, under any bonus plan or policy of the Company, or otherwise, assuming that all applicable performance goals are met and conditions to the payment of such bonus are satisfied. 2. Termination. 2.1. In General. The Company may terminate the Employee's employment at any time. The Employee may terminate his or her employment at any time, provided that before the Employee may voluntarily terminate his or her employment with the Company, he or she must provide 30 days prior written notice (or such shorter notice as is acceptable to the Company) to the Company. Upon any termination of the Employee's employment with the Company for any reason: (a) the Employee (unless otherwise requested by the Board) concurrently will resign any officer or director positions he or she holds with the Company, its subsidiaries or affiliates, and (b) the Company will pay to the Employee all accrued but unpaid compensation through the date of termination, and (c) except as explicitly provided in Sections 2, 3 or 4, or otherwise pursuant to COBRA, all compensation and benefits will cease and the Company will have no further liability or obligation to the Employee, including, but not limited to, any unpaid Target Bonus. The foregoing will not be construed to limit the Employee's right -4- to payment or reimbursement for claims incurred under any insurance contract funding an employee benefit plan, policy or arrangement of the Company in accordance with the terms of such insurance contract. 2.2. Termination Without Cause. If the Employee's employment by the Company ceases due to a termination by the Company without Cause or due to death or Disability, then, in addition to the payments and benefits provided for in Section 2.1 above and subject to Section 5 below, the Company will (a) make a lump sum cash payment to the Employee equal to six months of the Employee's Base Salary, as in effect on such date, (b) continue to provide medical benefits to the Employee (and, if covered immediately prior to such termination, his or her spouse and dependents) for a period of six months commencing from the date of the Employee's termination of employment at a monthly cost to the Employee equal to the Employee's monthly contribution, if any, toward the cost of such coverage immediately prior to such termination, and (c) arrange for the provision to the Employee of reasonable executive outplacement services by a provider selected by the mutual agreement of the Company and the Employee, provided that if the Company's obligation to make the payments provided for in clause (a) of this Section 2.2 arises due to the Employee's death or Disability, the cash payments described in clause (a) will be offset by the amount of benefits paid to the Employee (or his or her representatives, heirs, estate or beneficiaries) pursuant to any life insurance or disability plans, policies or arrangements of the Company by virtue of his or her death or such Disability (including, for this purpose, only that portion of such life insurance or disability benefits funded by the Company or by premium payments made by the Company). The payments and benefits described in this section are in lieu of (and not in addition to) any other severance arrangement maintained by the Company. 3. Certain Terminations Following a Change in Control. If the Employee's employment with the Company ceases within twelve months following a Change in Control as a result of a termination by the Company without Cause or a resignation by the Employee for Good Reason, then in lieu of the payments and benefits provided for in Section 2.2, (a) the Company will pay to the Employee on the date of termination a lump sum cash payment equal to the sum of (i) one year of the Employee's Base Salary as in effect on such date, and (ii) the Employee's Target Bonus for the calendar year in which the termination occurs, (b) the Company will continue to provide medical benefits to the Employee (and, if covered immediately prior to such term, his or her spouse and dependents) for a period of one year commencing from the date of the Employee's termination of employment at a monthly cost to the Employee equal to the Employee's monthly contribution, if any, toward the cost of such coverage immediately prior to such termination, (c) the Company will arrange for the provision to the Employee of reasonable executive outplacement services by a provider selected by the mutual agreement of the Company and the Employee, (d) the Company will pay to the Employee the additional amount, if any, payable pursuant to Section 4 below, and (e) all outstanding stock options then held by the Employee will then become fully vested and immediately exercisable and will remain exercisable for 12 months following Employee's termination of employment, notwithstanding any inconsistent language in any equity incentive plan or agreement. -5- 4. Parachute Payments. 4.1. Generally. All amounts payable to the Employee under this Agreement will be made without regard to whether the deductibility of such payments (considered together with any other entitlements or payments otherwise paid or due to the Employee) would be limited or precluded by Section 280G of the Code and without regard to whether such payments would subject the Employee to the excise tax levied on certain "excess parachute payments" under Section 4999 of the Code (the "Parachute Excise Tax"). 4.2. Gross-Up. If all or any portion of the payments or other benefits provided under any section of this Agreement, either alone or together with any other payments and benefits which the Employee receives or is entitled to receive from the Company or its affiliates (whether paid or payable or distributed or distributable) pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (the "Payment") would result in the imposition of a Parachute Excise Tax, the Employee will be entitled to an additional payment (the "Gross-up Payment") in an amount such that the net amount of the Payment and the Gross-up Payment retained by the Employee after the calculation and deduction of all excise taxes (including any interest or penalties imposed with respect to such taxes) on the Payment and all federal, state and local income tax, employment tax and excise tax (including any interest or penalties imposed with respect to such taxes) on the Gross-up Payment provided for in this Section 4.2, and taking into account any lost or reduced tax deductions on account of the Gross-up Payment, shall be equal to the Payment. 4.3. Measurements and Adjustments. The determination of the amount of the payments and benefits paid and payable to the Employee, and whether and to what extent payments under Section 4.2 are required to be made, will be made at the Company's expense by an independent auditor selected by mutual agreement of the Company and the Employee, which auditor shall provide the Employee and the Company with detailed supporting calculations with respect to its determination within 15 business days after the receipt of notice from the Employee or the Company that the Employee has received or will receive a payment that is potentially subject to the Parachute Excise Tax. For the purposes of determining whether any payments will be subject to the Parachute Excise Tax and the amount of such Parachute Excise Tax, such payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Parachute Excise tax, unless and except to the extent, that in the opinion of the accountants, such payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount," or such "parachute payments" are otherwise not subject to such Parachute Excise Tax. For purposes of determining the amount of the Gross-up Payment, if any, the Employee shall be deemed to pay federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the gross-up payment is to be made and to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the gross-up payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if -6- paid in such year (determined without regard to limitations on deductions based upon the amount of the Employee's adjusted gross income); and to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the gross-up payment in the Employee adjusted gross income. Any Gross-up Payment shall be paid by the Company at the time the Employee is entitled to receive the Payment. Any determination by the auditor shall be binding upon the Company and the Employee. 4.4. Underpayment or Overpayment. In the event of any underpayment or overpayment to the Employee (determined after the application of Section 4.2), the amount of such underpayment or overpayment will be, as promptly as practicable, paid by the Company to the Employee or refunded by the Employee to the Company, as the case may be, with interest at the applicable federal rate specified in Section 1274(d) of the Code. 5. Timing of Payments Following Termination. Notwithstanding any provision of this Agreement, the payments and benefits described in Sections 2, 3 and 4 are conditioned on the Employee's execution and delivery to the Company of a Release in a manner consistent with the Older Workers Benefit Protection Act and any similar state law that is applicable. The amounts described in Sections 2.2(a) or 3(a) (as applicable) will be paid in a lump sum, as soon as the Release becomes irrevocable following the Employee's execution and delivery of the Release. 6. Restrictive Covenants. As consideration for all of the payments to be made to the Employee pursuant to Sections 2, 3, and 4 of this Agreement, the Employee agrees to be bound by the Restrictive Covenants set forth in this Section 6. The Restrictive Covenants will apply without regard to whether any termination of the Employee's employment is initiated by the Company or the Employee, and without regard to the reason for that termination. 6.1. Covenant Not To Compete. The Employee covenants that, during the Restricted Period, the Employee will not (except in his or her capacity as an employee or director of the Company or with the prior consent of the Company) do any of the following, directly or indirectly, anywhere in the world: 6.1.1. engage or participate in any business competitive with the Business; 6.1.2. become interested (as owner, stockholder, lender, partner, co-venturer, director, officer, employee, agent or consultant) in any person, firm, corporation, association or other entity engaged in any business competitive with the Business. Notwithstanding the foregoing, the Employee may hold up to 4.9% of the outstanding securities of any class of any publicly-traded securities of any company; 6.1.3. engage in any business, or solicit or call on any customer, supplier, licensor, licensee, contractor, agent, representative, advisor, strategic partner, distributor or other person with whom the Company shall have dealt or any prospective customer, supplier, licensor, licensee, contractor, agent, representative, advisor, strategic partner, distributor or other person that the Company shall have identified and solicited at any time during the Employee's employment by the Company for a purpose competitive with the Business; -7- 6.1.4. influence or attempt to influence any employee, consultant, customer, supplier, licensor, licensee, contractor, agent, representative, advisor, strategic partner, distributor or other person to terminate or adversely modify any written or oral agreement, arrangement or course of dealing with the Company; or 6.1.5. solicit for employment or employ or retain (or arrange to have any other person or entity employ or retain) any person who has been employed or retained by the Company within the 12 months preceding the termination of the Employee's employment with the Company for any reason. 6.2. Confidentiality. The Employee recognizes and acknowledges that the Proprietary Information is a valuable, special and unique asset of the business of the Company. As a result, both during the Employee's employment by the Company and thereafter, the Employee will not, without the prior written consent of the Company, for any reason either directly or indirectly divulge to any third-party or use for his or her own benefit, or for any purpose other than the exclusive benefit of the Company, any Proprietary Information, provided that the Employee may during his or her employment by the Company disclose Proprietary Information to third parties as may be necessary or appropriate to the effective and efficient discharge of his or her duties as an employee hereunder (provided that the third party recipient has signed the Company's then-approved confidentiality or similar agreement) or as such disclosures may be required by law. If the Employee or any of his or her representatives becomes legally compelled to disclose any of the Proprietary Information, the Employee will provide the Company with prompt written notice so that the Company may seek a protective order or other appropriate remedy. The non-disclosure and non-use obligations with respect to Proprietary Information set forth in this Section 6.2 shall not apply to any information that is in or becomes part of the public domain through no improper act on the part of the Employee. 6.3. Property of the Company. 6.3.1. Proprietary Information. All right, title and interest in and to Proprietary Information will be and remain the sole and exclusive property of the Company. The Employee will not remove from the Company's offices or premises any documents, records, notebooks, files, correspondence, reports, memoranda or similar materials of or containing Proprietary Information, or other materials or property of any kind belonging to the Company unless necessary or appropriate in the performance of his or her duties to the Company. If the Employee removes such materials or property in the performance of his or her duties, the Employee will return such materials or property to their proper files or places of safekeeping as promptly as possible after the removal has served its specific purpose. The Employee will not make, retain, remove and/or distribute any copies of any such materials or property, or divulge to any third person the nature of and/or contents of such materials or property or any other oral or written information to which he or she may have access or become familiar in the course of his or her employment, except to the extent necessary in the performance of his or her duties. Upon termination of the Employee's employment with the Company, he or she will leave with the Company or promptly return to the Company all originals and copies of such materials or property then in his or her possession. -8- 6.3.2. Intellectual Property. The Employee agrees that all the Intellectual Property will be considered "works made for hire" as that term is defined in Section 101 of the Copyright Act (17 U.S.C. ss. 101) and that all right, title and interest in such Intellectual Property will be the sole and exclusive property of the Company. To the extent that any of the Intellectual Property may not by law be considered a work made for hire, or to the extent that, notwithstanding the foregoing, the Employee retains any interest in the Intellectual Property, the Employee hereby irrevocably assigns and transfers to the Company any and all right, title, or interest that the Employee may now or in the future have in the Intellectual Property under patent, copyright, trade secret, trademark or other law, in perpetuity or for the longest period otherwise permitted by law, without the necessity of further consideration. The Company will be entitled to obtain and hold in its own name all copyrights, patents, trade secrets, trademarks and other similar registrations with respect to such Intellectual Property. The Employee further agrees to execute any and all documents and provide any further cooperation or assistance reasonably required by the Company to perfect, maintain or otherwise protect its rights in the Intellectual Property. If the Company is unable after reasonable efforts to secure the Employee's signature, cooperation or assistance in accordance with the preceding sentence, whether because of the Employee's incapacity or any other reason whatsoever, the Employee hereby designates and appoints the Company or its designee as the Employee's agent and attorney-in-fact, to act on his or her behalf, to execute and file documents and to do all other lawfully permitted acts necessary or desirable to perfect, maintain or otherwise protect the Company's rights in the Intellectual Property. The Employee acknowledges and agrees that such appointment is coupled with an interest and is therefore irrevocable. 6.4. Acknowledgements. The Employee acknowledges that the Restrictive Covenants are reasonable and necessary to protect the legitimate interests of the Company and its affiliates and that the duration and geographic scope of the Restrictive Covenants are reasonable given the nature of this Agreement and the position the Employee holds within the Company. The Employee further acknowledges that the Restrictive Covenants are included herein in order to induce the Company to enter into this Agreement and that the Company would not have entered into this Agreement in the absence of the Restrictive Covenants. 6.5. Remedies and Enforcement Upon Breach. 6.5.1. Specific Enforcement. The Employee acknowledges that any breach by him or her, willfully or otherwise, of the Restrictive Covenants will cause continuing and irreparable injury to the Company for which monetary damages would not be an adequate remedy. The Employee shall not, in any action or proceeding to enforce any of the provisions of this Agreement, assert the claim or defense that such an adequate remedy at law exists. In the event of any such breach by the Employee, the Company shall have the right to enforce the Restrictive Covenants by seeking injunctive or other relief in any court, without any requirement that a bond or other security be posted, and this Agreement shall not in any way limit remedies of law or in equity otherwise available to the Company. 6.5.2. Judicial Modification. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, such court shall have the power to modify such provision and, in its modified form, such provision shall then be enforceable. -9- 6.5.3. Accounting. If the Employee breaches any of the Restrictive Covenants, the Company will have the right and remedy to require the Employee to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by the Employee as the result of such breach. This right and remedy will be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity. 6.5.4. Enforceability. If any court holds the Restrictive Covenants unenforceable by reason of their breadth or scope or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the right of the Company to the relief provided above in the courts of any other jurisdiction within the geographic scope of such Restrictive Covenants. 6.5.5. Disclosure of Restrictive Covenants. The Employee agrees to disclose the existence and terms of the Restrictive Covenants to any employer that the Employee may work for during the Restricted Period. 6.5.6. Extension of Restricted Period. If the Employee breaches Section 6.1 in any respect, the restrictions contained in that section will be extended for a period equal to the period that the Employee was in breach. 7. Miscellaneous. 7.1. No Liability of Officers and Directors for Severance Upon Insolvency. Notwithstanding any other provision of the Agreement and intending to be bound by this provision, the Employee hereby (a) waives any right to claim payment of amounts owed to him or her, now or in the future, pursuant to this Agreement from directors or officers of the Company if the Company becomes insolvent, and (b) fully and forever releases and discharges the Company's officers and directors from any and all claims, demands, liens, actions, suits, causes of action or judgments arising out of any present or future claim for such amounts. 7.2. Successors and Assigns. The Company may assign this Agreement to any successor to all or substantially all of its assets and business by means of liquidation, dissolution, merger, consolidation, transfer of assets, or otherwise. The rights of the Employee hereunder are personal to the Employee and may not be assigned by him. 7.3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to the principles of conflicts of laws. 7.4. Enforcement. Any legal proceeding arising out of or relating to this Agreement will be instituted in the United States District Court for the Eastern District of Pennsylvania, or if that court does not have or will not accept jurisdiction, in any court of general jurisdiction in the Commonwealth of Pennsylvania, and the Employee and the Company hereby consent to the personal and exclusive jurisdiction of such courts and hereby waive any objections that they may have to personal jurisdiction, the laying of venue of any such proceeding and any claim or defense of inconvenient forum. -10- 7.5. Waivers; Separability. The waiver by either party hereto of any right hereunder or any failure to perform or breach by the other party hereto shall not be deemed a waiver of any other right hereunder or any other failure or breach by the other party hereto, whether of the same or a similar nature or otherwise. No waiver shall be deemed to have occurred unless set forth in a writing executed by or on behalf of the waiving party. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived. If any provision of this Agreement shall be declared to be invalid or unenforceable, in whole or in part, such invalidity or unenforceability shall not affect the remaining provisions hereof which shall remain in full force and effect. 7.6. Notices. All notices and communications that are required or permitted to be given hereunder shall be in writing and shall be deemed to have been duly given when delivered personally or upon mailing by registered or certified mail, postage prepaid, return receipt requested, as follows: If to the Company, to: Neose Technologies, Inc. 102 Witmer Road Horsham PA 19044 Attn: General Counsel Fax: 215-315-9100 With a copy to: Pepper Hamilton LLP 3000 Two Logan Square 18th & Arch Streets Philadelphia, PA 19103 Attn: Barry M. Abelson, Esquire Fax: 215-981-4750 If to Employee, to: or to such other address as may be specified in a notice given by one party to the other party hereunder. 7.7. Entire Agreement; Amendments. This Agreement and the attached exhibit contain the entire agreement and understanding of the parties relating to the provision of severance benefits upon termination, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature relating to that subject, including but not limited to the Retention Agreement by and between the Employee and the Company dated _________ and the Noncompetition and Confidentiality Agreement by and between the -11- Employee and the Company dated __________. This Agreement may not be changed or modified, except by an Agreement in writing signed by each of the parties hereto. 7.8. Withholding. The Company will withhold from any payments due to Employee hereunder, all taxes, FICA or other amounts required to be withheld pursuant to any applicable law. 7.9. Headings Descriptive. The headings of sections and paragraphs of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 7.10. Counterparts. This Agreement may be executed in multiple counterparts, each of which will be deemed to be an original, but all of which together will constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date and year first above written. NEOSE TECHNOLOGIES, INC. By: ______________________________________ C. Boyd Clarke President and Chief Executive Officer ____________________________________________ Employee -12- Exhibit A Release and Non-Disparagement Agreement THIS RELEASE AND NON-DISPARAGEMENT AGREEMENT (this "Release") is made as of the ___ day of _______, _____ by and between ____________________ (the "Employee") and NEOSE TECHNOLOGIES, INC. (the "Company"). WHEREAS, the Employee's employment as an executive of the Company has terminated; and WHEREAS, pursuant to Section[s] [2] [3] [and 4] of the Change of Control Agreement by and between the Company and the Employee dated as of __________ ___, 2002 (the "Change of Control Agreement"), the Company has agreed to pay the Employee certain amounts and to provide him or her with certain rights and benefits, subject to the execution of this Release. NOW THEREFORE, in consideration of these premises and the mutual promises contained herein, and intending to be legally bound hereby, the parties agree as follows: SECTION 1. Consideration. The Employee acknowledges that: (a) the payments, rights and benefits set forth in Section[s] [2] [3] [and 4] of the Change of Control Agreement constitute full settlement of all of his or her rights under the Change of Control Agreement, (b) he or she has no entitlement under any other severance or similar arrangement maintained by the Company, and (c) except as otherwise provided specifically in this Release, the Company does not and will not have any other liability or obligation to the Employee. The Employee further acknowledges that, in the absence of his or her execution of this Release, the payments and benefits specified in Section[s] [2] [3] [and 4] of the Change of Control Agreement would not otherwise be due to the Employee. SECTION 2. Release and Covenant Not to Sue. The Employee hereby fully and forever releases and discharges the Company and its parents, affiliates and subsidiaries, including all predecessors and successors, assigns, officers, directors, trustees, employees, agents and attorneys, past and present, from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, controversies, debts, costs, expenses, damages, judgments, orders and liabilities, of whatever kind or nature, direct or indirect, in law, equity or otherwise, whether known or unknown, arising through the date of this Release, out of his or her employment by the Company or the termination thereof, including, but not limited to, any claims for relief or causes of action under the Age Discrimination in Employment Act, 29 U.S.C. (S) 621 et seq., or any other federal, state or local statute, ordinance or regulation regarding discrimination in employment and any claims, demands or actions based upon alleged wrongful or retaliatory discharge or breach of contract under any state or federal law, [except for any claims arising out of the Tuition Reimbursement Agreement dated May 24, 2001 between Employee and the Company]. The Employee expressly represents that he or she has not filed a lawsuit or initiated any other administrative proceeding against the Company (including for purposes of this Section 2, its parents, affiliates and subsidiaries), and that he or she has not assigned any claim against the Company (or its parents, affiliates and subsidiaries) to any other person or entity. The Employee further promises not to initiate a lawsuit or to bring any other claim against the Company (or its parents, affiliates and subsidiaries) arising out of or in any way related to his or her employment by the Company or the termination of that employment. The forgoing will not be deemed to release the Company from (a) claims solely to enforce this Release, (b) claims solely to enforce Section[s] [2] [3] [and 4] of the Change of Control Agreement, (c) claims for indemnification under the Company's By-Laws, under any indemnification agreement between the Company and the Employee or under any similar agreement or (d) claims solely to enforce the terms of any equity incentive award agreement between the Employee and the Company. This Release will not prevent the Employee from filing a charge with the Equal Employment Opportunity Commission (or similar state agency) or participating in any investigation conducted by the Equal Employment Opportunity Commission (or similar state agency); provided, however, that any claims by the Employee for personal relief in connection with such a charge or investigation (such as reinstatement or monetary damages) would be barred. SECTION 3. Restrictive Covenants. The Employee acknowledges that the terms of Section 6 of the Change in Control Agreement will survive the termination of his or her employment. The Employee affirms that the restrictions contained in Section 6 of the Change in Control Agreement are reasonable and necessary to protect the legitimate interests of the Company, that he or she received adequate consideration in exchange for agreeing to those restrictions and that he or she will abide by those restrictions. SECTION 4. Non-Disparagement. The Company (meaning, solely for this purpose, Company's directors and executive officers and other individuals authorized to make official communications on Company's behalf) will not disparage the Employee or the Employee's performance or otherwise take any action which could reasonably be expected to adversely affect the Employee's personal or professional reputation. Similarly, the Employee will not disparage Company or any of its directors, officers, agents or employees or otherwise take any action which could reasonably be expected to adversely affect the reputation of the Company or the personal or professional reputation of any of the Company's directors, officers, agents or employees. SECTION 5. Cooperation. The Employee further agrees that, subject to reimbursement of his or her reasonable expenses, he or she will cooperate fully with the Company and its counsel with respect to any matter (including litigation, investigations, or governmental proceedings) which relates to matters with which the Employee was involved during his or her employment with Company. The Employee shall render such cooperation in a timely manner on reasonable notice from the Company. SECTION 6. Rescission Right. The Employee expressly acknowledges and recites that (a) he or she has read and understands this Release in its entirety, (b) he or she has entered into this Release knowingly and voluntarily, without any duress or coercion; (c) he or she has been advised orally and is hereby advised in writing to consult with an attorney with respect to this Release before signing it; (d) he or she was provided 21 calendar days after receipt of the Release to consider its terms before signing it (or such longer period as is required for this Release to be effective under the Age Discrimination in Employment Act or any similar state law); and (e) he or she is provided seven (7) calendar days from the date of signing to terminate and revoke this Release (or such longer period required by applicable state law), in which case this Release shall be unenforceable, null and void. The Employee may revoke this Release during those seven (7) days (or such longer period required by applicable state law) by providing written notice of revocation to the Company. SECTION 7. Challenge. If the Employee violates or challenges the enforceability of any provisions of the Noncompetition Agreement or this Release, no further payments, rights or benefits under Section[s] [2] [3] [and 4] of the Change of Control Agreement will be due to the Employee. SECTION 8. Miscellaneous. -2- 8.1. No Admission of Liability. This Release is not to be construed as an admission of any violation of any federal, state or local statute, ordinance or regulation or of any duty owed by the Company to the Employee. There have been no such violations, and the Company specifically denies any such violations. 8.2. No Reinstatement. The Employee agrees that he or she will not apply for reinstatement with the Company or seek in any way to be reinstated, re-employed or hired by the Company in the future. 8.3. Successors and Assigns. This Release shall inure to the benefit of and be binding upon the Company and the Employee and their respective successors, executors, administrators and heirs. The Employee may make any assignment of this Release or any interest herein, by operation of law or otherwise. The Company may assign this Release to any successor to all or substantially all of its assets and business by means of liquidation, dissolution, merger, consolidation, transfer of assets, or otherwise. 8.4. Severability. Whenever possible, each provision of this Release will be interpreted in such manner as to be effective and valid under applicable law. However, if any provision of this Release is held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision, and this Release will be reformed, construed and enforced as though the invalid, illegal or unenforceable provision had never been herein contained. 8.5. Entire Agreement; Amendments. Except as otherwise provided herein, this Release contains the entire agreement and understanding of the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature relating to the subject matter hereof. This Release may not be changed or modified, except by an Agreement in writing signed by each of the parties hereto. 8.6. Governing Law. This Release shall be governed by, and enforced in accordance with, the laws of the Commonwealth of Pennsylvania without regard to the application of the principles of conflicts of laws. 8.7. Counterparts and Facsimiles. This Release may be executed, including execution by facsimile signature, in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Release to be executed by its duly authorized officer, and the Employee has executed this Release, in each case as of the date first above written. NEOSE TECHNOLOGIES, INC. By: Name & Title:_______________________________ EMPLOYEE ____________________________________________ -3- EX-10.33 5 dex1033.txt MASTER SECURITY AGREEMENT Exhibit 10.33 MASTER SECURITY AGREEMENT dated as of December 19, 2002 ("Agreement") THIS AGREEMENT is between General Electric Capital Corporation (together with its successors and assigns, if any, "Secured Party") and Neose Technologies, Inc. ("Debtor"). Secured Party has an office at 401 Merritt 7 Suite 23, Norwalk, CT 06851-1177. Debtor is a other organized and existing under the laws of the state of Delaware. Debtor's mailing address and chief place of business is 102 Witmer Rd, Horsham, PA 19044. 1. CREATION OF SECURITY INTEREST. Debtor grants to Secured Party, its successors and assigns, a security interest in and against all property listed on any collateral schedule now or in the future annexed to or made a part of this Agreement ("Collateral Schedule"), and in and against all additions, attachments, accessories and accessions to such property, all substitutions, replacements or exchanges therefor, and all insurance and/or other proceeds thereof (all such property is individually and collectively called the "Collateral"). This security interest is given to secure the payment and performance of all debts, obligations and liabilities of any kind whatsoever of Debtor to Secured Party, now existing or arising in the future, including but not limited to the payment and performance of certain Promissory Notes from time to time identified on any Collateral Schedule (collectively "Notes" and each a "Note"), and any renewals, extensions and modifications of such debts, obligations and liabilities (such Notes, debts, obligations and liabilities are called the "Indebtedness"). 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR. Debtor represents, warrants and covenants as of the date of this Agreement and as of the date of each Collateral Schedule that: (a) Debtor's exact legal name is as set forth in the preamble of this Agreement and Debtor is, and will remain, duly organized, existing and in good standing under the laws of the State set forth in the preamble of this Agreement, has its chief executive offices at the location specified in the preamble, and is, and will remain, duly qualified and licensed in every jurisdiction wherever necessary to carry on its business and operations; (b) Debtor has adequate power and capacity to enter into, and to perform its obligations under this Agreement, each Note and any other documents evidencing, or given in connection with, any of the Indebtedness (all of the foregoing are called the "Debt Documents"); (c) This Agreement and the other Debt Documents have been duly authorized, executed and delivered by Debtor and constitute legal, valid and binding agreements enforceable in accordance with their terms, except to the extent that the enforcement of remedies may be limited under applicable bankruptcy and insolvency laws; (d) No approval, consent or withholding of objections is required from any governmental authority or instrumentality with respect to the entry into, or performance by Debtor of any of the Debt Documents, except any already obtained; (e) The entry into, and performance by, Debtor of the Debt Documents will not (i) violate any of the organizational documents of Debtor or any judgment, order, law or regulation applicable to Debtor, or (ii) result in any breach of or constitute a default under any contract to which Debtor is a party, or result in the creation of any lien, claim or encumbrance on any of Debtor's property (except for liens in favor of Secured Party) pursuant to any indenture, mortgage, deed of trust, bank loan, credit agreement, or other agreement or instrument to which Debtor is a party; (f) There are no suits or proceedings pending in court or before any commission, board or other administrative agency against or affecting Debtor which could, in the aggregate, have a material adverse effect on Debtor, its business or operations, or its ability to perform its obligations under the Debt Documents, nor does Debtor have reason to believe that any such suits or proceedings are threatened; (g) All financial statements delivered to Secured Party in connection with the Indebtedness have been prepared in accordance with generally accepted accounting principles, and since the date of the most recent financial statement, there has been no material adverse change in Debtors financial condition; (h) The Collateral is not, and will not be, used by Debtor for personal, family or household purposes; (i) The Collateral is, and will remain, in good condition and repair and Debtor will not be negligent in its care and use; (j) Debtor is, and will remain, the sole and lawful owner, and in possession of, the Collateral, and has the sole right and lawful authority to grant the security interest described in this Agreement; and (k) The Collateral is, and will remain, free and clear of all liens, claims and encumbrances of any kind whatsoever, except for (i) liens in favor of Secured Party, (ii) liens for taxes not yet due or for taxes being contested in good faith and which do not involve, in the judgment of Secured Party, any risk of the sale, forfeiture or loss of any of the Collateral, and (iii) inchoate materialmen's, mechanic's, repairmen's and similar liens arising by operation of law in the normal course of business for amounts which are not delinquent (all of such liens are called "Permitted Liens"). 3. COLLATERAL. (a) Until the declaration of any default, Debtor shall remain in possession of the Collateral; except that Secured Party shall have the right to possess (i) any chattel paper or instrument that constitutes a part of the Collateral, and (ii) any other Collateral in which Secured Party's security interest may be perfected only by possession. Secured Party may inspect any of the Collateral during normal business hours after giving Debtor reasonable prior notice. If Secured Party asks, Debtor will promptly notify Secured Party in writing of the location of any Collateral. (b) Debtor shall (i) use the Collateral only in its trade or business, (ii) maintain all of the Collateral in good operating order and repair, normal wear and tear excepted, (iii) use and maintain the Collateral only in compliance with manufacturers recommendations and all applicable laws, and (iv) keep all of the Collateral free and clear of all liens, claims and encumbrances (except for Permitted Liens). (c) Secured Party does not authorize and Debtor agrees it shall not (i) part with possession of any of the Collateral (except to Secured Party or for maintenance and repair), (ii) remove any of the Collateral from the continental United States, or (iii) sell, rent, lease, mortgage, license, grant a security interest in or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral. (d) Debtor shall pay promptly when due all taxes, license fees, assessments and public and private charges levied or assessed on any of the Collateral, on its use, or on this Agreement or any of the other Debt Documents. At its option, Secured Party may discharge taxes, liens, security interests or other encumbrances at any time levied or placed on the Collateral and may pay for the maintenance, insurance and preservation of the Collateral and effect compliance with the terms of this Agreement or any of the other Debt Documents. Debtor agrees to reimburse Secured Party, on demand, all costs and expenses incurred by Secured Party in connection with such payment or performance and agrees that such reimbursement obligation shall constitute Indebtedness. (e) Debtor shall, at all times, keep accurate and complete records of the Collateral, and Secured Party shall have the right to inspect and make copies of all of Debtor's books and records relating to the Collateral during normal business hours, after giving Debtor reasonable prior notice. (f) Debtor agrees and acknowledges that any third person who may at any time possess all or any portion of the Collateral shall be deemed to hold, and shall hold, the Collateral as the agent of, and as pledge holder for, Secured Party. Secured Party may at any time give notice to any third person described in the preceding sentence that such third person is holding the Collateral as the agent of, and as pledge holder for, the Secured Party. 4. INSURANCE. (a) Debtor shall at all times bear the entire risk of any loss, theft, damage to, or destruction of, any of the Collateral from any cause whatsoever. (b) Debtor agrees to keep the Collateral insured against loss or damage by fire and extended coverage perils, theft, burglary, and for any or all Collateral which are vehicles, for risk of loss by collision, and if requested by Secured Party, against such other risks as Secured Party may reasonably require. The insurance coverage shall be in an amount no less than the full replacement value of the Collateral, and deductible amounts, insurers and policies shall be acceptable to Secured Party. Debtor shall deliver to Secured Party policies or certificates of insurance evidencing such coverage. Each policy shall name Secured Party as a loss payee, shall provide for coverage to Secured Party regardless of the breach by Debtor of any warranty or representation made therein, shall not be subject to co-insurance, and shall provide that coverage may not be canceled or altered by the insurer except upon thirty (30) days prior written notice to Secured Party. Debtor appoints Secured Party as its attorney-in-fact to make proof of loss, claim for insurance and adjustments with insurers, and to receive payment of and execute or endorse all documents, checks or drafts in connection with insurance payments. Secured Party shall not act as Debtor's attorney-in-fact unless Debtor is in default. Proceeds of insurance shall be applied, at the option of Secured Party, to repair or replace the Collateral or to reduce any of the Indebtedness. 5. REPORTS. (a) Debtor shall promptly notify Secured Party of (i) any change in the name of Debtor, (ii) any change in the state of its incorporation or registration, (iii) any relocation of its chief executive offices, (iv) any relocation of any of the Collateral, (v) any of the Collateral being lost, stolen, missing, destroyed, materially damaged or worn out, or (vi) any lien, claim or encumbrance other than Permitted Liens attaching to or being made against any of the Collateral. (b) Debtor will deliver to Secured Party Debtor's complete financial statements, certified by a recognized firm of certified public accountants, within ninety (90) days of the close of each fiscal year of Debtor. If Secured Party requests, Debtor will deliver to Secured Party copies of Debtor's quarterly financial reports certified by Debtor's chief financial officer, within ninety (90) days after the close of each of Debtor's fiscal quarter. Debtor will deliver to Secured Party copies of all Forms 10-K and 10-Q, if any, within 30 days after the dates on which they are filed with the Securities and Exchange Commission. 6. FURTHER ASSURANCES. (a) Debtor shall, upon request of Secured Party, furnish to Secured Party such further information, execute and deliver to Secured Party such documents and instruments (including, without limitation, Uniform Commercial Code financing statements) and shall do such other acts and things as Secured Party may at any time reasonably request relating to the perfection or protection of the security interest created by this Agreement or for the purpose of carrying out the intent of this Agreement. Without limiting the foregoing, Debtor shall cooperate and do all acts deemed necessary or advisable by Secured Party to continue in Secured Party a perfected first security interest in the Collateral, and shall obtain and furnish to Secured Party any subordinations, releases, landlord waivers, lessor waivers, mortgagee waivers, or control agreements, and similar documents as may be from time to time requested by, and in form and substance satisfactory to, Secured Party. (b) Debtor authorizes Secured Party to file a financing statement and amendments thereto describing the Collateral and containing any other information required by the applicable Uniform Commercial Code. Debtor irrevocably grants to Secured Party the power to sign Debtor's name and generally to act on behalf of Debtor to execute and file applications for title, transfers of title, financing statements, notices of lien and other documents pertaining to any or all of the Collateral; this power is coupled with Secured Party's interest in the Collateral. Debtor shall, if any certificate of title be required or permitted by law for any of the Collateral, obtain and promptly deliver to Secured Party such certificate showing the lien of this Agreement with respect to the Collateral. Debtor ratifies its prior authorization for Secured Party to file financing statements and amendments thereto describing the Collateral and containing any other information required by the Uniform Commercial Code if filed prior to the date hereof. (c) Debtor shall indemnify and defend the Secured Party, its successors and assigns, and their respective directors, officers and employees, from and against all claims, actions and suits (including, without limitation, related attorneys' fees) of any kind whatsoever arising, directly or indirectly, in connection with any of the Collateral. 7. DEFAULT AND REMEDIES. (a) Debtor shall be in default under this Agreement and each of the other Debt Documents if: (i) Debtor breaches its obligation to pay when due any installment or other amount due or coming due under any of the Debt Documents; (ii) Debtor, without the prior written consent of Secured Party, attempts to or does sell, rent, lease, license, mortgage, grant a security interest in, or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral; (iii) Debtor breaches any of its insurance obligations under Section 4; (iv) Debtor breaches any of its other obligations under any of the Debt Documents and fails to cure that breach within thirty (30) days after written notice from Secured Party; (v) Any warranty, representation or statement made by Debtor in any of the Debt Documents or otherwise in connection with any of the Indebtedness shall be false or misleading in any material respect; (vi) Any of the Collateral is subjected to attachment, execution, levy, seizure or confiscation in any legal proceeding or otherwise, or if any legal or administrative proceeding is commenced against Debtor or any of the Collateral, which in the good faith judgment of Secured Party subjects any of the Collateral to a material risk of attachment, execution, levy, seizure or confiscation and no bond is posted or protective order obtained to negate such risk; (vii) Debtor breaches or is in default under any other agreement between Debtor and Secured Party; (viii) Debtor or any guarantor or other obligor for any of the Indebtedness (collectively "Guarantor") dissolves, terminates its existence, becomes insolvent or ceases to do business as a going concern; (ix) If Debtor or any Guarantor is a natural person, Debtor or any such Guarantor dies or becomes incompetent; (x) A receiver is appointed for all or of any part of the property of Debtor or any Guarantor, or Debtor or any Guarantor makes any assignment for the benefit of creditors; (xi) Debtor or any Guarantor files a petition under any bankruptcy, insolvency or similar law, or any such petition is filed against Debtor or any Guarantor and is not dismissed within forty-five (45) days; (xii) Debtor's improper filing of an amendment or termination statement relating to a filed financing statement describing the Collateral; or (xiii) Debtor defaults under any other material obligation for (A) borrowed money, (B) the deferred purchase price of property or (C) payments due under any lease agreement. (b) If Debtor is in default, the Secured Party, at its option, may declare any or all of the Indebtedness to be immediately due and payable, without demand or notice to Debtor or any Guarantor. The accelerated obligations and liabilities shall bear interest (both before and after any judgment) until paid in full at the lower of eighteen percent (18%) per annum or the maximum rate not prohibited by applicable law. (c) After default, Secured Party shall have all of the rights and remedies of a Secured Party under the Uniform Commercial Code, and under any other applicable law. Without limiting the foregoing, Secured Party shall have the right to (i) notify any account debtor of Debtor or any obligor on any instrument which constitutes part of the Collateral to make payment to the Secured Party, (ii) with or without legal process, enter any premises where the Collateral may be and take possession of and remove the Collateral from the premises or store it on the premises, (iii) sell the Collateral at public or private sale, in whole or in part, and have the right to bid and purchase at said sale, or (iv) lease or otherwise dispose of all or part of the Collateral, applying proceeds from such disposition to the obligations then in default. If requested by Secured Party, Debtor shall promptly assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party which is reasonably convenient to both parties. Secured Party may also render any or all of the Collateral unusable at the Debtor's premises and may dispose of such Collateral on such premises without liability for rent or costs. Any notice that Secured Party is required to give to Debtor under the Uniform Commercial Code of the time and place of any public sale or the time after which any private sale or other intended disposition of the Collateral is to be made shall be deemed to constitute reasonable notice if such notice is given to the last known address of Debtor at least five (5) days prior to such action. (d) Proceeds from any sale or lease or other disposition shall be applied: first, to all costs of repossession, storage, and disposition including without limitation attorneys', appraisers', and auctioneers' fees; second, to discharge the obligations then in default; third, to discharge any other Indebtedness of Debtor to Secured Party, whether as obligor, endorser, guarantor, surety or indemnitor; fourth, to expenses incurred in paying or settling liens and claims against the Collateral; and lastly, to Debtor, if there exists any surplus. Debtor shall remain fully liable for any deficiency. (e) Debtor agrees to pay all reasonable attorneys' fees and other costs incurred by Secured Party in connection with the enforcement, assertion, defense or preservation of Secured Party's rights and remedies under this Agreement, or if prohibited by law, such lesser sum as may be permitted. Debtor further agrees that such fees and costs shall constitute Indebtedness. (f) Secured Party's rights and remedies under this Agreement or otherwise arising are cumulative and may be exercised singularly or concurrently. Neither the failure nor any delay on the part of the Secured Party to exercise any right, power or privilege under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise of that or any other right, power or privilege. SECURED PARTY SHALL NOT BE DEEMED TO HAVE WAIVED ANY OF ITS RIGHTS UNDER THIS AGREEMENT OR UNDER ANY OTHER AGREEMENT, INSTRUMENT OR PAPER SIGNED BY DEBTOR UNLESS SUCH WAIVER IS EXPRESSED IN WRITING AND SIGNED BY SECURED PARTY. A waiver on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. (g) DEBTOR AND SECURED PARTY UNCONDITIONALLY WAIVE THEIR RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE OTHER DEBT DOCUMENTS, ANY OF THE INDEBTEDNESS SECURED HEREBY, ANY DEALINGS BETWEEN DEBTOR AND SECURED PARTY RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN DEBTOR AND SECURED PARTY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT. THIS WAIVER IS IRREVOCABLE. THIS WAIVER MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING. THE WAIVER ALSO SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY OTHER DEBT DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 8. MISCELLANEOUS. (a) This Agreement, any Note and/or any of the other Debt Documents may be assigned, in whole or in part, by Secured Party without notice to Debtor, and Debtor agrees not to assert against any such assignee, or assignee's assigns, any defense, set-off, recoupment claim or counterclaim which Debtor has or may at any time have against Secured Party for any reason whatsoever. Debtor agrees that if Debtor receives written notice of an assignment from Secured Party, Debtor will pay all amounts payable under any assigned Debt Documents to such assignee or as instructed by Secured Party. Debtor also agrees to confirm in writing receipt of the notice of assignment as may be reasonably requested by Secured Party or assignee. (b) All notices to be given in connection with this Agreement shall be in writing, shall be addressed to the parties at their respective addresses set forth in this Agreement (unless and until a different address may be specified in a written notice to the other party), and shall be deemed given (i) on the date of receipt if delivered in hand or by facsimile transmission, (ii) on the next business day after being sent by express mail, and (iii) on the fourth business day after being sent by regular, registered or certified mail. As used herein, the term "business day" shall mean and include any day other than Saturdays, Sundays, or other days on which commercial banks in New York, New York are required or authorized to be closed. (c) Secured Party may correct patent errors and fill in all blanks in this Agreement or in any Collateral Schedule consistent with the agreement of the parties. (d) Time is of the essence of this Agreement. This Agreement shall be binding, jointly and severally, upon all parties described as the "Debtor" and their respective heirs, executors, representatives, successors and assigns, and shall inure to the benefit of Secured Party, its successors and assigns. (e) This Agreement and its Collateral Schedules constitute the entire agreement between the parties with respect to the subject matter of this Agreement and supersede all prior understandings (whether written, verbal or implied) with respect to such subject matter. THIS AGREEMENT AND ITS COLLATERAL SCHEDULES SHALL NOT BE CHANGED OR TERMINATED ORALLY OR BY COURSE OF CONDUCT, BUT ONLY BY A WRITING SIGNED BY BOTH PARTIES. Section headings contained in this Agreement have been included for convenience only, and shall not affect the construction or interpretation of this Agreement. (f) This Agreement shall continue in full force and effect until all of the Indebtedness has been indefeasibly paid in full to Secured Party or its assignee. The surrender, upon payment or otherwise, of any Note or any of the other documents evidencing any of the Indebtedness shall not affect the right of Secured Party to retain the Collateral for such other Indebtedness as may then exist or as it may be reasonably contemplated will exist in the future. This Agreement shall automatically be reinstated if Secured Party is ever required to return or restore the payment of all or any portion of the Indebtedness (all as though such payment had never been made). (g) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CONNECTICUT (WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE EQUIPMENT. IN WITNESS WHEREOF, Debtor and Secured Party, intending to be legally bound hereby, have duly executed this Agreement in one or more counterparts, each of which shall be deemed to be an original, as of the day and year first aforesaid. SECURED PARTY: DEBTOR: General Electric Capital Corporation Neose Technologies, Inc. By: /s/ John Edel By: /s/ A. Brian Davis ------------------------------- ------------------------------- Name: John Edel Name: A. Brian Davis ----------------------------- ----------------------------- Title: Senior Vice President Title: Vice President, Finance ---------------------------- ---------------------------- EX-10.34 6 dex1034.txt AMENDMENT TO MASTER SECURITY AGREEMENT Exhibit 10.34 AMENDMENT THIS AMENDMENT is made as of the 19th day of December, 2002, between General Electric Capital Corporation ("Secured Party") and Neose Technologies, Inc. ("Debtor") in connection with that certain Master Security Agreement, dated as of December 19, 2002 ("Agreement"). The terms of this Amendment are hereby incorporated into the Agreement as though fully set forth therein. Section references below refer to the section numbers of the Agreement. The Agreement is hereby amended as follows: 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR. New Subsection (l) is hereby added to Section 2 and hereby reads as follows: "(l) Secured Party will acquire by the terms of this Agreement good title to the Collateral under any and all Collateral Schedules free from all liens and encumbrances whatsoever and the Collateral has been delivered to Debtor in good order and condition, and conforms to the specifications, requirements and standards applicable thereto; and " New Subsection (m) is hereby added to Section 2 and hereby reads as follows: "The amount financed as set forth in the Collateral Schedules is the correct original equipment cost that Debtor paid to the vendors listed in the Collateral Schedules." 5. REPORTS. Subsection (b) is hereby amended and restated as follows: "(b) Debtor will deliver to Secured Party financial statements as follows. If Debtor is a privately held company, then Debtor agrees to provide monthly financial statements, certified by Debtor's president or chief financial officer including a balance sheet, statement of operations and cash flow statement within 30 days of each month end and its complete audited annual financial statements, certified by a recognized firm of certified public accountants, within 120 days of fiscal year end or at such time as Debtor's Board of Directors receives the audit. If Debtor is a publicly held company, then Debtor agrees to provide quarterly unaudited statements and annual audited statements, such annual statements being certified by a recognized firm of certified public accountants, within 10 days after the statements are provided to the Securities and Exchange Commission ("SEC"). All such statements are to be prepared using generally accepted accounting principles ("GAAP") and, if Debtor is a publicly held company, are to be in compliance with SEC requirements." 7. DEFAULT AND REMEDIES. Subsection (a) is hereby amended and restated as follows: "(a) Debtor shall be in default under this Agreement and each of the other Debt Documents if: (i) Debtor breaches its obligation to pay when due any installment or other amount due under any of the Debt Documents; (ii) Debtor, without the prior written consent of Secured Party, attempts to or does sell, rent, lease, license, mortgage, grant a security interest in, or otherwise transfer or encumber (except for Permitted Liens) any of the Collateral; (iii) Debtor breaches any of its insurance obligations under Section 4; (iv) Debtor breaches any of its other obligations under any of the Debt Documents and fails to cure that breach within thirty (30) days after written notice from Secured Party; (v) Any warranty, representation or statement made by Debtor in any of the Debt Documents or otherwise in connection with any of the Indebtedness shall be false or misleading in any material respect; (vi) Any of the Collateral is subjected to attachment, execution, levy, seizure or confiscation in any legal proceeding or otherwise, or if any legal or administrative proceeding is commenced against Debtor or any of the Collateral, which in the good faith judgment of Secured Party subjects any of the Collateral to a material risk of attachment, execution, levy, seizure or confiscation and no bond is posted or protective order obtained to negate such risk; (vii) Debtor breaches or is in default under any other agreement between Debtor and Secured Party; (viii) Debtor or any guarantor or other obligor for any of the Indebtedness (collectively "Guarantor") dissolves, terminates its existence, becomes insolvent or ceases to do business as a going concern; (ix) If Debtor or any Guarantor is a natural person, Debtor or any such Guarantor dies or becomes incompetent; (x) A receiver is appointed for all or of any part of the property of Debtor or any Guarantor, or Debtor or any Guarantor makes any assignment for the benefit of creditors; (xi) Debtor or any Guarantor files a petition under any bankruptcy, insolvency or similar law, or any such petition is filed against Debtor or any Guarantor and is not dismissed within forty-five (45) days; (xii) Debtor's improper filing of an amendment or termination statement relating to a filed financing statement describing the Collateral; or (xiii) Debtor defaults under any other material obligation for (A) borrowed money, (B) the deferred purchase price of property or (C) payments due under any other material equipment lease agreement. (xiv) At any time during the term of this Agreement Debtor sells more than 50% of its interest in the company to another corporation or business or all or substantially all of its assets without Secured Party's prior written consent." TERMS USED, BUT NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN TO THEM IN THE AGREEMENT. EXCEPT AS EXPRESSLY AMENDED HEREBY, THE AGREEMENT SHALL REMAIN IN FULL FORCE AND EFFECT. IF THERE IS ANY CONFLICT BETWEEN THE PROVISIONS OF THE AGREEMENT AND THIS AMENDMENT, THEN THIS AMENDMENT SHALL CONTROL. IN WITNESS WHEREOF, the parties hereto have executed this Amendment simultaneously with the Agreement by signature of their respective authorized representative set forth below. General Electric Capital Corporation Neose Technologies, Inc. By: /s/ John Edel By: /s/ A. Brian Davis --------------------------------- --------------------------------- Name: John Edel Name: A. Brian Davis ------------------------------- ------------------------------- Title: Senior Vice President Title: Vice President, Finance ------------------------------ ------------------------------ EX-10.35 7 dex1035.txt PROMISSORY NOTE OF NEOSE TECHNOLOGIES, INC. Exhibit 10.35 PROMISSORY NOTE 12/27/02 --------------------------- (Date) FOR VALUE RECEIVED, Neose Technologies, Inc. an other located at the address stated below ("Maker") promises, jointly and severally if more than one, to pay to the order of General Electric Capital Corporation or any subsequent holder hereof (each, a "Payee") at its office located at 401 Merritt 7 Suite 23, Norwalk, CT 06851-1177 or at such other place as Payee or the holder hereof may designate, the principal sum of Two Million Two Hundred Sixty Thousand Nine Hundred Sixty One Dollars ($2,260,961.00), with interest on the unpaid principal balance, from the date hereof through and including the dates of payment, at a fixed interest rate of Eight percent (8.00%) per annum, to be paid in lawful money of the United States, in Thirty Six (36) consecutive monthly installments of principal and interest as follows: Periodic Installment Amount -------------------------------- Thirty Five (35) $70,849.26 each ("Periodic Installment") and a final installment which shall be in the amount of the total outstanding principal and interest. The first Periodic Installment shall be due and payable on 2/1/03 and the following Periodic Installments and the final installment shall be due and payable on the same day of each succeeding month (each, a "Payment Date"). Such installments have been calculated on the basis of a 360 day year of twelve 30-day months. Each payment may, at the option of the Payee, be calculated and applied on an assumption that such payment would be made on its due date. The acceptance by Payee of any payment which is less than payment in full of all amounts due and owing at such time shall not constitute a waiver of Payee's right to receive payment in full at such time or at any prior or subsequent time. The Maker hereby expressly authorizes the Payee to insert the date value is actually given in the blank space on the face hereof and on all related documents pertaining hereto. This Note may be secured by a security agreement, chattel mortgage, pledge agreement or like instrument (each of which is hereinafter called a "Security Agreement"). Time is of the essence hereof. If any installment or any other sum due under this Note or any Security Agreement is not received within ten (10) days after its due date, the Maker agrees to pay, in addition to the amount of each such installment or other sum, a late payment charge of five percent (5%) of the amount of said installment or other sum, but not exceeding any lawful maximum. If (i) Maker fails to make payment of any amount due hereunder within ten (10) days after the same becomes due and payable; or (ii) Maker is in default under, or fails to perform under any term or condition contained in any Security Agreement, then the entire principal sum remaining unpaid, together with all accrued interest thereon and any other sum payable under this Note or any Security Agreement, at the election of Payee, shall immediately become due and payable, with interest thereon at the lesser of eighteen percent (18%) per annum or the highest rate not prohibited by applicable law from the date of such accelerated maturity until paid (both before and after any judgment). Notwithstanding anything to the contrary contained herein or in the Security Agreement, Maker may not prepay in full or in part any indebtedness hereunder without the express written consent of Payee in its sole discretion. It is the intention of the parties hereto to comply with the applicable usury laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in this Note or any Security Agreement, in no event shall this Note or any Security Agreement require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under this Note or any Security Agreement, or if all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under this Note or any Security Agreement on the principal balance shall exceed the maximum amount of interest permitted by applicable law, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither Maker nor any other person or entity now or hereafter liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to Maker, at the option of the Payee, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under this Note or any Security Agreement which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Maker or otherwise by Payee in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for the Payee to receive a greater interest per annum rate than is presently allowed, the Maker agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to the maximum interest per annum rate allowed by the amended state law or the law of the United States of America. The Maker and all sureties, endorsers, guarantors or any others (each such person, other than the Maker, an "Obligor") who may at any time become liable for the payment hereof jointly and severally consent hereby to any and all extensions of time, renewals, waivers or modifications of, and all substitutions or releases of, security or of any party primarily or secondarily liable on this Note or any Security Agreement or any term and provision of either, which may be made, granted or consented to by Payee, and agree that suit may be brought and maintained against any one or more of them, at the election of Payee without joinder of any other as a party thereto, and that Payee shall not be required first to foreclose, proceed against, or exhaust any security hereof in order to enforce payment of this Note. The Maker and each Obligor hereby waives presentment, demand for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, and all other notices in connection herewith, as well as filing of suit (if permitted by law) and diligence in collecting this Note or enforcing any of the security hereof, and agrees to pay (if permitted by law) all expenses incurred in collection, including Payee's actual attorneys' fees. Maker and each Obligor agrees that fees not in excess of twenty percent (20%) of the amount then due shall be deemed reasonable. Maker hereby irrevocably authorizes and empowers the Prothonotary or Clerk, or any attorney for any Court of record to appear for Maker in such Courts, at any time, and confess a judgement against Maker, without process, in favor of any holder hereof, without the filing of a declaration of default, with release of errors, without stay of execution, for such amount as may appear from the face hereof to be due hereunder (or, if such attorney so elects, for the amount which may be due hereon as evidenced by an affidavit signed by a representative of holder setting forth the amount then due) together with charges, attorney's fees and costs as herein provided, and Maker hereby waives and releases all benefits and relief from any and all appraisement, stay or exemption laws of any state, now in force or hereafter to be passed. If a copy hereof, verified by an affidavit, shall have been filed in said proceeding, it shall not be necessary to file the original as a warrant of attorney. No single exercise of the foregoing warrant and power to confess judgement shall be deemed to exhaust the power, whether or not such exercise shall be held by any Court to be invalid, voidable, or void, but the power shall continue undiminished and may be exercised from time to time as often as the holder hereof shall elect, until all sums payable or that may become payable hereunder by Maker have been paid in full. THE MAKER HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS NOTE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN MAKER AND PAYEE RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN MAKER AND PAYEE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS.) THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. This Note and any Security Agreement constitute the entire agreement of the Maker and Payee with respect to the subject matter hereof and supercedes all prior understandings, agreements and representations, express or implied. No variation or modification of this Note, or any waiver of any of its provisions or conditions, shall be valid unless in writing and signed by an authorized representative of Maker and Payee. Any such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. Any provision in this Note or any Security Agreement which is in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. Neose Technologies, Inc. __________________________________ By: /s/ A. Brian Davis (Witness) ----------------------------- __________________________________ Name: A. Brian Davis (Print name) ---------------------------- __________________________________ Title: Vice President, Finance (Address) --------------------------- Federal Tax ID #: 121345678 ---------------- Address: 102 Witmer Rd, Horsham, Montgomery County, PA 19044 EX-10.36 8 dex1036.txt COMMON STOCK PURCHASE AGREEMENT Exhibit 10.36 COMMON STOCK PURCHASE AGREEMENT THIS COMMON STOCK PURCHASE AGREEMENT (the "Agreement") is entered into as of February 13, 2003, by and among NEOSE TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and the purchasers listed on Schedule I hereto (individually a "Purchaser" and, collectively, the "Purchasers"). Background A. The Company desires to issue and sell, and the Purchasers desire to purchase, shares of common stock, par value $.01 per share, of the Company ("Common Stock"), for the consideration and upon the terms and conditions hereinafter set forth. B. The Company and the Purchasers wish to set forth herein certain agreements regarding their future relationships and their rights and obligations with respect to the Common Stock. Terms NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth, the parties hereto agree as follows: 1. Sale and Purchase of Common Shares. (a) Sale and Purchase. Subject to the terms and conditions hereof, the Company hereby agrees to sell, and the Purchasers, severally and not jointly, hereby agree to purchase, on the date hereof (the "Closing Date") shares of Common Stock (the "Common Shares") at a price per Common Share (the "Share Price") of $6.00. The total purchase price to be paid by each Purchaser is set forth opposite each Purchaser's name as that Purchaser's "Purchase Commitment" on Schedule I hereto. The number of Common Shares to be purchased by a Purchaser shall be equal to the dollar amount of the "Purchase Commitment" set forth opposite the Purchaser's name on Schedule I hereto divided by the Share Price. The total aggregate purchase price to be paid by all of the Purchasers (the "Purchase Price") shall not exceed $17,200,596. (b) Closing. The closing shall take place at the offices of Pepper Hamilton LLP, 3000 Two Logan Square, Eighteenth and Arch Streets, Philadelphia, PA 19103-2799. (c) Payment of Purchase Price. On the Closing Date, each Purchaser shall pay and deliver to the Company that portion of the Purchase Price set forth opposite such Purchaser's name as that Purchaser's "Purchase Commitment" on Schedule I hereto by wire transfer of immediately available funds. (d) Delivery of Common Shares. On the Closing Date, against delivery by the applicable Purchaser of that portion of the Purchase Price to be paid by it, the Company shall issue and, within three (3) business days following the Closing Date, deliver to such Purchaser a certificate representing that number of Common Shares to be purchased by each Purchaser on the Closing Date pursuant to Section 1(a), registered in the name of such Purchaser or the designated nominee(s) of such Purchaser. 2. Representations and Warranties of the Company. The Company hereby represents and warrants as follows: (a) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, has full corporate power and corporate authority to own or lease its properties and conduct its business as described in the Company's statements, reports, schedules, forms and other documents filed by the Company with the Securities and Exchange Commission (the "SEC") since January 1, 2002 (the "SEC Documents") and as now being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary, except where failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company (a "Material Adverse Effect"). The Company has no subsidiaries and has never had any operating subsidiaries. (b) The authorized capital of the Company consists of 35,000,000 shares of capital stock, (i) of which 30,000,000 shares are designated Common Stock, of which 14,324,279 shares of Common Stock were outstanding and were duly authorized, validly issued, fully paid and nonassessable on December 31, 2002, and (ii) of which 5,000,000 shares are designated preferred stock, par value $.01 per share, none of which were outstanding on December 31, 2002 or are outstanding on the date hereof. The Company has no other classes of stock authorized or outstanding. As of December 31, 2002, options to purchase 3,827,683 shares of Common Stock were outstanding, and when such options are exercised and the prescribed exercise price paid, the shares of Common Stock issued with respect to such options will be duly authorized, validly issued, fully paid and nonassessable. Except as set forth above and other than (i) 496,542 shares of Common Stock reserved for issuance under the Company's Amended and Restated 1995 Stock Option/Stock Issuance Plan, (ii) 35,163 shares of Common Stock reserved for issuance under the Company's Employee Stock Purchase Plan, and (iii) 499,186 shares of Common Stock reserved for issuance under option grants outside of the Company's Amended and Restated 1995 Stock Option/Stock Issuance Plan, there are as of December 31, 2002, no existing options, warrants, calls, commitments or rights of any character to purchase or otherwise acquire from the Company shares of capital stock of any class, no outstanding securities of the Company that are convertible into shares of capital stock of the Company of any class, and no options, warrants or rights to purchase from the Company any such convertible securities. The Company has no outstanding contractual or other obligation to repurchase, redeem or otherwise acquire any outstanding shares of its capital stock. The issued and outstanding shares of Common Stock have not been issued in violation of any preemptive or other rights of any person, whether arising by statute, under the Second Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation"), the Certificate of Designation establishing and designating the Series A Junior Participating Preferred Stock (the "Certificate of Designation") -2- or the Second Amended and Restated Bylaws (the "Bylaws") of the Company or in any other manner known to the Company. No person or entity is entitled to any preemptive or similar right with respect to the issuance of any capital stock of the Company. (c) The Company has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly authorized and validly executed and delivered by the Company and constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as the indemnification agreements of the Company herein may be legally unenforceable. (d) None of the execution and delivery of this Agreement, the issuance and sale of the Common Shares by the Company hereunder, the fulfillment of the terms hereof or the consummation of the transactions contemplated herein, will (i) violate any law, rule, regulation, judgment, injunction, decree, determination, award or order of any court or governmental agency or instrumentality, domestic or foreign, or (ii) conflict with or result in any breach of any of the terms of or constitute a default (with or without the giving of notice or the passage of time or otherwise) under, or result in the termination of or the creation or imposition of any mortgage, lien, security interest or other charge or encumbrance of any nature under the terms of: (A) any material contract or agreement to which the Company is a party or by which the Company or any of the assets and properties of the Company is bound, other than any such conflict, breach or default that would not have a Material Adverse Effect; or (B) the Company's Certificate of Incorporation, Certificate of Designation or Bylaws. None of the execution and delivery of this Agreement, the issuance and sale of the Common Shares by the Company hereunder, the fulfillment of the terms hereof or the consummation of the transactions contemplated herein, requires any consent, approval, order or authorization of, or registration with, or the giving of notice to, any governmental or public body or authority or any other person, except for such notices, consents or approvals which have previously been obtained or which will be obtained on or before the Closing Date and notices and filings that may be required under applicable state and federal securities laws that will be undertaken by the Company after the Closing Date. (e) The Common Shares being sold hereunder have been duly authorized, and when issued and paid for in accordance with the terms hereof, will be validly issued, fully paid and nonassessable. (f) The Common Stock is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is listed on The Nasdaq National Market (the "Nasdaq Stock Market"), and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the Nasdaq Stock Market. (g) Since becoming subject to the periodic reporting requirements of the Exchange Act, the Company has made all required filings pursuant to the rules and regulations promulgated thereunder, and all such filings, as may have been amended, complied in all -3- material respects with the Exchange Act and such rules and regulations as of the date filed with the SEC. . None of the SEC Documents, as of their respective dates (as amended through the date hereof), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. There is, to the best of the Company's knowledge, no fact, other than general biotechnology information or other information which is in the public domain and not specific to the Company or its business, which materially and adversely affects the business, prospects, condition, affairs or operations of the Company or any of its properties or assets which has not been disclosed orally to the Purchasers or in the SEC Documents. (h) As of their respective dates, the financial statements of the Company, together with related notes and schedules, included in all of the SEC Documents complied in form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements and related notes and schedules have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the period involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and its results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). (i) The Company is not in violation of its charter, bylaws or other organizational documents, or in violation of any law, administrative regulation, ordinance or order of any court or governmental agency, arbitration panel or authority applicable to the Company, which violation, individually or in the aggregate, would be reasonably likely to have a Material Adverse Effect, and is not in default (and there exists no condition which, with or without the passage of time or giving of notice or otherwise, would constitute a default) in the performance of any bond, debenture, note or any other evidence of indebtedness in any indenture, mortgage, deed of trust or any other agreement or instrument to which the Company is a party or by which the Company is bound or by which the property of the Company is bound, which would be reasonably likely to have a Material Adverse Effect. (j) The Company has ownership or license or legal right to use all patent, copyright, trade secret, trademark, customer lists, designs, manufacturing or other processes, computer software, systems, data compilation, research results or other proprietary rights used in the business of the Company and material to the Company (collectively, "Intellectual Property") other than Intellectual Property generally available on commercial terms from other sources. All of such patents, registered trademarks and registered copyrights owned by the Company have been duly registered in, filed in or issued by the United States Patent and Trademark Office, the United States Register of Copyrights or the corresponding offices of other jurisdictions and have been maintained and renewed in accordance with all applicable provisions of law and administrative regulations in the United States and all such jurisdictions, except where the failure to do so would not reasonably be expected to have a Material Adverse Effect. All material licenses or other material agreements under which (i) the Company is granted rights in Intellectual Property, other than Intellectual Property generally available on commercial terms -4- from other sources, and (ii) the Company has granted rights to others in Intellectual Property owned or licensed by the Company, are, to the knowledge of the Company, in full force and effect and, to the knowledge of the Company, there is no material default by the Company thereto. The Company believes it has taken all steps required in accordance with sound business practice and business judgment to establish and preserve its ownership of or rights to all material Intellectual Property. To the knowledge of the Company, the present business, activities and products of the Company do not infringe any intellectual property of any other person, except where such infringement would not have a Material Adverse Effect. Except as described in the SEC Documents, no proceeding charging the Company with infringement of any adversely held Intellectual Property has been filed. To the knowledge of the Company, the Company is not making unauthorized use of any confidential information or trade secrets of any person. Neither the Company nor, to the knowledge of the Company, any of its employees has any agreements or arrangements with any persons other than the Company related to confidential information or trade secrets of such persons other than such agreements that would not materially restrict the Company from conducting its business as currently conducted. (k) There is no material legal or governmental proceeding pending or, to the knowledge of the Company, threatened, to which the Company is a party or of which the business or property of the Company is subject that is not disclosed in the Company's SEC Documents under the heading "Legal Proceedings." There are no requests for confidential treatment of information currently pending before the SEC. There is no investigation, inquiry or proceeding by the SEC of or against the Company currently pending, and, to the Company's knowledge, no such investigation, inquiry or proceeding has been threatened. (l) Since September 30, 2002, there has not been (i) any Material Adverse Effect, whether or not arising in the ordinary course of business, (ii) any obligation, direct or contingent, that is material to the Company, incurred by the Company, except obligations incurred in the ordinary course of business consistent with past practice, (iii) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (iv) any loss or damage (whether or not insured) to the physical property of the Company which has been sustained which has had a Material Adverse Effect. (m) Except as set forth in Schedule 2(m), the Company has good and marketable title to its properties, free and clear of all material security interests, mortgages, pledges, liens, charges, encumbrances and claims of record. The properties of the Company are, in the aggregate, in good repair (reasonable wear and tear excepted), and suitable for their respective uses. To the Company's knowledge, any real property held under lease by the Company is held under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the conduct of the business of the Company. The Company owns or leases all such properties as are necessary to its business or operations as now conducted. (n) Except as would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect: (i) the Company is in compliance with all applicable Environmental Laws (as defined below), (ii) the Company has all permits, authorizations and approvals required under any applicable Environmental Laws and is in compliance with the requirements of such permits authorizations and approvals, (iii) there are no pending or, to the -5- knowledge of the Company, threatened Environmental Claims (as defined below) against the Company, and (iv) under applicable law, there are no circumstances with respect to any property or operations of the Company that are reasonably likely to form the basis of an Environmental Claim against the Company. For purposes of this Agreement, "Environmental Law" means any United States (or other applicable jurisdiction's) Federal, state, local or municipal statute, law, rule, regulation, ordinance, code, policy or rule of common law and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to the environment, health, safety or any chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority and "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. (o) The Company has filed all material tax returns required to be filed, which returns are true and correct in all material respects, and the Company is not in default in the payment of any taxes, including penalties and interest, assessments, fees and other charges, shown thereon due or otherwise assessed, other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without interest which were payable pursuant to said returns or any assessments with respect thereto. (p) The Company has not taken any action outside the ordinary course of business designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (q) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for an investment company, within the meaning of the Investment Company Act of 1940, as amended. (r) Except as contemplated by Section 4 of this Agreement and except with respect to up to 286,097 shares of Common Stock that may be held by Johnson & Johnson Development Corporation, the Company is not under any obligation to "register" any of its presently outstanding securities or any of its securities which may hereafter be issued. For the purposes of this Agreement, the term "register" refers to a registration effected by filing a registration statement in compliance with the Securities Act (as defined below) or the securities laws of any state. (s) The Company is not indebted, either directly or indirectly, to any present or former stockholder, officer or director, or to any of their respective spouses or children or any of their respective Affiliates (as such term is defined in Rule 405 under the 1933 Act), in any amount whatsoever, including, without limitation, any amounts due under any deferred compensation plan, other than for payment of consulting fees or salaries (but not deferred fees or salaries) for services rendered, employee benefits and reasonable expenses incurred on the Company's behalf. Except as disclosed in the SEC document, no present or former officer, director or stockholder of the Company (nor any person in the immediate family of any such officer, director or stockholder) nor any of their respective Affiliates is indebted to the Company or has any material direct or indirect ownership interest in any firm or corporation with which the -6- Company is affiliated or with which the Company has a business relationship with the Company or which competes with the Company. To the Company's knowledge, no officer, director or holder of any of its capital stock or any member of their immediate families or any of their respective Affiliates, is, directly or indirectly, interested in any contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any person, firm or corporation. (t) Except as required by this Agreement and except as disclosed in the SEC Documents, there are no agreements or arrangements between the Company and any of the Company's stockholders, or to the best of the Company's knowledge, between or among any of the Company's stockholders, which grant special rights with respect to any shares of the Company's capital stock or which in any way affect any stockholder's ability or right freely to alienate or vote such shares. 3. Representations and Warranties of the Purchasers. Each Purchaser for itself, severally and not jointly, hereby represents and warrants as follows: (a) Such Purchaser represents and warrants to the Company that (i) the Purchaser has full right, power, authority and capacity to enter into this Agreement and to consummate the transactions contemplated hereby and has taken all necessary action to authorize the execution, delivery and performance of this Agreement, and (ii) this Agreement constitutes a valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' and contracting parties' rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) and except as the indemnification agreements of the Purchasers herein may be legally unenforceable. (b) Such Purchaser understands that nothing in this Agreement or any other materials presented to the Purchaser in connection with the purchase and sale of the Common Shares constitutes legal, tax or investment advice. Such Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of Common Shares. (c) Such Purchaser is acquiring the Common Shares subscribed for hereunder for its own account as principal, for investment purposes and not with a view to any distribution thereof in violation of the Securities Act of 1933, as amended (the "Securities Act"), or any other securities laws. Such Purchaser further understands and acknowledges that the offer and sale of the Common Shares to the Purchaser pursuant to this Agreement will not be registered under the Securities Act or any foreign or state securities laws on the assumption that the offer and sale of the Common Shares to the Purchasers are exempt from registration pursuant to Section 4(2) of the Securities Act and Regulation D thereunder and that the Company's reliance upon such exemption is predicated upon such Purchaser's representations set forth in the Agreement. (d) Such Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act, and by virtue of such Purchaser's experience in financial and business matters, is capable of evaluating the merits and risks of such Purchaser's -7- investment in the Common Shares, has the ability to bear the economic risks of such an investment, including a complete loss of the investment, and has the capacity to protect the Purchaser's own interests. For purposes of the requirements of state securities laws, such Purchaser represents that it is solely a resident of the state set forth opposite its name on Schedule I hereto and that the offer and purchase of the Common Shares pursuant hereto has and will occur solely in such state. (e) Such Purchaser acknowledges that the certificates representing the Common Shares shall bear a legend substantially as set forth below indicating the restrictions on transfers to which the Common Shares are subject, and instructions shall be given to the transfer agent for the Common Stock that no transfer is to be effected except in compliance with such transfer restrictions: THE SHARES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE BEEN ISSUED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND APPROPRIATE EXEMPTIONS FROM REGISTRATION UNDER THE SECURITIES LAWS OF APPLICABLE JURISDICTIONS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR TRANSFERRED OTHER THAN PURSUANT TO AN EFFECTIVE REGISTRATION OR AN EXEMPTION FROM REGISTRATION SATISFACTORY TO THE ISSUER OF COMPLIANCE WITH THE SECURITIES ACT AND THE APPLICABLE SECURITIES LAWS OF ANY OTHER JURISDICTION. THE ISSUER SHALL BE ENTITLED TO REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT WITH RESPECT TO COMPLIANCE WITH THE SECURITIES ACT. (f) Because the Common Shares have not been registered under the Securities Act or applicable foreign or state securities laws, such Purchaser acknowledges that the economic risk of the investment must be borne indefinitely by such Purchaser, the Common Shares cannot be sold by the Purchaser unless subsequently registered under the Securities Act and such laws or unless an exemption from such registration is available, and while the Company intends to file a registration statement covering the Common Shares for public resale as set forth in Section 4 below, there is no assurance that the Common Shares will in fact be so registered. (g) Such Purchaser hereby acknowledges that the Company has made available to such Purchaser such books, records, corporate documents and all other information as Purchaser has requested and considers necessary to evaluating the merits and risks of an investment in the Common Shares. Each Purchaser acknowledges that it has been afforded the opportunity to ask questions concerning the Company and has received satisfactory answers thereto, to obtain all additional information that it has requested and to request and receive all documents concerning the Company and the terms and conditions of such Purchaser's investment. Such Purchaser acknowledges that it has not been offered the Common Shares by -8- any means of general solicitation or advertisement, and that no commission or sales charge is payable by the Purchaser to any third party in connection with the purchase of the Common Shares. (h) Such Purchaser recognizes that investment in the Common Shares involves a high degree of risk. In evaluating the suitability of an investment in the Common Shares, such Purchaser has not (i) relied upon any representations or other information (whether oral or written) other than (A) the representations and warranties set forth in this Agreement, (B) the documents and answers to questions furnished to such Purchaser by the Company (or its designated representatives) and (C) the Company' filings made pursuant to the Exchange Act, or (ii) relied upon any projections or predictions as to the future business or financial performance of the Company which the Company has not disclosed to the public. Such Purchaser is aware that no federal or state agency has made any finding or determination as to the fairness of the Common Shares for investment, nor any recommendation or endorsement of the Common Shares. 4. Registration Rights. (a) Initial Registration. No later than 45 days following the Closing Date, the Company shall prepare and file with the SEC (and such state securities commissions as may be necessary or appropriate to permit the registration of the Common Shares (and any other shares of Common Stock that the Company is required to register) in all 50 states and the District of Columbia) a registration statement on Form S-3 (or such other form as the Company deems appropriate) (the "Registration Statement") to effect the registration under the Securities Act and relevant state securities laws of the Common Shares in connection with the disposition of the Common Shares by the Purchasers, from time to time in the open market, in one or more transactions (which may involve block transactions), in negotiated, underwritten, or other transactions or through a combination of such methods of sale, at market prices prevailing at the time of sale, at prices relating to such prevailing market prices or at negotiated prices. The Company shall use its reasonable best efforts to obtain effectiveness of the Registration Statement as soon as practicable, but in no event later than 120 days following the Closing Date (the "Effectiveness Deadline"), and shall notify the Purchasers promptly upon the Registration Statement being declared effective by the SEC. All expenses of the Company associated with the preparation of the Registration Statement and the filing thereof shall be borne by the Company, including the payment of any applicable listing, blue sky compliance and printing fees. The Purchasers shall be responsible for fees and expenses of their own counsel and any broker fees and commissions or underwriting discounts, and transfer taxes, if any, payable with respect to any resale of the Common Shares. In connection with the Registration Statement, but subject to the limitations of Section 4(b) hereof, the Company will prepare and file with the SEC and any state securities commissions such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act and Rule 415 thereunder with respect to the disposition of all the Common Shares covered by such Registration Statement. Notwithstanding the foregoing, the Company will only be required to maintain the effectiveness of the Registration Statement with respect to the Common Shares registered thereunder for resale by -9- the Purchasers, until the earlier of (i) such time as all of such Common Shares have been disposed of in accordance with the intended methods of disposition by the Purchasers set forth in such Registration Statement, (ii) such date on which each of the Purchasers may dispose of all of the Common Shares held by it in one transaction in the open market pursuant to Rule 144(k) under the Securities Act, or (iii) two years from the effective date of the Registration Statement. The Company shall furnish to each Purchaser such number of copies of the Registration Statement and of each amendment and supplement thereto, such number of copies of the prospectus included in such Registration Statement and such other related documents as such Purchaser may reasonably request in order to facilitate the disposition of the Common Shares by such Purchaser. (b) Information from Purchasers. Each Purchaser shall furnish to the Company such information regarding each such Purchaser and its proposed method of distribution of the Common Shares as the Company may from time to time request and as shall be required by law to effect and maintain the registration of such Common Shares under the Securities Act and any state securities laws. (c) Agreements of the Company. The Company shall use reasonable efforts to (i) register and qualify the Common Shares under such other securities or "blue sky" laws of such jurisdictions in the United States as the Purchasers shall reasonably request, and (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the effectiveness of the Registration Statement; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (A) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 4(c), (B) subject itself to general taxation in any jurisdiction, (C) file a general consent to service of process in any such jurisdiction, (D) provide any undertakings that cause the Company undue expense or burden, or (E) make any change in its charter or bylaws, which in each case the Company's Board of Directors determines to be contrary to the best interests of the Company and its shareholders. (d) Transfer of Common Shares After Registration; Suspension. (i) The Purchaser agrees that it will not effect any disposition of the Common Shares or its right to purchase the Common Shares that would constitute a sale within the meaning of the Securities Act except as contemplated in the Registration Statement referred to in Sections 4(a) and (b) and as described below or as permitted by the Securities Act, and that it will promptly notify the Company of any changes in the information set forth in the Registration Statement regarding the Purchaser or its plan of distribution. (ii) Except in the event that paragraph (iii) below applies, the Company shall: (A) if deemed necessary by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated -10- therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Common Shares being sold thereunder, such prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (B) provide the Purchaser copies of any documents filed pursuant to Section 4(d)(ii)(A); and (C) inform each Purchaser that the Company has complied with its obligations in Section 4(d)(ii)(A) (or that, if the Company has filed a post-effective amendment to the Registration Statement which has not yet been declared effective, the Company will notify the Purchaser to that effect, will use its reasonable efforts to secure the effectiveness of such post-effective amendment as promptly as possible and will promptly notify the Purchaser pursuant to Section 4(d)(ii)(A) hereof when the amendment has become effective). (iii) Subject to paragraph (iv) below, in the event: (A) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to a Registration Statement or related prospectus or for additional information; (B) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose; (C) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Common Shares for sale in any jurisdiction or the initiation of any proceeding for such purpose; or (D) of any event or circumstance which necessitates the making of any changes in the Registration Statement or prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the prospectus, it will not contain any untrue statement of a material fact or any omission to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; then the Company shall immediately deliver a certificate in writing to the Purchaser (the "Suspension Notice") to the effect of the foregoing and, upon receipt of such Suspension Notice, the Purchaser will refrain from selling any Common Shares pursuant to the Registration Statement (a "Suspension") until the Purchaser's receipt of copies of a supplemented or amended prospectus prepared and filed by the Company, or until it is advised in writing by the Company that the current prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such prospectus. In the event of any Suspension, the Company will use its best efforts to cause the use of the prospectus so suspended to be resumed as soon as reasonably practicable within 30 calendar days after delivery of a Suspension Notice to the Purchasers. In addition to and without limiting any other remedies (including, without limitation, at law or at equity) available to the Purchaser, the Purchaser shall be entitled to specific performance in the event that the Company fails to comply with the provisions of this Section 4(d)(iii). (iv) Notwithstanding the foregoing paragraphs of this 4(d), the Purchaser shall not be prohibited from selling Common Shares under the Registration Statement as a result of Suspensions on more than four occasions of not more than 30 days each in any twelve month period. -11- (v) If a Suspension is not then in effect, the Purchaser may sell Common Shares under the Registration Statement, provided that the Purchaser arranges for delivery of a current prospectus to the transferee of such Common Shares. Upon receipt of a request therefor, the Company agrees to provide an adequate number of current prospectuses to the Purchaser and to supply copies to any other parties requiring such prospectuses. (e) Failure to Become Effective On or Prior to the Effectiveness Deadline. The Company and the Purchasers agree that the Purchasers will suffer damages if the Registration Statement is not declared effective by the SEC on or prior to the Effectiveness Deadline. The Company and the Purchasers further agree that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, if the Registration Statement is not declared effective by the SEC on or prior to the Effectiveness Deadline, the Company shall pay as liquidated damages for such failure and not as a penalty (the "Liquidated Damages") to each Purchaser an amount equal to one percent (1%) of the total purchase price paid by such Purchaser pursuant to Section 1 hereof for each 30 day period after the Effectiveness Deadline, pro rated for any period less than 30 days, following the Effectiveness Deadline until the Registration Statement has been declared effective by the SEC. Payments to be made pursuant to this Section 4(e) shall be due and payable in cash to a Purchaser immediately upon demand of such Purchaser. The parties agree that the Liquidated Damages represent a reasonable estimate on the part of the parties, as of the date of this Agreement, of the amount of damages that may be incurred by the Purchasers if the Registration Statement has not been declared effective by the SEC on or prior to the Effectiveness Deadline. (f) Indemnification. (i) To the extent permitted by law, the Company will indemnify each Purchaser and each person (including each officer, director or partner thereof) who controls the Purchaser within the meaning of Section 15 of the Securities Act with respect to which any registration statement under the Securities Act has been filed and become effective pursuant to this Agreement, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any definitive prospectus contained in any registration statement, as may be amended or supplemented, covering the Common Shares for resale, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and for any material misrepresentation or breach of any representation or warranty given or made by the Company in this Agreement, and will reimburse each such Purchaser and each person (including each officer, director or partner thereof) who controls the Purchaser within the meaning of Section 15 of the Securities Act for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, provided that (A) such legal and other expenses shall be limited to not more than one legal counsel for the Purchasers and each person (including each officer, director or partner thereof) who controls the Purchaser within the meaning of Section 15 of the Securities Act, and (B) the Company will not be liable in any such case to the extent that (x) any such claim, loss, damage or liability arises out of or is based on any untrue statement (or alleged untrue statement) or omission (or alleged omission) based upon written information furnished to the Company by such Purchaser specifically for use in such prospectus, or (y) the -12- Purchaser or its representative fail to deliver a copy of the definitive prospectus contained in any such registration statement, as may be amended or supplemented, to the buyer of any Common Shares. (ii) To the extent permitted by law, each Purchaser will indemnify the Company and each person (including each officer and director thereof) who controls the Company within the meaning of Section 15 the Securities Act, and each other such Purchaser and each person (including each officer, director and partner thereof) who controls the Purchaser within the meaning of Section 15 of the Securities Act against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such prospectus, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and will reimburse the Company, such Purchaser and each person (including directors, officers or partners thereof) who controls the Company or such Purchaser within the meaning of Section 15 of the Securities Act for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such prospectus in reliance upon and in conformity with written information furnished to the Company by such Purchaser specifically for use therein. (iii) Each party entitled to indemnification under this Section 4(f) (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure prejudiced the rights of the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. (iv) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which any person or entity entitled to indemnification under Section 4(f) makes a claim for indemnification pursuant to this Section 4(f) but it is judicially determined (by entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 4(f) provides for indemnification in such case; then, and in such case, the party that would otherwise be required to indemnify under Section 4(f) will contribute to the aggregate losses, claims, damages or liabilities to which the other parties may be subject (after contribution from others) -13- in such proportion as is appropriate to reflect the relative fault of the parties in connection with the losses suffered, as well as any other relevant equitable considerations. (g) Rule 144. The Company covenants that it will file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder in a timely manner in accordance with the requirements of the Securities Act and the Exchange Act and, for so long as any Common Shares may not be sold under Rule 144(k) under the Securities Act. The Company further covenants that it will use its reasonable best efforts to take such further action as any Purchaser may reasonably request, all to the extent required from time to time to enable such holder to sell Common Shares without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. (h) The Company has not, as of the date hereof, and the Company shall not, after the date of this Agreement, enter into any agreement with respect to any of its securities that is inconsistent with the rights granted to the Purchasers under this Agreement or otherwise conflicts with the provisions hereof. 5. Information Rights. At such time as the Company is not subject to the reporting requirements of the Exchange Act, and so long as the aggregate number of Common Shares then beneficially owned (as determined pursuant to Rule 13d-3 under the Exchange Act) by a Purchaser is not less than 50% of the sum of the initial number of Common Shares purchased by such Purchaser hereunder, the Company shall deliver the following to such Purchaser: (a) As soon as available, and in any event within 45 days after the end of each of the first three quarters in each fiscal year of the Company, unaudited consolidated statements of income, cash flows and shareholders' equity for such quarterly period and for the period from the beginning of the then current fiscal year to the end of such quarterly period, and an unaudited consolidated balance sheet of the Company as at the end of such quarterly period, in each case setting forth in comparative form consolidated figures for the corresponding periods in the preceding fiscal year, all in reasonable detail, prepared by the Company in accordance with generally accepted accounting principles consistently followed throughout the periods involved, subject to normal year-end adjustments, and certified by the principal financial officer of the Company and accompanied by a written discussion of operations in summary form with respect to such quarterly period. (b) As soon as available, and in any event within 90 days after the end of each fiscal year of the Company, consolidated statements of income, cash flows and shareholders' equity for such fiscal year, and a consolidated balance sheet of the Company as at the end of such year, in each case setting forth in comparative form consolidated figures for the preceding fiscal year, prepared by the Company in accordance with generally accepted accounting principles consistently followed throughout the periods involved, and certified by KPMG LLP or another nationally recognized firm of independent public accountants, and accompanied by a written discussion of operations in summary form with respect to such fiscal year. -14- 6. Notices. All notices, demands, requests, or other communications which may be or are required to be given, served, or sent by any party to any other party pursuant to this Agreement shall be in writing and shall be mailed by first-class, registered or certified mail, return receipt requested, postage prepaid, or transmitted by hand delivery, overnight or express mail, facsimile, telegram or telex, addressed as follows: If to the Company: Neose Technologies, Inc. 102 Witmer Road Horsham, Pennsylvania 19044 Fax No.: (215) 315-9100 Attention: C. Boyd Clarke President and Chief Executive Officer with copies (which shall not constitute notice) to: Neose Technologies, Inc. 102 Witmer Road Horsham, Pennsylvania 19044 Fax No.: (215) 315-9100 Attention: General Counsel and Pepper Hamilton LLP 3000 Two Logan Square Eighteenth and Arch Streets Philadelphia, PA 19103-2799 Attention: Barry M. Abelson, Esq. If to Purchasers: The address listed under each Purchaser's name on Schedule I hereto. Each party may designate by notice in writing a new address to which any notice, demand, request or communication may thereafter be so given, served or sent. Each notice, demand, request, or communication which shall be mailed, delivered or transmitted in the manner described above shall be deemed sufficiently given, served, sent and received for all purposes at such time as it is delivered to the addressee (with the return receipt, the delivery receipt, the affidavit of messenger or (with respect to a facsimile or telex) the answer back being deemed conclusive evidence of such delivery) or at such time as delivery is refused by the addressee upon presentation. 7. Publicity. The Company and the Purchasers shall notify each other prior to issuing any press releases or otherwise making any news release or other public announcement -15- with respect to the transactions contemplated hereby, other than as required in connection with any filings with any federal or state governmental or regulatory agency with respect thereto, and in no event will the Purchasers issue any such release or make any such public announcement without the prior approval of the Company. Notwithstanding the foregoing, the Purchasers hereby agree that the Company may issue a press release with regard to the subject matter of this Agreement on or after the Closing Date without providing the Purchasers with the notification required by this Section 7. 8. Legal Opinion of Company Counsel. On or before the Closing Date, the Company shall deliver to each Purchaser an opinion of Pepper Hamilton LLP, counsel to the Company, in form attached hereto as Exhibit A. 9. Miscellaneous. (a) This Agreement constitutes the entire agreement between the parties hereto with respect to the transactions contemplated herein, and the Agreement supersedes and terminates all prior oral or written agreements, commitments or understandings with respect to the matters provided for herein. (b) No amendment or modification hereof shall be binding unless set forth in writing and duly executed by the Company and Purchasers holding a majority of the Common Shares purchased hereunder. This Agreement and the rights and obligations of the parties hereunder may not be assigned without the prior written consent of the other parties hereto. Whenever any action, waiver or consent of Purchasers hereunder (collectively, "Action") is required or permitted to be done, made or given by a majority of the Purchasers, such Action shall have been duly approved in accordance with the terms of this Agreement, if the Purchasers holding a majority of Common Shares acquired under this Agreement consent to or approve such Action. (c) The representations or warranties of the Purchasers and the Company contained herein shall survive the execution and delivery of this Agreement and consummation of the transactions contemplated hereby. (d) Each of the Purchasers and the Company agrees to take such further actions and to execute and deliver such further instruments as may reasonably be necessary from time to time in order to fully effectuate the purposes, terms and conditions of this Agreement. (e) For purposes of this Agreement, the term "business day" shall mean any day other than a Saturday, Sunday or a day on which banking institutions in the Commonwealth of Pennsylvania are authorized or obligated by law or executive order to close. For purposes of this Agreement, the term "trading day" shall mean any day on which the Nasdaq Stock Market or the principal securities exchange or quotation system on which the Common Stock is traded is open for regular trading. For the purposes of this Agreement, the phrase "to the knowledge of the Company" or "to the Company's knowledge" shall mean to the actual knowledge of any of the persons holding the following executive offices of the Company: President and Chief Executive Officer; Senior Vice President and Chief Financial Officer; Vice President, Finance; Senior Vice President, General Counsel and Secretary; Senior Vice President, Pharmaceutical -16- Development; Executive Vice President, Research and Development; Senior Vice President, Business and Commercial Development; and Vice President, Regulatory and Project Management. (f) This Agreement shall be enforced, governed and construed in accordance with the laws of the Commonwealth of Pennsylvania. The parties hereby expressly agree that all claims in respect of this Agreement shall be brought in the state and federal courts of the Commonwealth of Pennsylvania, the parties hereby irrevocably submit to the jurisdiction of such courts for purposes of any such action and the parties hereby expressly waive the right to a jury trial in connection with any such action. The Purchasers acknowledge that any breach or threatened breach by a Purchaser of the terms of this Agreement would cause irreparable harm to the Company which would not be compensable by money damages alone, and the Purchasers agree that the Company shall have the right to enforce this Agreement and any such terms by injunction, specific performance or other equitable relief in order to prevent or restrain any such breach by a Purchaser. (g) This Agreement and the rights, power and duties set forth herein shall be binding upon the Purchasers and the Company, their successors and assigns, and shall inure to the benefit of the Company and the Purchasers, respectively. Failure of the Purchasers or the Company to exercise any right or remedy under this Agreement, or a delay by the Purchasers or the Company in exercising the same, will not operate as a waiver thereof. No waiver by the Purchasers or the Company will be effective unless and until it is in writing and signed by the party whose consent is required by the terms hereof. (h) It is the explicit intention of the parties hereto that no person or entity other than the parties hereto is or shall be entitled to bring any action to enforce any provision of this Agreement against any of the parties hereto, and that the covenants, undertakings and agreements set forth in this Agreement shall be solely for the benefit of, and shall be enforceable only by, the parties hereto or their respective successors and assigns as permitted hereunder. (i) If any provision or clause of this Agreement shall for any reason be held to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such provision or clause had never been contained in the Agreement, and there shall be deemed substituted therefor such other provision or clause as will most nearly accomplish the intent of the parties as expressed in this Agreement to the fullest extent permitted by law. (j) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original or a photocopy or facsimile of an original and all of which together shall constitute one and the same document. -17- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, or have caused this Agreement to be executed, as of the date written below. Date: February 13, 2003 NEOSE TECHNOLOGIES, INC. By: /s/ C. Boyd Clarke ------------------- Name: C. Boyd Clarke Title: CEO -18- PURCHASERS: BLACK BEAR FUND I, L.P., a California limited partnership By Eastbourne Capital Management, L.L.C., its general partner By: /s/ Eric M. Sippel ------------------- Eric M. Sippel Chief Operating Officer BLACK BEAR FUND II, L.L.C., a California limited liability company By Eastbourne Capital Management, L.L.C., its manager By: /s/ Eric M. Sippel ------------------- Eric M. Sippel Chief Operating Officer BLACK BEAR OFFSHORE MASTER FUND LIMITED, a Cayman Islands exempted company By Eastbourne Capital Management, L.L.C., its manager By: /s/ Eric M. Sippel ------------------- Eric M. Sippel Chief Operating Officer -19- CADUCEUS CAPITAL TRUST By Sven H. Borho, General Partner of the General Partner By: /s/Sven H. Borho ----------------- Sven H. Borho General Partner CADUCEUS CAPITAL II, L.P. By Sven H. Borho, General Partner of the General Partner By: /s/Sven H. Borho ----------------- Sven H. Borho General Partner PW EUCALYPTUS FUND, L.L.C. By Sven H. Borho, General Partner of the JV Partner By: /s/Sven H. Borho ----------------- Sven H. Borho General Partner PW EUCALYPTUS FUND, LTD. By Sven H. Borho, General Partner of the JV Partner By: /s/Sven H. Borho ----------------- Sven H. Borho General Partner -20- George W. Haywood By: /s/ George W. Haywood ---------------------- George W. Haywood Private Investor -21- DOMAIN PARTNERS V, L.P. By: One Palmer Square Associates V, L.L.C., its General Partner By: /s/Kathleen K. Schoemaker -------------------------- Kathleen K. Schoemaker Managing Member DP V ASSOCIATES, L.P. By: One Palmer Square Associates V, L.L.C. its General Partner By: /s/Kathleen K. Schoemaker -------------------------- Kathleen K. Schoemaker Managing Member -22- BAYSTAR CAPITAL II, LP By: /s/ Steven M. LaMar -------------------- Steven M. LaMar Chief Financial Officer BAYSTAR INTERNATIONAL II LTD. By: /s/ Steven M. LaMar -------------------- Steven M. LaMar Chief Financial Officer -23- ROYAL BANK OF CANADA By: RBC DOMINION SECURITIES CORPORATION, acting as agent By: /s/ Steven C. Milke -------------------- Name: Steven C. Milke Title: Managing Director By: /s/ Richard J. Tavoso ---------------------- Name: Richard J. Tavoso Title: Managing Director -24- KOPP EMERGING GROWTH FUND By: Kopp Investment Advisors, Inc. Its: Investment Manager By: /s/ Steven F. Crowley ---------------------- Name: Steven F. Crowley Title: Senior Vice President -25- SCHEDULE I
- ------------------------------------------------------------------------------------------------------------------- Name and Address of Purchase Commitment State of Residence ------------------- ------------------ Purchaser --------- - ------------------------------------------------------------------------------------------------------------------- Black Bear Fund I, L.P. $ 593,568 California c/o Eastbourne Capital Management, L.L.C. 1101 Fifth Avenue, Suite 160 San Rafael, CA 94901 - ------------------------------------------------------------------------------------------------------------------- Black Bear Fund II, L.L.C. $ 98,580 California c/o Eastbourne Capital Management, L.L.C. 1101 Fifth Avenue, Suite 160 San Rafael, CA 94901 - ------------------------------------------------------------------------------------------------------------------- Black Bear Offshore Master Fund Limited $1,807,848 Cayman Islands c/o Eastbourne Capital Management, L.L.C. 1101 Fifth Avenue, Suite 160 San Rafael, CA 94901 - ------------------------------------------------------------------------------------------------------------------- Caduceus Capital Trust $ 734,500 British Virgin Islands c/o OrbiMed Advisors LLC 767 Third Avenue, 30/th/ Floor New York, NY 10017 Attn: Andrew Kanarek - ------------------------------------------------------------------------------------------------------------------- Caduceus Capital II, L.P. $ 357,500 Delaware c/o OrbiMed Advisors LLC 767 Third Avenue, 30/th/ Floor New York, NY 10017 Attn: Andrew Kanarek - ------------------------------------------------------------------------------------------------------------------- PW Eucalyptus Fund, L.L.C. $ 806,000 Delaware c/o OrbiMed Advisors LLC 767 Third Avenue, 30/th/ Floor New York, NY 10017 Attn: Andrew Kanarek - ------------------------------------------------------------------------------------------------------------------- PW Eucalyptus Fund, Ltd. $ 104,000 Cayman Islands c/o OrbiMed Advisors LLC 767 Third Avenue, 30/th/ Floor New York, NY 10017 Attn: Andrew Kanarek - -------------------------------------------------------------------------------------------------------------------
-26-
- ------------------------------------------------------------------------------------------------------------------- Name and Address of Purchase Commitment State of Residence ------------------- ------------------ Purchaser --------- - ------------------------------------------------------------------------------------------------------------------- George W. Haywood $ 1,000,000 New York c/o Cronin & Vris, LLP 380 Madison Avenue, 27/th/ Floor New York, NY 10017 - ------------------------------------------------------------------------------------------------------------------- Domain Partners V, L.P. $ 5,567,088 Delaware One Palmer Square Suite 515 Princeton, NJ 08542 - ------------------------------------------------------------------------------------------------------------------- DP V Associates, L.P. $ 131,508 Delaware One Palmer Square Suite 515 Princeton, NJ 08542 - ------------------------------------------------------------------------------------------------------------------- Royal Bank of Canada $ 2,500,000 New York c/o RBC Dominion Securities Corporation 1 Liberty Plaza 165 Broadway New York, NY 10006 - ------------------------------------------------------------------------------------------------------------------- BayStar Capital II, LP $ 1,350,000 Delaware 80 East Sir Francis Drake Blvd., Suite 2B Larkspur, CA 94939 - ------------------------------------------------------------------------------------------------------------------- BayStar International II Ltd $ 150,000 British Virgin Islands 80 East Sir Francis Drake Blvd., Suite 2B Larkspur, CA 94939 - ------------------------------------------------------------------------------------------------------------------- Kopp Emerging Growth Fund $ 2,000,000 Minnesota c/o Kopp Investment Advisors 7701 France Avenue South, Suite 5000 Edina, MN 55435 - ------------------------------------------------------------------------------------------------------------------- TOTAL $17,200,592 - -------------------------------------------------------------------------------------------------------------------
-27- SCHEDULE 2(m) Montgomery County (Pennsylvania) Industrial Development Authority Bonds In 1997, we issued, through the Montgomery County (Pennsylvania) Industrial Development Authority, $9.4 million of taxable and tax-exempt bonds. The bonds are supported by an AA-rated letter of credit, and a reimbursement agreement between our bank and the letter of credit issuer. The interest rate on the bonds will vary weekly, depending on market rates for AA-rated taxable and tax-exempt obligations, respectively. The terms of the bond issuance provide for monthly, interest-only payments and a single repayment of principal at the end of the twenty-year life of the bonds. However, under our agreement with our bank, we are making monthly payments to an escrow account to provide for an annual prepayment of principal. To provide credit support for this arrangement, we have given a first mortgage on land, building, improvements, and certain machinery and equipment to our bank. We have also agreed to maintain a minimum required cash and short-term investments balance of at least two times the current loan balance. If we fail to comply with this covenant, we are required to deposit with the lender cash collateral up to, but not more than, the unpaid balance of the loan, which was $5.1 million as of December 31, 2002. Equipment Financings During 2002, we borrowed an aggregate of $2.3 million to finance the purchase of laboratory equipment. The terms of the financings are as follows: . 8% Equipment Loan. We borrowed $2.2 million at an annual interest rate of 8%, secured by laboratory equipment. We are committed to make monthly principal and interest payments over a three-year period ending February 2006. . 6.2% Equipment Loan. We borrowed $0.1 million at an annual interest rate of 6.2%, secured by computer equipment. We are committed to make monthly principal and interest payments over a three-year period ending November 2005. -28- EXHIBIT A FORM OF LEGAL OPINION (i) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. The Company has the corporate power and corporate authority to enter into, execute, deliver and perform the Agreement. (ii) The Agreement has been duly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except that we express no opinion as to the validity or enforceability of the indemnification and contribution provisions of the Agreement. (iii) The execution and delivery by the Company of the Agreement, the performance by the Company of its obligations thereunder and the issuance, sale and delivery of the Common Shares will not (a) violate any provision of any law applicable to the Company or the Certificate of Incorporation, the Certificate of Designation or the Bylaws of the Company, or (b) violate any law, rule, regulation, judgment, injunction, decree, determination, award or order of any court or governmental agency or instrumentality. (iv) The Common Shares have been duly authorized, and when issued, delivered and paid for in accordance with the terms of the Agreement, will be validly issued, fully paid and nonassessable. To our knowledge, the Common Shares are free of preemptive or similar rights restricting the transfer of the Common Shares or entitling any person to acquire the Common Shares from the Company. (v) Assuming the accuracy and completeness of all representations and warranties made by the Purchasers under the Agreement, the sale and issuance of the Common Shares are exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, subject to the filing of a Form D pursuant to Regulation D as promulgated by the Securities and Exchange Commission. (vi) The Company is not an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder. -29- EX-23.1 9 dex231.txt CONSENT OF KPMG LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Neose Technologies, Inc.: We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-97593, No. 333-73340, No. 333-47718, No. 333-88913, No. 333-35283 and No. 333-01410) and the Registration Statement on Form S-3 (No. 333-83925) of Neose Technologies, Inc. of our report dated February 19, 2003, with respect to the balance sheet of Neose Technologies, Inc. as of December 31, 2002, and the related statements of operations, stockholders' equity and comprehensive loss and cash flows for the year then ended and for the period from January 17, 1989 (inception) through December 31, 2002, which report appears in the December 31, 2002, annual report on Form 10-K of Neose Technologies, Inc. The financial statements of Neose Technologies, Inc. as of December 31, 2001 and for each of the years in the two-year period ended December 31, 2001 and for the period from January 17, 1989 (inception) through December 31, 2002, to the extent related to the period from January 17, 1989 (inception) through December 31, 2001, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements in their report dated January 25, 2002. Our opinion on the statements of operations, stockholders' equity and comprehensive loss, and cash flows, insofar as it relates to the amounts included for the period from January 17, 1989 (inception) through December 31, 2001, is based solely on the report of other auditors. /s/ KPMG LLP Philadelphia, Pennsylvania March 17, 2003 EX-23.2 10 dex232.txt INFORMATION REGARDING CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 Information Regarding Consent of Arthur Andersen LLP Section 11(a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that if part of a registration statement at the time it becomes effective contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may assert a claim against, among others, an accountant who has consented to be named as having certified any part of the registration statement or as having prepared any report for use in connection with the registration statement. Neose Technologies, Inc. dismissed Arthur Andersen LLP ("Andersen") as its independent auditors, effective April 29, 2002. For additional information, see Neose' s Report on Form 8-K dated April 29, 2002. After reasonable efforts, Neose has been unable to obtain Andersen's written consent to the incorporation by reference into Neose's registration statements (Nos. 333-97593, 333-73340, 333-47718, 333-88913, 333-35283 and 333-01410 on Form S-8) (collectively the "Registration Statements") of Andersen's audit report with respect to Neose's consolidated financial statements as of December 31, 2001 and for the two years in the period then ended. Under these circumstances, Rule 437a under the Securities Act permits Neose to file this Annual Report on Form 10-K, which is incorporated by reference into the Registration Statements, without a written consent from Andersen. As a result, with respect to transactions in Neose securities pursuant to the Registration Statements that occur subsequent to the date this Annual Report on Form 10-K is filed with the Securities and Exchange Commission, Andersen will not have any liability under Section 11(a) of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Andersen or any omissions of a material fact required to be stated therein. Accordingly, you would be unable to assert a claim against Andersen under Section 11(a) of the Securities Act. EX-99.1 11 dex991.txt CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Neose Technologies, Inc. (the "Company") on Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, C. Boyd Clarke, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ C. Boyd Clarke C. Boyd Clarke President and Chief Executive Officer March 17, 2003 EX-99.2 12 dex992.txt CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Neose Technologies, Inc. (the "Company") on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert I. Kriebel, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. (S) 1350, as adopted pursuant to (S) 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Robert I. Kriebel Robert I. Kriebel Principal Financial Officer March 17, 2003 -----END PRIVACY-ENHANCED MESSAGE-----